MERIT APEX LTD v.BOWEN GROUP INVESTMENT LTD AND ANOTHER

HCA 646/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 646 OF 2013

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1.  This was an application by Merit Apex Limited (“the plaintiff”) for interim injunctions to restrain Bowen Group Investment Ltd (“the 1^st defendant”) from dealing with 8.3 million ordinary shares in Asia Energy Co Ltd (“the 2^nd defendant”) belonging to the plaintiff and changing or procuring any change to the register of members and/or the register of directors of the 2^nd defendant.  At the conclusion of the hearing, judgment was reserved which I now give.

Background facts

2.  The plaintiff and the 1^st defendant are companies incorporated in the BVI in 2007 and 2009 respectively.  The plaintiff is wholly owned by Chen Hengshun (“Mr Chen”).

3.  The 2^nd defendant is a company incorporated in the Cayman Islands in 2010.

4.  On 9 July 2010 the 1^st defendant entered into a Subscription Agreement with, inter alia, the plaintiff to subscribe for 1.7 million Series A Preferred Shares (“the preferred shares”) in the 2^nd defendant for US$25 million (equivalent to just under RMB200 million).  On completion of the Subscription Agreement the issued share capital of the 2^nd defendant comprised 8.3 million ordinary shares owned by the plaintiff (“the ordinary shares”) and the preferred shares owned by the 1^st defendant.

5.  On the completion date, the 2^nd defendant owned the entire issued share capital of Glorious Shine Holdings Ltd (“the HK subsidiary”). The HK subsidiary in turn owned the entire registered capital of Jiangsu Henshunda Biological Energy Co Ltd (“the PRC subsidiary”).

6.  Also on 9 July 2010, the plaintiff and the 1^st defendant entered into a Share Charge whereby the plaintiff charged the ordinary shares as collateral to secure the performance of all the obligations and liabilities of, inter alia, the plaintiff under, inter alia, the Subscription Agreement. 

7.  Over two years later, on 2 November 2012, the 1^st defendant as seller, and the plaintiff and Mr Chen (“the buyers”) entered into a sale and purchase agreement whereby the buyers agreed to purchase the preferred shares at a purchase price of RMB350 million (“the SPA”).  The buyers agreed to pay a non-refundable deposit of RMB50 million and to deliver the Warrant as defined in the SPA by 31 December 2012. 

8.  The SPA also amended the Share Charge so that the latter was extended to cover loss caused by any breach of the SPA by the buyers.

9.  The SPA provided for disputes and claims to be resolved by arbitration in Hong Kong under the Hong Kong International Arbitration Centre Administered Arbitration Rules while the Share Charge provided for disputes and claims under it to be finally settled by the Hong Kong courts with non‑exclusive jurisdiction.

Chronology of events

10.  It is common ground that the buyers failed to pay the non-refundable deposit of RMB50 million and to deliver the Warrant to the escrow agent by 31 December 2012.

11.  The 1^st defendant caused a letter before action to be sent to the plaintiff on 3 January 2013.  In his response of 9 January 2013, acting on behalf of the buyers, Mr Chen admitted liability but sought more time to make payment.

12.  On 22 January 2013, the 1^st defendant served a written notice on the plaintiff “for the purposes of clause 6.2(a) of the Share Charge” to the effect that its “Chargee Loss due to the Events of Default” consisted of damages comprising, inter alia, the sum of the RMB350 million, default interest accruing on the non-refundable deposit, interest under clause 3.1 of the SPA and costs.

13.  On 8 February 2013, the 1^st defendant filed a notice of arbitration (“the notice”) under the “Agreement” comprising the SPA and supplemented by a side letter of 29 November 2012 claiming exactly the same relief as the “Chargee Loss” it had identified in the letter of 22 January 2013. Then on 2 March 2013, the 1^st defendant asserted in writing that since it had not received any response regarding the notice it was entitled to assume that the loss due to the breach of the SPA was RMB350 million.  It gave notice pursuant to clause 6.3 of the Share Charge of its intention to forthwith exercise its rights, inter alia, to transfer the collateral to its name and to deal with the same as the absolute owner thereof.

14.  The 1^st defendant, having executed the documents attached to the schedules of the Share Charge on 14 March 2013 removing Mr Chen as the sole director of the HK subsidiary, gave notice to Mr Chen the following day about his removal from office as director.

15.  The buyers filed an answer to the notice on 2 April 2013 disputing the amount of loss asserted and raised a counterclaim under the Share Charge for the delivery up of the documents executed by the defendants.

16.  The buyers disputed the amount of damages claimed, pointing out in its letter of 8 April 2013 that the 1^st defendant was still holding the preferred shares.  Further, they stated that the value of the collateral was substantially greater than the alleged loss and that, in any event, the 1^st defendant is not entitled to enforce the collateral.  The buyers demanded an undertaking by the 1^st defendant not to transfer or deal in the collateral, offering the usual undertakings to damages.  They also enquired whether the 1^st defendant’s solicitors had instructions to accept service of proceedings.

17.  On 9 April 2013 the 1^st defendant informed the buyers’ solicitors that it had already enforced the security under section 6 of the Share Charge with effect from 28 March 2013.  On the same day the plaintiff issued the writ with indorsement of claim together with the summons for interim relief and supporting affirmation with a return date of 24 May 2013.  These were served on the 1^st defendant solicitors on 22 April 2013.

Whether serious issue to be tried

18.  Mr Chan, counsel for the plaintiff, submitted that the crucial issue is whether the 1^st defendant is entitled to transfer and/or deal with the ordinary shares pursuant to clause 6 of the Share Charge.  As that turns on the provisions of clause 6, they need to be considered in greater detail.

19.  Clause 6 was headed “Enforcement of Security”.  Clause 6.1 of the Share Charge dealt with “Enforcement Rights”.  It gave the 1^st defendant to the right to transfer the collateral into its name and to sell the preferred shares to the extent of the loss suffered upon the occurrence of an “event of default”.  Importantly, that right was subject to the following provisos:

“provided that the value of such Collateral to be transferred into the name of the Chargee shall be limited to the Chargee Loss (as defined below), and further provided that when the Chargor is able to compensate in full the Chargee for the Chargee Loss from the funds other than obtained through the disposition of the Collateral, the chargor has the right to use such funds to make such compensation without the need to dispose of the Collateral; …”

20.  For present purposes, clauses 6.2, 6.3 and 6.4 are also relevant:

“6.2 Enforcement Procedure

a) Notwithstanding the Chargee’s rights under this Section 6, any claim of an Event of Default by the Chargee shall be delivered in writing to the Chargor with a description and evidence of the amount of the loss, liability, damage, deficiencies, costs or expenses, including without limitation any diminution in the value of the Shares or Assets and Properties, legal fees, and expenses of investigation and defense, incurred by the Chargee due to the Event of Default (‘Chargee Loss’).

b) The Chargor shall have twenty (20) Business Days to dispute the existence of an Event of Default and/or the amount of such claim by delivering a written notice to the Chargee. In the event of a dispute, such dispute shall be adjudicated in accordance with Section 17 hereof and no enforcement against the Charged Securities hereunder shall occur until the earlier of (A) the date when the dispute over such claim or action has been settled in an instrument of writing executed by the Chargor and the Chargee or (B) the date when the court decision in respect of such claim or action has been amended in accordance with Section 17 hereof.

6.3 Prior to Sale of Collateral

If an Event of Default shall occur and be continuing, the Chargee shall have the right to receive any and all cash dividends and interest payments in respect of the Collateral and make application thereof to reduce the obligations of each Covenanter under the Basic Documents in such order as the Chargee may determine, subject to Section 6.2 hereof. If (i) an Event of Default shall occur and be continuing and (ii) the Chargee shall give notice of its intent to exercise such rights to the Chargor, subject to Section 6.2 hereof, the Collateral necessary to repay the Chargee Loss and all reasonably expected costs and expenses of the Chargee to be incurred in connection with the sale of such Collateral and collection of relevant proceeds as determined in good faith by the Chargee (the ‘Claimed Collateral’) shall be registered in the name of the Chargee or its nominee …

6.4 Sale of Collateral

If an Event of Default shall occur and be continuing, the Chargee may exercise, in addition to all other rights and remedies granted in the Subscription Agreement and in any other instrument or agreement securing, evidencing or relating to the Subscription Agreement, all rights and remedies of a secured party, subject to Section 6.2 hereof ...”

21.  The written notice dated 22 January 2013 served on the plaintiff is described in §12 above.  The plaintiff's position is that given the requirements stipulated in clause 6.2(a) as to the contents of the notice, it is not a notice within clause 6.2(a), there being an absence of evidence/information required to constitute “Chargee Loss”.

22.  In my view, given the manner in which Chargee Loss is defined, it is seriously arguable that the written notice of 22 January 2013 does not satisfy the requirements stipulated.  The tenor of the definition of “Chargee Loss” is that some form of quantification supported by evidence is required. 

23.  This construction is supported by the provisos to clause 6.1(a). Those provisos clearly contemplate not only the quantification of the Chargee Loss but also a valuation of the collateral to be transferred. 

24.  As matters stand, the Chargee Loss consists of the non-refundable deposit of RMB50 million, interest accruing on that sum as from 1 January 2013, the value of the warrant (as to which there is no evidence) and damages (as yet unquantified) for breach of the SPA under clause 6.1(b) of the SPA.  For the second proviso in clause 6.1(a) of the Share Charge to operate, the Chargee Loss must first be quantified.  Logically, that means that no disposition of the collateral can take place without the plaintiff being given the opportunity to make full compensation to the 1^st defendant without the disposition of the collateral. 

25.  As I understand it, the 1^st defendant relies on the fact that the plaintiff failed to dispute the amount of the claim asserted by the 1^st defendant within 20 business days as required by clause 6.2(b).  It was said that that constituted a waiver on the part of the plaintiff.  That submission might carry more weight if the validity of the 1^st defendant’s written notice pursuant to clause 6.2(a) is not in issue.  Where its validity is questionable, it is certainly arguable that clause 6.2(b) is not triggered and no question of waiver arises.  Further, even on the hypothesis that the written notice of 22 January 2013 satisfies the requirements of clause 6.2(a), clause 6.2(b) does not in terms provide that where the plaintiff fails to serve a written notice of dispute within the 20 days, it shall be deemed to have waived its right to dispute and/or object to the amount of the loss.  Rather, clause 6.2(b) provides for adjudication by the court in the event of a dispute.  There is nothing in the Share Charge to suggest that enforcement can nevertheless proceed, pending adjudication of that dispute.

26.  I agree with Mr Chan that whether or not the 1^st defendant has a valid argument that the plaintiff is now debarred from disputing the amount of the loss and whether clause 6.2(b) operates to prevent the 1^st defendant from enforcing the collateral pending the resolution of the disputes as to quantum also constitute further or alternative serious issues to be tried.

27.  Ms Tjia, counsel for the 1^st defendant, submitted that clause 6.1 is only an additional right available to the 1^st defendant whose rights at common law and in equity were preserved by virtual of the opening paragraph of clause 6.1.  That provision reads:

“Without prejudice to any other rights available to the Chargee as a secured party at law or in equity, if an Event of Default shall have occurred and be continuing, the Chargee shall have the right to:

…”

28.  Implicit in the submission is the suggestion that the 1^st defendant was exercising its rights at common law and in equity so that non‑compliance with the requirements of clause 6 was irrelevant.  However, it is clear from the chronology above that the written notice of 22 January 2013 given by the 1^st defendant was specifically “for the purposes of clause 6.2(a) of the Share Charge”.  In other words, the 1^st defendant was not seeking to exercise any other right it may have under common law or in equity but its rights under clause 6.2.

29.  For the reasons stated above, I am satisfied that there are serious issues to be tried.

Whether damages would be an adequate remedy

30.  There is little doubt that monetary compensation would be sufficient so far as concerns the 1^st defendant. Its claim is essentially one for damages.

31.  So far as concerns the plaintiff, the position is very different.  What is at stake here is the ownership of shares in a private company that are not freely available on the market.  Once the collateral is sold, it would not be possible for the 1^st defendant to make the plaintiff whole should it ultimately be held that the 1^st defendant is not entitled to dispose of the collateral before the loss for breach of the SPA by the buyers has been quantified.

Balance of convenience

32.  In the present case, it is quite clear where the balance of convenience lies which is that an interim injunction should be granted.

33.  I take note of the fact that in §34 of his affirmation, Mr Chen has offered an undertaking on behalf of himself and the plaintiff that they will not transfer, sell, charge or otherwise deal with the ordinary shares pending the determination of the amount of the 1^st defendant’s loss.  Accordingly, those shares would remain available as security for any damages to which the 1^st defendant is entitled in its claim against the plaintiff and Mr Chen for breach of the SPA.  Since the ordinary shares constitute 83% of the issued capital of the 2^nd defendant and the preferred shares only the remaining 17%, prima facie, the ordinary shares are likely to have a greater value than the preferred shares which, in any event, are still in the possession and control of the 1^st defendant.

34.  Ms Tjia submitted that an interim injunction should not be granted on the basis that no urgency exists because no ex parte application had been made and the date for the present hearing was fixed over a month in advance.  But as Mr Chan explained, this application was necessitated by the 1^st defendant transferring the collateral into its name on 28 March 2013.  I see no merit in Ms Tjia’s submission.

35.  It should be mentioned that I find it inexplicable and extraordinary that notwithstanding notice of the application since 22 April 2013, the 1^st defendant has not seen fit to file any evidence in opposition to the plaintiff’s application for interlocutory relief.  Rather, Ms Tjia’s written skeleton submissions are replete with assertions and allegations that should have been made by way of affidavit by the person with knowledge of the matters concerned and, where appropriate, supported by documentary evidence.  The assertions and allegations made have no place in counsel’s written submissions.

36.  Ms Tjia then referred to a number of letters sent to the 1^st defendant by the PRC subsidiary allegedly in support of the allegation made in §16 of her written skeleton that Mr Chen and the plaintiff “concealed the fact that the Charged Shares were in fact charged to 2 other creditors in the absence of knowledge and approval of [the 1^st defendant]” and in §21 that Mr Chen “concealed the important fact that he had charged all of the PRC [subsidiary’s] assets to its creditors”.  Those letters written in Chinese formed part of the hearing bundle but no translations had been provided.

37.  I have caused those letters to be translated and having read them, I consider that they are of little assistance.  The letter dated 12 April 2013 contained the following statement:

“… previously, for the purpose of implementing the financing plan agreed by the company’s board of directors, all the assets of the company and the entire equity interest of [the HK subsidiary] in this company had been pledged by the company to the creditor/s and guarantor/s …”

38.  This passing reference to assets having been pledged cannot be taken at face value and considered in isolation because it is clearly part of a much larger canvas, being part of a series of correspondence precipitated by the 1^st defendant’s action in transferring the collateral into its name.  The 1^st defendant has not seen fit to provide the relevant evidence and must suffer the consequences.

39.  Finally, it was submitted that interim relief if granted will in effect dispose of this action finally and this would be unfair to the 1^st defendant.  It was said that the value of the 2^nd defendant is determined entirely by the value of the PRC subsidiary and as Mr Chen is still the de facto possessor and operator of that subsidiary, Mr Chen and/or the plaintiff will have no interest in proceeding with this case to trial.

40.  I am not persuaded by that submission.  It is always open to the 1^st defendant to make the appropriate application to vary the order should it see fit to do so and take appropriate steps to progress the action.

41.  Since the 1^st defendant has made clear its intention to exercise its rights to dispose of the collateral, the balance of convenience must be in favour of the preservation of the status quo.  Accordingly, I grant the interim injunction sought and make an order in terms of paragraph 1 of the summons.  I also make an order nisi that the costs of the application be the plaintiff's costs in the cause.