CAPITAL ACE HOLDINGS LTD AND ANOTHER v. INTERNATIONAL CAPITAL NETWORK HOLDINGS LTD AND OTHERS

HCA1842&2066/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. HCA 1842 OF 2002

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(consolidated pursuant to order of Deputy High Court Judge Woolley on 7th June 2002)

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J U D G M E N T

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1. This is the return date for an ex-parte injunction made by Deputy Judge Woolley on 30 May. The order, which can be found in the pleadings bundle at page 37, is in these terms:

"Unless with the approval of the shareholders of the company in general meeting to be held;

(i) The company be restrained from issuing any shares, options or other securities convertible into equity securities ("the said securities").

(ii) The 2nd to 5th defendants to the counterclaim being directors of the company be restrained from procuring or effecting the issue of the said securities by the company."

2. The plaintiffs who had obtained this order seek to have it continued until trial. The defendants require me to discharge it.

3. In order to understand how this matter comes about, it is necessary for me to provide some explanation of the background, which is not without a little complication.

4. Central to this dispute is a company called International Capital Network Holdings Limited ("the company"). It is incorporated in the Cayman Islands and since 30 November 2001 its shares have been listed for trading on the Growth Enterprise Market of the Hong Kong Stock Exchange, also known as the GEM board. The company's principal activities, as described by its chairman, Daniel Hui ("Mr Hui"), who is a defendant in this matter, concern the provision of business development and corporate advisory services, including underwriting share issues for companies wishing to be listed on the Stock Exchange. There is an ongoing struggle between the present board of directors and another group of persons said to be under the direction of a person by the name of Kenneth Cheung ("Mr Cheung") for control of the company. This faction, if I may express it in this way, is represented by the two plaintiffs in this action, Capital Ace Holdings Limited ("Capital Ace") and Wise Express Assets Limited ("Wise Express").

5. The material statistics and dramatis personae can be stated shortly. The company, although publicly-listed, only has 25 per cent of its issued shares in the hands of the public. The remaining shares are held as follows:

(i) 3.36 per cent by Mona Leung ("Miss Leung"), one of the founders of the company through Wise Express;

(ii) 7.85 per cent by Digital World Holdings Limited ("Digital World"), a company listed on the main board of the Hong Kong Stock Exchange through Capital Ace;

(iii) 24.33 per cent by Cecilia Chu ("Miss Chu"), also one of the founders of the company, through a company called International Technology Capital Limited;

(iv) 39.46 per cent through a company called International Capital Network Investor Limited which in turn is held indirectly as to:

(a) 76.34 per cent by Mr Hui to whom I have already made reference; and

(b) 23.66 per cent by Michael Lui ("Mr Lui"), both of whom are also founders of the company and parties of this litigation as its chairman/managing director and executive director respectively.

6. Mr Hui and Mr Lui currently control the company. The other faction is Miss Leung and Digital World but what is said by the company is that these persons and their companies, together with Miss Chu, are under the control of Mr Cheung to the extent that they hold their shares as his nominees. This, of course, is strongly denied by them. Until he resigned on 18 June this year, Mr Cheung was chairman of Styland Holdings Limited, also listed on the Hong Kong Stock Exchange main board. Mr Cheung and his associates control 18.86 per cent of Styland's shares which in turn is a 9.9 per cent shareholder of Digital World.

7. From this, I come to the litigation itself.

8. There are in fact two actions which have been consolidated by an order dated 7 June. The lead action, as it is now described, was instituted by the company on 15 May. On the same day, it obtained an ex parte injunction from Deputy Judge Poon restraining the defendants in that action, who are Capital Ace and Wise Express, from holding an extraordinary general meeting of the company on 23 May 2002 or at all (which I will need to explain in a moment), or until further order of the court.

9. The background and reasons for the company's application to Deputy Judge Poon have been very helpfully set out in Mr Smith's written submission on behalf of Capital Ace and Wise Express starting at page 8. I will need to relate some of this as shortly as I can.

10. It all started with mandates given to the company's board of directors by the shareholders on 13 November 2001 to:

(i) grant options to subscribe for shares and to allot and issue shares of the company to a share option scheme; and (ii) a general mandate to allot, issue and deal with shares of the company with an aggregate nominal value up to the sum of 20 per cent plus any share capital repurchased by the company.

11. The present board had been restricted under the GEM listing rules from issuing such shares for six months beginning with the starting date for dealings of the company's shares on the GEM. That restriction expired on 30 May, which is the date when the injunction order now before me was granted. Against the board, it is said that there has been a gradual breakdown of trust and confidence between it and the other founders of the company. In summary, the basis for this are the following complaints coming from Miss Chu and Miss Leung, who are not directors, against the present board:

(i) The style of management, including a failure to implement or at least a delay in implementing its business plan and the frequent absences from the office of Mr Hui and Mr Lui.

(ii) Unusual and unjustified transfers of funds of the company, principally the transfer of $40 million to the personal control of Mr Hui for the alleged purpose of "protecting" the funds.

(iii) The intention of the directors to issue further shares notwithstanding the present climate of low share prices and the fact that the company has no obvious need for further funds.

12. These alleged concerns have caused a number of shareholders, including Miss Chu and Miss Leung, to say that they had no confidence in the present board. On 10 April 2002, Capital Ace and Wise Express, the plaintiffs, wrote to the company pursuant to Article 72 of the Company's Articles requiring it to convene an EGM within 21 days of the date of the letter. The agenda for the proposed EGM was to consider and approve three resolutions:

(a) the revocation of any mandate given to the directors to allot, issue and deal with shares of the company;

(b) to appoint seven new directors, including Miss Chu and Miss Leung;

(c) the maximum limit of directors was to be fixed to the existing four plus the proposed seven new directors.

13. The motive for this was to obtain control of the board through the additional directors. The company reacted on 29 April by announcing the calling of the EGM but it fixed the date for the meeting to 2 December 2002, some eight months later. The board gave reasons for this date. It said that it needed time to investigate recent share trading activity in the company's shares; whether this had caused a triggering of the mandatory take-over obligations under the Take-over Code and whether there had been breaches of the Securities (Disclosure of Interests) Ordinance, Cap. 396, and other regulatory requirements by, amongst others, Capital Ace and/or Wise Express in relation to their intentions and/or dealings in the company's shares.

14. Not surprisingly, Capital Ace and Wise Express say that this was a groundless ruse by the company to frustrate their legitimate right to place their resolutions before the shareholders at an EGM within a reasonable time. The company then refused to bring the date forward to no later than 29 May, the significance of that date being that on 30 May the GEM listing rules restricting the issue of further shares would have expired.

15. Faced with that refusal, the requisitionists, as they have been referred to in the course of the argument, then purported to exercise their rights under Article 72, where the board has declined to convene an EGM within a reasonable time, to fix one themselves which they did for 23 May, the notices for this meeting having been published on 8 May. It was the fixing of this meeting which has provided the spark for this litigation.

16. On 15 May, the company started what has been described as the lead action in the order of 7 June consolidating the two actions, that being HCA 1842 of 2002. On the same day, they went ex parte before Deputy Judge Poon and, on the basis that it is said that the EGM of 23 May was convened in breach of the Company's Articles under Cayman Islands law, obtained an order prohibiting the holding of that meeting. For reasons that are not absolutely clear to me, given the urgency of all this, the return date for the inter-partes hearing of that order is now fixed for 3 January next year.

17. The requisitionists were not be deterred. They have now brought this action and obtained an ex-parte order of their own from Deputy Judge Woolley which, as I hope is clear from the narrative, has the effect at least of giving them part of what they had hoped to achieve at their EGM on 23 May, which is to prevent the present board from issuing new shares, save with the approval of a general meeting of the shareholders which they are reasonably confident would not be forthcoming because they consider, as presently constituted, they will be able to garner sufficient votes to block such a proposal.

18. Of course, in a commercial sense, this is all most unfortunate, if not completely disastrous. The board is struggling to keep control against a powerful opposition which may in the end win the day unless it can be demonstrated that control has been obtained by irregular and/or unlawful means, so that this majority may have to be disarmed and disabled by the courts and the regulatory authorities. Mr Smith, if I may say so, in a most attractive submission, has urged me to hold the ex parte order so that the ring is held, to use his expression, until trial. In the meantime, by this combination of injunctions, the contestants are held apart. The present board remains in control, presumably irremovable for the time being, but prevented from issuing further shares and free to manage the company's affairs as it sees fit.

19. In order to do that, he needs to show me that he has a serious issue to be tried and that the balance of convenience favours the granting of the injunction (see American Cynamid v Ethicon) This therefore brings me to the substance of the case.

20. Mr Smith has descended into the detail of the matter in his written submission but he seeks to paint with a broad brush where and if possible. Firstly, he submits, rightly in my judgment, that the two cases are to be viewed very much as part of the same matter and that the two injunctions are two sides of the same coin. Referring to the numerous factual issues which are inevitably in sharp controversy on the affidavits, his approach is to say that given the nature of these disputes the court cannot at this stage form a definitive view about them. Provided he passes the required evidential threshold and shows that his case raises serious issues to be tried, then he says that he is on firm ground in saying that the balance of convenience must favour the retention of the present injunction.

21. On the question of the issues to be tried, he has the following to say: if the current main directors, Mr Hui and Mr Lui, are permitted to exercise their mandate to issue securities, they would be doing so purely for the purpose of preserving their control of the company rather than for the genuine and proper requirements of the company's business interests. If this were to be demonstrated at trial, the exercise of such a power would be improper and amenable to being set aside. Authority for this proposition is Howard Smith Limited v Ampol Petroleum Limited [1974] AC 821 at 837.

22. He pursues this by submitting that there is a high risk of them doing so in the hope of issuing securities to persons or bodies favouring them in this dispute and thereby ensuring that the proposed resolution to appoint additional directors would be defeated. In this regard, he draws attention to the date of the proposed EGM on 2 December, the day after the restriction on share disposal. In this way, if the ex parte goes, Messrs Hui and Lui could try and issue shares to their supporters and win the day at the EGM. If they fail to do so, they could still dispose of their shares before they would be forced to relinquish control. He also submits that the current board has expressed a willingness to issue such shares. He points to such a sentiment in Mr Hui's evidence to the Securities and Futures Commission (E, page 269).

23. Mr Smith says that there can be no commercial sense in issuing shares at present where the share price is so weak. At current prices, if all the permissible shares were issued, they would raise no more than $6.5 million. It had been only $4 million a few days ago but the share price has risen by 50 per cent since then. But even so, Mr Smith contends that this would be a meaningless amount, especially where the company has a $40 million reserve under the custodianship of Mr Hui. So on the figures, says Mr Smith, share issues could only represent an attempt by the present board to manage the electorate, as it were, for the EGM in order to ensure its survival, not the proper exercise of their powers in the general interest of the company. All these matters are said to raise a serious issue that needs to be tried.

24. Turning to the balance of convenience, Mr Smith submits that this strongly favours his clients. The prejudice to the company in the event that the injunction stays would not be substantial. It has no immediate need for additional funding. Even if it did, the proposed method of issuing shares would be senseless and any pressure could be alleviated if the court ordered a speedy trial to break the deadlock.

25. Attention is also drawn to the protection given in the proviso to the injunction that the securities could be issued with the sanction of its shareholders in general meeting. Lastly, the company also has the protection of the undertaking in damages. Mr Smith then contrasts this with the position of the company's shareholders, including Capital Ace and Wise Express, which he describes as irreparable. Once shares are issued to third parties, it would be extremely difficult to invalidate these. The issue of such shares to friendly parties would alter the current balance of voting power which would leave Messrs Hui and Lui in control. With only 25 per cent of shares presently issued to the public, it would be very difficult for shareholders, including Capital Ace and Wise Express, to compensate for the dilution in their shareholding by acquiring more shares on the open market. In all the circumstances, the current status quo should therefore be retained.

26. Mr Strachan for the company and its main directors has opposed retention of the current injunction on the broadest possible grounds. The traditional narrow basis, that the applicant for the injunction has failed to show a serious triable issue and/or that the balance of convenience favours the removal of the injunction, is only a part of a wide ranging series of arguments as to why the injunction should be discharged. Where it can so often be successfully argued that the affidavit evidence cannot be resolved at this stage and that what is said for the applicant for the injunction on paper raises a serious triable issue, he will then succeed provided the balance of convenience favours the injunction.

27. Perhaps sensing potential difficulties in this regard, Mr Strachan has started his case by appealing, in a particularly focused way, to the equitable nature of this jurisdiction and that a party seeking this form of relief must come to court with clean hands, as it is said. The heart of the defence is the assertion that Mr Cheung and his nominees have acquired voting control by stealth and in so doing this group of persons has acted in breach of the take-over regulations and committed a criminal offence, contrary to section 26A of the Securities and Futures Commission Ordinance. It has achieved its position by improper and criminal methods which it now seeks to preserve by means of the injunction of 30 May.

28. One has only to state the assertion to understand its gravity and consequently the high burden that Mr Strachan has taken on for himself, even at this interlocutory stage. But he has not shrunk from it and with great care he has taken me through the evidence that is currently available to him. I will need to refer to it presently but perhaps it is convenient to consider now Mr Smith's reply to these allegations.

29. In essence, whilst denying the interpretation placed on the evidence by Mr Strachan, he is able to return to his main theme by submitting that at best all that one can say at this stage is that these issues simply cannot be resolved on paper and at present the proper balance is held by both injunctions. Even if his clients have behaved in the way described by Mr Strachan, they are unable to exploit the position that they are currently said to hold by stealth or otherwise. The truth will emerge from the trial, a speedy one at that, and if the company and its present board are shown to be correct, then any improper or unlawful position now held by Mr Cheung and his alleged nominees will be unravelled and they will be seen off to an irredeemable defeat.

30. It is helpful to bear this in mind as I consider the evidential basis for this part of Mr Strachan's case. Mr Strachan and his junior have also prepared a most helpful submission in writing. I have had regard to everything that appears in it as developed by Mr Strachan in the argument. To attempt a reproduction of it here would serve no useful purpose. I propose to identify the main issues raised and the basis for those issues.

31. The first 18 of the 26 page document spoken to by Mr Strachan is a close analysis of the relative positions of the persons said to be operating under the control and direction of Mr Cheung and how that can be supported by evidence of a highly compelling quality. I have listened and read with care the evidence surrounding the alleged relationships between Mr Cheung, Miss Chu, through her company, International Technology Capital Limited, Miss Leung, through Wise Express and Digital World, through Capital Ace (see paragraphs 4-7 of the written submission).

32. Before the company was listed, it is said that this faction was able to obtain 34.54 per cent of the company's shares (see paragraph 9) with 39.46 per cent to Mr Hui and Mr Lui, and 25 per cent to the public. Then strong reliance is placed on the discovery of a computer disc marked KCheungI, in Miss Chu's handwriting, found in her former office at the company's premises which has stored on it two draft declarations of trust created a year before listing, one of which indicates that her shares in the company were held by her as nominee of a "beneficial owner". The other draft indicates that Mona Leung's shares in what had been the original group holding company were also held by her as nominee for "the beneficial owner". Whilst the identity of the beneficial owner is not filled in, it is said that given the fact that the disc is marked with Mr Cheung's name, the inference, even now, should be drawn that he is the intended beneficiary.

33. Also found in Miss Chu's former office was a list of saleable items which refers to assets belonging to companies controlled by Mr Cheung. An email communication has been found from Miss Chu sending this list to Mr Cheung or Mr Cheung's wife's secretary, Iris. Mr Teddy Chan, a director of Digital World, also has information stored on the same computer disc relating to his resignation from the board of Digital World and a draft instrument of transfer regarding his shares in Digital World.

34. Turning to events after the company was listed, suspicion is said to attach to the fact that despite owning a quarter of the company Miss Chu never bothered to appear for the listing ceremony and that thereafter she took no interest in the company. Then days after listing, on 3 December 2001, the share price dropped by 15 per cent from $1.01 to $0.86. This is suggestive of orchestrated massive selling to force the price down. That day Mr Cheung is said to have asked Mr Hui for $18 million being his fair share of the proceeds of the listing which came to $38 million (see paragraph 18 of the written submission). This is, of course, dismissed by Mr Cheung as complete fantasy.

35. Then on 4 December, Styland Holdings, Mr Cheung's company, through a subsidiary, purchased 10 million shares in the company representing 3.12 per cent of its issued share capital and on 4 December and 8 April this year, Digital World purchased over 6 million shares representing 1.9 per cent of its issued share capital. On 27 March this year, the company sought a ruling from the SFC under paragraph 8.1 of the Take-over Code that Mr Hui, Mr Lui and Miss Chu should be considered as acting in concert. The following day, Miss Chu informed the SFC that she did not regard herself as acting in concert with the other two.

36. Then during April, there was much frenetic activity described on pages 8 and 9 of the submission which is said to support the case showing a clandestine take-over by the Cheung group. An inkroll has been found from the fax machine in the office used by Mona Leung and Mr Cheung. This means that Mr Strachan has available to him all the faxes received on this machine. Two faxes dated 26 March and 28 March this year are particularly relied on, both marked for the attention of Mona Leung. The fax of 28 March shows the shareholdings in the company as of that date owned by her, Digital World, Mr Cheung and Miss Chu. This shows that these parties owned 43.63 per cent of the shares.

37. Miss Leung, in her affirmation, says that the requisitionists are seeking to obtain control of the board but not of the company through their voting rights as shareholders. She asserts that there is no general agreement or understanding to co-operate when exercising their voting rights in the company. Mr Strachan submits, that on a proper construction of the material that his clients have been able to assemble, a coup has been in the planning by Mr Cheung' s group well before the company had been listed. From this, Mr Strachan has sought to show breaches of the take-over code and of section 26A of the Securities and Futures Commission Ordinance. The argument is well set out from pages 13 to 16 of the submission.

38. It seems to me that provided it can be demonstrated, to the required standard of proof, that the activities catalogued by Mr Strachan are true, then there must be every prospect of demonstrating both limbs of that accusation. I am required at this stage to form a view of how far down the evidential road the current material goes where so much is denied or some form of explanation or excuse is proffered. Clearly this is not proof positive, nor I think does Mr Strachan make that claim. That having been said, he has been able to make out a compelling "case to answer", if I can borrow from another jurisdiction. Much of this cries out for an explanation from the requisitionists and from Mr Cheung and his associates. From this, Mr Strachan moves on to say that this impropriety is undeserving of the exercise of this court's equitable jurisdiction. The Cheung faction is now, through its improperly and illegally obtained position, seeking to preserve it by means of this injunction.

39. The principle upon which the court acts in regard to parties coming before it without clean hands is well settled. These principles are reflected in Spry, "The Principles of Equitable Remedies", 6th Edition, page 409 to 414 and 494 to 495 which Mr Strachan has referred me to. I am satisfied that the court would not do so where such conduct is proved. Here the difficulty Mr Strachan faces is that whilst the evidence is compelling, it falls short of being proved at this paper stage before the witnesses can appear for cross-examination.

40. The question then becomes this: should I merely set aside this compelling evidence of impropriety by the applicants and deal with it by just holding the ring, as Mr Smith contends, provided the American Cynamid tests are satisfied or should I somehow give it weight in the exercise of my discretion?

41. It seems to me that notwithstanding the progress that Mr Strachan has made with the evidence, that before he can effectively avail himself of this ground to prevent the injunction being made, he would have needed to at least make out his case on a balance of probabilities which, in my judgment, he has fallen short of. These are issues which will need resolution at the trial and, if resolved in the company's favour, will attract the strongest consequences for the parties against whom these things are said. But I feel unable, for the reasons that I have attempted to give, to shut the court's door on the applicants for the injunction on as yet unproven material. The defendants must therefore be left to resist on the merits alone, in terms of American Cynamid, on the application for the injunction.

42. But another matter arises on the plaintiff's good faith. Mr Strachan has also deployed an argument that the ex-parte injunction should be set aside peremptorily for want of material disclosure to Deputy Judge Woolley. The law is well settled in this regard (see Bank Mellat v Nikpour [1985] FSR 87 at 81 and the older standard authority of R v Kensington Income Tax Commissioners [1917] 1KB 486 at 509).

43. I have considered the extent of the disclosure made to Judge Woolley and also the matters of non-disclosure that Mr Strachan has identified at pages 19 and 20 of his submission. Mr Smith has euphemistically referred to them as titbits. Whilst they are more than that of course, I am of the view that as full a picture as was required had been presented to the judge ex parte. Accordingly, this limb of the objection must fail.

44. Now, perhaps not before time, I come to consider the case on American Cynamid principles. Mr Strachan says that the other side has failed to show any serious triable issue and that if they have, that the balance of convenience is against them. There is no evidence, contends Mr Strachan, that the directors are proposing to use the fiduciary powers over the shares in the company purely for the purpose of destroying an existing majority that did not exist (see Howard Smith v Ampol supra at 837G). The basic principle is that a company should be managed by its board of directors and not by its shareholders , nor the court. Article 112 of the Company's Articles expressly provides for its management by the board. I accept that the mandate given to the board on 13 November is one that directors of public companies in Hong Kong routinely ask for and are given by its shareholders (see paragraph 6 of the first affidavit of David Norman).

45. Is there a serious issue to be tried that these directors are now trying to abuse their power? I have already related the improper motive being ascribed to the board by the requisitionists which is to dilute the requisitionists' voting power at the EGM and to increase their own vote. The argument has been well rehearsed from page 22 to 23 of the submission. I am impressed by the point made by Mr Strachan that the blanket injunction sought by the requisitionists is a most unusual one. The cases relied on by them ex parte are cases where the court thought it right to prohibit a particular transaction where it had been demonstrated that the proposed issue was shown to be for improper motives. In those circumstances, the court scrutinises the particular transaction before deciding whether to grant the injunction.

46. I can find nothing beyond fear and suspicion, given the bad blood between the two factions, that this may happen. In saying this, I have had regard to Mr Hui's statements to the SFC about this matter. His statements appear to me to be above board and not worthy of the motives ascribed to them by Miss Leung and Miss Jennifer Cheung and so, in my judgment, there is no serious issue to be tried. That would be sufficient to dispose of this injunction but even if I am wrong about that and such an issue has been overlooked by me, then I would have found that the balance of convenience favours not granting the injunction. I am convinced that Mr Strachan is right when he says that the requisitionists are more than adequately protected by the regulatory safeguards that are currently in place. Mr Norman's affidavit deals with this sufficiently. The regime is there to ensure that the placees for the shares are independent. There are notice provisions and proper information needs to be supplied. This is then reviewed by the Stock Exchange and the SFC. I have been shown the relevant questionnaire that needs to be filled in. Added to this, there is a two week period for the requisitionists, who I am sure will be most vigilant, to return to the court, ex-parte if need be, to put a stop to any particular issue of shares said to be improper. The share option scheme covered by the mandate will present no threat to the requisitionists for the reasons explained by Mr Strachan. The numbers are very modest under that scheme for every 12 month period.

47. Lastly, it seems to me that where the requisitionists are adequately protected by the regulatory regime, the board should now be allowed to manage in the best interests of the company at a most difficult time. If it needs to raise capital for proper commercial motives, it should be free to do so. The $40 million already in place has been earmarked for projects set out in the prospectus, but the board must also realise that their conduct is now being scrutinised by parties hostile to it and it will be careful as to how it exercises this mandate. Accordingly, for these reasons the injunction must be discharged.

48. Given the urgency with which these actions should be resolved, I will certify it for speedy trial and at this stage leave it to the parties to establish a timetable to bring the case on for hearing. In the event of any dispute as to any further interlocutory orders, application will need to be made to the court in the usual way.