XCHRX BEAMS LTD. v. BMS CONTROLS ASIA LTD. and Others

1997, No.A3656

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. I have before me an application by the Plaintiff for a number of injunctions which vary in nature. Those injunctions are sought only against the 2^nd and/or 4^th Defendants. To understand the substance of the application, it is necessary first to set out the background facts.

A brief history

2. The Plaintiff in this matter is a private company, the two shareholders of which are a husband and wife, Joseph and Diana Roznowski. Mr Roznowski is by training an electronics and controls engineer who specialises in the installation and operation of what are called building control systems. As I understand it, they are computer-controlled systems which are installed in modern buildings to harmonise light, heat, ventilation and the like.

3. The 4^th Defendant, whom I shall call Paul Chong, is a businessman involved in a substantial way in the construction industry. It appears from his affirmation filed in opposition to these proceedings that he operates various business enterprises relating to building and engineering through a holding company, Southa Investment Company Ltd., which is the 2^nd Defendant in this matter.

4. In or about 1993, Joseph Roznowski and Paul Chong agreed to create what is commonly called a joint venture company specialising in the supply of building control systems. This company was BMS Controls Asia Limited, the 1^st Defendant in this matter. To regulate affairs, a Shareholders' Agreement, dated 25^th July1994, was drawn up. In terms of this Agreement, the Plaintiff, Beams, and 2^nd Defendant, Southa Investment, each took up 50% of the issued share capital of the joint venture company. The equality of the shareholding was reflected in the number of directors; both Plaintiff and 2^nd Defendant nominating two directors.

5. Although there is some dispute on this matter, it appears that Joseph Roznowski took up the day-to-day position of manager of the joint venture company, BMS. He certainly had cards printed calling himself the Managing Director. What is not disputed is that, by reason of his experience and expertise in sourcing technical supplies, he was effectively put in control of this area of the business.

6. According to Joseph Roznowski, from humble beginnings, the joint venture company, BMS, did well. It is his case that in 1996 it enjoyed a turnover of some $15,000,000 and, all being well, subject to certain contracts being secured, it was hoping for a turnover in excess of double that figure in 1997. However, in or about February of this year the two parties to the joint venture came into serious conflict. In his first affidavit, Joseph Roznowski described it as a "broad-ranging dispute" concerning "all aspects of the management and finances" of BMS. It was, he said, an acrimonious dispute, the extent of which indicated that all trust and confidence between the joint venture parties had been destroyed.

7. In his affirmation in opposition, Paul Chong did not attest to such broad-ranging disputes. For him the major course of conflict appears to have been one issue only; that is, his belief that Joseph Roznowski and/or Beams has committed a fraud on the joint venture company. In his affirmation he described the genesis of this belief as follows -

a. In February of this year he received a letter from the accountants of BMS who were concerned that certain invoices may not be genuine. These invoices related to the purchase of certain technical equipment from (or through) a company in the United States called Pacific-Kelley Corp. allegedly carrying on business in Sunnyvale, California. The cost of the goods supplied was US$25,895.

b. Enquiries conducted through Dun & Bradstreet indicated that there was no such company operating in Sunnyvale, California. In fact, the only company in the United States which could be traced with the same name was situated on the East Coast of the United States and confirmed it had no operations at the material time in California.

c. Enquiries as to the price of the goods listed on the invoices revealed that they could be purchased through other standard sources for approximately 6% of the amount stated on the invoices.

8. It is Paul Chong's case that, despite his fiduciary obligations, Joseph Roznowski has never made any attempt to explain the "Pacific-Kelley" matter and that this has led to a breakdown in the management of the joint venture company.

9. What is apparent from the papers is that Paul Chong did not act with caution. Steps were taken to try and dismiss Joseph Roznowski, the staff of BMS were advised of the conflict and, in addition, a report was made to the police.

10. In his first affidavit, although he did not refer directly to the allegations of fraud, Joseph Roznowski accepted that the breakdown in management of BMS had resulted in deadlock. This was why, he said, he had resorted to the 'deadlock provisions' contained in the Shareholders' Agreement which, inter alia, provide for the valuation of the shares of BMS and the buying out of one or other of the parties to the joint venture. I shall refer in greater detail to the 'deadlock provisions' a little later as they form the foundation for one of the injunctions sought.

11. For his part, in his affirmation in opposition, Paul Chong spoke not of a buy-out in terms of the Shareholders' Agreement but rather of the necessary winding-up of the joint venture company.

The earlier hearing

12. Before coming before myself last Friday morning, the matter had come before Mr Justice Rogers who adjourned the matter for one week. In a written ruling, he said that he did so because he wished to hear further argument on the 'deadlock provisions' in the Shareholders' Agreement and also because he thought it best in general equity to afford Joseph Roznowski an opportunity to answer the allegations of fraud that had been made. In this regard the learned judge said as follows :-

"This is not a matter which I would like to take a decision on without full consideration and as much argument on the matter as possible. I think that before doing so I would like to see Mr Roznowski's answers to the allegations which have been made. Mr Miu on behalf of the 2^nd Defendant says that the reason his client is dragging its heals on the appointment of an independent expert is because the basis upon which the valuation will be done cannot be determined until it is known whether Mr Roznowski has in fact committed criminal offences or not. If that be right, the sooner the court is able to form a view on that the better. So, as regards this aspect of the application, what I propose to do is to allow the 2^nd Defendant until next Monday, as it has requested, to file its evidence in answer to the application. I shall give the Plaintiff three days until the noon on Thursday to file its answer and the matter can be restored again next Friday."

13. Joseph Roznowski however, chose not to give an explanation of the 'Pacific-Kelley' matter. In his third affidavit, the one filed in accordance with Mr Justice Rogers' order, he said as follows :-

"... I have been advised by my lawyers that because Paul Chong has made a report to the police and asserts that a police enquiry is under way (although I know nothing of any such enquiry) I should respond only to the police investigations about the Pacific-Kelley matter."

14. He then went on to say that, without any admission of liability, Beams had in fact paid back to the joint venture company the disputed sum of HK$232,003 in an attempt to "remove one of the disputes" between the shareholders and, in addition, to provide funds to pay salaries. Paul Chong had, however, distanced himself from that payment insisting that it be recorded in the company accounts as a loan and expressing his opinion that "no member of BMS is allowed to solicit settlement of any alleged criminal offence".

Privilege against self-incrimination

15. During the course of arugement, the Defendants made much of the fact that Beams and/or Joseph Roznowski had declined to give an explanation for the Pacific-Kelley matter and had, so it would seem, claimed privilege against self-incrimination.

16. If does raise a novel point of law. Beams in this matter is not a defendant resisting, for example, an order for discovery in terms of an injunction application, Beams is the Plaintiff. It is fundamental to any such application for an injunction that the party applying for it should show the utmost good faith.

17. It is equally fundamental that an injunction should not be granted unless there is full and fair disclosure of all material facts : Brinks-MAT Ltd. v. Elcombe [1988] 3 All ER 188.

18. Materiality is to be decided by the court not by the Plaintiff or his legal advisors. The fact that the court, might well have made the same order even if the full facts had been disclosed is beside the point : Behbehani v. Salem [1989] 1 WLR 723.

19. Beams, however, has chosen not to disclose what the Defendants at least consider to be matters of the most central materiality.

20. It has been argued by the Defendants that, in face of the documentary evidence that Beams and/or Joseph Roznowski may well be guilty of a fraud on the joint venture company (that fraud possibly being an indicator of a course of fraudulent conduct) and in face of their failure to provide any form of explanation, Beams has effectively barred itself from seeking relief. This, Defendants have argued, is based on the rule of equity that he who comes to equity must do so with clean hands.

21. In reply, it has been argued on behalf of the Plaintiff that, even if there has been the fraud, surely that cannot excuse the precipitous and calculated steps now being taken by the Defendants to force the joint venture into liquidation thereby effactively destroying the financial interest which Beams, through its endeavours, has built in the joint venture company. However, the fault, as I see it, with this (hypothetical) argument is that, however improper the conduct of the Defendants may be, if Beams has been guilty of a fraud on BMS that fraud most surely preclude it from seeking relief in equilty unless it was of such a petty nature as to be immaterial (Littlewood v. Caldwell 11 Price 97-98).

22. For reasons which will appear later in this judgment, I do not believe it is necessary to resolve the issue of whether, by Beams effectively claiming privilege from self-incrimination, it has barred itself from seeking relief. All I will say, in passing, is that, without full disclosure by Beams, this Court faces difficulties in respect of the application for a mandatory injunction in being able to conclude that Beams has an unusually strong and clear case.

The 'Russian roulette' provisions

23. One of the injunctions sought by Beams has been couched in the following terms in its draft order -

"The Second Defendant do within five business days hereof notify the Plaintiff in writing of the price per share which the Second Defendant considers to be the fair value of its shares, in accordance with clause 2.4 of the Shareholders' Agreement."

24. Clause 7 of the Shareholders' Agreement sets out the mechanism for resolving disagreements which result in deadlock, sub-clause 4 setting out a procedure often referred to in financial circles, I understand, as the 'Russian roulette' provisions.

25. The mechanism for resolving disagreements which result in deadlock is set in motion by the issue of a deadlock notice. Such a notice was issued by the solicitors acting for Beams on 3rd April of this year. Clause 7 initially contemplates an amicable resolution of disputes but, failing that, sets out the procedure whereby the shares in BMS, the joint venture company, are valued and one group of shareholders then buys out the other. Should the parties be unable to agree a value for the shares, it is stated that an independent expert shall carry out the valuation. This expert is defined in clause 1 as follows -

"means a professional accountant appointed by the shareholders or, if they fail to agree an appointee within 14 days of the first proposing such a person by notice to the other, to be appointed by the President (or senior official) of the Hong Kong Society of Accountants."

26. The solicitors for Beams did, in fact, make an application to the Hong Kong Society of Accountants but, by letter dated 8th April, the Registrar of the Society advised that, in respect of a commercial valuation of this kind, it was not in a position to recommend one member of the Society in preference to another.

27. No provision is stated in clause 7 for the appointment of an independent expert by this Court and nobody has argued before me that such a provision is implied or that this Court has any inherent jurisdiction to make such an appointment. In any event, clause 7.3 provides that any valuation by an independent expert shall not be binding on the parties.

28. With no independent expert able to be appointed, Beams has sought an injunction in terms of clause 7.4. That clause reads as follows -

"7.4 If the parties are unable to agree a price per share and Southa does not accept the price per share fixed by the Independent Expert within 5 Business Days of receipt of the Independent Expert's valuation, within a further 5 Business Days, Southa must notify Beams in writing of such higher price per share which it considers to be the fair value of its shares. Upon receipt of such notification, Beams shall be entitled to purchase Southa's shareholding in the Company at such higher price per share or many, alternatively, require Southa to purchase Beams' shareholding in the Company at such higher price per share."

29. The 2^nd Defendant has argued, however, that, despite there being unaudited accounts in existence, without a close examination of the records of BMS to ensure that no long-running fraud has been perpetrated on the company, it is not in a position, within such a limited period of time, to set a value on the shares of the company, especially in light of the fact that, by mutual mistake, the provisions of clause 7.3 have been vitiated and no share valuation exists to provide even a working foundation. The Defendants further argue that the company is, in any event, technically insolvent. In such circumstances, the Defendants argue that the provisions of clause 7.5 are the only solution. That sub-clause reads as follows -

"7.5 If the dispute or disagreement is not resolved between the Shareholders or through the purchase of either of the Shareholders' shareholding in the Company as set out above within 30 Business Days of Beams' entitlement to offer to purchase Southa's shareholding arising under clause 7.3, the Shareholders shall procure that the Company is round up forthwith."

30. The injunction sought by Beams is mandatory in nature; in short, it requires an act or set of acts to be done. Interlocutory mandatory injunctions may be granted but they are a very exceptional form of relief and, in my judgment, in the matter now before me, Beams has been unable to show that it should be granted that exceptional relief. I say so inter alia for the following reasons -

1. An interlocutory mandatory injuction will not be granted on affidavit evidence where the issues of fact are strongly contested and involve disputes which can only be determined on the trial of the action. In the matter now before me there are numerous areas of dispute. They involve not only the alleged fraud on the joint venture company but, for example, whether Beams has been entitled to charge BMS commissions for goods procured from a company known as Andover Controls Corporation. Beams itself has alleged an illicit but concerted course of conduct on the part of the Defendants to destroy BMS and assume its profitable contracts, a course of conduct which, in large part, has been responsible for the exodus of staff from BMS thereby exacerbating the present crisis.

2. If I do grant the injunction sought, I will effectively be undermining the very issues which are in contention between the parties. I say this because, if I grant the injunction, it will have the following effect -

a. 2^nd Defendant will have to value shares within a very short space of time which it says it is incapable of valuing without a detailed study of the company's records.

b. Despite the existence of unaudited accounts, it will have to value the shares without the benefit, whether accepted or not, of an existing expert's valuation, such valuation at least providing a rational base for the exercise. Clause 7.4, after all, provides that 2^nd Defendant must only give its value "within a further 5 business days" after receipt of the expert's valuation.

c. Once such an unsafe valuation is made, Beams shall be entitled, that is, it shall have the right to purchase, the 2^nd Defendant's shares in BMS for that stated sum or it may require the 2^nd Defendant to purchase its shares for the stated value. The Defendants argue that, if they are forced to follow the provisions of clause 7.4 they will provide Beams with an almost immediate mechanism for escaping its liability to the joint venture company, either by assuming full control of it or by being paid out and able thereafter to distance itself.

3. Although the matter was not argued before me, there may well be an arguable case that the mutual mistake that vitiated clause 7.3 has also vitiated clause 7.4.

4. Before a mandatory injunction will be granted, while of course it is no part of the Court's function at this stage to try to resolve conflicts of evidence upon which either party may ultimately depend, Beams must at least show on the papers a high standard of probability of success at trial. But, on the papers as they stand at this juncture, I cannot begin to hazard where the probabilities will lie at trial.

5. Finally, on a practical basis, I cannot say that Beams will suffer irreparable harm if I fail to grant the injunction, no matter where the probabilities of success may lie. Clause 7.4 is a 'buy out' provision and the probabilities sit equally as to whether Beams would buy or sell. Beams is able to seek its remedy in damages.

Restraint on employing staff

31. A further injunction sought by Beams is that, until further order, 2^nd and 4^th Defendants or their agents be prohibited from employing or offering to employ any of the staff or former staff of BMS.

32. Although I was not provided with specific details and therefore face some difficulties in this matter, it was not disputed that all (or virtually all) twenty employees of BMS have tendered their resignations. Exactly how many have left and how many are still working out their notice I do not know but it would appear that a substantial number have already left. Quite what provision any of these employees have made for their future I do not know. None of the employees have been made a party to these proceedings. It is possible, therefore, that some have already contracted with one of the Defendants to take up employment. An order of the kind sought will prohibit those persons from taking up their employment, cause immediate loss and proliferate potential legal actions.

33. Clause 10 of the Shareholders' Agreement which relates to the protection of the goodwill of the joint venture company states that neither party to it shall entice away employees of the joint venture company. But matters, of course, have gone a good deal further than envisaged in Clause 10. As I have said, all (or virtually all) of the employees have already tendered their resignations. For what they perhaps perceive as sound reasoning, they are leaving a company in crisis which has had difficulty paying wages. I do not believe that the injunction sought by Beams will, in a balanced way, assist Beams without causing unreasonable harm to the employees.

34. Restrictive covenants of the kind referred to in clause 10 cause special problems. Beams has not been able to satisfy me that, in the circumstances now prevailing, this Court should properly prohibit not merely the Defendants from taking on but prohibit thereby the employees (who are no part of this dispute) from accepting employment which they may well have already planned upon.

The employees of Beams

35. Plaintiff has further sought an injunction to restrain 2^nd Defendant and its agents from attempting to entice away or solicit its own employees.

36. However, with respect to Plaintiff's counsel, who presented a very full and lucid argument, I do not recall any argument that fell outside of the relationship of the parties in respect of the joint venture company. In short, the arguments and allegations have related only to the employees of BMS. Should Plaintiff believe its own rights are being directly threatened by the Defendants, that would, in my opinion, form the basis of a separate action.

Taking over BMS's business

37. To a great extent, Plaintiff has founded its application for the various injunctions on the basis that the Defendants have taken a concerted course of action to ensure the demise of BMS for the purpose, now that BMS is a thriving entity, of assuming its hard-earned place in the market. This has been denied by the Defendants, one of the arguments being that, in comparison to the size of its own commercial enterprises, BMS is a minnow set against a whale.

38. What is not denied, however, is that the 2^nd Defendant (or one or more of its subsidiaries) is the main contractor on several building projects in respect of which BMS is presently engaged as sub-contractor. I understand, in fact, that a couple of these contracts - certainly one, that is, the Shui On contract - are reaching a critical stage as far as the work of BMS is concerned.

39. As I have already indicated, it is the Plaintiff's argument that the Defendants, because of their influential position in the market, are in an ideal position to "choke off" BMS, taking over work that should, properly, in terms of the Shareholders' Agreement, have gone to BMS and, of course, enjoying the profits therefrom.

40. This Court cannot decide Plaintiff's claim on the affidavits. With an injunction that seeks to preserve the status quo until the rights of the parties have been decided at trial by way of restraining Defendants from taking a particular action, it is necessary only for Plaintiff to establish that it has a good arguable claim to the right it seeks to protect. This test, I am satisfied, the Plaintiff has satisfied.

41. This then leads me to consider whether the Court should exercise its discretion in favour of Plaintiff, that discretion being based upon the balance of convenience.

42. One of the first questions to be asked is whether damages will be a sufficient remedy; if so an injunction ought not to be granted. Damages, of course, will seldom be sufficient if the wrongdoer is unlikely to be able to pay them. In this case, however, it has never been suggested that the Defendants would be unable to pay. Indeed, the thrust of Plaintiff's claim has been based essentially on an opposite premise.

43. If there is any problem in respect of required undertakings, it lies rather with the Plaintiff. Beams has given an undertaking and underwritten it in the following terms -

"Beam's major asset (other than its shares in BMS) is its accounts receivable. Over the last three years Beams has delivered invoices to BMS which are unpaid valued at approximately HK$4 million (see the schedule of unpaid invoices ...)"

44. I regret I find a number of problems with this undertaking -

a. The schedule of unpaid invoices is itself disputed.

b. By this Court refusing Plaintiff's claim for a mandatory injunction to force an early buy-out, it would appear that an orderly winding-up of BMS is now probable.

c. Plaintiff's undertaking, however, is only of value if BMS is able to pay Beams the greater part of those claims but Plaintiff itself has argued that if BMS is wound up, it will destroy three years work, the clear implication being that the company, if wound up, will not be able to pay its debts 100 cents in each dollar.

d. The Defendants themselves have claims against BMS and a writ has been issued in this regard. These claims will rank pro rata with other unsecured creditors if there is a winding-up.

45. Is it, however, feasible that the Defendants may suffer damages if the injunction is granted? I believe it is. Indeed, with BMS now a 'paralysed' company and with building contracts reaching their critical stages, the Defendants, being often the main contractors, will be forced to limit their own losses by taking pragmatic steps in regard to building automation systems already installed, partially installed, ordered or designed.

46. I do, of course, appreciate that it is often difficult to assess damages for business disruption but essentially in the matter before me Plaintiff is seeking a valuation of the shares of BMS at about this moment in time for the purposes of a buy-out. I do not see it as being beyond the ingenuity of an expert in such matters, at a later stage, with the benefit of further investigation, to be able to place a fair value on those shares and to place that value at a moment in history.

47. In my judgment, therefore, the balance of convenience does not favour the Plaintiff.

Costs

48. This matter was argued before me last Friday as a matter of urgency. Because counsel for the Plaintiff was due to fly to England that night, I heard the matter through until 6 p.m. By that late hour there was no time for either counsel to even begin to comprehensively argue costs. My costs order will, therefore, be an order nisi, liberty given to either party to apply within 21 days to argue the matter.

Orders

49. Accordingly, it is my judgment that -

1. that Plaintiff's summons of 9^th April be dismissed; to avoid ambiguity, this to mean dismissal of each application for an injunction;

2. that the injunction order granted by Mr Justice Rogers on 11^th April 1997 be discharged;

3. that there be an order nisi for costs in favour of the Defendants with liberty to apply within 21 days.