Zhi Charles v. Kim Young Jun and Others

HCA 2494/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 2494 OF 2015

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D E C I S I O N

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1.By Summons dated 23 November 2015 (“the Summons”), the Plaintiff seeks an order that the 6^th Defendant

“refrain from holding the scheduled Board Meeting on 27 November 2015 to approve the announcement of interim results of 30 September 2015”.

2.The announcement of the 6^th Defendant, a company incorporated in the Cayman Islands but listed on the main board of the Hong Kong Stock Exchange, referred to in the Summons, and which is dated 17 November 2015, is as follows:

“The board of directors (the ‘Board’) of [the 6^th Defendant] (the ‘Company’) announces that a meeting of the Board of the Company will be held at Room 2402, 24^th Floor, Tower 2, Admiralty Centre, No. 18 Harcourt Road, Admiralty, Hong Kong on Friday, 27 November 2015 for the purposes of, among other matters, approving the announcement of the interim results of the Company and its subsidiaries for the six months period ended 30 September 2015 for publication and considering the payment of an interim dividend, if any”.

3.The plaintiff alleges in his Statement of Claim filed in this Action that he is a registered holder of 290,000 shares of the 6^th Defendant and

“is suing in this action against all of the defendants in its [sic] capacity as shareholder for and on behalf of D6 and got its benefit and interest”.

4.The Statement of Claim makes the following allegations:

(1) The 1^st defendant was and is a “connected person” by being associated with the beneficial owners of 45% of the shares of the 6^th defendant.  He fully controls the board of directors of the 6^th defendant, including Jang Sam Ki (its chairman)[1] (“Jang”) and Hong Sang Jun (an executive director)[2].

(2) The 1^st defendant also owns, through trustees or constructive trustees, including the 4^th and the 5^th defendants (both Hong Kong companies), US$300,000,000 Third Convertible Notes (“CNs”) issued by the 6^th defendant and also certain loans advanced to the 6^th defendant.

(3) The 4^th defendant is controlled by the 1^st defendant and had extended loans of US$7,550,000 to the 6^th defendant (“the Pioneer Loans”).

(4) The 5^th defendant holds US$412,270,000 CNs issued by the 6^th defendants on trust for the 1^st defendant and other creditors of the 6^th defendant.

(5) “D6 is a neutral party in this action and is enjoined as a defendant only to execute any orders by the Court”.

5.In this Action, the plaintiff complains about the Pioneer Loans, which he alleges, while being disclosed by the 6^th defendant as loans from independent sources, to be a money laundering operation involving three Korean companies controlled by the 1^st defendant. 

6.The Statement of Claim also refers to the alleged fact that in certain Korean investigations, Jang confessed that he was not aware of a HK$400,000,000 Loan Facility (“Loan Facility”) provided under his name to the 6^th defendant. 

7.And, after reciting an agreement in relation to the CNs and the transfer thereof to the 5^th defendant (with no apparent unlawful acts in relation thereto pleaded), the plaintiff alleges in his Statement of Claim:

“13.In the premises, by virtue of the actual Indictment of D1 by the Supreme Prosecutors Office of the Republic of Korea, D1 has also committed a series of misconducts and offenses even under the laws of Hong Kong.

14. In particular, the acts of D1 has [sic] been a clear breach of the Code on Takeovers and Mergers and Share Repurchases (Takeovers Code).

15. By reasons aforesaid, the Board has been acting only upon instruction of D1, warranting immediate dissolvement of the Board of D6 to halt the continuos [sic] unfair prejudicial impositions on the Company and independent shareholders.

16. Further, most of the purported debts of the Company, including but not limited to the Third Convertible Notes and the Pioneer Loans, have been issued were ultra vires and illegal.

17. In the case of Pioneer Loans, they would be fitting to the clauses of Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (Cap. 615). The Board and officers of D6 are accused of aiding and abetting money laundering at the behest of D1.

18. By reasons aforesaid, any approval or audit reports and interim reports provided by the Auditors of the Company would be unfairly prejudicial, ultra vires and illegal. In particular, the HK$ 400,000,000 Loan Facility provided by Jang Sam Ki to D6 is also ultra vires and illegal.

19. Likewise, any attempt to replace the Third Convertible Notes and recapitalization of Debts of D6, mostly held by D1, is ultra vires and illegal, possibly amounting another perverting the course of justice [sic]”.

8.Various reliefs are being claimed, including declarations that the Loan Facility and the Pioneer Loans are ultra vires and “ab initio void”.  No specific reliefs relating to the vires or validity of the CNs are being sought, or in relation to any recapitalization of debts of the 6^th defendant (save for a declaration that certain persons are acting in concert in relation to the “whitewash waiver of recapitalization of most of the Debts of D6 and replacement and resetting of conversion price of the Third Convertible Notes issued by D6”), but injunctions restraining the 4^th defendant from disposing or in any way dealing with the Pioneer Loans, and the 5^th defendant from disposing or in any way dealing with the CNs, until further notice by the Court are sought.

9.Further, certain declaratory reliefs are sought as against the 6^th defendant, as well as an order “to restate the audit and interim reports of D6”.

10.The plaintiff’s allegations of various unlawful acts, mainly revealed supposedly in the Korean investigations, are further detailed in his Affirmation dated 24 November 2015 made in support of the Summons.  However, what has not been made clear in the Affirmation, or in his submissions before me today, is why the injunction he is now seeking by way of the Summons is required to protect him pending the trial or final disposal of this Action, in the sense that without the injunction he would suffer any irreparable or uncompensatable harm even if he succeeds at the trial, or that any final relief he will obtain at the trial will be rendered useless or nugatory if the injunction sought is not granted.

11.In his Affirmation, the plaintiff refers to three “going concern” issues[3] of the Company which have “resurfaced”, namely (1) the fact that over HK$200 million of the Company’s debts are maturing within one year (this presumably is related to the alleged recapitalization of debts referred to in the Statement of Claim), (2) uncertainty as to the conversion of the CNs; and (3) the Loan Facility is bogus.  It is said that these issues would render the approval of any interim report of the 6^th defendant “premature”. At the very least, the plaintiff says, clarification announcements for each of these issues should be made by the 6^th defendant before its board considers approving any interim report.  However, the Summons does not ask for any order that the interim results should be announced together with any “clarification announcements”, but for a blanket ban on the Board of the 6^th defendant to hold a meeting approving the announcement of interim result.  I do not think I can make any order for any accompanying clarification announcements in any event, as it is not clear to me what is suggested the announcements should contain, and there may be issues as to the details to the provided and the accuracy thereof.  I would be straying too far into the management of the 6^th defendant if I make any such order, and any such order would be very difficult, if not impossible, to be supervised.

12.If I understand the plaintiff’s case correctly, the approval of any interim reports of the 6^th defendant on the basis that the Loan Facility is legal and proper, and without taking whatever account or notice of issues (1) and (2), at least without any accompanying announcements alerting the shareholders and the public to the issues, would render any such report misleading.  Even if that is so, on which it is not necessary for me to express any concluded views, I do not understand, and the plaintiff has been unable to explain to me, how the approval of any such report, which is likely to happen if I do not grant the injunction sought, would have the effect on the plaintiff, in relation to his pursuit of remedies in this Action, as I stated in §10 above.  A party cannot simply come to Court and apply, by way of summons in an existing Action, for an (interlocutory, although the relief sought does not say so) injunction restraining a defendant from doing certain acts (which may or may not be unlawful) which the party does not want to take place for some reason, without satisfying the Court that without the injunction he would suffer any irreparable or uncompensatable harm even if he succeeds at the trial, or that any final relief he will obtain at the trial will be rendered useless or nugatory if the injunction sought is not granted.  Merely approving and publishing interim reports by the directors based on certain facts or transactions which are later proven at trial to be ultra vires or otherwise illegal do not without more have the effect of depriving the plaintiff of any substantive remedies which he may be able to obtain at the trial if he proves his case, as pleaded in the Statement of Claim. 

13.The plaintiff says he is seeking to right the wrongs committed as a good citizen.  I do not see how his attempt to do so at the trial will be affected by the publication of the interim results.  He says that such publication would give those in control of the 6^th defendant impetus to go ahead with the “whitewash waiver” and to re-fix the conversion price of the CNs.  Apart from the fact that there does not appear to be any evidential basis for this, I do not see how that can affect the plaintiff in the manner required for an interlocutory injunction to be granted.

14.The above is sufficient for me to dispose of this Summons.  I would, however, also make the following points:

(1) It is common ground that the matters to be dealt with by the Board at the proposed meeting on 27 November 2015 are matters pertaining to the internal management of the 6^th defendant. It is well-established that the Court would not interfere with the internal management by directors of a company: see Kwok Ping Sheung Walter v Sun Hung Kai Properties Ltd [2009] 2 HKLRD 11 at §§19-21 per Rogers VP; Zhi Charles v Lim Hosok (HCA 160/2015, 19 March 2015) at §10 per G Lam J.

(2) The plaintiff argues, citing Burland v Earle [1902] AC 83 (referred to in Kwok Ping Sheung Walter) that the Court will interfere when the directors are not acting within their powers in dealing with the internal affairs of the company.  However, I fail to see how a board of directors is not acting within its powers in considering and approving interim results simply because the results may be wrong.

(3) I also agree with Mr Kwok, counsel for the 6^th defendant, that the 6^th defendant does have obligations under the Companies Ordinance (Cap 622) and the Listing Rules regarding the preparation, approval and publication of periodic financial results, otherwise trading of its shares may be suspended, and the balance of convenience suggests that the application ought to be refused.

15.On 27 October 2015, the plaintiff also applied, in this Action, for interlocutory injunctions against the 6^th defendant, restraining it from, inter alia,

“using or relying on a loan facility agreement for the purpose of resolving the going concern issue in the audit reports”.

The “loan facility” referred to is the Loan Facility.

16.That application therefore bears substantial similarity with the present application.  By a decision dated 9 November 2015, Chung J dismissed the application.  I respectfully adopt what the learned Judge said in that Decision which is applicable here:

“14. [The 6^th defendant] also complains (principally) of the lack of a discernible cause of action. Further, it argues that any impropriety concerning the debt restructuring of a listed company which requires the approval of the Securities and Futures Commission (‘SFC’) is a matter for the SFC rather than for the individual shareholders (who can avoid any loss which may arise out of the restructuring by disposing of their shares in the stock market anyway). The vires of a loan facility of a listed company is also no concern of the individual shareholders.

17.  I agree with the above arguments. In addition, matters such as the compilation of audit reports and the restructuring of company debts are, in the absence of some special circumstances, more matters pertaining to the operation and management of a company, and hence more a matter for its directors and managers, and as such are not matters for shareholders.”

18.I dismiss the Summons with costs to the 6^th defendant, to be payable forthwith by the plaintiff.

The plaintiff appeared in person

Mr Eugene Kwok, instructed by Baker & McKenzie, for the 6^th defendant