MACAU FIRST UNIVERSAL INTERNATIONL LTD v. DING XIAOHONG AND OTHERS

HCA 992/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 992 OF 2010

____________

_____________

DECISION

_____________

The Application

1.  Pursuant to a 3-day hearing in February 2011 (“the February hearing”), I handed down a judgment on 10 March 2011 (“the Judgment”) whereby I appointed 2 persons as joint and several receivers and managers (“the Receivership Order”).   In this Decision, I shall adopt the same abbreviations as in the Judgment.

2.  Subsequent to the Judgment, Macau First and DG (“the Applicants”) took out 2 summonses (collectively “the 2 Summonses”):

(i) For leave to appeal from the Receivership Order and a stay of execution pending appeal (“the Leave to Appeal and Stay Summons”).

(ii) For variation and clarification of the Receivership Order (“the Variation and Clarification Summons”).

3.  This is an application by the Applicants for an interim stay pending hearing of those 2 summonses on 13 May 2011.  It is the Applicants’ case that given the significance of the issues raised by the proposed appeal and the apparent disregard that the Receivers have shown for the purposes for which they were appointed, it is essential that there now be a stay so that further irreparable damage is avoided.  The Applicants seek an interim stay that is limited in scope and time by asking me to make an order (a) deeming the Receivership Order to have been made in the terms of the draft order attached to the notice of appeal; or (b) by staying paragraphs 5 and 6 of the Receivership Order which require DG to produce title documents and information to the Receivers.

Urgency for Interim Stay

4.  Although there was no apparent delay in taking out this application, the Applicants have failed to demonstrate any urgency in hearing this application, whether in the affirmations filed in support or otherwise.

5.  In addition, the Applicants have sought to rely on the assertion that the Receivership Order is not recognized under Mainland law and expert legal opinion is adduced.  They have failed to give a fair opportunity to DY to answer that assertion.

6.  The Applicants complain that the Receivers:

(i)     have exercised their powers far beyond the purpose for which they were appointed;

(ii)     have interfered with DG’s participation in the management of Shanghai Bading and the Management Company as a result of the court not making the prohibition against his ouster from management express; and

(iii)    have attempted (and continue to attempt) to exert their powers over Shanghai Bading and the Management Company notwithstanding that neither the Court, nor they, have any jurisdiction in respect of those companies.

7.  The Applicants say that the actions of the Receivers are causing prejudice and damage to Shanghai Bading and the Management Company in terms of interference with banking relationships and tenants.

8.  The Receivers have taken action pursuant to the Receivership Order.  In sending out notices e.g. to tenants of Citigroup Tower and banks, they have made clear that they are receivers of Hong Kong First appointed by the Hong Kong Court.  They knew they were not receivers of Shanghai Bading.  They did not meet with much success in obtaining documents and cooperation from DG as he could not be located.  By a resolution executed by the Receivers, DY and DHX, Yu Xiaan was purportedly removed as the legal representative of Shanghai Bading (“the Resolution”).  By that mode the Receivers purportedly gained control over Shanghai Bading

9.  In McDonald v. Golden Dynasty Enterprises Ltd [2008] 5 HKLRD 569, Kwan J (as she then was) dealt with a similar situation.  Interim receivers were appointed over holding companies in Samoa (Cs).  The appointment orders vested them with the corporate powers of Cs’ board of directors and specifically empowered them to assume control over Cs and to preserve their assets.  The Receivers complained of substantial non-compliance by Cs so that they were unable to identify and secure of Cs’ assets.  They argued that in the absence of Cs’ cooperation, they would find it problematic to act for and on behalf of Cs in the PRC, as it was extremely difficult to obtain recognition there of the authority of liquidators, provisional liquidators and Receivers to so act solely by reference to the orders or documents which appointed them; and this was particularly so for receivers as there was no such concept in Chinese jurisprudence.  The Receivers therefore applied for an order from the Court requiring Cs to pass a board resolution and execute a power of attorney (which were routinely recognized in the PRC) authorizing them to take actions for and on behalf of Cs to identify and preserve Cs’ assets and investigate any dispositions by Cs during the receivership period.  Kwan J granted the order sought.

10.  MacDonald’s case has a similar factual matrix as faced by the Receivers here.  What is distinguishable is that the receivers there sought approval of the Court before passing the board resolution; and that case did not appear to have an injunction similar to the one granted by Suffiad J (“the injunction”).  In the present case, the Receivers took it upon themselves to pass the board resolution which on its face might be in breach of the injunction.  It is arguable that the Receivers had acted outside their powers.

11.  Even so, it seems the proper challenge is not by staying the Receivership Order but by a summons properly served on the Receivers to challenge their acts.  As it stood, the present summons was not served on the Receivers.  Initially, like Mr Manzoni, I was surprised at the presence of the Receivers and their apparent litigious stance. But having considered their evidence and submission, I am satisfied that the Receivers were concerned about the allegation of their breach of the injunction; and their presence (together with their helpful report) was to assist the Court.  Their attendance was justified.

12.  Subject to the potential argument of the Receivers acting in breach of the injunction by passing the Resolution, I do not see, at this stage, that the Receivers have acted beyond the letter and spirit of the Receivership Order.

13.  The Applicants complain that the actions of the Receivers are causing prejudice and damage to Shanghai Bading and the Management Company in the sense of creating negative publicity, raising concerns of lending banks and tenants.  These have been anticipated, argued in the February hearing and analyzed in the Judgment.  The evidence under the present application only shows that DG’s worries at the February hearing have come true.  This complaint cannot constitute the ground for seeking a stay of the Receivership Order.  In fact, if DG has turned up, cooperated with the Receivers to act in the best interests of the Companies, Shanghai Bading and the Management Company, those concerns could be allayed.

14.  Whether or not passing of the Resolution was in breach of the injunction, DG has an existing and continuing personal duty to comply with the Receivership Order.  He has always claimed to be in control and management of the Companies, Shanghai Bading and the Management Company and Yu Xiaan was his nominee.  It would have been within his ability to comply.  Accordingly, his handing over of title deeds to his present firm of solicitors instead of to the Receivers was in breach of the Receivership Order.  Likewise his failure to provide information to the Receivers was a breach of his duty to produce and procure the production of documents/ information.

15.  For these reasons, the interim stay application ought to be dismissed.

16.  For the sake of completeness, I will briefly analyze this application on the assumption that I am wrong on the urgency point.

Stay under the Leave to Appeal and Stay Summons

17.  The starting point is the authority of Star Play Development Ltd. v. Bess Fashion Management Co. Ltd. [2007] 5 HKC 84, para 6-10.  The burden is on the Applicants to show good reasons for stay.  The existence of strong grounds of appeal or likelihood of success is by itself a good reason.  However, in the majority of cases it is undesirable and unnecessary to go deeply into the merits and strength of an appeal.  If the appellant only has an arguable appeal, he will have to provide additional reasons why an appeal is justified, such as that an appeal will be rendered nugatory if no stay is granted.  The cases of SWE Limited v. Chong Lai Fun HCA 1064 of 2004; Re Chime Corporation Ltd HCMP 4146 of 2001are distinguishable as they relate to stay of proceedings rather than stay of execution of an order pending appeal as in the present case.

Merits of the Appeal

18.  The grounds of appeal can broadly be classified into 2 limbs:

(i)   That this Court has no jurisdiction to appoint receivers over a foreign non-party such as Shanghai Bading (“the jurisdiction ground”).

(ii) The terms of the Receivership Order are not clear and adequate and have to be clarified (“the ambit ground”). This limb is the mirror image of the Variation and Clarification Summons.

The Jurisdiction Ground

19.  A jurisdictional issue may be taken at any stage and it can be dealt with on appeal even though it was not argued in the Court below: Norwich Corporation v. Norwich Electric Tramways Co Ltd [1906] 2 KB 119, 125; Westminster Bank Ltd v. Edwards [1942] AC 529, 533-534.

20.  It cannot be disputed that this Court has only a personam jurisdiction over the parties who are before it.  It cannot purport to give an order that binds non-parties outside the Court’s jurisdiction. See Babanaft International Co SA v. Bassatne [1990] Ch 13, 44B.  For present purposes, I also accept that the proviso used by the English Court to protect the position of foreign non-parties is also applicable to Hong Kong: Derby & Co. Ltd. v. Weldon (Nos. 3 & 4) [1990] CH 65, 84 C-F; Bank of China v. NBM LLC [2002] 1 WLR 844, para 16-23.

21.  The jurisdiction ground was not raised at the February hearing.  The situation spoke for itself – leading and junior counsel on both sides then before me were clear that there was no jurisdiction issue.  The appointment of receivers and managers was not directly on Shanghai Bading and the Management Company.  The effect of the Receivership Order is that the Receivers are appointed over Macau First and Hong Kong First and through their control of these Companies, control their most valuable underlying assets, Shanghai Bading, the Land and the Citigroup Tower.

22.  In purporting to appeal on the jurisdiction ground, the Applicants have to rely on a PRC legal opinion, which is new evidence.  At the February hearing, the parties have had every opportunity to adduce expert evidence on PRC law.  I cannot see how the present attempt to rely on a new PRC legal opinion can pass any of the Ladd v. Marshall tests and the Applicants have not even begun to show that they could.  On top of it, DY has not been given a reasonable opportunity, as of the date of this hearing, to respond to the legal opinion.

23.  Assuming the new PRC legal opinion relied on by the Applicants is admissible on appeal, it says that the Receivership Order is not recognized under PRC law.  However, that cannot prevent the Hong Kong Court from making and enforcing a receivership order.  For an example, see McDonald v. Golden Dynasty Enterprises Ltd [2008] 5 HKLRD 569, per Kwan J (as she then was).

24.  I see little merit in the jurisdiction ground.

The Ambit Ground

25.  The Receivership Order is criticized as being unclear and inadequate.   The Variation and Clarification Summons seeks to put that clear.  I am grateful to Mr Yuen SC leading Mr MC Law (acting for DY) for preparing a draft amended Receivership Order which sets out all the proposed terms of variation and clarification suggested by the Applicants or otherwise should be included if the Applicants were successful in the appeal.  In summary the Applicants seek to:

(i)          Add new provisions to state that the purpose of the appointment of the Receivers is to monitor the running and management of the Companies, Shanghai Bading and the Management Company and if the Receivers reasonably believe there threatens to be a breach of the DG undertakings, to take steps necessary to prevent that beach so as to ensure there is no dissipation of assets of the Companies, Shanghai Bading and the Management Company.  The Receivers are not entitled to exercise their powers to restrain DG from participating in the business or interfere with his participation unless the Receivers reasonably believe there to be a breach of DG’s undertaking.

(ii)        Remove the existing paragraph 3 which provides that “the powers of all directors and officers of the Companies shall cease forthwith unless otherwise authorized by the Receivers or by this Court.”

(iii)     Remove the Receivers’ power to take in assets of the subsidiaries of the Companies including Shanghai Bading and the Management Company. 

(iv)     Provide that the Receivers will not have power to distribute dividends out of the profits of the Companies.

(v)        Remove the power of the Receivers to appoint or remove directors and limits its powers to take control of the Companies qua shareholders only.

(vi)     Require the Receivers to specify a date by which DG shall hand over title documents.

(vii)   Limit DG’s obligation to comply with the existing paragraph 5 of the Receivership Order (on provision of title documents and information and compliance with Receivers’ directions) “insofar as DG can lawfully do so in accordance with PRC or other applicable law”.

(viii)   Remove the obligation on DG in paragraph 6 of the Receivership Order to provide information and/or documents concerning the Companies and/or Shanghai Bading and/or the Management Company, their promotion, formation, businesses, dealings, affairs or properties to the Receivers.

(ix)     Require the Receivers to file reports every 14 days.

26.  During the February hearing, when leading counsel for DG said that he wished to comment on the terms of the Receivership Order after I had given a decision on whether to make the appointment, I expressly informed counsel that it was my practice to have the terms of the order argued at the same time.  It was precisely with a view to avoiding the situation I am now facing – an attempted re-opening of arguments.  In the end, after discussion with counsel, I adopted the draft minutes of order with certain adjustments.

27.  After handing down of the Judgment, solicitors for both parties had the opportunity to review the terms of the draft order before submission for sealing.  There was an issue over how to reflect paragraph 87 of the Judgment in the draft order, which states,

“What I do not accept, however, is that DG be ousted from management even before determination of the action. There is no strong reason to the contrary. The existence of receiver and manager will be there to safeguard any potential dissipation of assets by DG.”

28.  In the correspondence, only 2 areas of changes were raised.  The first one –to extend DY’s undertaking as to damages to cover not only Hong Kong First but also DG personally – was accepted by DY’s solicitors.  The second one – to add a phrase at the end of paragraph 4(7) to the draft order to provide that the power to appoint or remove directors should not include the power to oust DG from the management of the Companies.

29.  The letter dated 14 March 2011 from Messrs. King & Wood (Solicitors for DY) to this Court largely reflected what happened during the hearing and my views.

30.  Through my clerk’s letter dated 14.3.2011, I have stated my views on the 2 proposed changes as follows:

“Re point no. 1 in [the letter from DG’s former solicitors]: I agree that the undertaking as to damages should extend to loss of DG personally.

Re point no. 2 in the same letter: there should be no change to paragraph 4(7) of the Order. A paragraph between paragraphs 7 and 8 should be added to the Order which refers to the dismissal of paragraph 2 of the summons. This will reflect my view that DG will not be ousted from management.

Paragraph 87 of my judgment is to ensure that there be a proper review of the terms of the draft Minutes before engrossment to ensure that terms relating to ouster of DG be removed.  After reading the 2 solicitors’ letters, it seems the Minutes do not require amendment except to put in the amendments discussed with counsel at the hearing, which I have already done.”

31.  There was then no more issue over the terms and the Receivership Order was sealed.  I cannot see how the Applicants can now say the terms were unclear and seek for variation which is in effect to re-argue the terms of the Receivership Order.

32.  The Applicants should be left to justify the ground for seeking a stay of execution at the next hearing.  Suffice to say that on the evidence now before me, the purpose of the appointment has already been stated in paragraph 1 of the Receivership Order, namely, “until the final determination of this action or further order of this Court”.  I have not just appointed receivers but also managers.  A receiver collects and preserves assets; a manager carries on the trade and not just monitors its running: In re Manchester and Milford Railway Co (1880) 14 Ch.D. 645, at 653.  It is ludicrous to suggest that the Receivers should only act if there is a threatened breach of the DG Undertakings when this Court has already found that there existed a risk of breach of the DG Undertakings, that there was risk of dissipation of assets and mismanagement of Shanghai Bading and that corporate governance was such as to cause genuine doubts as to the integrity and propriety of the accounts to warrant the appointment of the Receivers.

33.  The purported appeal on the ambit ground seeks to remove one of the most important powers of the Receivers to ultimately gain control over Shanghai Bading and the Management Company and defeats the purpose of the appointment.  DG has also failed to show how compliance with his obligations under the Receivership Order will be against any law.  I see little merit in this ground of appeal at this stage.

Appeal Being Rendered Nugatory If No Stay

34.  There is nothing to show that the appeal will be rendered nugatory or anything being irreversible if the appeal is allowed and the Applicants have not shown any. The Applicants are also protected by DY’s undertaking as to damages.

 Stay Pending the Variation and Clarification Summons

35.  Paragraph 10 of the Receivership Order gives liberty to the parties to apply generally.  It is pursuant to that paragraph that the Variation and Clarification Summons is taken out.  The terms of variation and clarification and my analyses under the ambit ground are applicable.

36.  In addition, the Court will not entertain an application for variation of a court order unless there is significant change of circumstances: Chanel v. FW Woolworth & Co. Ltd. [1981] 1 WLR 485 at 492-493; Re Prudential Enterprise Ltd, HCCW 594/1999, at para 12-13, per Chu J.

37.  In the present case, there has not been such change.  The stigma created by an appointment of Receivers and the so called significant risk of prejudice and damage to Shanghai Bading and the Management Company cannot be such change.  Neither can the suggestion, through a PRC legal opinion, that a receivership order is not recognized in Mainland China.

38.  I see little merit in the Variation and Clarification Summons at this stage.

Balance of Convenience

39.  Assuming that the principles on stay of proceedings are applicable to the Variation and Clarification Summons, the Court will have to consider the balance of convenience and fairness between the parties: SWE Ltd v. Chong Lai Fun, HCA 1062 of 2004, per Reyes J, at para 27; Re Chime Corporation Ltd, HCMP 4146 of 2001, per Kwan J, at para 14.

40.  The Receivership Order was made despite DG’s undertakings. Any delay in execution of the Receivership Order will be a denial of DY’s “fruits of judgment” in that all the risks of dissipation of assets and mismanagement of companies existing before the February hearing will be revived.  On the other hand, DG’s concerns (except the jurisdiction ground and breach of injunction) have all been rehearsed at the February hearing.  The balance of convenience lies in not staying the Receivership Order.

Conclusion

41.  I find that there is no urgency in the present application.  There do not appear to be merits in the 2 Summonses and there is no question of any stay of the Receivership Order on the terms suggested by the Applicants.  The terms of the proposed variations failed to take into account the stance of the previous team of lawyers for DG and do not reflect the substance of Judgment.

42.  Even if the Applicants can demonstrate an appeal with arguable grounds of appeal, there is nothing to show that the appeal will be rendered nugatory or that there will be irreversible damage. The balance of convenience lies in no interim stay.

43.  The application for interim stay is dismissed.  I direct that the Receivers do attend the hearing on 13 May 2011 as they may have to justify the validity of the Resolution.

44.  On a nisi basis,

(i) costs of this application should be to the respondent DY to be summarily assessed upon disposal of the 2 Summonses on 13 May 2011;

(ii) costs of the Receivers’ preparation and attendance be borne by the Applicants to be summarily assessed upon disposal of the 2 Summonses on 13 May 2011.

45.  I thank counsel for their assistance.