SECURITIES AND FUTURES COMMISSION v. MANDARIN RESOURCES CORPORATION LTD AND ANOTHER

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JUDGMENT

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Nazareth, V.P.:

1. I will invite Godfrey, J.A. to give the first judgment.

Godfrey, J.A.:

Introduction

2. We are concerned in this appeal with interlocutory orders of Rogers, J. (1) made on 24 July 1996, appointing John Lees and Desmond Chiong ("the provisional liquidators") provisional liquidators of Mandarin Resources Corporation Ltd ("the company"); (2) made on 2 August 1996, discharging the provisional liquidators; and (3) also made on 2 August 1996, re-appointing them. These orders were made in proceedings for (among other things) the compulsory winding-up of the company, being proceedings commenced on 25 June 1996 by the petition of the Securities and Futures Commission ("the petitioner") presented to the court on that date (a "public interest" petition). We have to consider whether the judge was right to appoint the provisional liquidators on 24 July 1996; whether he was right to discharge them on 2 August 1996 (questions the answers to both of which are of significance in relation to the cross-undertaking in damages given by the petitioner to the court on 24 July 1996); and whether he was right to re-appoint them on the same date. The company says that the judge was wrong to appoint the provisional liquidators on 24 July 1996; that he was right to discharge them on 2 August 1996; and that he was wrong on the same date to re-appoint them. The petitioner says that the judge was right to appoint the provisional liquidators on 24 July 1996; that he was wrong to discharge them on 2 August 1996; but that, in any event, he was right to re-appoint them on the same date.

The proceedings below

3. Although, as I have said, the petitioner presented its petition to the court on 25 June 1996, seeking to have the company wound up, it did not file any evidence in support of the petition until 23 July 1996. The next day, 24 July 1996, it applied to the judge ex parte for the appointment of the provisional liquidators. The petitioner succeeded in obtaining the order for which it asked (an order varied, in an immaterial respect, on an application, again made ex parte, on 25 July 1996). On 26 July 1996, the company applied, by summons inter partes, for the discharge of the judge's order appointing the provisional liquidators. On 2 August 1996, the judge did discharge the provisional liquidators; but he re-appointed them by a fresh order of that date. The judge made his original order of 24 July 1996 because he thought the allegations made in the petition, of improper transactions carried out in 1991 and 1992, said to be detrimental to the company, and to have been made between the company and one of its major shareholders, one Chim Pui Chung ("Mr. Chim"), were "very serious". (The details of those transactions, summarised in the judgge's judgment given on 2 August 1996, are, for present purposes, immaterial; it is sufficient to record that the company was on 2 August 1996 content to concede, for the purposes of the hearing on that date, that the petitioner's evidence had established a good prima facie case for winding-up, and the same is conceded before us.) The judge was concerned that it was proposed to put before the company in general meeting resolutions approving these transactions, and that the information proposed to be supplied to members was insufficient. However, on 2 August 1996 he decided that there had been a "serious lapse" in the evidence filed in support of the petitioner's application for the appointment of the provisional liquidators (it had been alleged by the petitioner, wrongly, that the company was about to enter, without the petitioner's approval, into further transactions a result of which would be "an outflow of money" from the company to Mr. Chim). The judge, therefore, stating that in his view he had "no alternative", discharged the appointment of the provisional liquidators. He found the question whether to re-appoint the provisional liquidators "not an easy one"; but being of the view that it was "in the public interest" that they should be re-appointed, he re-appointed them. He said that, although the company was solvent, the material before him disclosed a case, if proved, of "serious and highly culpable mismanagement"; that Mr. Chim was seeking to "procure a resolution which would absolve him from liability"; and that Mr. Chim and others concerned with the management of the company were seeking in these circumstances to buy out the minority shareholders. He considered that, bearing all these matters in mind, there was a "real risk" that steps would be likely to be taken to circumvent the proper rectification of any wrongs which might "eventually be proved". He said he appreciated that the transactions of which complaint was made were old transactions, but that things were "clearly at the moment coming to a head" and that there was a "need for vigilance and caution".

The law

4. The decisions of the judge (1) on 24 July 1996 to appoint the provisional liquidators; (2) on 2 August 1996 to discharge their appointment; but (3) on the same date to re-appoint them, were all decisions by which he exercised a discretion whether or not to grant the applicant the relief sought. A court of appeal must be very careful not to interfere with the exercise of such a discretion entrusted to the judge. It can do so only if he has erred in law or in principle; or if he has taken into account some matter which he ought not to have taken into account; or left out of account some matter which he ought to have taken into account; or if his decision was so plainly wrong that it must have been reached by a faulty assessment of the weight of the factors which he has had to take into account. Unless the judge's decision exceeds the generous ambit within which reasonable disagreement is possible, a court of appeal is simply not entitled to substitute its own view as to how the discretion ought to have been exercised for that of the trial judge.

5. There are no hard and fast rules as to how a judge ought to exercise his discretion when called on to appoint, or discharge, or re-appoint, provisional liquidators. There cannot be any such rules. The judge's decision must, ultimately, depend on the view he forms as to whether, on the material before him, the balance of justice and convenience comes down in favour of granting or refusing the particular application in question. But our attention was helpfully drawn by both sides to a number of authorities from which a court having to exercise these various discretions might gain some useful guidance. I propose to mention just four of these authorities, in support of the following propositions.

The issues

6. It remains, in the light of all this, to consider the following issues: (1) Was the judge entitled to appoint the provisional liquidators in the first place? (2) Was the judge entitled subsequently to discharge them? and (3) Was the judge entitled, nevertheless, to re-appoint them?

Issue (1) - Was the judge entitled to appoint the provisional liquidators in the first place?

7. It was represented by the petitioner to the judge on 24 July 1996 that it was in the public interest that provisional liquidators be put in place to maintain the status quo pending the hearing of the petition and that there was "otherwise a risk that assets would be dissipated (as they had been in the past)". The petitioner contended that the appointment of provisional liquidators was necessary and expedient in the interests of the minority shareholders and of the investing public generally. The petitioner said that the company was being mismanaged, and that it was in breach of the requirements of the Hong Kong Stock Exchange applicable to the company. As I have already said, the petitioner claimed that there was a risk of transactions being effected at an early date which would result in an "outflow of money" from the company to Mr. Chim, the person accused by the petitioner of mismanaging the company's affairs. Of course the judge was entitled, on this material, to appoint the provisional liquidators at once, as he did. He might, no doubt, have queried why, since the petition had been filed a month earlier, he was only now being asked to make the appointment, and why the matter was so urgent, and the risk so great, that the petitioner's application had to be dealt with ex parte, depriving the company, against all elementary principles of justice, of its right to be heard before so drastic a step was taken against it. But, if he had done so, he could have been given some pretty convincing answers. The company was shortly to hold a meeting, requisitioned since the presentation of the petition by interests associated with Mr. Chim in order (among other things) to ratify the transactions complained of in the petition, the legal result of which ratification would be, at best, doubtful. Mr. Chim or his associates were, or were thought to be, trying to buy out minority shareholders at what was or may have been at undervalue. Share transfer registrations were apparently continuing, despite the presentation of the petition, and the provisions of s.182 of the Companies Ordinance, Cap. 32 (rendering such transfers null and void unless validated by an order of the court). On 18 July 1996 Mr. Chim had been arrested on charges of forgery relating to one of the companies said in the petition to have had dealings with the company. The company was (understandably) not co-operating with the petitioner. The interests of overseas shareholders were not being adequately protected. The petitioner had become increasingly concerned that if it did not act quickly the objects it sought to achieve by its petition would or might be frustrated. I was at one stage of the argument disposed nevertheless to accept the company's submission that the petitioner's application for ex parte relief was unjustified, and that the judge should have insisted on notice of the application being given to the company, and accordingly an inter partes hearing held, before any appointment of provisional liquidators was made; but in the end, I am satisfied that the petitioner and its legal advisers, and indeed the judge, cannot fairly be criticised for taking the view that ex parte relief was, on the unusual facts of the case, appropriate.

Issue (2) - Was the judge entitled on 2 August 1996 to discharge the appointment of the provisional liquidators?

8. I need say little about this. The judge took the view that the evidence filed by the petitioner in support of its application for ex parte relief was in certain respects seriously misleading. He said that in his view he had "no alternative" but to discharge the order he had made on 24 July 1996. But it is clear from his judgment that he did not mean this literally. He was well aware that he had a discretion to exercise whether to discharge the order or not. I am satisfied that all he meant was that, in his view, the only appropriate course for him to take was to discharge the order. He did so. The petitioner has objected to this exercise of the judge's discretion. For myself, I can find no fault with it.

Issue (3) - Was the judge entitled to re-appoint the provisional liquidators?

9. In my judgment, he was. He had to balance the need, in the public interest, to maintain the status quo until the hearing of the petition (something which he was entitled to consider could best be achieved, in the absence of any acceptable suggestion to the contrary, by the re-appointment of the provisional liquidators) against the need, in the interests of justice, to ensure that the petitioner gained no procedural advantage over the company by having obtained ex parte relief on evidence held to have been in certain respects seriously misleading. It is said he misdirected himself in approaching this exercise, because he said he was approaching it "de novo". Again, I do not understand him to mean that he was starting (to use a little more Latin) with a tabula rasa. As it seems to me, all he meant was that he now had to look to the future in order to decide what course he ought now to take; he did not say that he was obliged as a matter of law to ignore the past altogether, which would have been a misdirection. He had the past well in mind. But he said of it that the penalty aspect which the court will usually visit upon a party that makes a material mistake is "somewhat alleviated" in a case where a party is not gaining any advantage for itself but only exercising its public duty at public expense to protect the public interest. I accept that these considerations do not negate the consequences of a material mistake; but for my part I agree with the judge that they do "somewhat alleviate" the case. The judge, weighing in the balance the competing needs of the public interest on the one hand, and the interests of justice on the other, regarded the former as, in this instance, outweighing the latter. I do not consider he misdirected himself in doing so; his decision, in the exercise of his discretion, to re-appoint the provisional liquidators was one to which, in my judgment, he was perfectly entitled to come.

Conclusion

10. For these reasons, I would dismiss the company's appeal against the judge's order of 2 August 1996 re-appointing the provisional liquidators. I would also dismiss the appeal of the petitioner against the judge's order of 2 August 1996 discharging his original order made ex parte on 24 July 1996, including its appeal against that part of the order of 2 August 1996 which gave the company liberty to apply to the court to enforce the cross-undertaking in damages given by the petitioner to the court when it obtained the order of 24 July 1996. The order of 2 August 1996 does not preclude the right of the petitioner, if such an application for assessment of damages is made by the company, to ask that the application be stood over to come on with the hearing of the petition; or thereafter. Nor does it not preclude the petitioner from arguing, when the time comes, that in all the circumstances, the company should not be awarded any damages at all.

Mortimer, J.A.:

11. I have also reached the clear view that both the appeal and the cross appeal must be dismissed. I would give reasons of my own but I would only repeat in different words those given by Godfrey JA. I find myself entirely in agreement with him.

12. The judge below gave an extempore judgment at a late hour. His judgment was impeccable.

Nazareth, V.P.:

13. I also agree with the conclusions reached by Godfrey JA and with his reasons. I have nothing to add.