GOLDLION PROPERTIES LTD AND OTHERS v. REGENT NATIONAL ENTERPRISES LTD

HCMP 5273/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 5273 OF 2003

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D E C I S I O N

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1.  This is a summons issued by the plaintiffs to appoint interim receivers and managers over Regent National Enterprises Limited (“the Company”) and its assets with such rights and powers as the court may provide for.  Alternatively, the plaintiffs seek a continuation of the interlocutory injunction granted on 12 September 2006 until trial or further order.

The background

2.  I will first give the background matters.

3.  The Company is the registered owner of the Kimberley Hotel (“the Hotel” or “the Property”) at No. 28 Kimberley Road in Kowloon.  The ultimate beneficial owner of the Company is Kimberley Hotel Holdings Limited (“KHHL”), a company incorporated in the British Virgin Islands.  In 1996, Stephen Lau Hei Wing (“Stephen Lau”) acquired the Hotel by a share acquisition financed by the predecessor of the Bank of China (Hong Kong) Limited.  I shall refer to the predecessor and the succeeding bank as “BOC”.

4.  By a loan agreement, BOC lent the Company the initial sum of US$200 million.  Part of the security for the loan included:

(1)     a debenture dated 6 June 1996 entered into between the Company and BOC incorporating a first fixed charge on the Property and a first floating charge over the Company’s undertakings; and

(2)     a share charge in favour of BOC given by KHHL.

As at 23 June 2006, the approximate amount outstanding from the Company under the loan agreement was US$341 million.

5.  In 1999, when Stephen Lau was in Beijing, he was detained by the authorities to assist in investigations relating to corruption allegations concerning another individual.  Stephen Lau was detained for over 3½ years, during which time his businesses collapsed and various financing arrangements including the facilities of BOC went into default.

6.  In October 2002, BOC petitioned to wind up KHHL in the British Virgin Islands on the basis of its failure to pay under the covenant in the share charge monies owed by the Company under the loan agreement.  A winding-up order was made, and liquidators from Deloittes were appointed.

7.  Also in October 2002, Radier Limited, a subsidiary of KHHL which operated the Hotel, was wound up on the petition of BOC.  The role of Radier Limited to manage the Hotel was taken over by Fancy Kingdom Limited as from March 2003.  Fancy Kingdom Limited was owned as to 50% by the Company and 50% by a service company of Deloittes.

8.  The management of the Company was replaced and corporate directors which are service companies of Deloittes were appointed.

9.  On 23 July 2003, a formal sale and purchase agreement of the Property was entered into by the Company acting by the liquidators of KHHL and the 1^st plaintiff.

10.  The Company agreed to sell the Hotel and the fixtures and fittings to the 1^st plaintiff or its nominees for HK$700 million, completion was to take place on 21 November 2003.

11.  Clause 13.2 of the sale and purchase agreement provided that if the vendor should become unable or should fail to complete the sale and purchase on the completion date due to any matter (including and without limitation to third party action) beyond the reasonable control of the vendor and which in the reasonable opinion of the vendor materially hinders, prevents or obstructs completion of the sale and purchase, the vendor shall return all the deposits and other monies paid by the purchaser in connection with the purchase of the Property together with interest accrued and the actual costs incurred by the purchaser, as full and final settlement of the purchaser’s claim and the purchaser shall not take any further action to claim damages or enforce specific performance.

12.  Clause 25.1 provided that time shall in every aspect be of the essence in the agreement.

13.  On 20 November 2003, the day before completion, the Company’s solicitors sent a letter to the plaintiffs and invoked clause 13.2 to terminate the sale.  The Company did not complete the sale and purchase.

14.  The Company asserted that the following matters had in its reasonable opinion materially hindered, prevented or obstructed the completion of the sale and purchase:

(1)     on 19 November 2003, Waygood Investment Limited (“Waygood”), a company controlled by Stephen Lau, presented a petition to wind up the Company in HCCW No. 1285 of 2003; and

(2)     on 20 November 2003, the Company’s solicitors were informed by Waygood’s solicitors that Stephen Lau had applied to the court in the British Virgin Islands to appeal against the winding-up order of KHHL and to seek a stay of the winding up pending his appeal.

15.  On 21 November 2003, before the deadline for completion, the Company was served with an injunction issued by the court of the British Virgin Islands on 20 November 2003, restraining the Company and the liquidators of KHHL from carrying out any acts in furtherance of the sale and purchase agreement.  This injunction was discharged only on 17 December 2003.

16.  On 3 December 2003, the plaintiffs issued the originating summons in these proceedings, seeking specific performance of the sale and purchase agreement of the Hotel, and for all necessary and consequential accounts, directions and enquiries.  They also claimed damages for breach of the agreement with interest, in addition to or as alternative relief to the claim for specific performance.

17.  The plaintiffs contended that the Company did not hold reasonable belief that the attempts to prevent completion engineered by Stephen Lau had hindered or prevented completion.  They alleged the reason why clause 13.2 was invoked was because BOC encouraged the liquidators to terminate the sale and purchase agreement so that the Hotel could be sold at a higher price.

18.  The trial of the originating summons is to take place on 1 November 2006.

19.  In August 2006, the plaintiffs discovered BOC had transferred part of its interest as mortgagee to Raiffeisen Zentralbank Osterreich AG (“RZB”) by a mortgage transfer deed dated 6 July 2006.  There would appear to be a restructuring of the debts of the Company to BOC, the terms of which have not been disclosed in the evidence filed in this application.  What is clear is that RZB has acquired all of the rights of BOC in the loan agreement and in the security and other documentation executed in favour of BOC in connection with the loan.  So RZB is now the major creditor of the Company by virtue of the loan agreement assigned, it is the holder of security over all the Company’s assets including the debenture, and RZB now stands in the shoes of BOC.

20.  On 11 August 2006, the plaintiffs’ solicitors wrote to RZB seeking confirmation that RZB would not seek to sell the Property as mortgagee until after the determination of the originating summons and that RZB would be prepared to discharge its security interest when the sale of the Property was specifically performed by the Company.

21.  On 16 August 2006, RZB replied by its solicitors stating that it does not accept that BOC or RZB had in any way compromised its rights to sell the Property, or had agreed to release its security over the Property other than on a discharge of all liabilities secured, or was in any way estopped from exercising its rights.  RZB confirmed that it has no intention to sell the Property at present, and if it does, it would agree to give the plaintiffs 14 days’ notice of such intention.

22.  On 17 August 2006, the plaintiffs issued a writ against RZB in HCA No. 1788 of 2006 seeking:

(1)     a declaration that RZB’s interest in the Hotel created under the debenture, a second mortgage dated 11 June 1997 and the mortgage transfer deed is held subject to the plaintiffs’ interest in the Hotel;

(2)     an order that immediately on completion of the sale under the sale and purchase agreement, RZB shall against tender of the purchase price forthwith discharge the Hotel from the mortgage deeds; and

(3)     an injunction to restrain RZB from exercising any power of sale conferred on the mortgagee under the mortgage deeds or otherwise foreclosing the mortgage created under the debenture unless and until the originating summons and any appeal have been finally disposed of and judgment given against the plaintiffs.

23.  This writ has not been served on RZB to date, although a copy was supplied to them by the plaintiffs as a matter of courtesy.

24.  On 11 September 2006, RZB issued a summons to be joined in the originating summons as it has an interest in the outcome of these proceedings.  An order was made for its joinder on 18 September 2006.

25.  On 30 August 2006, the court in the British Virgin Islands made an order to stay the winding up of KHHL and to discharge the liquidators.  With the discharge of the liquidators, the management of the Company changed and on 7 September 2006, Stephen Lau and his brother were appointed directors.

26.  On 11 September 2006, the petition against the Company in HCCW No. 1285 of 2003 was dismissed.

27.  During the last 3 years, the Hotel was operated by the liquidators of KHHL.  The liquidators may have reached some kind of informal moratorium with BOC.  The plaintiffs had been content with that situation as they did not think Deloittes would have dispersed the assets and revenue of the Company when the winding-up petition was pending, and they had no doubt that if they should succeed, the Property would be conveyed to them on an order for specific performance.

28.  The plaintiffs have no confidence in Stephen Lau who is back in control, as he had in 2003 interfered with completion.

29.  On 7 September 2006, the plaintiffs’ solicitors wrote to the Company requesting an undertaking from the new directors they will manage the Company in the same way as the liquidators and that no payments would be made to RZB or BOC pending the final resolution of the originating summons.

30.  On 9 September 2006, the Company under the new management replied by its solicitors and refused to give the undertaking requested.

31.  On 12 September 2006, the plaintiffs made an ex parte application on notice in these proceedings for the appointment of interim receivers, alternatively for an interlocutory injunction to restrain disposal of the Property and the money and assets of the Company save in the ordinary course of business.  I granted the interim injunction until the determination of the inter partes summons heard today.

The plaintiffs’ case for interim relief

32.  The reasons for seeking interim receivers or an injunction were put in this way:

(1)     The debts of the Company to BOC had been restructured and although the terms of the restructuring are not known, it is likely that the terms would involve the accrued profits of the Company from the operation of the Hotel being used immediately to settle part of the outstanding sums.

(2)     Because of the above, the plaintiffs are concerned that their claim for an account of the profits earned during the period of 21 November 2003, when completion should have taken place, to the date of actual completion on the making of the order for specific performance, as well as their claim for damages, would be prejudiced.

(3)     Stephen Lau is now in control of the Company.  Unlike the liquidators of KHHL, he is not impartial.  The plaintiffs are concerned that he could not be relied on to maintain the status quo until completion.

(4)     The plaintiffs are concerned that Stephen Lau may introduce changes to the operation of the Hotel and that such changes may prejudice the plaintiffs’ plans to run the Hotel if they should be ultimately successful.

33.  The plaintiffs said their concerns are justified, as Stephen Lau has deposed that on 11 September 2006, with the consent of RZB, he had caused HK$173 million to be transferred from an account of Fancy Kingdom Limited with BOC into an account of Synergy New York Limited (“Synergy New York”), apparently a company under Stephen Lau’s control, with CITIC Ka Wah Bank.  Of the amount transferred, HK$70 million was to be used to pay RZB for the debts to BOC, as under the restructuring agreement this amount is payable at the latest on 10 November 2006.  The balance was to be used to pay the quarterly payments due thereafter and other obligations of the Company and the recurring expenses of the Hotel operations.

34.  Further, Stephen Lau intended to use HK$50 million to renovate the Hotel.  He said that at the time of the transfer of money to the account at CITIC Ka Wah Bank, he had no knowledge of the plaintiffs’ application for interim receivers or an injunction.

35.  Since the granting of the interim injunction, he has given instructions that the sums with Synergy New York are to remain intact, even though of the sums transferred, HK$30 million comprise income derived from the operations of the Hotel before the contractual completion date.

36.  His explanation for the transfer from BOC to an account in CITIC Ka Wah Bank is because the latter offered better interest rates and his relationship with the former had soured.

37.  It is common ground that for the appointment of interim receivers and the granting of interlocutory injunction, the principles in American Cyanamid v Ethicon Ltd [1975] AC 396 are to be applied.

38.  The court should be slower to appoint interim receivers than to grant interlocutory injunctions, as this form of relief is “more intrusive, more expensive and less reversible than the granting of an injunction”.  The applicant must show that the appointment of interim receivers is appropriate because other less invasive remedies would be inadequate (Commercial Injunctions by Stephen Gee, 5^th Edition, paragraph 16.008).

Serious question to be tried

39.  Two broad issues are raised in the originating summons.  The first issue is whether the Company was entitled to invoke clause 13.2 to terminate the sale.  An assertion was made in the affirmation of Stephen Lau that the Company has a strong and obvious defence.  Mr Tong, SC for the Company has not contended that there is no serious question to be tried on this issue.  Mr Ng for RZB has adopted a neutral stance on this issue.  The burden of showing there is a serious question to be tried is not a high one, and I hold it is satisfied here.

40.  The other issue is that raised by RZB when it sought and obtained leave to intervene in the originating summons.  That is assuming the Company was not entitled to invoke clause 13.2, whether the plaintiffs are entitled to have the Property assigned to them free from all encumbrance on payment of the purchase price, or in other words, whether RZB as successor of BOC is obliged to release its security over the Property notwithstanding there is no payment in full of all the liabilities secured.

41.  The plaintiffs contended that BOC had consented to release its security on payment of the purchase price.  It relied on negotiations before the sale and purchase agreement was made in which BOC was involved, the terms of the agreement, the terms of the draft assignment, and letters between the Company’s solicitors and the plaintiffs’ solicitors before completion was to take place.

42.  RZB asserted it had never been informed and was not aware of any agreement between the plaintiffs and BOC on the release of the security.  BOC had expressly confirmed and warranted to RZB it had never entered into any such agreement, and reliance was placed on a provision in the mortgage transfer deed.  So RZB is only obliged to release the security on payment of all outstanding sums under the loan agreement.  I note the submissions of Mr Ng on this issue.  I am satisfied there is a serious issue to be tried here as well.

If damages would be an adequate remedy if the plaintiffs were to succeed at the trial

43.  I am persuaded by Mr Tong that damages would be an adequate remedy if the plaintiffs were to succeed, and there is no question that the monetary claims of the plaintiffs cannot be paid.  There is therefore no need to go on to consider further the question if damages would be an adequate remedy to the Company or the balance of convenience (American Cyanamid, supra at 408C).  There is no suggestion that the Hotel would be disposed of before the trial in November 2006.  As stated earlier, RZB had written to the plaintiffs’ solicitors confirming it has no present intention to sell and that if it should exercise its power to sell as mortgagee, it would give 14 days’ notice to the plaintiffs.  The originating summons in these proceedings and the writ in HCA No. 1788 of 2006 have been registered against the Property in the Land Registry.  I agree with Mr Tong there is no real risk that the Property would be disposed of.

44.  As to the plaintiffs’ claim for profits from the operation of the Hotel after 21 November 2003 (it is not necessary to go into details of the submissions here by Mr Harris, SC and Mr Tong of the nature of the plaintiffs’ claim for an account and their entitlement to profits since November 2003 to the actual day of completion; I will assume the plaintiffs may have a claim for profits over this period, noting Mr Harris’ contention that the plaintiffs’ claim in this respect is of a proprietary nature), any claim here would and could be met out of the purchase price which the plaintiffs would have to pay the Company if specific performance is ordered, and that is HK$700 million.  The same goes for any claim as to damages.  Mr Harris’ submission that RZB may well petition to wind up the Company, if the plaintiffs should succeed at trial, and that the plaintiffs would have to argue with the liquidators of the Company if they are entitled to set off the plaintiffs’ claim against the balance of the purchase price is neither here nor there.

45.  Mr Harris submitted further that the arrangement of set-off envisaged by the Company is not workable here, because the plaintiffs have accepted that RZB would need to be paid the full sum of HK$700 million for the security over the Property to be released.  So if the plaintiffs should pay any amount less than HK$700 million after netting off the plaintiffs’ claims for profits and possibly damages, and the amount tendered is less than HK$700 million, RZB would not be obliged to release the security. The Company is, according to its balance sheet, insolvent, and would not be able to pay any shortfall to RZB to obtain a release.

46.  I do not think that is a valid argument.

47.  To start with, that is not the position of RZB.  RZB insists that there would be no release of security until payment in full of the liabilities secured by the debenture. 

48.  It is not clear to me the basis on which the plaintiffs say RZB is entitled not to release the security until they are paid the full sum of HK$700 million.  It is not alleged there is any agreement with BOC or any representation to that effect.  HK$700 million has no relation to the amount of the liabilities secured.  The plaintiffs’ case in resisting RZB’s contention, as I understand it, is that BOC had consented to the sale of the Property by the Company at HK$700 million on the terms of the sale and purchase agreement, and had agreed to release the security upon the completion of the sale and purchase under the agreement.

49.  Under the sale and purchase agreement, provision was made for a draft apportionment account to be furnished by the vendor and the purchaser is entitled to set off from the balance of the purchase price payable on completion any amount due to the purchaser under the draft apportionment account.

50.  I fail to see how and why the plaintiffs can now say RZB would be entitled to insist on payment of a full sum of HK$700 million for release of the security.

51.  I am also in agreement with Mr Tong that if the plaintiffs’ concern is the risk of insolvency of the Company, and that the plaintiffs would have to prove in liquidation for any claim in damages obtained in these proceedings, this is not an appropriate basis for a Mareva injunction to be granted.  A plaintiff seeking unliquidated damages cannot apply to wind up the defendant company, and to grant him an injunction would be tantamount to making him a secured creditor (Gee, supra, paragraph 12.037; K/S A/S Admiral Shipping v Portlink Ferries Limited [1984] 2 Lloyds Rep 166; and Iraqi Ministry of Defence v Arcepey Shipping Company SA [1981] 1 QB 65 at 72E to F).

52.  The plaintiffs want to stop the Company from making payments to RZB, the failure to do so would cause the Company to go into liquidation.  The loss to the Company in that situation would be difficult to quantify, if not irreversible.  It does not seem damages would be an adequate remedy to the Company.

53.  Mr Tong has made other criticisms of the interim injunction granted on 12 September 2006.  I do not find it necessary to go into them, as I am satisfied it should be discharged.

54.  As this is not a proper case for an interlocutory injunction to be granted, there is even less justification for interim receivers.  I will dismiss the plaintiffs’ summons.

55.  As for the costs of this application, I think the Company and RZB are entitled to their costs.  The only question is whether I should order costs to be paid forthwith, or whether the order should be the defendant’s costs in the cause, which would seem to be the normal practice. 

56.  I am persuaded I should depart from the normal practice in this instance, as the result of the trial does not seem to have a bearing to the present application, which, in my view, should not have been brought.  I decline to give costs to RZB on an indemnity basis.  The order I make is that the plaintiffs are to pay the costs of the Company and of RZB in this application forthwith, including the costs reserved on 12 September 2006.  I will give a certificate for two counsel.  I also give liberty to the Company to apply on the undertaking as to damages given by the plaintiffs on 12 September 2006.