LUCKY SUN DEVELOPMENT LTD AND ANOTHER v. GAINSMATE INTERNATIONAL LTD AND OTHERS

HCCT 12/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO. 12 OF 2007

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D E C I S I O N

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1.  This is an application to stay the execution of my injunction order made on 2 October 2007.  The dispute is about the sale and transfer of the 3rd defendant’s shares by the 1st and 2nd defendants to the plaintiffs and the plaintiffs’ potential liability to bear the tax that may be levied on the 1st and 2nd defendants in respect of this sale.

2.  This matter has been referred to arbitration.  The Arbitration Tribunal will soon consider whether to make an interim order requiring the transfer of the shares to the plaintiffs, subject to the provision of a guarantee or security by the plaintiffs to pay the tax if need be. 

3.  Mr Chang SC, who only appeared on this application, submitted that I should stay the execution of the order in the interim pending the interim order of the Arbitral Tribunal. 

4.  Miss Cheng SC said that I have no jurisdiction to make such an order and I could only consider a stay pending appeal.  I do not agree.  First, my injunction order was said to be subject to further order.  Second, I think O.45 r.11 of the Rules of High Court empowers me to make such order, because the notice by the Arbitral Tribunal dated 7 October 2007 stating its intention to make an interim order is a new development in this matter.

5.  Mr Chang further submits that if the shares should be transferred pursuant to the Tribunal’s interim award, there will be no need for my order as the part of the dispute relating to my order will be resolved.  However, I do not know if the Tribunal will be in a position to make the order or when the order will be made.

6.  The 1st and 2nd defendants will be suggesting to the Tribunal that the parties should go directly before the Mainland tax authority to find out the actual amount of tax payable.  If that suggestion should be accepted by the Tribunal, then it will take some more time before the Tribunal will be in a position to make the award.  In any event there is no guarantee that an interim award for transfer of the shares will be made.  The Tribunal’s intention to make the award also has nothing to do with the merits of my order.  I therefore decline Mr Chang’s suggestion of an interim stay.

7.  I now consider the 1st and 2nd defendants’ application for an order for stay pending appeal.  Mr Chan Heung-wing of the defendants’ solicitors has made two affirmations to support this application.  He has advanced a number of grounds in his seventh affirmation.  The first ground is that if the Huigu shares are released pursuant to my order, the freezing order will be discharged by the Mainland court.  His reason being that the 3rd defendant has no substantive asset that can be used as security save the shares of Huigu.  He went on to say that without the freezing order the Mainland litigation might become futile.  He also impressed upon me that the freezing order had been upheld despite repeated challenges by the defendant of those proceedings and that the Mainland courts accepted that the freezing order should be in place.  He further said that if the freezing order should be discharged, a successful appeal against my order would become nugatory.  In that even, the defendant in the Mainland proceedings can also sell the properties which are presently covered by the freezing order.  It can also transfer the proceeds away.

8.  The freezing order provides security for the benefit of the 1st and 2nd defendants in the event of the plaintiffs’ default in completing the purchase of the 3rd defendant’s shares after taking away RMB300 to 400 million from Huigu.  If the sale of the 3rd defendant’s shares can be completed, the freezing order will not continue as the plaintiffs, after taking over the shares of the 3rd defendant, will procure the withdrawal of the Mainland action and the freezing order.  Since the freezing order is for the benefit of the 1st and 2nd defendants and against the will of the plaintiffs, it is for the 1st and 2nd defendants to provide their own security to back it up. 

9.  The plaintiffs own a substantial portion of the beneficial interests of the 3rd defendant’s shares and, through which, the Huigu’s shares, for whatever they may be worth.  It is not right for the 1st and 2nd defendants to use such shares to secure the freezing order.  The latest expert evidence procured by the 1st and 2nd defendants on their tax liability is at RMB60 million only (and not RMB200 million).  The position of the 1st and 2nd defendants has thus improved to the tune of RMB140 million. 

10.  I have made it clear in my last decision that I do not intend to interfere with the Mainland proceedings or the freezing order.  I only want the 1st and 2nd defendants to procure the release of the Huigu shares.  They can provide other security to keep the freezing order in place.  If the 1st and 2nd defendants can provide other security, the appeal will also not become nugatory.  If my order should be overturned on appeal, the 1st and 2nd defendants would then be at liberty to use the Huigu shares as security again.

11.  The 1st and 2nd defendants can also consider applying to the Mainland court for an order to preserve the proceeds of sale of the properties that are subject to the freezing order.  This is a matter for the parties in the Mainland proceedings and I make no comment on it.

12.  Mr Chan also mentioned that it was this court which raised the option of requiring the 1st and 2nd defendants to provide their own security to maintain freezing order and that this option was raised quite late and, thus, never properly addressed to by evidence.

13.  The plaintiffs were seeking to maintain the ex parte order as a whole.  They wanted the release of the Huigu shares as well as other remedies.  Their main ground was that they were the beneficial owners of the Huigu shares through their beneficial ownership of the 3rd defendant.  The 1st and 2nd defendants opposed it.  They wanted the ex parte order to be discharged in toto.  However, neither side should expect that the ex parte order would only be maintained or discharged in toto.  The court will choose an option which appears most just in the circumstances.  The option of requiring the 1st and 2nd defendants to provide their own security was mentioned by the court with a view to preserve the freezing order and, at the same time, not to expose the Huigu shares to risk.  When this was raised, leading counsel for the defendants did not seek indulgence to put in further evidence. 

14.  This court has been vigilant to ensure that the parties are given proper opportunities to present their evidence.  It was because of this that an attempt by the plaintiffs to provide the defence of the Mainland proceedings did not succeed.  Furthermore, Mr Chan has not stated what sort of evidence would have been given if this option should have been raised earlier or at the stage of exchange of affidavits.

15.  Mr Chang also submitted this morning that the defendants were desirous of putting in further evidence, but I understand it to be evidence for this application.  Since my order is subject to further order, I will deal with the new evidence when it is properly available. 

16.  Mr Chan also repeated the argument that the Mainland proceedings were for recovery of money wrongfully taken away from Huigu.  He said there is no justification for the 1st and 2nd defendants to put up security for the freezing order.  I am afraid this argument overlooks the reasons that I have given in my decision.  I just want to add that the freezing order was obtained and maintained against the will of the plaintiffs.  In truth and in fact, the freezing order provides security to the 1st and 2nd defendants and is ultimately beneficial to them.  If the transaction should be completed and the plaintiffs should become the legal owners of the 3rd defendant’s shares, I am sure they would apply to withdraw the Mainland proceedings and the freezing order in no time. 

17.  Mr Chan further said that if the 1st and 2nd defendants are required to put up security for the freezing order, they would suffer serious financial loss immediately when they have to divert very substantial assets from their legitimate business purpose.  They also cannot look to anyone to compensate such loss.  They are also BVI companies that have no real assets.  In almost the same breath, he said the defendants are not in a position to put up very substantial assets as security for the freezing order as their assets are tied down in long term investments and cannot be extricated without disastrous financial consequences. 

18.  These are assertions with no particulars.  It also overlooks the undertaking in damages given by the plaintiffs.  If the 1st and 2nd defendants should succeed in showing that the plaintiffs are indeed liable to pay the Mainland tax under their contract with the 1st and 2nd defendants, and the 1st and 2nd defendants are entitled in the meantime not to transfer the 3rd defendant’s shares to them, then the 1st and 2nd defendants can consider seeking damages under the plaintiffs’ undertaking.  The plaintiffs have also proffered a cross-undertaking in damages if no stay of the order is granted.  I accept this undertaking.  The 1st and 2nd defendants are at present keeping RMB200 million paid to them by the plaintiffs.  If the transaction should be completed, the plaintiffs would be holding the shares of the 3rd defendant and the assets of Huigu through the 3rd defendant. 

19.  Mr Chan also argued that if the defendant in the Mainland proceedings has no defence, then the plaintiffs would not suffer any loss.  I have already dealt with this argument at length in my last decision.  I see no merit in it.

20.  Mr Chan also said in his 8th affirmation that the Mainland judges were on leave and they only returned to work yesterday, hence the time for complying with the order should be postponed.  I agree with it and will deal with it below.

21.  Mr Chan also said that there was no urgency for my order as the price of real property has been on the rise in the Mainland and the defendant in the Mainland proceedings is benefiting from the increase in value of its properties which are frozen by the freezing order. 

22.  My order was not granted on the basis of urgency.  It was granted for the reasons in my decision.  Whether the freezing order is hurting or benefiting the defendant in the Mainland proceedings is irrelevant.  If that party wants to reap the benefit from the increase in property price, it is at liberty not to sell the properties now, but it is not a matter that I should consider on this application.

23.  I refer to the decision of Star Play Development Ltd v Bess Fashion Management Co Ltd., HCA4726/2001 at paragraphs 6 to 10, where the principle for stay of execution has been set out by Ma J (as he then was).  I do not think the 1st and 2nd defendants have advanced sufficient reasons to justify a stay of my order.  I am not convinced that there are reasonable prospects of success on the appeal.  There is also no evidence to show why the appeal will be rendered nugatory if no stay is granted.

24.  For the above reasons, I dismiss the application for stay pending appeal.  However, I will revise the time for the 1st and 2nd defendants to perform the order to within 10 days after service of this revised order on the 1st and 2nd defendants, or either of them.  This revision also takes care of the requirement of O.42 r.2 of the Rules of High Court.

25.  Finally, I make a costs order nisi, that the 1st and 2nd defendants do pay the plaintiffs the costs of this application, to be taxed.