XCHRX STANDARD CHARTERED BANK v. YEUNG KWOK FAN AND ANOTHER

HCA 1969/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1969 OF 2000

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REASONS FOR DECISION

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1. The 1st Defendant is the Chairman and Managing Director of Wah Lee Resources Holdings Ltd, ("Holdings") a company incorporated in Bermuda and Listed on the Hong Kong Stock Exchange and holds 70% of the entire issued share capital of Lucky Bingo Investment Ltd ("Lucky Bingo") while the 2nd Defendant is the wife of the 1st Defendant, a director of Holdings and holds the balance of the issued share capital of Lucky Bingo.

2. Lucky Bingo is a substantial shareholder of Holdings holding 517,620,000 shares which represented 33% of the issued share capital.

3. By a Guarantee dated 13 July 1999 in consideration of the Plaintiff granting banking facilities to 4 companies within the Holdings to the extent of $70 million the Defendants undertook to pay and discharge the liabilities of those 4 companies.

4. Statutory Demands were made under the Guarantee on 27 Oct 1999. The Defendants have not made payments under the Guarantee. Instead they have instituted proceedings to set aside the Statutory Demand.

5. Meanwhile on 25 November 1999 the Plaintiff presented a petition in Bermuda for the winding up of Holdings. The petition was first heard on 14 January 2000 but was adjourned for hearing on 3 March 2000 when the Plaintiff will seek a winding up order.

6. By a notice dated 15 February 2000 from Holdings signed by the 1st Defendant as Chairman and Managing Director it was announced that Lucky Bingo had commenced preliminary negotiations with an independent third party for the sale of its shares in Holdings.

7. By a second notice dated 18 February 2000 signed by the 1st Defendant as Chairman and Managing Director of Holdings it was announced that

(i) By an agreement dated 18 February 2000 Lucky Bingo would sell by private placement to independent third parties 313,600,000 shares at $56 million completion to take place on 23 February 2000.

(ii) By a Subscription Agreement of the same date Lucky Bingo would subscribe the equal number of shares in Holdings completion of the subscription to take place on 1 March 2000 subjection to conditions set out in that notice.

(iii) The effect of the two agreements was to dilute Lucky Bingo's holding from 33% to 27%.

8. As part of its proposal to re-structure the indebtedness of Holdings the notice also stated that the proceeds under the subscription would be used to repay bank borrowings and other loans of the group and also as general working capital.

9. Completion of the placement was on 23 February 2000 and the proceeds of sale are now in existence.

10. On 23 February 2000 the Plaintiff applied for a Mareva Injunction in respect of the proceeds of sale before Stone J ex-parte. The application was dismissed. The Plaintiff appealed to Woo JA ex-parte and was granted the order on 24 February 2000. The matter was adjourned to 3 March 2000 before me.

11. The Plaintiff feared that unless an injunction is granted those proceeds of sale would be used to purchase the new subscription shares in Holding under the Subscription Agreement.

12. However Clause 2.3 of the letter dated 18 February 2000 from Lucky Bingo to Holdings signed by the same person for Lucky Bingo and Holdings it stated

"2.3 In the event of the conditions referred to in Clause 2.1 above not having been fulfilled by the time specified therein (or such later date as may be agreed by the parties hereto) or the Petitions have not been discharged and/or discontinued by the time specified in Clause 2.2(c) all rights, obligations and liabilities of the parties hereunder in relation to the subscription shall cease and determine and none of the parties shall have any claim against any other in respect of the subscription."

13. That Subscription Agreement lapsed as the Plaintiff's petition to wind-up Holdings have not been discharged or discontinued and that 4 of Holdings subsidiaries have been wound-up under the order pronounced by Le Pichon J.

14. The Plaintiff's case is that since the Defendants are the beneficial owners of all the issued share capital of Lucky Bingo they are entitled to the proceeds of the placement sale of the 313,600,000 shares in Holdings. If the proceeds were to be put back to Holdings by way of subscribing the shares in Holdings there will be dissipation of assets as the effect of the Subscription Agreement is to dilute Lucky Bingo's share holding in Holdings from 33% to 27% without any apparent gain. Further Holdings is hopelessly insolvent as it owed the Plaintiff (Petitioner in Bermuda petition) over 60 million which according to Mr Tong SC is about 20% of Holdings' indebtedness to its creditors. To pump the proceeds of sale of the placement shares would mean putting the cash into a black hole which is commercially unjustifiable. The Plaintiff in any event is going to oppose any adjournment and will press for a winding up order.

15. Mr Tong submitted that there is no evidence that rescue operation of Holdings would not work and there is the question of whether there is any threat of unjustifiable dissipation. Holdings being a public company the Defendants should be allowed to use the proceeds as intended in the notice to rescue Holdings for the moral good of the public. Further although the Subscription Agreement lapsed there is nothing to stop the Defendants from entering into a different agreement.

16. Though the 1st Defendant is the Chairman and Managing Director of Holdings, however no affidavit has been filed. He knew or ought to have known whether there are schemes for the rescue of Holdings. The only information available as to re-structuring of Holdings is the proposal dated 23 February 2000 by Sun Hung Kai International Ltd on behalf of an investor to inject $100 million subject to a number of conditions including the withdrawal or termination of all outstanding liabilities, claims, disputes and litigations relating to the group (i.e. Holdings and its subsidiaries) to the satisfaction of the Investor.

17. Apparently it did not work as there is no evidence as to any progress arising out of that proposal. In the absence of any evidence of a re-structuring proposal it is unlikely that the Bermuda Court will grant a further adjournment at the resumed hearing of the winding up petition of the Holdings in a few hours time today (due to time difference). If Holdings were to be wound up it would be futile to give any undertaking not to use the proceeds of sale other than to rescue Holdings. In any event it is unlikely that Holdings can be rescued with the injection of only $56 million when the total amount of debt owed by Holdings is about $300 million. Since the Plaintiff insists on a winding up order, the chance of the survival of Holdings is extremely slim. If the proceeds of sale were to be paid into Holdings it is likely the Plaintiff would be able to get just a fraction of that amount in the event of a winding up. The proceeds of sale will be dissipated.

18. If Lucky Bingo genuinely wanted to rescue Holdings I query why the Subscription Agreement should be subject to conditions in particular that the agreement is subject to the Petitions being discharged or discontinued. If it takes time for the Stock Exchange to approve the subscription Lucky Bingo could have injected the proceeds of sale temporarily to Holdings as a loan if its intention was to rescue Holdings. There is no evidence that there was any negotiation or attempt for the Petition to be discharged. So was it a deliberate attempt for Lucky Bingo to minimise its loss in Holdings by holding into the proceeds of sale or to rescue Holdings? Was it for the moral good of the public to hold onto that amount? I have doubts about it.

19. In the event of a winding up order of Holdings any application by Lucky Bingo of the proceeds may amount to dissipation.

20. By reasons aforesaid the balance of convenience strongly favoured the restrain of the $56 million and Woo JA's order, save and except paragraph 2.2(1), should continue until further order.

21. In respect of paragraph 2.2(1) the time for disclosure of information regarding Defendant's assets will be extended for 14 days from 3 March 2000. By consent the disclosure amount will be enlarged to $100,000.00 and that the discovery be limited to only $8 million.

22. Costs in the cause. Certificate for two counsel.