XCHRX ELEGANT JUMP LTD. v. TRIBUNE BRIDGE LTD. ANOTHER

HCA 14037/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 14037 OF 1999

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REASONS FOR DECISION

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1. I have before me two summonses taking out by the Defendants, Tribune Bridge Limited ("the 1st Defendant") and Mr Terry John Miller, issued on 4 and 23 May 2000 respectively. In the first summons, the Defendants sought an order that the Plaintiff, Elegant Jump Limited, and the 1st Defendant by counterclaim, Mr Angus Ronald Yan Tak Cheng ("Mr Ronald Cheng") be ordered to fortify their undertakings in damages recorded in the Amended Order of Deputy High Court Judge To made on 21 September 1999 by providing security in the form of a payment into court in the sum of HK$31,286,550.00 or such other sum as the court would consider sufficient. The amount of HK$31,286,550.00 is the aggregate figure of the face value of the shares and convertible bonds for which the Defendants had given an undertaking in the said order of Judge To not to dispose of until the trial of this action or the agreement of the parties or further order of the court. In the second summons, the Defendants sought an order that if their application for fortification is not granted, the Defendants should be released from their undertaking aforesaid. I dismissed both summonses after hearing submissions from Mr Barrie Barlow, who appeared for the Defendants, and Mr Benjamin Yu, SC, who appeared with Mr Anderson Chow for the Plaintiff and Mr Ronald Cheng. These are my reasons.

Background

2. The protagonists in this action are Mr Miller and Mr Ronald Cheng. Mr Miller is the beneficial owner of all the issued shares of the 1st Defendant, a company incorporated in the British Virgin Islands. Mr Ronald Cheng is the beneficial owner of all the issued shares in the Plaintiff, which is also a company incorporated in the British Virgin Islands. The 1st Defendant was the registered owner of 208,577 shares in New Media Corporation ("the New Media Shares"). On 15 June 1999, the Defendants entered into 2 agreements ("the share sale agreements") with the Plaintiff for the sale of (1) the New Media Shares at the price of US$5,214,425.00 and (2) all the shares of Mr Miller in the 1st Defendant at the price of US$2,085,770.00. Three days before the completion of the sale and purchase, Essential Enterprises Co. Ltd ("Essential"), a company listed on the Hong Kong Stock Exchange, gave public notice of a conditional general offer by its wholly owned subsidiary for the purchase of all the issued shares of New Media Corporation. Completion under the share sale agreements with the Plaintiff did not take place and the Defendants subsequently gave notice to rescind the agreements. The Plaintiff brought this action claiming specific performance of the share sale agreements and other relief.

3. The defence raised by the 1st Defendant and Mr Miller is that Mr Ronald Cheng, who is a director of New Media Corporation, owed fiduciary duties to the shareholders of that company and that he had acted in breach of such duties when he used the Plaintiff to purchase the 1st Defendant's shares in New Media Corporation without disclosing his interest in the Plaintiff and in failing to disclose information regarding the existence of the possible general offer by Essential. Further or alternatively, the share sale agreements were entered into as a result of fraudulent misrepresentations of Mr Ronald Cheng and his agent. As a further and alternative defence, it is pleaded that Mr Ronald Cheng, the Plaintiff and its agent had conspired to defraud the 1st Defendant and Mr Miller out of the majority of the realisable value of the 1st Defendant's shares in New Media Corporation.

4. On 8 September 1999, the Plaintiff applied for an interlocutory injunction against the 1st Defendant and Mr Miller to restrain them from disposing of the New Media Shares and Mr Miller's shares in the 1st Defendant, being the subject of the share sale agreements. On 14 September 1999, the Plaintiff issued a further summons seeking in the alternative an interlocutory injunction restraining the 1st Defendant from dealing with the proceeds of sale of the New Media Shares as a result of acceptance of Essential's general offer. The proceeds of sale comprised the following:

(1) US$2,607,212.50;

(2) convertible bonds in the principal amount of HK$15,643,275.00 ("the Bonds") issued by Essential, which had since changed its name to e-New Media Co. Ltd; and

(3) 15,643,275 new ordinary shares ("the Shares") at an issue price of HK$1.00 per share issued by Essential.

5. The hearing before Deputy High Court Judge To on 21 September 1999 was an inter partes hearing and the parties were represented by their respective counsel. They reached agreement on the disposal of the Plaintiff's two summonses and that agreement was embodied in a consent order dated 21 September 1999 which was subsequently amended ("the Consent Order"). Under the Consent Order, the Defendants were allowed to sell the New Media Shares to Essential upon the undertaking of the Defendants and their solicitors to hold until trial or agreement of the parties or further order the following:

(1) US$521,442.50, being the cash consideration paid by Essential less the sum of US$2,085,000;

(2) the Bonds; and

(3) the Shares.

6. In return, the Plaintiff and Mr Ronald Cheng (who is the 1st Defendant by counterclaim) gave a cross undertaking in damages. I should mention that the Defendants were apparently concerned at the time that a cross undertaking in damages from the Plaintiff alone might be valueless as it is a foreign company with no known assets and it was for this reason that the Defendants sought a personal undertaking of similar effect from Mr Ronald Cheng to reinforce the Plaintiff's undertaking. This was agreed to by the other side. The Defendants did not then require Mr Ronald Cheng to produce any evidence regarding his financial ability to meet his undertaking in damages. The question of fortification of Mr Cheng's personal undertaking was just not canvassed at that hearing.

7. Upon the above undertakings and other undertakings recorded in the Consent Order, it was ordered by consent inter alia that there should be a speedy trial of the action and there be no further order on the Plaintiff's two summonses for interlocutory injunctions. The parties were given liberty to apply.

8. Eight months after the Consent Order, the Defendants took out the present summonses seeking fortification of the cross undertakings in damages given by the Plaintiff and Mr Ronald Cheng. Should they be allowed to do so?

The questions in this application

9. I am concerned with the following questions in this application:

(1) Whether the court has power or jurisdiction to order that fortification of an undertaking in damages be given where a defendant has not applied for such security at the time when the injunction is granted and the cross-undertaking given?

(2) If the answer to (1) is yes, under what circumstances should this power be exercised?

(3) Whether it is incumbent upon Mr Ronald Cheng to make full and frank disclosure of his financial position when the Defendants subsequently sought fortification of his cross undertaking in damages?

(4) Is the present case an appropriate case for the court to exercise the power to order fortification subsequently?

The power or jurisdiction of the court

10. Mr Yu drew my attention to this paragraph in the Supreme Court Practice 1999, Vol. 1, para. 29/L/29 under the heading of "Fortifying undertaking" which reads as follows:

"A defendant should apply for the security at the time when the injunction is granted and the undertaking is given. The Court has no power subsequently to impose such an additional term on the grant of an injunction (Commodity Ocean Transport Corp. v. Basford Unicorn Industries Ltd, The "Mito" [1987] 2 Lloyd's Rep. 197)" (emphasis supplied)

11. I was taken by both parties to the Mito case, a decision of Hirst J. I agree with Mr Barlow's submission that the statement in the White Book is not entirely borne out by the decision in The Mito. It is also important to note that in that case, fortification of the cross undertaking in damages was sought after the interlocutory injunction had been discharged, although the discharge had no effect on the cross undertaking which was in force between the grant of the injunction and its discharge. The salient parts of the judgment are as follows:

"Although I have some hesitation about it [i.e. the jurisdiction to order fortification subsequently], because there is no decision directly in point, I shall assume without deciding for present purposes that technically I have such jurisdiction. However, even on that assumption... I am quite satisfied that it would not be correct either in principle or in the exercise of my discretion to make it.

... When such security is originally sought it is sought as a condition for the grant of the injunction, in other words the plaintiff is told: 'if you want this injunction you have got to pay the price by fortifying the undertaking as to damages'. The plaintiff can then either agree or disqualify himself from obtaining the injunction.

...

Mr McClure [the Defendants' counsel] says that the plaintiff has already paid a price here when the cross-undertaking was given, which is perfectly correct so far as it goes: but the plaintiff did not ever agree nor were they ever asked to pay the extra [original emphasis] price, that is the fortification of the undertaking by security. If they had been asked to do so, it may very well be that they would... 'have declined to take an injunction'. Of course, ... the Court has no power to impose an undertaking on the plaintiffs; and here I think that if I were to make this order I would in essence, ex post facto, be imposing an additional term to the undertaking, without any knowledge one way or the other as to what the situation would have been if it had been sought by the defendants in the first place. That is something which I think it is wrong in principle to do. The addition cannot be shrugged off by the defendants as being merely ancillary ... since it would have been, in my judgment, an important and substantive extra burden over and above the undertaking in fact given." (at 199-200; emphasis supplied)

12. Thus, it would appear from the above extracts that Hirst J did not decide that the court does not have power or jurisdiction to order fortification when security was not sought by a defendant at the time the injunction was obtained and the cross undertaking in damages given. Rather, he had assumed without deciding that technically the court does have such jurisdiction and he went on to hold that it would be wrong in principle to order fortification in such situation.

13. As I understand Mr Yu's submissions, he did not put his case so high that the court would have no jurisdiction to entertain the Defendants' application. In my judgment, the court does have power to order fortification be given subsequently notwithstanding that no application for security was sought when the injunction was granted and the cross-undertaking in damages given as part of the inherent jurisdiction of the court to exercise control over process.

Circumstances in which the power is to be exercised

14. The objections in principle as stated by Hirst J in The Mito are powerful considerations that a defendant should not be given a second bite of the cherry. I accept Mr Barlow's submission that there is a distinction to be drawn between the situation in The Mito where the interlocutory injunction had already been discharged by the time the subsequent application for security was made and the usual case where the interlocutory injunction or the undertaking given in lieu of the injunction (as in the present case) is still in force. Mr Barlow argued that in the case where the interlocutory injunction had been discharged, one could readily see that it would be inappropriate to entertain an application by the Defendant for security to be given of the cross undertaking because at that point, the Plaintiff would no longer have the choice of providing fortification or giving up the injunction. I take the point that in the usual case where the injunction or undertaking in lieu is still in force, it is possible for a Plaintiff faced with a late application from the Defendant either to fortify his undertaking in damages or to let go the injunction. Nevertheless, in that kind of situation, it is still "an important and substantive extra burden over and above the undertaking in fact given" if the court were to order fortification when no security was sought at the time the Plaintiff provided his cross undertaking in damages. In my view, the objections in principle in The Mito are nonetheless relevant and pertinent considerations in an application of this kind in the usual situation where the injunction or undertaking in lieu is still in force.

15. I was referred by Mr Barlow to the decision of Goff J in Harman Pictures N. V. v. Osborne [1967] 1 WLR 723 in which it is stated at 739D-F that the Defendants who were given the liberty to apply to discharge the interlocutory injunction could come back to court and ask for "more security" if there be any material change in the circumstances. I do not regard this statement as indicative of the court's readiness to entertain an application of this nature. I think it is important to bear in mind that in Harman Pictures, Goff J had initially ordered security to be provided by the Plaintiff to fortify its undertaking in damages when he granted the interlocutory injunction. The amount he fixed as security might prove to be insufficient if circumstances should change and the Defendants should then be in a better position to estimate the loss they would suffer if the injunction was to be continued. In that situation, it might well be appropriate for the Defendants to apply for more security to fortify the cross undertaking in damages. This is very different from the situation where no security was ordered in the first place and the Plaintiff is then required to bear "an important and substantive extra burden" as the price for the injunction or the Defendant's undertaking in lieu.

16. In view of the objections in principle as set out in The Mito, I am inclined to think that a subsequent application for fortification when no security was sought in the first place will not usually be entertained, unless the circumstances are compelling. Further, the following observations of Buckley LJ in Chanel Ltd v. F. W. Woolworth & Co. Ltd [1981] 1WLR 485 (a case concerned with an application to discharge an undertaking in lieu of an injunction in an order by consent) are relevant to the exercise of the court's power in an application of this nature:

"The defendants are seeking a rehearing on evidence which, or much of which, so far as one can tell, they could have adduced on the earlier occasion if they had sought an adequate adjournment, which they would probably have obtained. Even in interlocutory matters a party cannot fight over again a battle which has already been fought unless there has been some significant change of circumstances, or the party has become aware of facts which he could not reasonably have known, or found out, in time for the first encounter." (at 492H to 493A; emphasis supplied)

Full and frank disclosure of financial position

17. It was argued by Mr Barlow that as nothing was said by Mr Ronald Cheng regarding his financial position when he gave the cross undertaking in damages in the Consent Order, he had impliedly represented that his financial position would allow him to meet his potential liability under his cross undertaking. As the Defendants have questioned Mr Ronald Cheng's ability to honour his undertaking when the Defendants applied subsequently for fortification, it would be incumbent upon Mr Cheng to make a full and frank disclosure to the court of his financial position to demonstrate that he is able to honour his undertaking. Reliance was placed by Mr Barlow on the decision of the Court of Appeal in Wah Nam Holdings Co. Ltd and Ors v. Excel Noble Development Ltd and Ors CACV No 241 of 1999, 23 December 1999 and the decision of Scott J in Manor Electronics Ltd v. Dickson [1988] RPC 618.

18. I am unable to accept Mr Barlow's submission here. In my view, on the evidence adduced by the Defendants in support of this application (and I will deal with the evidence later), it cannot be said that realistic doubts have been raised about Mr Ronald Cheng's ability to honour his undertaking. In these circumstances, I do not think it is incumbent on him to make full and frank disclosure of his financial position to demonstrate that he is able to honour his undertaking. What Ribeiro J (as he then was) said in the Wah Nam case is as follows:

"It follows that if a Plaintiff's financial position is such that, viewed fairly, it may be said to raise realistic doubts as to the Plaintiff's ability to honour the cross-undertaking, it becomes incumbent upon the Plaintiff to make full and frank disclosure of his financial position to the ex parte judge so as to permit the judge to determine for himself the correct order to make in the light of such disclosures. ...

If the facts were such that the Plaintiff came under a duty to make disclosure, it does not avail him to say that his non-disclosure was inadvertent ...

Similarly, where genuine doubts can materially be raised and there has been a failure to disclose the questionable financial position, it is no answer for the Plaintiff subsequently to argue, from a close analysis and calculation of his actual worth that he probably could meet any potential liability ...

In my judgment, on the evidence, the Plaintiffs were, to say the least, in a highly precarious financial position, making it seriously questionable whether they would be able to honour their cross-undertaking. It was therefore incumbent on the Plaintiffs to make full and frank disclosure of that position to the ex parte judge. ...

It was sufficient for Yuen J to hold that the evidence raised genuine and realistic doubts as to the Plaintiff's ability to honour their cross-undertaking in damages so that a failure to disclose the material circumstances at the ex parte stage constituted a material non-disclosure." (pages 15I to M and S, 16I to K, 17H to J and 25C to E; emphasis supplied)

19. In both Wah Nam and Manor Electronics, the Defendants had adduced evidence before the court to raise genuine and realistic doubts as to the Plaintiffs' ability to honour their cross-undertakings in damages. It was in those circumstances that the courts held that the Plaintiffs should come under a duty to make full and frank disclosure of their financial position and their failure to do so constituted material non-disclosure. As I would demonstrate when I deal with the evidence in this application, the present case is very different on the evidence when compared to the factual situations in Wah Nam and Manor Electronics. If I were to hold Mr Ronald Cheng would come under such a duty to make full and frank disclosure when the evidence adduced by the Defendants did not give rise to any genuine doubt about his ability to honour his cross undertaking, I would be allowing the Defendants to fish for evidence when there is simply no justification for it.

Evidence of Mr Ronald Cheng's financial position

20. Before I deal with the evidence adduced by the Defendants questioning Mr Cheng's ability to honour his undertaking, I need to make a ruling on the admissibility of certain affidavits filed on both sides. Directions were given for the filing of evidence in this application on 12 May 2000. By that order, the Plaintiff and Mr Cheng were required to file evidence in opposition by 19 May 2000 and the Defendants to file evidence in reply by 23 May 2000. The evidence in opposition consisting of an affidavit each of Mr Cheng and the Plaintiff's solicitor Miss Mun Lee Ming, was filed within time on 19 May 2000. On 23 May 2000, the Plaintiff's solicitors filed a further affirmation of Mr Cheng out of time to explain the words "no worse" used in the earlier affidavit of Mr Cheng when he described his financial position in September 1999. Mr Cheng also exhibited to his further affirmation a chart and table regarding the Nasdaq Index. This was his 5th affirmation filed in this action.

21. On 24 May 2000, the Defendants filed evidence in reply being the 6th affidavit of the Defendants' solicitor, Mr Anthony Hill. This affidavit was filed late. On the following day, the Plaintiff's solicitors filed yet another affidavit being the 5th affidavit of Miss Mun in answer to the 6th affidavit of Mr Hill to clarify the attendance of the solicitors in the firm who had attended the hearing when the Consent Order was made in September 1999.

22. At the outset of the hearing before me on 26 May 2000, Mr Barlow informed the court that the Defendants' solicitors would seek leave to put in yet a further affidavit, being the 7th affidavit of Mr Hill which was sworn on 26 May 2000. That affidavit was not ready when Mr Barlow began his submissions and a copy was only supplied to the other side in the course of his submissions.

23. Mr Yu sought leave to rely on two late affidavits on his side, being the 5th affirmation of Mr Cheng and the 5th affidavit of Miss Mun. Mr Barlow's position was that he would not oppose Mr Yu's late affidavits provided that Mr Yu would likewise not oppose his two late affidavits, being the 6th and 7th affidavits of Mr Hill. Mr Yu opposed the late filing of the 7th affidavit of Mr Hill as this affidavit came far too late. He was unable to respond to it with evidence and could only make submissions on the face of the document exhibited. Moreover, in this affidavit, Mr Hill deposed to a document which was inspected by the Defendants' solicitors on discovery on 25 October 1999 by which it was alleged that the Defendants first became suspicious about Mr Cheng's financial position. There was no reason why the Defendants' deponents could not have dealt with this matter when evidence was filed in support of this application in early May 2000 or when the Defendants filed their evidence in reply on 24 May 2000.

24. Having considered the contents of each of these late affidavits, I would give leave to the Plaintiff and Mr Cheng to rely on the 5th affirmation of Mr Cheng and the 5th affidavit of Miss Mun. I would also give leave to the Defendants to rely on the 6th affidavit of Mr Hill. I would decline to give leave to the Defendants to use the 7th affidavit of Mr Hill in this application. This affidavit came far too late for the other side to respond to it with evidence. Moreover, the matters covered in the 7th affidavit of Mr Hill were not triggered by the late affidavits of the other side and there was no reason why those matters could not have been covered in the two rounds of affidavits filed by the Defendants.

25. I now turn to the available evidence on the financial position of Mr Cheng. The only evidence adduced by the Plaintiff to cast doubt on Mr Cheng's financial position is as follows:

(1) In the 5th affidavit of Mr Hill, he stated that he had been informed by Mr Miller and verily believed that Mr Ronald Cheng "is a person who has or has had reasonably substantial assets although, as a result of his recent trading history in securities and the substantial down turn in the values of so-called 'high tech' securities, his present financial position is extremely doubtful and it is unlikely that he would be able to perform on his undertaking in damages in the event .... that the Plaintiff's claim is dismissed."

(2) In the 2nd affidavit of Mr Miller, he confirmed the truth of that statement in Mr Hill's 5th affidavit.

26. It is not surprising that in view of such evidence from the Defendants, Mr Ronald Cheng had merely stated in his 4th and 5th affirmations that he knew of no basis for the Defendants' allegation that his present financial position has become "extremely doubtful" for the reasons as alleged and he confirmed that his present financial position is "as good as, if not better than" the time when he provided his undertaking in damages in September 1999.

27. As pointed out by Mr Yu, the Defendants' evidence consisted of vague and general assertions wholly unsupported by any evidence. On reading that statement in Mr Hill's 5th affidavit, one simply has no idea what the "recent trading history in securities" of Mr Cheng was alleged to be that had brought about a significant change in the "reasonably substantial assets" of Mr Cheng and caused his present financial position to become "extremely doubtful". What specifically were the securities in which Mr Cheng was alleged to be trading? In which stock market was he allegedly trading? Over what period was he trading? And how and to what extent were his financial resources affected by the "substantial" down turn in the values of "high tech" securities? On any fair view of the evidence, it is impossible to say that realistic doubts had been raised regarding Mr Cheng's financial ability to honour his undertaking.

28. For completeness sake, I would add that even if I were to allow the Defendants leave to rely on the 7th affidavit of Mr Hill, I do not think this would have improved the Defendants' position. The Defendants relied on a copy cheque exhibited to that affidavit to justify their suspicion of Mr Cheng's financial position. That cheque was drawn by a third party for the sum of US$5,214,425.00 made payable to the 1st Defendant being the price for the sale of the New Media Shares to the Plaintiff under one of the share sale agreements sued upon. It was submitted for the Defendants that as the purchase price for these shares was not paid by a cheque of Mr Cheng or the Plaintiff, this showed that Mr Cheng did not have assets to pay for such shares. I do not think that would be a proper inference to draw as there may be all sorts of reasons why the cheque of a third party was provided.

Why the application should be dismissed

29. I have dealt with the law and the evidence. In my judgment, the present case is not an appropriate case to exercise the power to order fortification eight months after the undertakings were given in the Consent Order. The objections in principle stated by Hirst J in The Mito are relevant considerations in the present case. The cross undertaking in damages and the Defendants' undertakings were embodied in a Consent Order after agreement was reached between the parties who were legally represented. No doubt was raised by the Defendants at that time as to the financial ability of Mr Cheng to honour his cross undertaking. Indeed, in the 5th affidavit of Mr Hill, he deposed to the information he was given by Mr Miller that Mr Ronald Cheng is a person who "has or has had reasonably substantial assets". There is no or no adequate basis in the evidence filed by the Defendants which would cause one to have realistic doubts as to Mr Cheng's financial ability to honour that undertaking.

30. Submissions had been made to me on both sides regarding the effect of certain "lock-up undertakings" (whereby the Defendants would not have been able to sell the Shares prior to 29 September 2000 in any event regardless of the Defendants' undertaking in the Consent Order), the inability of the Defendants to deal with the Shares on the "grey" market and his inability to borrow on the security of the Shares because of the Defendants' undertaking in the Consent Order. I do not propose to deal with these submissions because I do not think they are really material to the consideration whether fortification should be ordered in the particular circumstances.

31. For the above reasons, I dismissed the two summonses taken out by the Defendants and ordered that they should pay the costs of the Plaintiff and Mr Ronald Cheng in this application in any event with a certificate for two counsel.