GENTLE SOAR LTD v. CMBC CAPITAL FINANCE LTD AND OTHERS

HCA 678/2021

[2021] HKCFI 3450

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 678 OF 2021

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DECISION

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Introduction

1.  This application concerns the sale and transfer (the “Sale” or “Disposal”)  in April 2021 of 652,680,000 shares (the “Subject Shares”)  in Steer Holdings Limited (Stock Code 1826)  (the “Listco”)  by the 1^st defendant (“D1”)  to the 2^nd defendant (“D2”, of which the 3^rd defendant (“D3”)  has been the sole shareholder and a director”), and raises the issues as to whether the Sale was, as averred by the plaintiff (“P”), effected wrongfully, so that D2 should be restrained from dealing with the Subject Shares.

2.  Mr Ambrose Ho SC and Mr Jenkin Suen SC leading Mr Terrence Tai appeared for P.  Mr Victor Dawes SC, leading Mr Bernard Mak, Mr Bryan Lee and Ms Candice Lau appeared for D2 and D3.

The Injunction sought

3.  Before me is the substantive hearing of the summons (the “Injunction Summons”)[1] taken out by P on 4 May 2021 for an injunction to restrain D2[2], whether by itself or its officers, directors, employees, servants or agents or otherwise howsoever from:

(a)  taking further steps to complete the Sale (§1(1));

(b)  dealing with, selling, transferring, disposing or creating any security interest in respect of the Subject Shares (§1(2)(a)); and

(c)  exercising the voting rights attached to the Subject Shares (§1(2)(b)).

4.  According to the evidence before me, the Sale has been completed.  There is nothing further in that regard to be enjoined.  That being the case, and as confirmed by Mr Ho, §1(1)  of the Injunction Summons is no longer being pursued.

5.  The foci of the application are therefore whether D2 and D3 should be enjoined from dealing with the Subject Shares (§1(2)(a)), and even so, whether they should also be enjoined from exercising the voting rights attached to those shares (§1(2)(b)).

The background

6.  P is a company incorporated in the British Virgin Islands.  Mr Gao Yunhong (“Gao”)  has been its sole director and shareholder.

7.  CMBC Capital Holdings Limited (“CMBC Capital”)  is a company listed on the Stock Exchange of Hong Kong.  It is the parent company of D1. D1’s principal business is the provision of loan financing services.

8.  Before 2017, D3 was through D2 the controlling shareholder of the Listco. In about November 2017, P acquired from D2 70% shareholding in the Listco at HK$0.544 per share.  After the acquisition, P held 70% shares in the Listco, and D2 4.62%.  D3 remained on the Listco’s board.

9.  By a facility agreement dated 30 May 2018 (the “Facility Agreement”), P obtained a loan in the sum of HK$200 million from D1 (the “Loan”).  The Loan was secured by a share charge of the same date in favour of D1 over some of the shares in the Listco which P held (the “Share Charge”).  The exact number of the charged shares varied at different stages.  But at the time relevant to the present action, the total number of the Subject Shares were so charged.

10.  On 12 and 15 March 2021, D1 issued demand letters to P for non-payment of outstanding interest.

11.  In his first affirmation, D3 says that in around March 2021, he was worried that D1 might sell the Subject Shares to strangers.  Having satisfied himself that he would have sufficient resources to acquire the Subject Shares, he on 18 March 2021 gave instructions to his assistant to instruct his solicitors, Messrs K M Lai & Li (“KMLL”), to approach D1 to express interest in acquiring the Subject Shares.

12.  On 19 March 2021, P by email[3] asked D1 for a standstill of the Facility Agreement for two years, during which period neither principal nor interest would be repaid.  The stated reasons for the request were the deterioration of P’s operation environment, and its financial difficulties.  P said that if it were to continue to make repayment to D1, its business would completely “withered” (乾枯), that it would bleed its last drop of blood, and that there would be no possibility of recovery.

13.  On 22 March 2021, D1 provided D2 and D3 with copies of the Facility Agreement and Share Charge.

14.  On 23 March 2021, D1 informed KMLL that the outstanding principal and interest on the Loan was HK$105 million, and that P had defaulted repayment of interest in the amount of HK$2.25 million.

15.  According to D3, from 23 March 2021 onwards, KMLL had been negotiating with D1 on the purchase price of the Subject Shares.

16.  Between about 23 and end of March 2021, P says that there were discussions between P and D1 concerning P’s performance of its obligations under the Facility Agreement and Share Charge.

17.  On 31 March 2021 at 06:10, the Listco uploaded its Annual Results Announcement for the Year Ended 31 December 2020 dated 30 March 2021 (“Annual Results”).  The Annual Results show amongst other things that:

(a)  the “(Loss)/earnings per share – Basic and diluted (HK cents)” dropped from profit of 1.7 in 2019 to loss of (18.4)  in 2020;

(b)  the net asset value (“NAV”)  and total equity had dropped during that same period from HK$428,189,000 to HK$2,316,000, which represents a drop of nearly 99.5%;

(c)  The Listco and its subsidiaries incurred a net loss of approximately HK$429,528,000 during that financial year, and had net current liabilities of approximately HK$16,819,000; and

(d)  the Auditors had issued a disclaimer opinion (“Disclaimer Opinion”)  in relation to the consolidated financial statements of the Listco and its subsidiaries.  The announced bases for the Disclaimer Opinion related to (1)  “Other receivables, deposits and prepayments”, (2)  “Income tax expense and tax payable”, and (3)  “Multiple uncertainties relating to the going concern”;

(e)  Specifically under basis (3), the Listco in the Annual Results had the following to say:

“ As explained in Note 3 to the consolidated financial statements, the Group incurred a net loss of approximately HK$429,528,000 for the year ended 31 December 2020, and, as of that date, the Group had net current liabilities of approximately HK$16,819,000. In addition, as described above, the Group may be subject to significant late penalty and surcharge related to income tax of the financial information and technology services segment. These conditions indicate the existence of material uncertainties that may cast significant doubt on the Group's ability to continue as a going concern.”

18.  With effect from 31 March 2021 at 09:00, the trading in the shares of the Listco was upon its request halted.  The reason announced was the issue of the Disclaimer Opinion by the auditors[4].

19.  On 31 March 2021, D1 issued to P a default notice[5] (the “Default Notice”).  D1 stated therein that events of defaults under the Facility Agreement had occurred.  In particular, four events of defaults were named: (i)  failure to pay on due date the amounts payable, (ii)  Gao having ceased to be the Chairman of the Listco, (iii)  the NAV of the Listco having dropped below HK$100 million; and (iv)  an event which would reasonably be expected to have a Material Adverse Effect as defined in the Facility Agreement having occurred.  D1 called for immediate repayment by 7 April 2021 of the outstanding Loan in the amount of HK$100 million together with interest and default interest in the total amount of HK$674,750.

20.  In respect of the third named events of default, it is relevant to note that the NAV of the Listco disclosed in the Annual Results represented only 2.316% of the minimum (of HK$100 million)  required under the Facility Agreement.

21.  P did not made repayment as demanded by D1.

22.  On 7 April 2021, a sum of HK$10 million was paid via a cheque issued by KMLL for D2 to D1.

23.  According to D3, the total consideration of the purchase from D1 of the Subject Shares was on 13 April 2021 confirmed to be HK$103 million.

24.  On 14 April 2021, D1 issued a notice of enforcement to P (the “Enforcement Notice”)[6]. D1 notified P amongst other things that it had received an offer for the Subject Shares in the sum of HK$103 million, and that unless P made full repayment of the outstanding amounts by 15 April 2021, it would accept the offer and proceed with the sale of the Subject Shares without further notice.

25.  An agreement for sale and purchase of the Subject Shares dated 21 April 2021was ultimately signed (the “S&PA”)[7]. It was between D1 as vendor and D2’s nominee[8] as purchaser.  The consideration was HK$103 million (the “Sale Consideration”).  Clause 2.3 thereof says that “a sum of HK$10,000,000 (the ‘Deposit’)  being deposit already paid to the Vendor prior to the signing of this Agreement …”  The Bought and Sold Note and Instrument of Transfer are both dated 23 April 2021.  D2 paid the balance of the Sale Consideration on the same day.  The CCASS instruction record dated 26 April 2021 shows that the Subject Shares has been transferred to the custody of China Galaxy International Securities (Hong Kong)  Co., Limited, which is the broker/security custodian of D2.

26.  At the time of the Sale and Disposal, the Subject Shares represented 49% of the shares in the Listco.

P’s pleaded case

27.  The Writ with general indorsement was filed on 30 April 2021.  The Statement of Claim was filed on 7 July 2021. In gist, P claims:

(a)  against D1[9] breach of mortgagee duties, in that the Sale Consideration was at a knockdown price which just covered the outstanding loan and interest, that “the fair value of the Subject Shares as of 23 April 2021 was (at least)  HK$182,616,245”, that the Sale Consideration did not take into account Shell Premium[10], that less than a month has lapsed since the issuance of the Default Notice, and that “[it] appears that [D1] did not take any reasonable care and precautions to obtain the fair or true market value of or the proper price for the Subject Shares”;

(b)  against D2 and D3[11] that they acted in bad faith in purchasing the Subject Shares with knowledge of the breaches on D1’s part; and

(c)  against Ds[12] that they acted in concert or conspired together to injure P’s interest by unlawful means.

Parties’ cases in the present application

28.  At its core, P’s case against all the defendants (“Ds”)[13] is that:

(a)  D1 has not seriously made any real attempt:

(i)  to expose the Subject Shares to the market;

(ii)  to take steps to enable investors to conduct due diligence over the Subject Shares; and/or

(iii)  to obtain proper valuation evidence regarding the price at which the Subject Shares ought to be sold;

(b)  Ultimately, D1 and D2 wilfully turned a blind eye and were content for the Subject Shares to be sold/acquired hastily at a knockdown price, barely enough to pay off debts owed by P to D1; and

(c)  Ds ignored the fact that the Subject Shares would confer on D2 a controlling interest in the Listco, and that the price at which the Subject Shares were sold took no account of the Shell Premium.

29.  On the above basis, Mr Ho submits that:

(a)  D1 has breached its duties as mortgagee when exercising its power of sale, so that the Disposal is liable to be set aside;

(b)  in the absence of injunctive relief, D2 may dispose of or otherwise deal with the Subject Shares which may render P’s claims herein nugatory; and that

(c)  there are serious issues to be tried and that the balance of convenience tilts heavily in favour of the grant of injunctive relief.

30.  On behalf of D2 and D3, Mr Dawes submits that there are no serious issues to be tried.  He submits that P’s case that the Sale Consideration of HK$103 million being a knockdown price is based on the opinion provided by Vincorn Consulting and Appraisal Services (“Vincorn”), but that Vincorn’s opinion is obviously erroneous and faulty.  There are good reasons that necessitated the speed of the Sale.  D1 had taken reasonable care in obtaining the fair value for the Subject Shares, and for that purpose Somerley Capital Limited (“Somerley”)  had been engaged.  The evidence is far from being cogent to support P’s allegations of fraud and conspiracy against Ds.

31.  On balance of convenience, Mr Dawes acknowledges that if this Court is to find that there are serious issues to be tried, it would be difficult for D2 to argue that it is nonetheless entitled to sell, transfer or dispose of or create any security interest over the Subject Shares.  However, on the facts of the case, given in particular the need to regain the listing status of the Listco, and P’s previous impeding course of conduct, D2 should not be enjoined from exercising its voting rights.

Whether events of defaults have occurred

32.  Whether the events of defaults relied upon by D1 have indeed occurred (or otherwise constituted events of defaults as defined in the Facility Agreement)  is in dispute.

33.  However, as has been submitted by Mr Ho[14], for the purposes of this application, P will focus on D1’s alleged breaches of duties as mortgagee and D2’s alleged knowledge of the same to contend that there are serious issues to be tried. 

34.  I will therefore proceed for the purpose of this application with that focus in mind. 

The applicable principles

35.  Mr Ho has highlighted the fact that the present application by P is for an interim proprietary injunction. 

36.  The legal principles and considerations applicable to an application for a proprietary injunction is not in dispute[15]. As summarized at Sections C1 and C2 of Mr Ho’s written submissions (citing inter alia Pacific Bulk Investment Ltd v Chu Kong [2020] HKCFI 2825, Samtani v Samtani [2012] 4 HKLRD 872, Liao Chen Toh v Loyal International Enterprises Co Ltd & Ors, HCA 2302/2014 (30 March 2016)  and Music Advance Ltd v Incorporated Owners of Argyle Centre Phase I [2010] 2 HKLRD 1041:

(a)  For the grant of an interlocutory injunction, the broad requirements are that (a)  there is a serious issue to be tried, and (b)  the balance of convenience lies in favour of granting or continuing the injunction;

(b)  Specifically in relation to the grant of a proprietary injunction or a preservation order:

(i)  There is property which is bona fide the subject matter of the cause or matter, or as to which any question may arise;

(ii)  Something ought to be done for the security of that property, because for example damages may not be an adequate remedy;

(iii)  Unlike application for a Mareva injunction, no risk of dissipation needs to be demonstrated;

(iv)  Even if there has been delay in making an application which may lead to refusal of a freezing injunction, a proprietary injunction may nonetheless be granted;

(v)  An enquiry into the relative merits of rival claims is not necessary.  In respect of the merits of the claim, the party seeking the preservation order only needs to show that there is a serious issue to be tried on the merits on the normal American Cyanamid principles;

(vi)  If the opposing party seeks to show that there is no serious issue to be tried, the threshold is high, as it would be necessary to demonstrate that the claim should be struck out;

(vii)  There is no strict requirement for an undertaking as to damages where the Court grants a proprietary injunction or a preservation order, albeit that the Court may require such an undertaking “where the circumstances warrant”;

(viii)  There is no need for P to show that damages would not be an adequate remedy;

(c)  As a fundamental principle, the Court at the interlocutory stage would take whichever course that appears to carry the lower risk of injustice if it should turn out that it is wrong;

(d)  I have also considered the number of authorities cited by Mr Ho[16] on the threshold of “serious issues to be tried”.  I bear in mind that it is “not a very steep hurdle”[17], but that, as has been summarized above, if the opposing party seeks to show that there is no serious issue to be tried, the threshold is high.

37.  Given the plea of fraud against Ds, the Re H principle is engaged, which is equally applicable when considering whether a serious issue to be tried has been established in the context of an application for interlocutory injunction – see Prime Deal (HK)  Enterprises Limited v The Hongkong and Shanghai Banking Corporation Limited and anor HCA 2142/2002 (unrep, 15 July 2002), per Ma J (as he then was)  at §§ 14(4), (5)  and (7)  and Yu Mengying v Skyhigh Investment Ltd [2020] HKCFI 913, 1 June 2020, §§40-41, per Mimmie Chan J.

38.  The law on the duties of mortgagee is not in dispute.  In gist, and as summarized by Mr Ho:

(a)  In exercising his power of sale, a mortgagee is under an obligation to act in good faith and not to deal wilfully and recklessly with the mortgaged property in such a manner that the interest of the mortgagor are sacrificed: Kennedy v De Trafford [1897] AC 180 at 185 per Lord Herschell;

(b)  The mortgagee is under a duty to take reasonable precautions to obtain a proper price.  This duty to take reasonable precautions is an aspect of the mortgagee’s duty to act in good faith: Forsyth v Blundell (1973)  129 CLR 477 at 481 per Menzie J; Frost Ltd v Ralph (1981)  115 DLR (3d)  612 at 622 per Goodridge J;

(c)  The mortgagee cannot unfairly prejudice the mortgagor by selling hastily at a knockdown price sufficient to pay off his debt.  He must take proper care whether by fairly and properly exposing the property to the market or otherwise to obtain the best price reasonably obtainable at the date of sale: Silven Properties Ltd v RBS Plc [2004] 1 WLR 997 at §19 per Lightman J;

(d)  Where a mortgagee fails to take all reasonable steps to obtain the best price reasonably obtainable, the Court may set aside the sale and restore to the borrower the equity of redemption of which he has been unjustly deprived: Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349 at 1359H-1360A per Lord Templeman;

(e)  A subsequent purchaser is not protected if he has actual or constructive notice of the impropriety in the sale.  In such case, the mortgagor can have the sale set aside, if he seeks relief promptly, with the result that he recovers his equity of redemption: Fisher & Lightwood’s Law of Mortgage (2019, 15^th Edn)  at §30.38.

39.  I apply the above principles.

The expert evidence on valuation

40.  One main plank of P’s case is that the Sale Consideration was at a knockdown price.

41.  I will therefore consider this plank of P’s case first.

42.  Expert evidence on valuation of the Subject Shares has been adduced.

43.  For P:

(a)  Vincorn has been engaged.  Its report of 26 May 2021 has been produced[18];

(b)  In determining the fair value of the Subject Shares, Vincorn adopted the Market Approach by making reference to two market comparables;

(c)  When considering those comparables, Vincorn assumed that the transaction prices each comprise (i)  the NAV of the company which the sale shares concerned represented (the “NAV Portion”), and (ii)  the “Shell Premium”[19];

(d)  Vincorn explained that “Shell Premium is borne from a listed company and its listed status which is a valuable asset that could be realized for the benefit of the shareholders through a ‘backdoor’ listing by the interested buyer”;

(e)  Vincorn opined that although the Subject Shares only represented 49% of the entire issued share capital of the Listco, given D2’s pre-existing holding of some 4.62%, the Disposal was deemed to be a controlling shares transaction with listing status, and the fair value of the Subject Shares should incorporate Shell Premium;

(f)  From the two comparables, Vincorn worked out the value of the Shell Premium.  In respect of each of the comparables, Vincorn noted the percentage of the acquired interest (72.05% and 61.94% respectively).  From the actual consideration paid, it worked out the consideration for the Implied 100% Interest (by dividing the actual consideration by the percentage of the acquired interest).  Vincorn then noted the 100% NAV of the company from public documents, and subtract that sum from the Implied 100% Interest.  The result Vincorn said represented the Shell Premium paid.  It averaged out the Shell Premium in each of the two comparables, and reached the valuation of HK$134,069,985;

(g)  The 49% NAV of the Listco which the Subject Shares represented (i.e. the NAV Portion)  was HK$48,546,260;

(h)  The fair value of the Subject Shares disposed to D2 is therefore the aggregate of the NAV Portion and Shell Premium, which comes to HK$182,616,245 (which price, it is noted, is pleaded in the Statement of Claim as being the least of the fair value of the Subject Shares).

44.  For D2 and D3:

(a)  Valtech Valuation Advisory Limited (“Valtech”)  has been engaged. Its opinion letter of 2 August 2021 has been adduced[20];

(b)  In gist, it is the opinion of Valtech that:

(i)  Since the Subject Shares represented only 49% of the entire issued shares of the Listco, the Shell Premium shall, according to the methodology employed by Vincorn, be applied in accordance with the proportion of the equity interest being valued (ie. 49%);

(ii)  As such, the Shell Premium (and hence the fair value of the Subject Shares)  shall, assuming that Vincorn was correct in all other aspects, be reduced (at least)  by 51% (i.e. HK$68,375,692)[21];

(iii)  Vincorn's Valuation appears to be (at least)  flawed for its failure to make the adjustment accordingly;

(c)  Apart from commenting on the valuation of Vincorn, Valtech has not put forward their own valuation of the Subject Shares.

45.  In reply[22], Vincorn:

(a)  expressed the view that:

“ A Shell value is a monetary value paid by purchasers for the shares they acquired, rather than a notional value attached to the entirety of the shareholding of a company to be pro-rated to the percentage of shares acquired. A Shell Premium should be attached to a block of shares if, after acquiring such block, the intended purchaser's shareholding would increase to over 50%. A Shell Premium could hardly be charged if the purchaser were a different person without a shareholding that could make up to over 50% after the purchase.”

(I will for ease of reference refer to that approach and methodology as the “No Pro-rata Approach”.)

(b)  maintained the accuracy of its original valuation.

46.  In my view, the valuation of Vincorn is problematic. 

47.  The valuation of Vincorn is internally inconsistent, in the sense that it is inconsistent with the very same comparables which Vincorn relied on:

(a)  I have summarized above Vincorn’s opinion and its reasoning;

(b)  In reaching its valuation of the Subject Shares, Vincorn added to the NAV Portion the full 100% Shell Premium of HK$134,069,985, despite the fact that the Subject Shares represented only 49% of the issued capital of the Listco;

(c)  In its reply, it maintained that the No Pro-rata Approach is the correct one given P’s pre-existing shareholding, which together with the Subject Shares took its shareholding to over 50%;

(d)  That No Pro-rata Approach however is inconsistent with the very comparables which Vincorn relied upon;

(e)  In both of those comparables, the interest acquired was more than 50%.  According to the No Pro-rata Approach, the purchasers should both have paid the full Shell Premium.  However, Vincorn’s own methodology and calculations in reaching its valuation show (or were proceeded on the basis[23])  that in each of the comparables, the Shell Premium added to the NAV Portion was pro-rated to the percentage of the equity interest which the sale shares represented, but not the full 100% Shell Premium[24];

(f)  In short, the purchaser in each of the two comparables did not pay the full Shell Premium, but only the pro-rated amount.

48.  Apart from being internally inconsistent, Vincorn’s approach and methodology may also be said to give rise to anomaly in terms of one aspect of the operation of the Codes on Takeovers and Mergers and Share Buy-Backs (the “Takeovers Code”);

(a)  Rule 26 of the Takeovers Code required D2 to make a general offer to all other shareholders at a unit price not less than the unit price it paid D1 (and so in effect at the same unit price);

(b)  That unit price, calculated with reference to the price D2 paid D1, would have a Shell Premium element in it.  If the Sale Consideration which D2 paid D1 had in fact already contained the full 100% Shell Premium, any further prices which D2 would need to pay in the general offer that were attributable to Shell Premium would have represented payment beyond 100% of the Shell Premium.  That, it is suggested, could not have been right.

49.  As demonstrated by the calculations set out at §49 of Mr Dawes’ submissions, if the Shell Premium is to be pro-rated, and assuming otherwise the accuracy of Vincorn’s valuation, D2 has paid at least 40.6% Shell Premium (as oppose to 49% which the Subject Shares represented).  Mr Dawes submits that the difference of 8.4% is within acceptable margin given that valuation of shares is not an exact science – see Arcelormittal v China Oriental Group & Ors[2018] HKCFI 2066 at §49 per Ng J.

50.  I have on the other hand considered Chow Wai Shing Daniel v Lu Ying [2020] HKCFI 2148 per Au-Yeung J at §§220(3)-(5)  and 223.  That case was cited by Vincorn in its reply, and does appear to support the No Pro-rata Approach.

51.  However, Chow Wai Shing cannot assist in explaining the internal inconsistency of Vincorn’s valuation as explained above.

52.  For the above reason, and primarily for reasons of the internal inconsistency of the valuation, I accept Mr Dawes’s submissions that the opinion and valuation of Vincorn are unreliable.  

Whether serious issues to be tried

53.  As I have noted above, the valuation of Vincorn has been relied upon and pleaded by P in the Statement of Claim as the least of the fair value of the Subject Shares as at the 23 April 2021.

54.  I have formed the view that the opinion and valuation of Vincorn are unreliable.

55.  The result is that P’s pleaded case that the Sale Consideration was at a knockdown price is not backed up at this stage by any reliable expert evidence.

56.  The question then is whether, in the absence of any reliable evidence to back up P’s allegation that the Sale Consideration was at a knockdown price, P has established any serious issue to be tried.

57.  In the course of the hearing, Mr Ho took stock of the facts, which he took this court through in some details.  For the present purpose, I skip the part of his submissions based on valuation opinion of Vincorn.  Mr Ho canvassed the mental states of D1 and D3.  He submitted that D3 had been eying to regain the control of the Listco.  The Listco was at the material time in financial difficulties.  Gao had publicly confirmed to provide financial support to the group.  Gao’s financial position was vulnerable, and D3 must know about it.  He submitted that D3 in effect exploited the situation to his advantage.  He approached D1.  D1 on 22 and 23 March 2021 provided to D2 and D3 copies of the Facility Agreement and Share Charge, and informed KMLL of the amount of outstanding principal and interest.  In Mr Ho’s words, the benchmark sale price was thereby leaked to D3. The Disposal was effected in haste.  The Default Notice was only issued on 31 March 2021.  D2 paid D1 HK$10 million as early as 7 April 2021.  He submitted that that was the deposit for the Sale (though D1 in its Defence (“Defence/D1”)  calls it “earnest money”).  The Enforcement Notice only gave P one day to pay.  The S&PA was signed shortly afterwards on 21 April 2021, and the Bought and Sold Note and Instrument of Transfer executed on 23 April 2021.  He emphasized that D1 had not seriously made any real attempt to expose the Subject Shares to the market, to take steps to enable potential investors to conduct due diligence, and/or to obtain proper valuation regarding the price which the Subject Shares ought to be sold, and with the Shell Premium ignored.  He submitted that all the above support the conclusion that there are serious issues to be tried.

58.  I observe first of all that there is per se nothing wrong in D3 trying to get back the control of the Listco.  That is part of the commercial reality.

59.  Nor is it, as accepted by Mr Ho, per se any breach of duty on D1s’ part to provide copies of the Facility Agreement and Share Charge to D2 and D3, and to inform them of the amount of the Loan and interest that were outstanding.

60.  Mr Ho relied heavily on the pace at which the Disposal was effected.

61.  In this regard, Mr Dawes in the course of the hearing highlighted the context in which the Disposal was made.  D1 issued demand letters to P on 12 and 15 March 2021.  In reply P asked for a standstill.  I have set out some contents of the request by P.  The picture P itself painted therein was not encouraging.  Then, the Annual Results were announced on 31 March 2021.  The Listco had suffered substantial loss.  Its NAV had dropped by 99.5%, to only HK$2,316,000.  The auditors had issued Disclaimer Opinion.  The auditors’ concern was multi-faceted and fundamental, relating as they did to the group’s very ability to continue as a going concern.  Trading of the shares was then halted on 31 March 2021.  D1 on that same date issued the Default Notice.  The Enforcement Notice was issued on 14 April 2021.  P was informed of the offer in the sum of HK$103 million.  Whilst P was only given one day to make repayment, the deadline of 15 April 2021 was more than one month after the issue of the first demand letter.

62.  I accept, in that context, that D1 had all the reasons to be legitimately concerned, and to act expeditiously.  I accept Mr Dawes’ submissions in this regard.  It would be foolhardy for a seller in such circumstances to delay – see Esquire (Electronics)  Ltd v HSBC Ltd [2007] 3 HKLRD 439 at §113. 

63.  Mr Ho submits[25] that the pace at which the Disposal was pushed through “notwithstanding the suspension of trading (leaving aside D2/D3’s knowledge of price sensitive information and the resumption prospects of Listco no known to the public)  additionally casts grave doubts on the bona fides of the [Disposal]”.

64.  Mr Ho is not there making any express allegation of insider trading against Ds, as any allegation of possession of sensitive information has been left aside.  Nor has the point of insider dealing been developed further in the course of the hearing.  Given the context discussed above, I am not satisfied that the pace of the Disposal in the context of the present case in any way casts any doubt on the bona fides of the Disposal.

65.  When considering the above, I regard also as relevant the facts, as submitted by Mr Dawes, that it is in effect a case of distress assets which D1 was concerned with, and there is no expert evidence before this court as to whether the way the Disposal was effected has been at variance with any market norm or practice.

66.  P complains also about D1’s alleged lack of effort in exposing the Subject Shares to the market, and its alleged failure to obtain independent opinion on their fair value.  That criticism has to be considered in the light of the engagement by D1 of Somerley which I have mentioned above:

(a)  On 15 April 2021, Somerley prepared for CMBC Capital a summary on the feedback received from potential investors (the “Summary”);

(b)  Somerley stated in the Summary, as part of the Introduction, that:

“ • We act as the financial adviser of CMBC to assist in identifying one or more potential investors, whom shall not be an affiliate or nominee of Platinum Alpha Limited, to acquire the [Subject Shares] and introducing them to CMBC

…

• This summary sets out feedback obtained by Somerley in the past seven days from each of the investors approached and views, where provided, on the suggested selling price”;

(c)  According to Defence/D1[26], it was on 29 March 2021 when CMBC Capital sought assistance from Somerley to look for potential buyers for the Subject Shares;

(d)  Independent of what D1 has pleaded in Defence/D1, working backwards from the date of the Summary, and taking into account say 7 days for potential investors to consider the approach, and another 7 days for Somerley to collect feedbacks, end of March would have been about the time when Somerley was first engaged.  Mr Ho accepted that in the course of his submissions;

(e)  Hence, and in context, Somerley was engaged about the time when the trading of the Listco’s shares were halted, and when the Default Notice was issued;

(f)  In the Summary, Somerley set out a number of selected recent precedent cases wherein sales process had been initiated for charged shares in Hong Kong-listed companies;

(g)  Then it set out the feedbacks of nine potential investors.  Only one of them put in an offer, in the preliminary amount of HK$5 million, or HK$40 million if resumption or conditional resumption of trading is achieved.  Others said inter alia that there were other opportunities in the market with less risk, and were concerned about potential contingent liabilities;

(h)  The Sale Consideration D1 subsequently accepted from D2 was substantially better than the only other offer which D1 had obtained.

67.  P criticizes D1 for issuing the Default Notice while they were engaged in discussion on P’s performance of its obligations under the Facility Agreement and Share Charge.  In my view, on the facts, and given the nature of the alleged acts of defaults, D1 could hardly be criticized for issuing the Default Notice.

68.  P also alleges that D3 owns it a personal loan, and that “not only did [D3] fail to repay the Personal Loan, he actually took advantage of funds repayable to [P] acquire the Subject Shares through [D2] in an attempt to take control of the Listco. One may say that [D3] was in effect using the funds he owed [P] to acquire the latter’s Subject Shares”.

69.  The alleged personal loan is in dispute.  It is not as if funds earmarked for repayment of that loan had been misused.  I fail to see how the allegation may bear upon the present application. 

70.  In addition to the above, I have to consider the Re H principle. Fraud is being alleged against Ds.  As to serious question to be tried, the evidential burden is a manifestation of the principle that the more serious the allegation, the more compelling the evidence must be. 

71.  In my view, without any reliable evidence in support of the allegation that the Sale Consideration was at a knockdown price, the other circumstantial matters which P seeks to rely on, whether individually or collectively, and when set against the context, do not establish any serious issue to be tried.

72.  Before reaching the above view, I have considered in addition one alternative line of analysis of the expert’s evidence:

(a)  In the course of the hearing, I raised with both Mr Ho and Mr Dawes the following way of analyzing the two comparables relied upon by Vincorn;

(b)  On the No Pro-rata Approach, given Vincorn’s assumption that the consideration in each the two comparables comprised only the NAV Portion and the Shell Premium, the difference between the actual consideration paid and the NAV Portion should without adjustment be the full Shell Premium;

(c)  The adjustment Vincorn gave to the differences (yielding ultimately the figure of HK$134,069,985)  is in fact inconsistent with the No Pro-rata Approach;

(d)  Calculated in the way as set out in (b)  above, the Shell Premium in the comparable of SEHK 1867 should be HK$88,978,301.5, and that in the comparable of SEHK 1667 HK$89,592,962.6, yielding the average of HK$89,285,632;

(e)  Upon the adoption of the above methodology, the fair value of the Subject Shares may be taken as HK$137,831,892 (HK$48,546,260 (i.e. the NAV Portion)  plus HK$89,285,632);

(f)  The Sale Consideration represents about 75% of HK$137,831,892;

(g)  Upon this court’s invitation to Mr Ho to make submissions on this alternative line of analysis, Mr Ho maintained his submission that Vincorn’s original valuation of the Shell Premium in the sum of HK$134,069,985 is consistent with the No Pro-rata Approach.  I do not accept that submission;

(h)  Mr Dawes accepted that it is open to this Court to consider the above alternative way of analyzing the comparables.  He however stressed that that was not the methodology Vincorn has adopted, and that HK$182,616,245 (at least)  has been pleaded as in the Statement of Claim as the fair value of the Subject Shares;

(i)  Having considered this alternative line of analysis further and with the benefit of submissions, I have decided against taking it into account.  There are a number of reasons:

(i)  as Mr Dawes has submitted, that is not Vincorn’s approach and methodology;

(ii)  this alternative analysis is not subject to any expert analysis before this court, and is not P’s pleaded case;

(iii)  this court has had no expert assistance as to whether the adoption of this alternative analysis would trigger other considerations which this court and the parties without expert assistance may not be aware of;

(iv)  this court has had no expert assistance as to whether the alternative valuation of HK$137,831,892 may be regarded as a knockdown price, given the context in which the Disposal was effected, and given that valuation is not a precise science; and

(v)  it will be unfair to D2 and D3 for this court to take the above alternative analysis into account.

Conclusion on the question as to whether serious issue to be tried

73.  For the above reason, I conclude that P has failed to establish any serious issue to be tried.

74.  On this basis, I dismiss P’s application.

Balance of convenience

75.  In the light of my conclusion above, balance of convenience is not engaged.  In deference to the submissions made, I express the following brief views.

76.  As will be explained below, on the facts of this case, I do not find it easy to consider the issue of balance of convenience on a hypothetical basis divorced from the question of serious issue to be tried.

77.  Mr Dawes has acknowledged that if this Court is to find that there are serious issues to be tried, it would be difficult for D2 to resist §1(2)(a)  of the Injunction Summons. 

78.  Given the proprietary nature of the application, I agree, and would have granted §1(2)(a)  of the Injunction Summons had I concluded that P had established serious issues to be tried. 

79.  The much more difficult issue is whether D2 should on the balance of convenience also be enjoined further from exercising its voting rights attached to the Subject Shares.

80.  Mr Ho submits that D2 should be so enjoined.  He submits, relying on Pacific Telecom & Navigation Ltd v Ye Lei [2020] HKCFI 586 at §17(2)  per DHCJ MK Liu, that a shareholder’s voting rights stem from the shares owned by them and is proprietary in nature.  Such rights should be not carved out from the interests in the shares which the holder can enjoy. 

81.  On the other hand, Mr Dawes, relying on Hiromi Okada v Tomohiro Okada [2018] HKCFI 2310 at §61 per Peter Ng J, submits that if D2 and D3 are enjoined from exercising the voting rights attached to the Subject Shares, and if the Court eventually decides in favour of Ds, damages would not be an adequate remedy.  

82.  But equally, if D2 is not enjoined from exercising the voting rights, and if the Court eventually decides in favour of P, damages would be an inadequate remedy for P.  In this regard, it should be noted that it is D2’s and D3’s declared intention to vote Gao and Gao’s camp out of the board once they are permitted to do so.

83.  At this stage, the Court would take whichever course that appears to carry the lower risk of injustice if it should turn out that it is wrong – Music Advance.  It is said that the status quo ante is to be preserved.  But in those regards, P says that it was the owner of the Subject Shares to start with, whilst D2 and D3 say that they are now owners of those shares.  The question may come back to the old one as to which status quo ante is the status quo ante to safeguard.

84.  Mr Dawes relies on a number of matters set out in D3’s 2^nd affirmation in support of the submissions that P and its affiliates have been frustrating D2’s attempts to satisfy the conditions for resumption of trading in the Listco’s shares.  He submits that time is sensitive, and D2 and D3 should be permitted to exercise the voting rights to oust Gao and his camp.

85.  Resumption of trading in the Listco’s shares is I agree of vital importance.  Continual board room struggle would only act to the detriment of the Listco and all its shareholders.

86.  The matters which Mr Dawes relies on however are factually not straightforward.  They are in dispute.  A lot of them are the subject matters of separate legal actions.  I see force in Mr Ho’s submissions that this application is not the appropriate forum to pre-empt the determination of those pending disputes.

87.  Mr Ho places emphasis on the fact that independent of the Subject Shares, there are also other shares held by Gao (15.74%)  and D2 (4.62%), and there are also shares held by the public (28.18%).  Even if D2 is enjoined from exercising the voting rights attached to the Subject Shares, the voting rights attached to those other shares could still be exercised.  I however cannot ignore the reality, as submitted by Mr Dawes, that public shareholders may not be active in the exercise of their voting rights.

88.  Towards the end of the hearing, and to address his shareholding percentage advantage when the Subject Shares are discounted, P through Mr Ho gave an undertaking that, subject to certain exceptions, it would not exercise the voting rights of its shares in support of any proposed resolution to change the present composition of the board of the Listco, which was put in by consensus between the parties in the course of HCA 704/2021. 

89.  That undertaking however cannot fully address D2’s and D3’s the fundamental complaint that D2 should not be enjoined from exercising the voting rights in its shares, and that if D2 can exercising those rights, D2 would have an overwhelming majority over Gao and his camp.

90.  In the present case, the weights on both sides of the balance are in my view quite even.

91.  In his oral reply, Mr Dawes reminded this Court of Hong Kong Civil Procedure 2022 §29/1/16.  He submits that if on the question of serious issue to be tried, P has only barely scraped through, that factor may be taken into account and can tip the balance.

92.  I come back to my early observation and reservation that in the present case, I find it difficult to consider the balance of convenience divorced from the question of serious issue to be tried.  But in the end, and having considered the matters in the round, even if I had concluded that P had established serious issues to be tried, I would have concluded that P had only barely done so.  I would have taken that into account, and would have ruled that the balance of convenience had tilted against the grant of §1(2)(b).

Disposition

93.  For the above reasons, I dismiss the Injunction Summons.  D2 is accordingly also discharged from the Undertakings.

Costs

94.  I also make a costs order nisi that, subject to the costs order I made on 6 September 2021 in the context of the Further Evidence Summons[27], which order stands, D2 and D3 shall have the costs of and occasioned by the Injunction Summons, with certificate for two counsel, to be summarily assessed.