China Shanshui Cement Group Ltd and Others v. Zhang Caikui and Others
Read the full judgment text of HCA 2880/2015 on BabelCite. This High Court CFI judgment was delivered on 15 January 2016.
1. By their summons dated 28 December 2015, the plaintiffs seek against, amongst others, D1 (“ Zhang senior ”) and D2 (“ Zhang junior ”) (collectively “ the Zhangs”) :
Cited by 1 case · Cites 7 cases
|
HCA 2880/2015 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO 2880 OF 2015 ____________
____________
_________________________________ REASONS FOR DECISION _________________________________ INTRODUCTION 1.By their summons dated 28 December 2015, the plaintiffs seek against, amongst others, D1 (“Zhang senior”) and D2 (“Zhang junior”) (collectively “the Zhangs”) :
2.The plaintiffs based their applications on 4 activities of the Zhangs (“the 4 activities”):
3.The Zhangs have not been served at their primary addresses in the Mainland. However, pursuant to the order of Lok J, Messrs Deacons who have been acting for Zhang senior in other proceedings in Hong Kong have been served with the concurrent writ and notice of hearing on 13 January 2016. Although Messrs Deacons have returned the papers to the plaintiffs’ solicitors (“W&G”), that did not undermine the effective service. 4.At the 2nd hearing on 13 January, 2016, Mr Barlow SC informed me that Zhang senior had a hearing before Chow J on the day before in the Trust Actions (defined below) for substantive arguments of a striking out application against him. Zhang senior was represented by Messrs Deacons. Clearly Zhang senior was involved in litigation in Hong Kong but chose to ignore the present proceedings. 5.There was no substituted service order on D2, so the hearings on both dates have proceeded on ex parte basis against D2. 6.At the hearing on 8 January 2016, I made the orders sought against, amongst others, the Zhangs as per paragraph 1 above. At the hearing on 13 January 2016, I approved the terms of the corrective amendments. Here are my reasons. BACKGROUND 7.P1 (“GroupCo”) was incorporated in the Cayman Islands with its shares listed on the Stock Exchange of Hong Kong (“SEHK”). It is the holding company for the Shanshui Cement group of companies (“the Group”) through 3 immediate subsidiaries:
8.Shandong Cement holds the Group’s subsidiaries that owns the vast majority of the Group’s fixed assets, employs most of the Group’s staff and are responsible for about 99% of the Group’s revenue. As of 30 June 2015, Shandong Cement’s consolidated balance sheet showed total assets of RMB 34.8 billion, with net assets of RMB 15.13 billion. 9.Since 21 July 2015, the shareholders of the GroupCo have been:
10.In respect of GroupCo’s board of directors (“the GroupCo Board”),
11.In respect of HK Cement (P2) and Pioneer (P3), until 2 December 2015, the Zhangs had been the only directors. 12.In respect of Shandong Cement, until 28 October 2015, its directors were the Zhangs and 4 Group employees loyal to them, ie Chen Xueshi, Huang Kehua, Tian Guang and Zhu Wei. 13.Zhang senior had been able to control CSI, until July 2015. 14.Since March 2015, the Zhangs have been heavily involved in litigation in Hong Kong with multiple interlocutory proceedings. There were 2 main sets of proceedings:
See the decisions of G Lam J’s dated 13 May, 20 May and 17 June 2015 in HCA 1661/2014 (consolidated) and Harris J’s decision dated 17 March 2015 in HCMP 360/2015. 15.In the Trust Actions, G Lam J appointed interim receivers (“the Receivers”) to take possession of the CSI shares claimed upon a finding of clear risk of jeopardy to the trust property. 16.In July 2015, the Receivers, with approval of the court, caused the CSI Board to be reconstituted and so Zhang senior lost control over it. 17.On 1 December 2015 with the assistance of the court in the Trust Actions, the board of directors of GroupCo was completely replaced by individuals (“the new directors”) who are not under the control or influence of the Zhangs. 18.The new directors discovered that, amongst others, the Zhangs had breached their fiduciary duties to the plaintiffs. The plaintiffs therefore brought this action. For the purpose of the present applications, they relied only on the 4 activities. Legal principles for grant of injunction 19.The legal principles for the grant of interlocutory injunction are settled. It is for the plaintiff to show serious issues to be tried, that damages would not be adequate remedy; that the balance of convenience lies in favour of the grant of an injunction and that it is just and convenient to grant the injunction: American Cyanamid Co v Ethicon Ltd [1975] 2 WLR 316. 20.Questions of balance of convenience and preservation of status quo ante are not of much relevance in the context of a claim for an interlocutory proprietary injunction: CY Foundation Group v Cheng Chee Tock & ors [2012] 1 HKLRD 532, 545, Barma J (as he then was). 21.In the case of a mandatory injunction, the plaintiff has to demonstrate a high degree of assurance that at the trial it will be shown that the injunction was rightly granted. At the injunction stage, the court will take whichever course appears to carry the lower risk of injustice if it should turn out that it is wrong. Two common guidelines are the consideration of the merits of the plaintiff’s claim and the balance of convenience. At no stage should the court lose sight of the practical realities of the situation to which the injunction will apply. See Music Advance Ltd v The Incorporated Owners of Argyle Centre Phase I [2010] 2 HKLRD1041 at §12 per Ma J (as he then was); National Commercial Bank Jamaica Ltd v Olint Corporation Ltd [2009] 1WLR 1405, §§17-20, Lord Hoffmann. 22.Where the grant or refusal of an interlocutory injunction sought by the plaintiff would dispose finally of the claim for an injunction in the writ, the court should approach the matter on the broad principle that it should endeavour to do what will avoid injustice. The plaintiffs have to show at least that they are likely to succeed at the trial, and that requires a stronger evidential case than is required in ordinary matters to which the American Cyanamid principles apply: Sunlink International Holdings Ltd v Wong Shu Wing [2010] 5 HKLRD 653, §10, Harris J. LEGAL PRINCIPLES ON BREACH OF FIDUCIARY DUTY 23.In Re Tysan Holdings Ltd [2013] 4 HKC 425, §38, Mimmie Chan J stated that:
24.In Extrasure Travel Insurances Ltd & anor v Scattergood & anor [2003] 1 BCLC 598, Deputy Judge Jonathan Crow said, at §90 that:
25.In the same judgment, the learned Deputy Judge also set out the test for ascertaining whether or not a director has acted in breach of fiduciary duty (§92). It is unnecessary for the plaintiff to prove that a director was dishonest or that he knew he was pursuing a collateral purpose. The test is an objective one. The court must:
PARAGRAPH 1 OF THE SUMMONS - CONTINUATION OF THE INJUNCTION AND DISCLOSURE ORDERS Bases for the applications 26.The 4 activities are analyzed below. 27.Firstly, Zhang’s misappropriation of company funds (§17 soc). It is the plaintiffs’ case that until 13 October 2015, the Board was dominated by the Zhangs. Zhang senior treated CSI as his own property and GroupCo as his to manipulate. There had been payment of directors’ remuneration to him of about RMB149 million. There had been misfeasant loans to companies controlled by the Zhangs. There was evidence of the Zhangs acting in collaboration with ACC and CNBM to enable those 2 companies to try and obtain control of GroupCo without a general offer. Such conduct resulted in the unfair prejudice proceedings. 28.Further, despite having net profit of over RMB150 million in the preceding year, GroupCo’s public announcement showed unaudited mid-2015 net trading losses of over RMB 1 billion, with unexplained increases in administrative expenses from RMB 572 million to RMB 851 million. 29.The Board has failed to take action in respect of the prima facie breaches of fiduciary duties by Zhang senior, committed with the knowing assistance of Zhang junior and D3. 30.Secondly, the defendants caused ultra vires proceedings to be brought in the Grand Court of the Cayman Islands, attempting to wind up GroupCo pursuant to a purported board resolution on 10 November 2015. 31.The purported resolution was passed by all the defendants except D3 (company secretary). It also authorized GroupCo to apply for joint provisional liquidators (“JPLs”) to be appointed. The draft order would have ordered the JPLs to develop a compromise with the Company’s creditors and authorized JPLs to, without sanction of the court, deal with all questions affecting the assets or the restructuring of the Company. If JPLs had been appointed, it would have the effect of displacing the management control of the GroupCo Board. 32.The purported board meeting was to pre-empt another GroupCo EGM which Harris J directed to be held in Hong Kong on 1 December 2015, when it was anticipated that all the members of the GroupCo Board (including the Zhangs) would be replaced. 33.The winding-up petition in the Grand Court was presented on the ground of alleged inability of GroupCo to repay its debts. Zhang junior, as authorized by the purported resolution, filed an affirmation in support of the petition. If what he had deposed to were true, the Group had a wholly unexplained cash deficiency of about RMB 171 million for which D1 to D5 would have to account. 34.In addition, D5 swore an affidavit inviting the Grand Court to appoint JPLs (“the JPL application”). 35.The Grand Court struck out the winding-up petition and dismissed the JPL application on the ground that the GroupCo Board had no authority to present the winding-up petition without authorization from GroupCo’s shareholders, which the GroupCo Board never sought. 36.Thirdly, the Zhangs (together with D3) purported to misappropriate the Group’s most valuable subsidiary Shandong Cement (with gross assets of RMB 34.8 billion) through unlawfully altered Articles of Association. They did so at a time when they were the only directors of Pioneer (P3). The unlawfully altered articles were 5.2.2.1, 5.2.2.2, 5.2.4, 5.2.7, 5.3.2 and 15.3. The effects of the alterations were:
37.Fourthly, there had been theft of company records. 38.GroupCo has maintained its principal place of business at Lippo Centre in Hong Kong (“the GroupCo Premises”). HK Cement (P2) and Pioneer (P3) also maintained their registered office there. Since the outgoing directors have not delivered up to the new directors the Group’s properties and records, the new directors went to the GroupCo premises on 2 December 2015. It was discovered that all the main records had been removed from GroupCo’s premises. Those included accounting records, bank statements, most of the employment records, all of GroupCo’s records of dealings with SEHK and the SFC, all records of litigation of which GroupCo was a party and all the computer data on the only 4 Group lap-top computers left in the GroupCo office. Since GroupCo has taken possession of the GroupCo premises, none of the previous staff of GroupCo have returned to the GroupCo premises to work. 39.Under s.377 of the Companies Ordinance, Cap 622 and s.51C of the Inland Revenue Ordinance (“IRO), Cap 112, each of the plaintiffs was required to keep its books and records. Anybody who without reasonable excuse failed to comply with s.51C of the IRO commits an offence (s.80). 40.Clearly the directors had to keep the books, accounts and records of a company. There was no reason for the removal of those documents from GroupCo’s premises. The Zhangs, as outgoing directors, had no reason to keep or refuse to hand over the company records of the plaintiffs to the new directors. The computer data was clearly deliberately removed and the outgoing directors would have a duty to explain the whereabouts of those data. SERIOUS ISSUES TO BE TRIED 41.Individually, the 4 activities formed serious issues to be tried on breach of fiduciary duties. 42.Misappropriation of GroupCo’s funds , if established, was for the benefit of the Zhangs and not in the interests of GroupCo or the Group. 43.Bringing the winding-up proceedings in Cayman Islands was clearly unlawful and against the interests of GroupCo. The purpose apparently was to engineer a change in composition of the GroupCo’s body of shareholders for the benefit of the Zhangs. There might be issues of dishonesty on the part of Zhang junior in trying to mislead the Cayman Islands as to financial inability of GroupCo. This activity showed the grievous extent to which the the Zhangs would go to strip GroupCo even of its existence. 44.There was no discernible commercial purpose for unlawfully altering the articles of Shandong Cement. The overall effect of the amendments was an attempt to thwart the Zhangs’ impending removal from the GroupCo Board and to entrench the Zhangs’ control over the Group’s assets through Shandong Cement for at least another 3 years. This would give the Zhangs free reign over Shandong Cement and hence its assets. There was apparent lack of honesty and good faith on the part of the Zhangs. 45.It was a clear inference that in anticipation of the outcome of the 1 December 2015 EGM and in order to block or impede any investigations and the criminal and civil proceedings that would ensue, the essential books and records of the plaintiffs and the Group were removed. At this stage, it might not be possible to pinpoint the Zhangs as the thieves. However, as directors, they did have the duty to keep or cause to be kept those books and records, which they apparently had failed to discharge. They also had a duty to hand them over to the new directors. 46.As Deputy Judge Seagroatt said in the Trust Actions, HCA 1661/2014 (consolidated), 26 October 2015, §23:
47.In another decision in the same case, 18 November 2015, §5, the learned Deputy Judge similarly criticized:
48.Collectively, the 4 activities, if established, continued to reflect the truth of such criticisms and the oppressive conduct of the Zhangs that aggravated the damage. Applying the principles in paragraphs 23-25 above, there were clearly serious issues to be tried as to whether the conduct of the Zhangs was in breach of their duties as directors. ADEQUACY OF DAMAGES AS A REMEDY 49.Very valuable assets have been or might be removed pending trial. Theft of the plaintiffs’ records was criminal conduct in itself. As directors, the Zhangs were not fulfilling their duties to keep proper records pursuant to the Companies Ordinance and Inland Revenue Ordinance. They also put the plaintiffs at risk of violation of SEHK Listing Rules for lack of records of dealings with SEHK. Without company records, the plaintiffs would be unable to conduct their business properly. Without the litigation records, the plaintiffs would be unable to assert or defend their interests properly. All of these could not be adequately compensated for by damages. BALANCE OF CONVENIENCE 50.There was no conceivable defence to the plaintiffs’ claim to recover their own assets and stop the Zhangs’ unlawful and oppressive conduct. The plaintiffs have given an undertaking in damages. The balance of convenience was clearly in favour of the continuation of the injunction. THE DISCLOSURE ORDERS 51.The court has power to make an order for disclosure of information in order to ascertain the whereabouts of missing trust funds and to enable tracing of them. The court may require directors of a company to make full disclosure of certain specified facts on affidavit. It may make orders for interrogatories to be answered by the defendants or their employees or director. A v C [1981] QB 956, 958E-959E, Robert Goff J; Zimmer Sweden AB v KPN Hong Kong Ltd & anor, HCA 2264/2013, 2 May 2014, §§73-75, per DHCJ Kent Yee. 52.The 2 disclosure orders sought against the Zhangs fell within the principles of A v C. The plaintiffs were clearly entitled to the information sought, which would enable them to take steps to collect in, preserve or trace the assets, or handle its business and litigation properly. I granted the orders sought. PARAGRAPHS 2-3 OF THE SUMMONS FOR PROHIBITORY INJUNCTION AND MANDATORY INJUNCTION Prohibitory injunction 53.I have alluded to the effects of the unlawfully altered articles (paragraphs 36 and 44 above). They removed all safeguards against entrenchment of directors. Exercise of powers thereunder might lead to misappropriation of huge assets beneficially belonging to the plaintiffs. There appeared to be no resolution of Pioneer (P3) or other plaintiffs or public announcements relating to the unlawfully altered articles. Damages would not be an adequate remedy. 54.There has been a history of the Zhangs using unlawful and oppressive means to gain control as shown in the Trust Actions, the unfair prejudice proceedings and the rest of the 4 activities. The Zhangs treated companies as their own to manipulate for their own benefit to the detriment of the relevant company or the minority shareholders. It was hard to imagine to what extent they might use or abuse their powers under the unlawfully altered articles which might leave the plaintiffs with an empty judgment should the plaintiffs win. 55.The plaintiffs are likely to succeed at the trial in showing that amendments to the articles were unlawful or in breach of fiduciary duties owed by the Zhangs. Any prejudice that might be caused to the Zhangs as a result of an injunction would likely be caused by their own conduct. There were compelling reasons and it was just to restrain the Zhangs from acting upon the unlawfully altered articles pending trial. MANDATORY INJUNCTION 56.The grant of the mandatory injunction would have a dispositive effect of this part of the claim. I only had the evidence from the plaintiffs’ side. However, I could see no legitimate justification for the alteration to the articles. The reasoning in the 3 preceding paragraphs applied. The unlawfully altered articles appeared to have been registered according to a public statement on GroupCo’s websites (probably placed at the instigation of the Zhangs) and members of the public might be misled. The draft corrective amendments sought to restore the articles to the version immediately before the alternation. 57.In my view, granting the prohibitory injunction was plainly more likely to do justice than refusing it. If the Zhangs shall fail to execute the corrective amendments on the due date, the Registrar of the High Court would do so on their behalf pursuant to section 25A of the High Court Ordinance, Cap 4. URGENCY 58.Given the above analyses, one could see that there was urgency in the hearing of these applications even in the absence of Zhang junior. He had, at least in the attempt to winding-up GroupCo, demonstrated that he might engage dishonest means to further his (and his father’s purpose). Unless the orders sought were put in place, it was possible that Zhang junior (alone or with his father) would take steps to put valuable assets and records beyond the reach of the plaintiffs. CONCLUSION 59.I had therefore made the orders against the Zhangs as sought in paragraph 1 above. 60.I also made an order nisi for costs to be in the cause with certificates for 2 counsel for the plaintiffs. I will ask the taxing master to note that the 2nd hearing on 13 January 2016 was necessitated only because the draft corrective amendments were not ready in view of the pressing circumstances of the case. The quantum of costs to the plaintiffs should more properly be allowed on the basis of time for preparation of the draft corrective amendments and hearing instead of fresh briefs/refreshers. 61.I thank counsel for their assistance.
Mr Barrie Barlow SC and Mr David Chen, instructed by Wilkinson & Grist, for the 1st, 2nd and 3rd plaintiffs The 1st and 2nd defendants were not represented and did not appear |
Cases cited in this judgment
Other judgments that cite this case
Further hearings and rulings under HCA 2880/2015