張才奎所託管中國山水投資有限公司股份 and Another v. 張才奎 and Another
Read the full judgment text of HCA 1661/2014 on BabelCite. This High Court CFI judgment was delivered on 30 September 2015.
1. This is an application by the principal defendant for an injunction to restrain the court appointed receivers from acting in a certain way in respect of the company of which the defendant is the principal shareholder, and to reverse certain steps taken by them including the appointment of two independent non‑executive directors. It is necessary to set out in some detail the background to this step.
Cited by 10 cases
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Corrected and approved 11th October 2015. HCA 1661, 1766, 2191/2014 & IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NOS 1661, 1766, 2191 OF 2014 AND 623, 939, 1564 OF 2015 BETWEEN
________________________ (Consolidated pursuant to the Order of
______________________________ REASONS FOR DECISION 1.This is an application by the principal defendant for an injunction to restrain the court appointed receivers from acting in a certain way in respect of the company of which the defendant is the principal shareholder, and to reverse certain steps taken by them including the appointment of two independent non‑executive directors. It is necessary to set out in some detail the background to this step. 2.This action in its collateral forms and varying phases, has come before Harris J, Godfrey Lam J and Au ‑Yeung J from whose judgments, which I have read, I have culled the essential factual matrix. As will be apparent to the readers of those judgments, I have adopted much of their phraseology and many of their comments, as well as much of their reasoning which have facilitated my task in reviewing the essential material forming the factual matrix of my judgment. They have made my task, so much easier. I therefore need to go back in time. [See Note 1 below.[1]] 3.It is logical to start with HCMP 360/2015, an action brought by six shareholders of China Shanshui Investment Limited (“Shanshui Investment”) in the name of that company against China Shanshui Cement Company (“Shanshui Cement”), Mr Zhang Caikui (Zhang Sr), Mr Zhang Bin (Zhang Jr, his son), China National Building Materials Company Limited (“China Building”) and Cao Jianlin (“Jianlin”). Shanshui Investment is also a defendant for efficacy’s sake. 4.The Zhangs are both directors and Zhang Sr is an indirect shareholder, of Shanshui Investment and Shanshui Cement. China Building acquired in October 2014 a 20% interest in Shanshui Cement pursuant to a subscription agreement, one of the events which the applicants complain occasions them unfair prejudice. 5.The judge (Harris J) gave them leave to bring their action under sections 732 and 733 of the Companies Ordinance (Cap 622) on 17 March 2015. 6.Shanshui Investment is incorporated in Hong Kong with an issued share capital of HK$10,000 divided into 1,000,000 shares each of HK$0.01. The applicants hold 17.44% of the issued shares. 7.Zhang Sr holds 81.74% of Shanshui Investment issued shares. The applicants claim that he holds 61.77% of those shares on trust for the employees of the operating companies of which Shanshui Cement is the holding company. These employees, termed contributing employees in a number of actions, seek declarations that Zhang Sr holds such shares on a constructive trust for their benefit. 8.The board of Shanshui Investment at that time consisted of three directors — the Zhangs (father and son) and the 1st applicant, Mr Yu Yuchuan. 9.Shanshui Investment is incorporated in the Cayman Islands but its shares are listed on the Hong Kong Stock Exchange. Both Zhangs are executive directors of Shanshui Cement. It appeared that at the time of the hearing before Harris J, the Zhangs controlled Shanshui Investment and Shanshui Cement. The former company held 30.11% of the issued share capital of the latter. 10.At the heart of the applicants’ complaints against the defendants — the Zhangs in particular — were three activities. The first was the approval of a new general mandate at Shanshui Cement’s annual general meeting on 16 May 2014. This was to enable the board of Shanshui Cement to issue shares which it did. It was passed by the use of the voting shares of Shanshui Investment which were exercised by the Zhangs. The effect of the resolution was that it enabled the Zhangs to dilute Shanshui Investment’s holding in Shanshui Cement by causing additional shares in Shanshui Cement to be issued. In causing this to happen the applicants contended that the Zhangs were acting in breach of their fiduciary duty to Shanshui Investment and thereby, its shareholders. 11.There was an argument over whether proper notice had been given to Mr Yu Yuchuan, and whether the proxy was properly exercised. The judge felt that the applicants did not have a strong case on that but in any event I do not need to consider it further. 12.The next bone of contention, the second, concerned the subscription agreement that Shanshui Cement entered into with China Building whereby Shanshui Cement would allot over 530 million shares, equivalent to 20% of the then existing capital of Shanshui Cement for a favourable (? discounted) price of HK$2.77 per share. If the mandate was valid then the agreement would stand up. The judge did not think that the applicants had been able to establish that there was a serious issue to be tried on this. 13.The applicants maintained their attack on a second front. The agreement was not bona fide in the interests of Shanshui Cement but only those of Zhang Sr, China Building and a Mr Song Zhiping. It was also prejudicial to Shanshui Investment because its investment/holding in Shanshui Cement had been reduced from 30.11% to 25.09%. China Building had thus become, through Zhang Sr’s resort to Mr Song, its Chairman, the second largest shareholder of Shanshui Cement. 14.The judge traced through the dubious aspects of this subscription agreement. He found no evidence that it was an “arm’s length transaction”. 15.On Shanshui Cement’s reasons for entering the agreement, namely that the net proceeds from the subscription were required for partial redemption of its US dollar bonds and general working capital needed replenishing, the judge commented that the bonds were not due for repayment until May 2016 and February 2017. Further, at June 2014 Shanshui Cement still had cash in excess of RMB2,154.5 million. 16.Another cause for concern on the part of the applicants was the Share Options Scheme. Shanshui Cement passed a resolution in January 2015 offering to the Zhangs, and others, share options, up to a total of 207.3 million new shares in the company at a price of HK$3.68 per share. 17.If all were exercised Shanshui Investment’s holding in Shanshui Cement would be reduced from 25.09% to 23.64%. Thus the former would be unable to block any special resolution put to members at a general meeting. 18.The applicants’ argument was that the significant reduction in net profits of Shanshui Cement in 2013 and the interim report’s picture for 2014 makes the grant of share options unjustified. Furthermore the declared purpose of providing incentives to employees or attracting and retaining high calibre staff was highly dubious. 19.Although one would have expected a discussion of the merits of granting the options in 2015, there was no evidence of this having taken place. It was done by a paper resolution signed by the Zhangs. The position of the independent non‑executive directors is also questionable. A Mr Hon, one of them, was Chairman of the Remuneration Committee and approved the share options resolution. But he is a beneficiary of the “Zhang Trust”, a fact which he did not disclose. Since Zhang Sr’s case is that this is a discretionary trust, Mr Hon’s entitlement as a beneficiary is dependent upon Zhang Sr’s discretion. 20.The judge had to decide whether all these complaints gave rise to a serious issue to be tried and he conceded that there was. He went further and gave vent to his views which, as the various proceedings have ensured, have gained in strength. 21.He was satisfied that the applicants had demonstrated a basis for suggesting that Zhang Sr had engineered the agreement with China Building for his own reason or purposes which went beyond the mere notion of commercial sense. 22.No evidence had been presented to the judge that directors other than the Zhangs had been involved in negotiations with China Building — no reports or internal memoranda considering the commercial strategy or independent advice. The question clearly arose — had the majority of the board supply rubber-stamped the decision of Zhang Sr without any genuine independent consideration of the merits, or taking into account all the interests concerned? 23.In giving leave to the applicants’ to prosecute a statutory derivative action with the advantage of the wide discretion given to the companies court under section 725(1) to cure unfair prejudice and mis‑management, the judge had said “judging whether or not it is in Shanshui Investment’s interest to challenge the subscription is not easy. On balance I conclude that it is.” [in its interest] 24.I now move to the situation presented to Godfrey Lam J and his judgment of 13 May 2015. It concerned High Court Actions 1661/2014, 1764/2014 and 2191/2014, brought by a number of the aggrieved in respect of their share holdings in Shanshui Investment and the nature of these, as I have referred to earlier. The defendant took out interlocutory applications to set aside the orders for substituted service and leave to serve out of the jurisdiction made in favour of the applicants. There were also summons to stay all three actions on the ground of “forum non conveniens” which had then fallen by the wayside. 25.The plaintiffs (applicants) had also applied for injunctive relief relating to the voting rights attached to the shares, and for the appointment of receivers in respect of a quantity of shares in Shanshui Investment of which they claimed to be the beneficiaries. The defendants are the Zhangs, father and son. 26.The ultimate effect of the defendants’ summonses was that they were dismissed save in respect of one paragraph of the Amended Statement of Claim, namely §31, which contained an allegation of misconduct on the part of group companies, which were not identified, in relation to certain projects. 27.Within one week the parties were back before Godfrey Lam J for the adjourned hearing of the plaintiffs’ application for the injunctions and for the appointment of receivers in those three actions. There were also identical applications in two further actions. 28.The evidence adduced in this hearing before Godfrey Lam J and his comments and conclusions are of extreme importance in relation to the immediate past litigation history and to the defendant’s applications before me. 29.I will seek to avoid any unnecessary repetition but some detail is required to see how this commercial or corporate warfare is developing. 30.The summonses for an injunction sought an order requiring Zhang Sr to attend the EGM of Shanshui Investment in order to vote the shares in his name, to which the minority shareholders (the applicants) claimed that they were beneficiaries, in favour of the minority shareholders. 31.The receivership application sought the appointment of three professional accountants to receive 384,961 shares (out of 817,421) so that they may become the registered holders on behalf of the claimed beneficiaries, and receive the income from them and exercise the beneficiary shareholders’ rights. 32.The grounds for these applications overlap but the primary intended relief is the receivership to cope with all the developments since the summons for an injunction was issued. 33.In §§6 to 11, Godfrey Lam J reviewed succinctly the legal ratio of receivership and I do not need to repeat that part of his judgment. 34.The conflict between the parties in this instance was but one — though an extremely important one — of the series of skirmishes which have taken place and which threaten to continue. 35.There is also strong evidence, as yet uncontradicted, of a “dirty tricks” brigade at work as will be apparent from what follows in my judgment. 36.The crux of the context which I have already set out, but bears repetition here, is the plaintiffs’/applicants’ contention that Zhang Sr holds the shares claimed by them on a constructive trust whereas Zhang Sr maintains that they are BV1 absolute discretionary trusts. 37.The plaintiffs paid for and owned equity interests in Shandon Shanshui in an employees stock ownership scheme which became shares in China Shanshui Investment. These interests have, on the face of it, been converted into a mere hope under two absolute discretionary trusts with no actual interest in Shanshui Investment’s shares. 38.Zhang Sr says that the employees knew that they had only the right to some economic benefits so that they have no legitimate complaints. It is clear that his statement is a distortion of the actual situation as, under the BV1 trusts, they do not have a right to any economic benefits. They are entirely in that regard, at the mercy of the 1st defendant, Zhang Sr. The defendant has not produced any evidence of informed consent to the way their original shares have been “converted”. 39.Against the 1st defendant’s stance is a letter of confirmation signed by the employees (beneficiaries) that he is to manage and protect the participating employees’ interests in a “fair, just and impartial” manner. In the face of that, the defendant involves himself in conflicting interests and duties, and prefers his own to those of the trusts. 40.At one stage the defendant made a proposal to crystallise, and terminate, the beneficiaries’ interests in the trusts, which he did not pursue. It involved buying out the beneficiaries’ interests in the BV1 trusts spread out over three terms each of 10 years — a 30 year programme! The capital payments for this period were to come out of the income of the trusts, ie dividends received by the trustee. This meant, quite simply that the beneficiaries’ own dividend income would be used, at least in part, to buy them out — they would themselves be paying for the buy‑out! 41.No evidence was forthcoming from the defendant to refute this, indeed, it would be difficult to see how he could refute this. It is important in this contest to see the mindset of the trustee (Zhang Sr) which contrived this scheme. 42.Of great concern, perhaps greater concern, since it demonstrates a devious, underhand activity which clearly involves criminal aspects is what came to light as a consequence of the, on the face of it, questionable involvement by a firm of solicitors, Siao Wen & Leung in April of this year. Godfrey Lam J designated the picture disclosed, rightly in my respectful view, as “a grave and most disturbing matter”. He dealt with it in detail in §§22 to 29. [See also §41(b) at page 230 of the judgment of Au‑Yeung J of 23 July 2015. A second firm of solicitors is similarly involved.] 43.I will not repeat that part of his judgment verbatim, but endeavour to summarise the paragraphs concerned because, with other matters already reviewed, and further matters they form an integral part of the background against which I have considered the defendants’ purpose and arguments in the application before me. 44.The firm of solicitors concerned, not otherwise engaged in this litigation, sent proforma letters allegedly on behalf of 489 plaintiffs in the first four actions claiming that they had been signed by those plaintiffs, to K&L Gates, their solicitors on the record, purporting to withdraw their authority to act on their behalf, and asking for all proceedings in their names to be terminated. 45.It transpired that of those 489 employees, 220 stated that they had never heard of Siao Wen & Leung, let alone asked that firm to act for them. 46.That firm, when asked to account for their involvement, replied that they were instructed “simply in the delivery of 489 original withdrawal letters to K&L Gates” and that their duty to the said 489 plaintiffs had been duly performed and the matter has come to an end. As far as this court is concerned, the matter has most certainly not come to an end, and I anticipate that the solicitors for these plaintiffs have the same view. From a professional viewpoint this is a matter of great concern and I shall of necessity have something further to say about this in due course. 47.Whatever was behind this scheme to use this firm of solicitors in this way, and in which the firm allowed itself to be so used, has now misfired. 48.56 of the plaintiffs have detailed the circumstances in which they were forced by their supervisors, in this employment, to sign the letters on “pain of demotion, relocation to remote regions, deprivation of bonuses, outright dismissal or other hostile consequences”. This took place on the Mainland of the PRC. 49.335 of the 489 have given further written reminders to K&L Gates to prosecute these actions. 50.Letters from employees refer to what the judge described as an orchestrated campaign, an expression with which I respectfully agree, to put pressure upon the plaintiffs concerned. He covers this helpfully in some detail and quoted from a letter from one of the 56:
He had an extremely sick wife, was experiencing some physical problems himself, and his monthly medical expenses were considerable. His income was all that his family received. He signed against his will but, as the judge noted, he courageously revoked that notice. 51.Counsel for the defendant had sought to trivialise the matter of the intimidation, not an attractive approach. The judge rejected his argument. Counsel also argued that his opponents reference to these events were “pure prejudice, mudslinging and irrelevant”. The judge disagreed and, for what it is worth, had such argument been advanced before me, I would have given it equally short shrift. 52.It is impossible not to draw the inferences that the defendant had a hand in this effort, cunningly planned, to frighten off his “pursuers”. He was the only beneficiary of this activity, and if it had succeeded it would have left him with a free hand on the corporate battlefield — the battle would have been won by him. He must have been directly or indirectly involved in what was a conspiracy to blackmail and pervert the course of justice. 53.The use of a firm of solicitors needs a very careful investigation. In my judgment they must be called to account and forced to disclose their records. They cannot claim clients’ privilege in respect of at least 335 of the plaintiffs. What was going on is highly material to all the current disputes between the parties. It may well be that the plaintiffs’ solicitors will want to subpoena the senior partner of the firm to produce all the alleged client instructions, and give evidence and be cross‑examined at a very early stage of these proceedings in order to see the full extent of this conspiracy. 54.In my view, sooner or later, and preferably sooner, the papers must be referred to the Director of Public Prosecutions, despite the difficulties in respect of investigations on the Mainland. For that reason I caused the firm of Siao Wen & Leung to be notified of the delivery of this judgment. All the parties have had a copy of my letter. The Receivers may have a view on whether a reference now would complicate their efforts. 55.The upshot of Godfrey Lam J’s consideration of all the material before him was his view that “these matters cry out for the intervention of the court and interim protection of the plaintiffs as beneficiaries” — and “there is a clear risk of jeopardy to the trust property as well as the plaintiffs’ interests in the trust property”. 56.It is necessary to reflect again the succinct findings of Godfrey Lam J as part of the relevant background to the matter dealt with by me:
57.On the appointment of receivers the court assumes control of the legal and equitable title to the affected property and the receivers would have to be involved in any transfer of shares in Shanshui Investment. Similarly in relation to any transfer or action regarding the equitable interest under the trust, it would be a contempt of court to seek to interfere with the receivers or the property in their hands. It follows therefore that they are to protect the plaintiffs not only against the 1st defendant but also against anyone else seeking to intimidate or pressure them. There is therefore a strong case for an investigation of the matters involving Siao Wen & Leung, now rather than later, so that this court, and its appointed receivers can be fully aware of the enemy within, or without, and its cohorts. 58.Godfrey Lam J accordingly made an order appointing the receivers with powers limited to acts to protect the shares and the income; to control and exercise all rights attached to the shareholdings including the appointment or removal of directors and other officers and agents of Shanshui Investment, and “to take all such steps as the Receivers think fit to protect the shares, to preserve their value and to do all things incidental to the exercise of the foregoing powers (there were other detailed collateral powers which I do not need to repeat) reasonably necessary to preserve the shares and their income.” (my emphasis). 59.In less than a month the parties were back before Godfrey Lam J seeking his leave to appeal his decision. The grounds were spurious (my term), and the judge had little hesitation in rejecting them after considering them individually. The judge himself repeated a number of matters which had given him cause for concern:
60.In respect of the last point the receivers had noted, as requiring investigation, a “dramatic decrease of cash of over RMB70 million for the first four months of 2015”. Those were the months immediately preceding the appointment of the receivers. 61.I too have taken into account the matters expressed by the judge and made a qualitative assessment of the risk of jeopardy based on evidence before the court. I consider that that risk has increased significantly with obvious implications since then, as I will make clear. 62.Yet again, within a month of the rejection of their application for leave to appeal Godfrey Lam J’s judgment (17 June), the 1st defendant came back to court (14 July) seeking directions to curtail or inhibit the Receivers in the exercise of their powers. 63.On 14 June 2015, one day before the hearing of the application for leave to appeal just referred to, the 1st defendant had entered into a sale and purchase agreement with China Building under which the defendant sold 102,448 shares to that company, and sought to appoint one Cao, an official of China Building, as a director of Shanshui Investment. That latter action had however been restrained by injunction imposed by Harris J. 64.This skirmish came before Au‑Yeung J who reviewed the salient features which have now become the immutable backcloth to this litigation. 65.The bone of contention this time was essentially concerned Tianrui (International) Holding Co Ltd (“Tianrui”) and its associate, together holding about 28.16% of the share capital of Shanshui Cement. The 1st defendant claimed that the Receivers, as minority shareholders of Shanshui Investment, and/or the plaintiffs were “in cahoots” to oust the current management of Shanshui Cement. I shall return to the use of this expression later. See §96. 66.The stance of the Receivers was not known at the time of this hearing, and Shanshui Investment had yet to hold a meeting to decide on how to vote. The Receivers considered that the defendants’ application was unnecessary and in any event premature. The judge also took the view that it was misconceived. She dismissed it. 67.The judge added a number of, in the overall content of this litigation, pertinent remarks which I have also adopted:
68.A little over one week later the same judge was concerned with an application by the receivers for directions as to how they should vote at an EGM of Shanshui Cement. 69.In the course of a detailed judgment the judge reviewed the powers of the receivers in the context of the ambit of their appointment — they had since become directors of Shanshui Investment as well as shareholders on behalf of the claiming beneficiaries — and the problems which had arisen and seemed to continue to arise. 70.She took account of a number of cases involving the purpose of appointing receivers and their consequent powers. I extract a few to give the flavour of the problem. Street J in Duffy v Super Centre Development Corp Ltd [1967] 1 NSWR 382 (at pp 383‑384): “A court appointed receiver ... is not so much ... a company director, but rather his function is that of a company caretaker. His function is not so much to restore profitability. It is rather to preserve those assets of the company upon which fortunes may be dependent, and to preserve its potentiality for ensuring profits in the future.” This in itself indicated a flexibility of approach towards the powers of the receivers in achieving what they were appointed for — holding the ring between interests in conflict. 71.As Au‑Yeung J said, “the means adopted to safeguard the shares must take into account the practicalities of the situation, and the measures taken must be effective according to the circumstances of the case (see Bartlett v Barclays Trust Co (No 1) [1980] 1 Ch 515 per Brightman J, as he then was). Particularly apposite is what Brightman J said at pp 533‑534:
72.Of course we all have to bear in mind that the citations from other cases are essentially “obiter dicta” reflecting the position of receivers in the context of the situation which called for them to be appointed, or encapsulations of developed law being applied to a particular set of circumstances. In this dispute it is easy to lose sight of the facts that the assets, the benefits of the shares in Shanshui Investment, are linked to the well‑being of Shanshui Cement because the only assets of Shanshui Investment are its minority holding in that company — 25.09%. 73.In her summary of the undisputed factors, Au‑Yeung J included these:
74.She then set out the matters which formed the basis of the application by the Receivers for directions. This reiterated the matters which gave rise to the concern of herself as well as Godfrey Lam J together with other matters which have come to sight more recently as a result of the Receivers’ investigations. 75.See §§37 to 48 which I do not repeat but which form important material in relation to the 1st defendant’s behaviour and which I have taken into account. 76.The judge however declined to direct the receivers to exercise the either of the two roles they sought. 77.That is how the matter stood before the defendants’ application before me, save for some additional actions by the receivers. 78.At this stage, it is important to stand back and consider the strategy and energy of the warring parties. 79.The 1st defendant has resisted the plaintiffs at every juncture so far and extended the warfare to the Receivers and the independent directors. His strategy is to block any attempt to restrict his overall control of Shanshui Investment and Shanshui Cement and pursue his own interests. It is as well that at this stage I should emphasize that interference with the legitimate powers of the Receivers as officers of the court, and attempts to circumvent orders of the court, constitute contempt of court and are punishable as such. The thinly veiled threat 80.Immediately before the hearing of the defendant’s summons before me, there was another skirmish between the plaintiffs and the defendant which the latter had precipitated. Happily, at least for the moment, resolution was deferred on the strength of the defendant’s undertaking not to use certain material. It may be, on mature consideration, the defendant and his advisers will think better of the tactic they sought to apply. 81.Nonetheless it is necessary to state the nature of this and the implications to which, in my judgment, it has given rise. 82.In a document, described as a defendant’s affirmation, reference is made to a digital recording (so‑called) of part or the whole of a speech or oral contribution made by a person at a conference organised by the plaintiffs’ solicitors in which, for part of it at least, they were to advise their clients being some or all of the plaintiffs in these actions. 83.The person who made the recording, and the one who, we are left to assume, handed it directly or indirectly to the defendant, is not identified. None of the relevant circumstances is revealed. The inferred intention is to leave the plaintiffs with the impression that a “mole” has been able to disclose to the opposition some aspects of the plaintiffs’ case. 84.If this so‑called record had any place in an affirmation or statement it would have to be in such a document signed or sworn to by the person who claimed to make the recording, and would require the essential detail to prove the authenticity of the record. It would not of course be proper for such person to make any comment on its relevance. Similarly it would be entirely inappropriate for the defendant himself, whatever value he may think it has, to comment on it. The reasons for this are obvious to any competent lawyer. 85.I was informed that this affirmation was settled and approved by counsel. It is no part of counsel’s professional practice to settle affidavits/affirmations save in the most exceptional cases and even those require great care before embarking on such an exercise. Years ago controversy arose in the UK over a situation in which counsel had been involved in settling the reports of professional medical experts. It was termed “special pleading” and invoked the criticism of the courts. 86.I am surprised, to say the least, that lawyers in both branches of the profession had the temerity to indulge in this exercise in this case and simply adopt what the defendant revealed to them in all its inadequacy and dubious propriety — source and veracity — and seek to give it some semblance of legitimacy by including in a document which, on the face of it, had their seal of approval, and to which the defendant was to be sworn its intention being to file it at court. It must have been thought that this was a legitimate tactic. Perhaps the kindest thing that I can say is that it may have been a case of the “tail wagging the dog” and that the to be expected professional judgment and code, has for once, flown out of the window. 87.I make it clear that in my view the drafting of statements and affirmations is part and parcel of a solicitors’ stock in trade. It is he or she who sees witnesses and the client and has the direct contact. If he or she has to run to counsel to do his or her work for her, in ‘a nanny like’ exercise, then he or she cannot legitimately claim the level of fees put forward as appropriate to his or her year of call, and such items in a bill of costs as “attending upon counsel (usually with one or two supporters) for the settling of statement/affirmation” is a farcical exercise for which there should be no remuneration whatsoever. 88.I had already decided on the strength of the material which emerged from the judgments of my brother and sister judges that I was not prepared to accept any averment by the defendant as to fact or truth unless it was confirmed or corroborated by an independent source. The situation revealed in his proposed affirmation simply hardens my approach. 89.The summons was taken out on 8 September. The proposed amendment is dated 23 September. The appointment of the independent directors was clearly indicated by resolution on 7 August. The defendant was certainly slow in action and shortening the time available before the next company meeting. The defendant’s summons 90.The defendant sought to amend his summons. I refused leave to do so but I have considered the gravamen of his application as if it had been fully drafted in accordance with his proposed amendment. The application was made on a personal basis. He did not seek to include China Shanshui Investment as a party to it. 91.There is far too much verbiage but it boils now to the following:
92.Even those paragraphs contain a superfluity but it is easy to distil the crux: the receivers are not to change the board of Shanshui Investment; the appointments of the independent directors are invalid, and no changes are to be made to the board of Shanshui Cement. The appointment of the additional directors 93.This is well within the existing powers of the receivers: see 5(2) of the order of Godfrey Lam J and the purpose is clear. I am satisfied from the receivers’ evidence and written argument that it was done for the proper purpose. Because the only asset of Shanshui Investment, and therefore of its shareholders, is its holding in Shanshui Cement, the ambit of concern must include the share capital of Shanshui Cement. 94.It is clear from passages in his affirmation that he harbours an irrational animus against the Receivers and the newly‑appointed independent directors which verges on the offensive. It is a pity that his legal advisers allowed him to give vent to his attitude in this way, though given the fact that English is not his natural language, the passages may have been drafted for him. 95.Mr Lam SC, appearing on his behalf, made it clear that he distanced himself from the use of such terms as an “abuse of court process”, “improper and collateral purpose to circumvent the court’s supervision over the Receivers” and “intermeddling”. 96.There is a bizarre reference to the independent directors acting “in cohorts with” Tianrui. I think he and the drafter of his affirmation must mean “in cahoots with” — ie conspiring with. “Cohorts” may be an adequate description of the gang of intimidators and conspirators. (See §57, page 16.) 97.It is patently obvious that the 1st defendant resents the existence of the receivers and any independent directors on his corporate scene, whatever lip service he may have made on occasions to their appointment. He failed to put forward alternate candidates as independent directors having been given a week’s extension in which to do so, as well as the opportunity of meeting the two proposed by the receivers. In a somewhat hysterical review of the firms or personalities he sees ranged against him, he lays an innuendo against the receivers simply because they were the same ones involved in the Birmingham International Holding case. 98.Is it proper for lawyers to be used as mouthpieces in ventilating unreasonable and unsupported allegations against reputable professional people, including officers of the court, so as to denigrate or disparage them in their professional status for the self‑interest of their client? I think not. 99.I take a serious view of professional lawyers — perhaps I should say more accurately, members of the legal profession — who allow themselves to be used in this way. 100.He sees the receivers and independent directors as inhibiting the way he wants to conduct corporate matters and this is evident by his behaviour to date and the contents of his affirmations. 101.A court does not appoint experienced reputable men or women in the corporate field as officers of the court without having every confidence that they know their obligations and will act in accordance with them. Wild, sweeping, unsupported allegations against the integrity of such court appointed officers which have to be abandoned (and rightly so) are bound to reflect upon the person making them. It is a reasonable inference that they are used as a last resort where no real ground for objection and opposition exist. And that is the inference I have drawn, supported by the other conclusions, which I have expressed as reasonable ones, from earlier events. 102.This court will not allow the law of the jungle to prevail, wielded by a powerful shareholder and director in corporate entities who regards such companies as his own fiefdoms. It will not countenance obstruction of its appointed officers or the flouting of its orders. 103.Whilst Zhang Sr may think that his “feudal writ” runs on the Mainland he should not delude himself into thinking that he can exercise his “feudal writ” in this jurisdiction. 104.The concerns expressed by the Receivers giving rise to their perceived need to monitor the corporate governance of Shanshui Cement is the lack of regard for the interest of its shareholders, which of course include Shanshui Investment. There is also the small matter of the RMB149 million which was received by the 1st defendant as his director’s remuneration in 2011. 105.The immediate practical advantage of the independent directors is that in the event of one or more of the Receivers being unable to attend a meeting, one or both of these directors can keep an eye on matters and act accordingly. 106.The financial state and dispositions of Shanshui Cement’s capital and income are crucial to Shanshui Investment’s assets, namely, its shares in Shanshui Cement. That is a fundamental aspect of corporate governance and may require board changes to effect the protection of assets sought. The court would inevitably have this in mind when it appointed the receivers. It relied upon the skill and experience of receivers, who well knew their role, to take all necessary steps to protect assets in which they themselves had no personal interest whatsoever. It may seem trite to say it but that is why they were appointed. There is no need for the court to monitor them unless they go outside their “brief”. And there is no substance in the suggestion or imputation that they are about to do so. There is no reason for a court to pull the receivers back in order to examine their logical steps or activity, when it is absolutely clear that they are within their remit. 107.Since the judgment of Godfrey Lam J, the situation has deteriorated and become intense, hence the steps taken by the Receivers since. They are not acting “ultra vires” and the defendant now seems to have abandoned that stance. Their reports set out the difficulties which they have encountered since their tenure. Paragraphs 10 to 13 inclusive of the affirmation of the receiver, Mr Liu Yiu Keung, deal with these in summary form. Further paragraphs, 16 to 19 and paragraph 20 encapsulate the essential basis for their concern with the performance of Shanshui Cement, ie its effect upon the value of Shanshui Investment’s shares in Shanshui Cement. 108.The full content of his affirmation, which I do not propose to set out in this document, confirms my view that the Receivers have at all times acted within their remit and not beyond it. Had it been necessary for them to come back to court following the decisions, and I make it clear that in my view it would not have been necessary for reasons already indicated, I would have unhesitatingly confirmed the propriety and legitimacy of their action. Such an unnecessary referral back to the court would have wasted time and costs — and to judge from the immediate past history, a further waste of paper and lawyers’ drafting. 109.All these events underline how vigilant a court must be to protect the interest of oppressed minorities and how vigilant its officers, the Receivers, must be to detect, test, examine and call to account other shareholders and directors for their actions, and be alert to devious activities and the possibility that seemingly above board transactions, may conceal prejudicial deals or fraudulent ones. 110.For all the reasons set out in this judgment in which I have sought to traverse and highlight the sequence of events over the past six months or so, I dismissed the defendants’ application. 111.In extremis, and one hopes this state does not come to pass, providing all practicalities are observed, it may be necessary in order to preserve the substance of the claimed beneficiary interests, for the court to consider a scheme, or devise one, whereby a sum of money or other form of real security is paid/lodged in court to await the decision on the dispute, especially if the Receivers find that the powers conferred upon them, however wide, cannot in the long run control the activities of a substantial shareholder or director, which continually pose a threat to the preservation of the assets in question.
Ms Audrey Eu SC, leading Mr Law Man Chung, instructed by K&L Gates, for the plaintiffs Mr Paul Lam SC, leading Mr Frederick Chan and Mr Jean‑Paul Wou, instructed by Deacons, for the 1st defendant Mr Barrie Barlow SC, leading Mr Jonathan Chang, instructed by P C Woo & Co, for the receivers Ms Queenie Lau, instructed by ONC Lawyers, for Mr Chong Cha Hwa and Mr Hwa Guo Wai Godwin Mr Victor Joffe & Ms Rachel Lam, instructed by Wong & Lawyers, for Mr Yu Yuchuan [1] Where I have quoted directly, or with some variation of expression from these judgments, I have not used inverted commas but have already indicated that there are significant attributions and adoptions. |
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Further hearings and rulings under HCA 1661/2014