KWOK HIU KWAN v. CONVOY GLOBAL HOLDINGS LTD AND OTHERS

HCMP 900/2018

[2018] HKCFI 1729

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 900 OF 2018

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D E C I S I O N

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1.  On 15 June 2018 Deputy High Court Judge S T Poon heard an application ex‑parte on notice by the plaintiff for an order that the defendants be restrained from causing or procuring the 2^nd defendant to dispose of 1,070,400,000 shares in First Credit Finance Group Limited (“First Credit”) pursuant to a share sale and purchase agreement dated 8 June 2018 entered into by First Credit with Mr Xiao Guoliang.

2.  The 2^nd defendant Convoy Collateral Limited (“CCL”) is an indirect wholly-owned subsidiary of the 1^st defendant, Convoy Global Holdings Limited (“Convoy”). The remaining defendants are directors of Convoy.

3.  The application was adjourned to be heard by me on Friday, 22 June 2018.  Convoy and the 2^nd defendant had undertaken not to complete the share sale until the application had been determined.

4.  At the hearing, Mr Xiao applied to be joined as a party which was not opposed.  Mr Xiao was represented by Mr Patrick Siu, the plaintiff was represented by Mr Charles Sussex SC and Ms Frances Lok, Convoy by Mr William Wong SC, Mr Lai Chun Ho and Ms Sharon Yuen, the 10^th defendant was represented by Ms Janine Cheung, and the remaining defendants except the 6^th defendant were represented by Mr José Maurellet SC, Mr Jason Yu and Ms Rosa Lee. 

5.  The application comes to be made against a complex background involving the investigation of the conduct of Convoy’s officers by the Securities and Futures Commission (“SFC”) and their possible involvement in the existence market manipulation involving a number of listed companies.  The background itself is not relevant to the present application, except to the extent that it explains why the board of Convoy has been reconstituted since the investigations became public, and it is the actions of that newly constituted board which is the subject of the complaint in these proceedings. 

6.  In the second half of 2016 when Convoy had a differently constituted board, CCL acquired approximately 29.5% of First Credit’s shares at a total price HK$375,473,000.  The current board believes that the acquisition was not entered into in the bona fide interests of Convoy and CCL.  First Credit was a member of what has come to be known as the “Enigma Network”.  The current board suspects that the board was at the time controlled by Roy Cho, whose conduct is central to the investigations by the authorities into widespread market manipulation, and he caused the shares to be acquired in circumvention of the obligation to make an offer under the Take-over Code and the disclosure requirements of the Securities and Futures Ordinance (Cap 571).

7.  After First Credit was named as a stock in the Engima Network in September 2017 its price plummeted by approximately 80%.

8.  It is against this background that Mr Xiao approached Convoy on about 26 March 2018 with a proposal to purchase CCL’s interest in First Credit.  Initially he offered $0.42 per share.  There were negotiations.  Mr Xiao increased his offer to $0.50 and subsequently in early June to $0.57 per share.

9.  The board of Convoy met on 8 June 2018 to consider the improved offer.  The minutes record the matters the board had regard to in deciding to accept the offer.  They include:

(1)   the suspension of trading in First Credit at the direction of the SFC, the reasons for which had not been made public: paras 2 and 3;

(2)   First Credit being named as a member of the “Engima Network”: para 3;

(3)   Lack of board representation: para 4;

(4)   The risk of First Credit being delisted: para 5;

(5)   Advice from Yu Ming Investment Management Limited that the offer represented fair value: para 9.

10.  A share sale and purchase agreement (“SPA”) was signed on 8 June 2018.

11.  The originating summons seeks an order enjoining the board from causing or procuring the dispose of the shares and also a declaration that the SPA is void or voidable.  It is not in dispute that the SPA has been executed and the beneficial interest in the shares has passed.  The SPA is thus specifically enforceable.

12.  Having heard argument, I do not understand it to be controversial that it is not sufficient to have the SPA set aside for the plaintiff to prove that in agreeing to the sale at $0.57 per share the directors were negligent and in breach of the duty to exercise reasonable skill and care in the carrying out of their functions now codified in section 465(1) of the Companies Ordinance, Cap 622.  It would be necessary to prove that:

(a)   they were in breach of their fiduciary duty to act bona fide in the best interests of Convoy and by extension CCL; and

(b)   Mr Xiao was sufficiently aware of the relevant matters that he was not a bona fide purchaser for value without notice of the breach of fiduciary duty.

13.  In other words, for the purpose of obtaining an interlocutory injunction, it is not sufficient to show that in respect of a claim for breach of duty there is a serious issue to be tried; it is necessary to show that there is a serious question to be tried in respect of (a) and (b) in the previous paragraph.

14.  As Mr Sussex candidly accepted, there is no direct evidence of members of the board conspiring to sell the shares for an improper purpose or that Mr Xiao was involved in such a conspiracy.  The plaintiff’s case is based on inference.  The matters relied on as supporting the necessary inference are principally as follows:

(1)   The sale price was at an 80% discount to First Credit’s net asset value as recorded in its last audited financial statement, which had a clean audit opinion.

(2)   The plaintiff had obtained a valuation by Grant Thornton Advisory Services Limited (“Grant Thornton”) indicating a fair value of between HK$131 million and HK$180 million rather than the approximately HK$61 million agreed with Mr Xiao.

(3)   Convoy has no immediate need of money.  The sale simply crystallises a substantial loss.

(4)   Nothing is known about Mr Xiao.  There is no evidence other than the statement in the public announcement dated 13 June 2018 disclosing the transaction demonstrating he is an independent third-party and is not a connected person.

(5)   The delay in publishing the announcement and the fact that in his evidence on behalf of the Company, Mr Yap refers incorrectly to all directors approving the sale; in fact some did not attend the board meeting.

15.  The allegation that the transaction was not bona fide and entered into knowingly and at an undervalue is a very serious one.  It necessarily impugns the conduct and motives of most of the board, Mr Xiao and Yu Ming Investments.  In HKSAR v Lee Ming Tee and Securities and Futures Commission (2003) 6 HKCFAR 336, Sir Anthony Mason NPJ (and I quote from the judgment of Ribeiro PJ in Nina Kung v Wong Din Shin (2005) 8 HKCFAR 387 at [187] )—

“acknowledged the need for such a disciplined approach to the drawing of inferences and in particular for inferences of fraud or serious misconduct to be drawn only where such inferences are compelling. Dealing with an allegation that senior SFC officers had deliberately and improperly terminated an investigation in order to avoid compromising the standing of the subject of the investigation who was acting as an expert witness in a criminal trial in which the SFC was interested, his Lordship stated:

… that conclusion was not to be reached by conjecture nor, as the respondent submitted, on a mere balance of probabilities. It was to be plainly established as a matter of inference from proved facts. (at §72)”

16.  It is necessary for the plaintiff to adduce affirmation evidence, which having regard to this guidance demonstrates that there are facts and matters capable of justifying the inference that the transaction was not entered into bone fide, but, rather, for an improper purpose and that it was not in the company’s best interests.

17.  Whether or not there is a serious question to be tried has to be assessed by reference to these principles and involves assessing the substance and implications of the matters the plaintiff relies on and also testing them against the defendant’s evidence.

18.  In my view, the plaintiff has clearly failed to demonstrate that there is a serious question to be tried.  The shares were trading at a discount to the net asset value of 60% before trading was suspended.  Grant Thornton were asked to give a preliminary view:

“5. We have reviewed relevant public information of First Credit and Convoy, as well as Mr. Kwok’s affirmation and relevant Court’s documents. Based on our preliminary analysis, we take the view that the Disposal appears to be grossly undervalued. The fair value in respect of the 29.5% stake in First Credit would be in the range of HKD131 million to HKD180 million.

6. First Credit is a Hong Kong-based investment holding company principally engaged in money lending business which through its branches provide secured and unsecured loans to customers.  Its unsecured loans include personal loans, corporate loans and foreign domestic workers loans.  Its secured loans include first property mortgage loans, subordinated property mortgage loans and other secured loans. It mainly operates businesses in Hong Kong.”

19.  What Grant Thornton have done is to produce a valuation of the shares on various bases: first, on an asset basis; secondly, on a market basis calculating a price-earnings ratio.  What Grant Thornton did not, and given they are an accounting practice quite possibly do not have the expertise to do, is assess whether the price agreed was within the range of prices a board of a company, concerned about the factors relied on by the board of Convoy, might be expected to consider acceptable even if less than ideal.  I consider their evidence to be of limited value.

20.  What seems to me clear is that the matters relied on by the plaintiff fall well short of establishing that the transaction approved by the board with Mr Xiao was not a genuine arm’s length transaction.  As I have already noted, it is not sufficient to justify the grant of an interlocutory injunction for the plaintiff to demonstrate that the board was negligent in agreeing to sell the shares for approximately HK$61 million. It is not, therefore, necessary for me to consider the other issues debated before me, save to say that if I had found that there was a serious issue to be tried, I would have held that damages was an adequate remedy.

21.  I, therefore, dismiss the application and will hear the parties’ counsel on costs.

(Submissions on costs)

22.  There is no dispute that the costs of the plaintiff’s application before me should be paid by the plaintiff to the defendants and Mr Xiao forthwith, and, where relevant, with a certificate for two counsel. However, the defendants have also asked that costs be assessed on an indemnity basis.  The reason for doing so is that, as I have explained in my reasons, it was necessary in order to succeed in the application for the plaintiff to demonstrate that there is a serious issue to be tried in respect of allegations of serious misconduct, and that having failed to satisfy that threshold it is appropriate for the court, in recognition that serious allegations which are unjustified have been made, to award costs on an indemnity basis. 

23.  There was some discussion before me about the point in time at which the plaintiff should have appreciated the high burden that he   would have to satisfy in order to succeed in getting an interlocutory injunction.  It seems to me that the position was this: once, which would have been following reading the announcement of 13 June 2018, it was appreciated that a share sale and purchase agreement had been executed for the purchase of the entire of CCL’s interest in First Credit, namely, 29.5%, it should have been appreciated for the reasons explained in Spry, The Principles of Equitable Remedies (9^th ed), p 66–67 that the agreement was probably specifically enforceable, with the consequences for the criteria which had to be satisfied explained in my earlier reasons.

24.  It seems to me that it is appropriate where an allegation is made of serious misconduct against directors of a public company and the purchaser of shares in it, that in the event that the applicant is unable to even satisfy the serious question to be tried test, costs should be assessed on the basis that the defendant should not be out of pocket. 

25.  It, therefore, follows in my view that it is appropriate to order that the defendants’ costs and Mr Xiao’s costs are paid on an indemnity basis with certificate for two counsel.