Acropolis Ltd Suing on behalf of Itself and All Other Shareholders in Aeso Holding Ltd and Another v. W&Q Investment Ltd and Others

CACV 276/2017 &
CACV 277/2017

[2018] HKCA 184

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 276 & 277 OF 2017

(ON APPEAL FROM HCA 1496/2017)

____________

____________

(Heard together)

______________________________

REASONS FOR JUDGMENT

______________________________

Hon Chow J (giving the reasons for judgment of the court):

INTRODUCTION

1.On 31 August 2017, Madam Justice B Chu granted an interlocutory injunction to restrain the 1^st to 4^th, 10^th to 12^th and 14^th to 16^th Defendants from relying on and/or carrying into effect certain resolutions purportedly passed at an extraordinary general meeting of the 14^th Defendant (“Aeso”), a company listed on the GEM Board of the Stock Exchange of Hong Kong, held on 12 June 2017 which effectively re‑constituted the board of directors of Aeso, and any further resolutions passed by the respective boards of Aeso and its subsidiaries (“the Group”) in reliance upon the said disputed resolutions, save and except certain specified matters (“the Injunction Order”).

2.The Judge also dismissed the 1^st to 4^th Defendants’ cross‑summons seeking to restrain the 2^nd Plaintiff from holding himself out as having authority to act on behalf of Aeso and its subsidiaries without the authorization of their respective boards, and/or directly or indirectly obstructing resolutions from time to time passed by the respective boards of Aeso and its subsidiaries.

3.The 1^st to 4^th Defendants’ and the 5^th to 9^th Defendants’ appeals to the Court of Appeal against the Injunction Order (in CACV 266/2017 and CACV 277/2017 respectively) were heard on 2 March 2018.  At the conclusion of the hearing of the appeals, we allowed the appeals under certain undertakings given by the 1^st to 4^th Defendants and the 5^th to 9^th Defendants respectively, with reasons to be given later.  This we now do.

BACKGROUND FACTS

4.The background facts giving rise to the present disputes between the parties are fully set out in the written judgment (“the Judgment”) of Madam Justice B Chu handed down on 31 August 2017.  For the purpose of disposing of the present appeals, the following summary shall suffice.

(i)   The parties

5.The 2^nd Plaintiff (“Jones Chan”) is the founder of the 16^th Defendant (“Aeso HK”), which carries on the business of providing fitting-out and renovation contracting services in Hong Kong.  It is a wholly owned subsidiary of the 15^th Defendant (“Aeschylus”), a BVI company, which in turn is a wholly owned subsidiary of Aeso (incorporated in the Cayman Islands).

6.Aeso was listed on the GEM Board of the Stock Exchange of Hong Kong on 13 January 2017 by way of private placement.

7.The 1^st Plaintiff (“Acropolis”) is Jones Chan’s corporate vehicle to hold shares in Aeso.

8.The 2^nd Defendant (“Wilson Liu”) is an investor.  The 1^st Defendant (“W&Q”) is Wilson Liu’s corporate vehicle to hold shares in Aeso.

9.The 3^rd and 4^th Defendants (“Zhang” and “Law”) were non‑executive directors of Aeso nominated by the Wilson Liu/W&Q.

10.The 5^th to 9^th Defendants (collectively the “Requisitionists”) are five of the Private Placees of shares in Aeso, holding 10.825% of all the issued share capital of Aeso.

11.The 10^th to 12^th Defendants (collectively the “Disputed INEDs”) are independent non-executive directors of Aeso appointed at the disputed extraordinary general meeting (more particularly described below).

12.The 13^th Defendant (“Daniel Kan”) was a Responsible Officer and Assistant Director of Anglo Chinese Corporate Finance Limited, the sponsor acting for Aeso in relation to its listing on the GEM Board.

(ii)   The listing of Aeso

13.In around October 2015, Jones Chan decided to list the business of Aeso HK on the GEM Board.  He was introduced to a “pre‑IPO” investor, namely, Wilson Liu, who agreed to provide around HK$20 million for defraying the listing expenses.

14.A corporate reorganization took place prior to the listing, with Aeso being formed to hold, through Aeschylus, the entire issued share capital of Aeso HK.

15.Aeso was listed by way of private placement, which took place on 13 January 2017.  At that time, Aeso had an issued share capital of 200,000,000 shares with a nominal value of US$0.01 each, held by the following parties:-

(1)   Jones Chan (through Acropolis) – 38.25%;

(2)   Wilson Liu (through W&Q) – 36.75%; and

(3)   Private Placees – 25%

16.Under the relevant GEM listing rules, there must be a minimum “public float” of 25% of the issued share capital of a company in order for it to be listed on the GEM Board.  Accordingly, to comply with the requirement of the GEM listing rules, the Private Placees, who together held 25% of the issued share capital of Aeso, must all be “independent” of the directors and substantial shareholders of the company.

17.Prior to the events described below, Aeso’s board of directors consisted of 7 members, namely:-

(1)   Jones Chan;

(2)   HT Cheung, an executive director;

(3)   Zhang and Law, non-executive directors; and

(4)   Lee Chi Chung (“Lee”), Or Chun Man (“Or”) and Leung Ka Kui (“Leung”), independent non-executive directors.

(iii)   The Disputed EGM

18.According to the Plaintiffs, in early 2017, shortly after the listing of Aeso, Wilson Liu made known his intention, and proposed, to acquire Jones Chan/Acropolis’ shares in Aeso for HK$60 million (subsequently increased to HK$100 million), but his proposal was rejected by Jones Chan.

19.On 13 April 2017, the board of Aeso received a written requisition (“the Requisition”) from the Requisitionists requiring an extraordinary general meeting to be convened for the purpose of passing various resolutions to re-constitute the board of Aeso, namely:-

(1)   appointing 5 persons, including the 10^th to 12^th Defendants (ie, the Disputed INEDs) as directors of Aeso;

(2)   removing Jones Chan and HT Cheung as executive directors of Aeso;

(3)   removing Zhang and Law as non-executive directors of Aeso;

(4)   removing Lee, Or and Leung as independent non-executive directors of Aeso; and

(5)   removing any additional directors appointed by the board of Aeso since 12 April 2017 other than the 5 individuals mentioned in (1) above.

20.In view of the Requisition and as required by its Articles of Association, on 2 May 2017, Aeso gave notice to its shareholders that an extraordinary general meeting would be held on 12 June 2017.

21.On 8 June 2017, Or and Leung tendered their resignation as independent non-executive directors of Aeso with immediate effect, and the board of Aeso appointed Ye Wensin (“Ye”) and Wang Aisheng (“Wang”) as new independent non-executive directors in place of Or and Leung.  The validity or propriety of the appointment of Ye and Wang as directors of Aeso is disputed by the 1^st to 4^th Defendants.

22.By a public statement dated 9 June 2017, Zhang and Law (unlawfully, according to the Plaintiffs) purportedly for or on behalf of Aeso announced that:-

(1)   due to the change in the composition of the board of Aeso as aforesaid, the proposed resolutions to be passed at the forthcoming extraordinary general meeting to remove Or and Leung as independent non-executive directors was no longer applicable;

(2)   Ye and Wang, the two newly appointed independent non‑executive directors were subject to removal in accordance with the proposed resolution referred to in paragraph 19(5) above at the forthcoming extraordinary general meeting; and

(3)   Zhang was the chairman and non-executive director of Aeso.

23.On 9 June 2017, 5 members of the board of Aeso (with the exception of Zhang and Law) signed a notice pursuant to Article 106(h) of the Articles of Association of Aeso to remove Zhang and Law as non‑executive directors of Aeso.  The validity or propriety of the removal of Zhang and Law as directors of Aeso is disputed by the 1^st to 4^th Defendants.

24.Conflicting announcements from Aeso then followed on 11 and 12 June 2017 as to whether the extraordinary general meeting as scheduled would proceed or be postponed. The parties are also in dispute as to what happened at the extraordinary general meeting of Aeso held on 12 June 2017.

25.According to a letter dated 14 June 2017 issued by Zhang as chairman on behalf of Aeso to the SFC, an extraordinary general meeting of Aeso was held on 12 June 2017 (“the Disputed EGM”) and certain resolutions were passed thereat (“the Disputed EGM Resolutions”), with the result that:-

(1)   Jones Chan remained on the board of Aeso;

(2)   HT Cheung, the other executive director, was removed;

(3)   Lee, Ye and Wang, independent non-executive directors, were removed; and

(4)   Zhang, Law and the 3 Disputed INEDs were appointed as directors of Aeso (collectively, the “New Directors”).

26.The new board of Aeso after the Disputed EGM consisted of 6 persons, namely, Jones Chan, Zhang, Law and the Disputed INEDs (“the New Board”).

(iv)   Events subsequent to the Disputed EGM

27.Thereafter, the New Board purported to act upon the Disputed EGM Resolutions to carry out the business of Aeso and/or the Group, including (i) making announcements regarding the removal and appointment of directors; (ii) forming an “internal control committee”; (iii) changing the composition of the audit committee, remuneration committee and nomination committee; (iv) appointing Zhang and one Yeung Chi Fai as authorized representatives of Aeso, and (v) appointing Zhang as the sole authorized signatory of all the existing bank accounts of Aeso and any of its subsidiaries.

28.Further, on 23 June 2017, the New Board convened a board meeting of Aeso to engage Harneys Westwood & Riegels as its legal representatives, remove Jones Chan from the board of directors of Aeschylus and Aeso HK, and appoint new directors for the two companies.

29.It is the Plaintiffs’ case that: (i) Wilson Liu never had any genuine intention to invest in or help list the business of Aeso HK, and his only interest was to create/acquire a “listed shell”, and (ii) at all material times, the New Directors acted in tandem and/or in accordance with the instructions or wishes of Wilson Liu/W&Q.

30.The Plaintiffs also allege that Wilson Chan/W&Q and others (including the Requisitionists) were involved in a fraudulent scheme to seize control of Aeso, in particular by making a false representation in various “Letters of Independence” to the effect that the Private Placees were independent shareholders, whereas in truth and in fact the Private Placees, or a majority of them (including the Requisitionists and three other minority shareholders), were acting in collusion or in tandem with Wilson Liu/W&Q.

31.The Plaintiffs commenced the present action on 26 June 2017.

32.On 30 June 2017, the Plaintiff applied for an interim injunction to restrain, effectively, the New Directors from acting as directors of Aeso.  Madam Justice Au-Yeung refused to grant the interim injunction sought by the Plaintiffs upon certain undertakings given by the 1^st to 4^th Defendants and 5^th to 12^th Defendants.

33.A number of events took place after the hearing before Madam Justice Au-Yeung on 30 June 2017.  These were summarized in paragraph 64 of the Judgment:-

“(i) On 4 July 2017, Aeso received a letter dated 3 July from KL Gates (‘KLG’), solicitors acting for Dragon Success referring to a purported loan facility agreement entered into by Aeso with Dragon Success dated 8 June 2017 (‘Loan Facility Agreement’) pursuant to which Dragon Success had advanced to Aeso a total sum of about HK$34.8m, and that under the Loan Facility Agreement, Dragon Success may immediately demand repayment of the drawn down sums in the event the trading of Aeso’s shares is suspended for more than 15 business days or there is change in, among other things, Aeso’s management.

(ii) On 4 July 2017, Liu’s Camp called a board meeting and passed resolutions appointing Zhang as a director of Aeschylus and to require Jones Chan to provide all the books, records, bank statements, online password and/or token of all bank accounts of Aeso HK within 2 days.

(iii) On 5 July 2017, Liu’s Camp called a board meeting and passed resolutions that no repayment was to be made under the Loan Facility Agreement without written approval of all the members of the New Board and requiring Jones Chan to provide the draft of all financial records of Aeso to all the New Directors within 7 days.

(iv) On 5 July 2017, Zhang sent a letter to KLG demanding a copy of the Loan Facility Agreement. On the same day, Jones Chan sent a letter purportedly on behalf of Aeso to KLG acknowledging the alleged debt and requested for extension of time to repay, indicating that Aeso had cash flow problems.

(v) On 6 July 2017 Zhang sent an email to Jones Chan and the Financial Controller of Aeso Chiu Fu Keung (‘Chiu’) requesting them to provide books and records of Aeso within 7 days.

(vi) On 6 July 2017, Liu’s Camp called a board meeting and passed resolutions that all documents to be executed by Aeso are to be signed by two directors of Aeso, and all cheques to be signed and all bank accounts to be operated by two authorized signatories of Aeso. Later that day, Liu’s Camp called a board meeting of Aeschylus to appoint two additional directors both of surname Chan (‘Chans’) on the board of Aeso HK.

(vii) On 7 July 2017, the Chans called a board meeting of Aeso HK and passed various resolutions including adding the Chans as account signatories of all bank accounts of Aeso HK.

(viii) On 10 July 2017, Liu’s Camp called a board meeting and passed various resolutions including adding Zhang and another to be the authorized signatories of Aeso’s bank accounts with HSBC.

(ix) On 11 July 2017, Zhang said she learnt from the registered agent of Aeschylus that they received a letter dated 10 July 2017 from Sabals Law, lawyers purportedly acting for Aeschylus that Jones Chan had executed a purported share charge of the 1 share in Aeschylus on 8 June 2017 in favour of Dragon Success to secure the loan facility of HK$50m under the Loan Facility Agreement.

(x)    On 13 July 2017, the Chans called a board meeting of Aeso HK and passed resolutions including adding the Chans as authorized signatories of Aeso HK’s accounts with HSBC and BEA and change the signing arrangement to allow any two of the authorized signatories to sign jointly to operate those accounts.  On the same day, a nomination committee of Aeso appointed Zhang as an executive director on the New Board and 2 further board meetings were called by Liu’s Camp to add Zhang and another as authorized signatories of Aeso’s accounts with HSBC and to change the signing arrangement to allow any two of the authorized signatories to sign jointly.”

34.Also, there were 5 other related legal actions commenced after the 30 June 2017, as summarized in paragraph 67 of the Judgment:-

“(i) On 10 July 2017, a defamation action, namely HCA 1624/2017 was commenced by Wilson Liu against Jones Chan for defamatory remarks made by the latter.

(ii) On 12 July 2017, Acropolis filed a petition in HCCW 218/2017 against Liu’s Camp, the Requisistionists, the 3 Disputed INEDs, the 3 Minority Shareholders and the Company, seeking an order that the Disputed EGM and the Disputed EGM Resolutions be declared null and void ab ignitio and of no legal effect, the subscription of shares by W&Q and the Requisitionists and the other two subscribers be declared null and void and of no legal effect, or alternatively the Company be wound up.

(iii) On 21 July 2017, an action was commenced by Dragon Success under HCMP 1647/2017 against the Company for recovery of loans advanced to the Company under the Loan Facility Agreement and secured by the Share Charge, and a summons was issued on 31 July 2017 by Dragon Success to appoint interim receivers in respect of the 1 share in Aeschylus (‘Receivership Summons’).

(iv) On 24 July 2017, an action was commenced by the Company and W&Q under HCA 1737/2017 against Dragon Success, Jones Chan and HT Cheung for, among other things, a declaration that the Loan Facility Agreement and the Share Charge are null and void and for Jones Chan to provide all the books and records of the Company and to deliver the proceeds obtained under the Loan Facility Agreement, and further, the Company and W&Q obtained an ex parte injunction on 24 July 2017, which was later continued by Lisa Wong J on 28 July 2017 (‘1737 Injunction’).

(v) On 4 August 2017, HCMP 1721/2017 was commenced by the Company and Zhang and others against Jones Chan and others for production and inspection of books and record of the Company and Aeso HK, and as seen earlier, it was under this action, the Production Summons was issued.”

35.The following applications were before the Judge on 21 August 2017:-

(1)   The Plaintiff’s summons dated 26 June 2017 as amended by further summonses dated 28 June 2017 and 17 August 2017 respectively seeking, amongst other things, an interlocutory injunction to restrain the 1^st to 4^th Defendants, 10^th to 12^th Defendants and 14^th to 16^th Defendants, until the determination of the parties’ disputes herein or further order of the court, from relying on and/or carrying into effect:-

(a)   the Disputed EGM Resolutions;

(b)   resolutions passed by the New Board in reliance on the Disputed EGM Resolutions; and

(c)   further resolutions passed and/or to be passed by the New Directors as purported directors of Aeso, and by the respective boards of directors of Aeso HK and Aeschylus in reliance on or deriving their authority from, whether directly or indirectly, the resolutions passed by the New Directors as purported directors of Aeso.

(2)   The 1^st to 4^th Defendants’ cross-summons dated 10 August 2017 seeking to restrain the 2^nd Plaintiff from holding himself out as having authority to act on behalf of Aeso and its subsidiaries without the authorization of their respective boards, and/or directly or indirectly obstructing resolutions from time to time passed by the respective boards of Aeso and its subsidiaries.

THE JUDGMENT

36.The Judge approached the Plaintiffs’ application for interlocutory injunction by considering (i) whether the Plaintiffs had shown a serious issue to be tried, and (ii) whether the balance of convenience lied in favour of granting the injunction sought, and damages would not be adequate remedy (see paragraph 69 of the Judgment).

(i)   Serious questions to be tried

37.As at the date of the hearing the Plaintiffs’ application before the Judge, no statement of claim had yet been filed.  The Plaintiffs’ case for nullifying the transfer and placement of shares to Wilson Liu/Q&G and the Requisitionists (and possibly other Placees acting in concert with them) was put on the basis that the transfer and placement of those shares were procured by fraud and the result of a conspiracy to defraud (see paragraph 83 of the Judgment).

38.The Judge considered the evidence before her and referred to a number of unusual features in the present case as summarized by Mr Clifford Smith, SC (for the Plaintiffs), namely:-

“(i) Extremely short time lapse between listing and the Requisition;

(ii) The Requisition is contrary to commercial sense and logic;

(iii) The proposed directors in the Requisition are unverified and have no connection with or experience of the industry;

(iv) The results of the Disputed EGM correspond with the Yu Ming Proposals put forward by Warren Lee in the 17.05.17 Meeting;

(v) All the Requisitionists are long time friends and as seen earlier are connected with Wilson Liu and Liu’s Camp;

(vi) The Requisitionists and/or Liu’s Camp were associated with people with a known history of engaging in creating and exploiting shell companies[1];

(vii) The number of shares transferred out of CCASS prior to the Disputed EGM, together with shares held by W&Q amount to just over 50% and by contrast the trading and sale of the Company’s shares have been rather thin since listing;

(viii) A number of the Placees were unaware or had minimal awareness of their acquisition of shares in the Company;

(ix) Numerous investigations all concluded that there is at least prima facie case of a fraudulent conspiracy” (see paragraph 125 of the Judgment).”

39.The Judge came to the conclusion that the evidence overwhelmingly pointed towards “the Requisition [being] really a device in a larger fraudulent scheme and the shares placed to the Placees [being] sham transactions”, and was satisfied that there was, at the very least, a serious issue to be tried (see paragraph 129 of the Judgment).

(ii)   Balance of convenience

40.On the issue of balance of convenience, the Judge’s views were set out in paragraphs 155 to 170 of the Judgment, as follows:

“156. At present, there are serious issues to be tried, and if the allegations of Chan’s Camp of fraud against the Liu’s Camp and the Requisitionists are proved to be correct, this means Liu’s Camp and the Requisitionists will be part of the group of persons involved in a fraudulent scheme, and to allow directors nominated or proposed by them to continue to act may result in potential damage to the Company.

157. On the other hand, there have now also been some serious allegations of fraud made by Liu’s Camp against Jones Chan over the Loan Facility Agreement and the Share Charge involving Dragon Success, and there are also serious issues to be tried. At the moment, Dragon Success has issued the Receivership Summons, which is due to be heard shortly.

…..

160. If the orders sought by Ps are refused, then Liu’s Camp, or Zhang and WK Law and/or the Chans, would effectively be in control of the management of the Company and also the only operating company Aeso HK, with no one among those in control having the length of experience or extensive knowledge of running the operations of a business of fitting-out and renovation of properties as Jones Chan and HT Cheung. This in my view cannot be in the interest of Aeso HK, nor the shareholders of the Company.

161. If the orders sought by Ps are granted, then Jones Chan would effectively be in control of the management of the Company and Aeso HK and also operations of Aeso HK, the only cash cow, can still continue as before. Even if an interim receiver is appointed for Aeschylus, if Dragon Success’s Receivership Summons is granted, there is no evidence that a receiver would not want the operations of Aeso HK to continue.

162. Mr Wong submits that Jones Chan’s stonewalling and obstruction of the New Board shows that he has no intention or effort to salvage the Company from receivership, and in fact Jones Chan has issued winding up proceedings, and that ‘Jones Chan is the person who wants the Company to die’, and that the court should not place the Company in the hands of a person who wants it to die.

163. However, I note from the transcript of the hearing before Au Yeung J, Liu’s Camp had at that hearing themselves made an alternative proposal to make an application for receivership. In any event, in my view, the evidence currently indicates that Jones Chan has been trying to keep the operations of Aeso HK, the only cash cow, going and not to die.

164. So far as the Company is concerned, as pointed out by Mr Smith, the orders sought, if granted, will only result in a ‘freeze’ of the New Board in the interim, as the quorum for a board meeting is 2 directors, and Jones Chan being the only director on the New Board, will not be able to pass any resolutions on his own. The Company’s only operating business is that of Aeso HK. Trading of shares in the Company has been suspended.

…..

168. In any event, Jones Chan, by being the sole director and sole signatory of Aeso HK’s accounts will be able to continue to operate the bank accounts if the orders sought are granted. At the moment, there have been a number of dishonoured cheques issued by Aeso HK to suppliers due to the freezing of the bank accounts by the banks and it seems instead of agreeing for the cheques to be cleared first, Zhang insisted on the Chans being signatories.

169. Mr Smith submitted that the orders if granted would have no or minimal adverse effect on any business or commercial activities. The Company is a holding company only, and that Aeso HK has all along been managed by Jones Chan. Further, the Disputed INEDs have adopted a neutral position concerning the interim relief sought, and thus the majority of the New Board does not in fact oppose the interim relief.

170.  Having considered all the above, and weighing up the balance of convenience, and adopting a forward looking approach, I have come to the view that the balance of convenience and/or the course which appears to carry the lower risk of injustice if it should turn out to be wrong, would be to grant the interim relief sought by Ps, subject to certain exceptions stated below.”

41.On the basis of the above conclusions, the Judge granted the interlocutory injunction sought by the Plaintiffs, save that Aeso could act on any resolutions passed for it to continue to defend the action brought by Dragon Success in HCMP 1647/2017 and to pursue the claim commenced against Dragon Success, Jones Chan and HT Cheung in HCA 1737/2017.  The Judge also dismissed the 1^st to 4^th Defendants’ cross-summons.

Leave to appeal

42.The 1^st to 4^th Defendants’ and 5^th to 9^th Defendants’ respective applications for leave to appeal against the Injunction Order came before this court on 24 November 2017.  Both the 1^st to 4^th Defendants and 5^th to 9^th Defendants sought to challenge the Judge’s conclusions that (i) there was a serious issue to be tried, and (ii) the balance of convenience lied in favour of granting the interlocutory injunction sought by the Plaintiffs.

43.Having heard counsel for the parties, we refused to grant leave to the 1^st to 4^th Defendants and 5^th to 9^th Defendants to appeal on the grounds relating to (i) whether there was a serious issue to be tried, and (ii) whether there was clear evidence that Jones Chan’s conduct was detrimental to the interest of Aeso, but granted them leave to appeal on the issue of balance of convenience.

44.In passing, we note that neither the 1^st to 4^th Defendants nor the 5^th to 9^th Defendants have sought to challenge the Judge’s view that, for the purpose of the Plaintiffs’ present application for interlocutory injunction, all that the Plaintiffs need to show is a “serious issue to be tried” that the transfer and placement of the shares in Aeso to Wilson Liu/W&Q and the Requisitionists (and possibly some other Placees) were procured by fraud or the result of a conspiracy to defraud.  The effect of the injunction sought by the Plaintiffs and granted by the Judge is to restrain the New Directors from acting as directors of the Company.  In view of the fact that the New Directors are appointed, we are given to understand, for a term up to the next AGM of Aeso, it is likely that by the time of the trial of this action, the term of office of the New Directors will have expired, and another new board will have been returned at the AGM.  On the other hand, the Plaintiffs’ complaint is not just the invalidity of the Disputed EGM Resolutions or the appointment of the New Directors at the Disputed EGM.  The Plaintiffs’ case is that the transfer or placement of shares in Aeso to Wilson Liu/W&Q and the Requisitionists were procured by fraud and should be nullified, and it is for this reason why the Disputed EGM Resolutions are invalid and the New Directors should not be allowed to act as directors of Aeso.  The grant of the interlocutory injunction sought by the Plaintiffs would not therefore be dispositive of the whole action or mean that there would not be a trial of the action at all.

45.In the course of the hearing of the appeals, the issue of whether the approach of G Lam J in China Investment Fund Company Limited v Guang Sheng Investment Development Group Limited and Others, HCA 411/2016 (27 May 2016), at paragraph 19, should be applicable to the present situation, such that the Plaintiffs would be required to satisfy a higher standard so far as their prospect of success was concerned before the court would grant the interlocutory injunction sought by them, was briefly touched upon.  Since we have not heard full arguments on this issue, we do not propose to deal with it further in this judgment.

BALANCE OF CONVENIENCE LIED IN FAVOUR OF REFUSING TO GRANT THE INJUNCTION

46.At the outset, it should be noted that the Judge plainly understood the present action to be a derivative action brought by the Plaintiffs on behalf of Aeso against (inter alia) the 1^st to 4^th Defendants and 5^th to 9^th Defendants (see paragraphs 5 and 81 of the Judgment).  We were told by Mr Smith that he had also relied on the Plaintiffs’ personal causes of action in support of the application for interlocutory injunction before the Judge.  However, the Plaintiffs’ Respondent Notices in CACV 276/2017 and CACV 277/2017 dated 15 and 18 December 2017 respectively do not contend that the Judge’s decision should be affirmed on the additional ground that the Injunction Order could be justified on the basis of the Plaintiffs’ personal causes of action.  We were also told by Mr Ronny Tong, SC (for the 1^st to 4^th Defendants) and Mr Denis Chang, SC (for the 5^th to 9^th Defendants) that they had both understood that the Plaintiffs’ application before the Judge proceeded on the basis of a derivative action brought for the benefit of Aeso, and their respective appeals were advanced on that basis.  In the circumstances, we consider that, for the purpose of the present appeals, this action should be treated as a derivative action, and the correctness of the Judge’s analysis of the issue of balance of convenience must be examined on that basis.

47.Accordingly, under the rubric of balance of convenience, the court should consider, amongst other matters, (i) what harm would be caused to Aeso if the injunction sought is refused and whether such harm could adequately be compensated by an award of damages, (ii) what harm would be caused to the parties to be restrained if the injunction sought is granted and whether such harm could adequately be compensated by an award of damages, and (iii) other relevant considerations.  Ultimately, the guiding consideration is that the court should adopt a course which appears to carry the lower risk of injustice if it should turn out to be wrong.

48.We consider the Judge to have erred in the following aspects in her consideration of the issue of balance of convenience which would entitle us to interfere in her exercise of discretion to grant the interlocutory injunction.

49.First, the Judge said that Wilson Liu and the Requisitionists were alleged to be involved in a fraudulent scheme to obtain control of Aeso and if the allegation should prove to be correct, allowing directors nominated or proposed by them to continue to act “may result in potential damage to the Company” (paragraph 156 of the Judgment).  There is, however, no evidence that Wilson Liu and those alleged to be acting in concert with him, including the New Directors, have dissipated or intend to dissipate assets belonging to Aeso, or have acted or intend to act in a manner which has harmed or will harm the interests of Aeso or the Group. Further, Jones Chan remains a director of the New Board and can, in that capacity, monitor the activities and affairs of the Group.  There is, it seems to us, no sufficient evidential basis for the Judge’s view that allowing the New Directors to continue to act may result in potential damage to Aeso or to the Group.

50.Second, the Judge said that if the injunction sought by the Plaintiffs was refused, Wilson Liu and those acting in concert with him would effectively be in control of the management of Aeso and Aeso HK with no one among those in control having the length of experience or extensive knowledge of running and operating the business of fitting out and renovation of properties as Jones Chan and HT Cheung.  The Judge took the view that this could not be in the interests of Aeso HK or the shareholders of Aeso (see paragraph 160 of the Judgment). However, the effect of the Disputed EGM Resolutions is that Jones Chan will continue to be a director of Aeso and he can continue to contribute to the business and operations of Aeso HK.  On the other hand, it is not suggested that the grant of the injunction will have the effect of HT Cheung being re-appointed to the board of Aeso pending the trial of this action.  Further, in the Prospectus relating to the listing of Aeso, it is stated that Aeso and the Group are capable of carrying on its business independently of its controlling shareholders and their respective associates after listing.  Although the Judge’s attention was drawn to this matter, she dismissed it on the ground that the basis for the said statement in the Prospectus was that the 3 Initial INEDs were sufficiently experienced and capable of monitoring Aeso’s operations independently of the controlling shareholders.  We consider that the Judge has confused between, on the one hand, the senior management’s ability to carry out and execute the business decisions of the Group independently of the controlling shareholders and, on the other hand, the INEDs’ experience and capability to monitor the Group’s operations independently of the controlling shareholders.  Further, it should be noted that two of Initial INEDs (namely, Or and Leung) had already resigned by the time of the Disputed EGM, and the third Initial INED (namely, Lee) was removed as a director of Aeso at the Disputed EGM.  Their experience or capability would not, therefore, be available to Aeso in any event.  In all, we consider that there is no proper evidential basis for the view taken by the Judge that refusing to grant the injunction would have the result of Aeso losing or being deprived of the benefit of the knowledge and experience of Jones Chan and HT Cheung.

51.Third, the Judge said that as far as Aeso was concerned, the injunction sought, if granted, would “only” result in a “freeze” of the New Board in the interim, as the quorum for a board meeting was 2 directors, and Jones Chan, being the only director of the New Board, would not be able to pass any resolutions on his own.  Apparently, the Judge did not consider the freezing of the board of directors to be harmful to Aeso.  The importance of having a functioning board of directors for a listed company seems to us to be obvious, having regard to (amongst other things) the whole raft of statutory and regulatory obligations to be observed or complied with by the listed company.  We agree with the submissions of Mr Tong and Mr Chang that the Judge failed to take proper account of the damage or harm that would be caused to Aeso by the grant of the injunction which we consider could not adequately or easily be compensated by an award of damages.

52.Fourth, the Judge has failed to consider the harm which would be suffered by Wilson Liu/Q&G and the Requisitionists, including the deprivation of their voting rights and their choice of Aeso’s management, by the grant of the injunction, which again is something that we consider could not adequately or easily be compensated by an award of damages.

53.For the above reasons, we consider that we are entitled to exercise our discretion afresh on whether to grant the interlocutory injunction sought by the Plaintiff.

54.In the course of the hearing of the appeals, Mr Tong, on behalf of the 1^st to 4^th Defendants, informed the court that his clients were prepared to give the following undertakings to the court:-

(1)   not to remove Jones Chan as a director from any of the boards of directors of Aeso and its subsidiaries;

(2)   not to unlawfully or unfairly deprive the rights enjoyed by the Jones Chan as a director of Aeso and its subsidiaries;

(3)   not to remove Jones Chan as an account signatory of any of the bank accounts of Aeso and its subsidiaries; and

(4)   to ensure that Jones Chan will remain as one of the account signatories whose signature will be required for the operation of the bank accounts of Aeso and its subsidiaries.

55.Mr Chang, on behalf of the 5^th to 9^th Defendants, also informed the court that his clients were willing to give the same undertakings, insofar it was within their powers to do so, to the court.

56.We consider the undertakings offered by the 1^st to 4^th Defendants and 5^th to 9^th Defendants to provide sufficient safeguards for Aeso’s interests, and proper checks and balances of the competing interests of the parties.  In particular, the undertakings would ensure that Jones Chan will remain a member of the board of directors of Aeso, Aeschylus and Aeso HK, and one of the necessary signatories of the bank accounts of Aeso, Aeschylus and Aeso HK.  These measures would allow Jones Chan to monitor the activities of Aeso and its subsidiaries, and ensure that the funds of Aeso and its subsidiaries will not be improperly spent or dissipated.

57.It is well established that the court should only make an order which has the effect of determining the composition of a board of directors in very special circumstances, and may only interfere in the management of a company if it is absolutely essential to do so (see Re Chime Corp Ltd [2003] 2 HKLRD 905, at paragraph 26).  We do not consider the present circumstances to be such as would justify the court doing either, which would be the practical effect of granting the injunction sought by the Plaintiffs.

58.In all the circumstances of this case and taking into account the undertakings offered by the 1^st to 4^th Defendants and 5^th to 9^th Defendants respectively, we are of the view that the balance of convenience lies in favour of refusing the interlocutory injunction sought by the Plaintiff.

59.Having reached this conclusion, it becomes unnecessary for us to consider the issue of appointment of a receiver/manager for Aeso which was one of the possible options mooted at the hearing of the appeals.

60.Since Jones Chan is only one of the directors of Aeso and its subsidiaries, it seems to us to be clear that he should not be permitted to hold himself out as having authority to act on behalf of Aeso and its subsidiaries without the authorization of their respective boards, and/or directly or indirectly obstruct resolutions from time to time passed by the respective boards of Aeso and its subsidiaries.  On the evidence, it is clear that Jones Chan has refused to accept the authority of the New Board and has obstructed the resolutions passed by the respective boards of Aeso and its subsidiaries (see paragraphs 24 to 35 of Zhang’s 1^st Affirmation filed in HCA 1737/2017 on 23 July 2017, the contents of which were adopted by him in paragraph 15 of his 2^nd Affirmation filed herein on 28 July 2017).  We consider it to be clear that the injunction sought by the 1^st to 4^th Defendants under their cross-summons ought to be granted.

RESPONDENTS NOTICES

61.The two Respondents’ Notices filed by the Plaintiffs on 15 and 18 December 2017 respectively are materially identical, save that in answer to the appeal brought by the 5^th to 9^th Defendants in CACV 277/2017, the Plaintiffs have raised an additional point that the 5^th to 9^th Defendants lack standing to challenge the Injunction Order.  That point was, however, not seriously pursued by Mr Smith at the hearing on 2 March 2018.  It has, in any event, no merits because the Injunction Order plainly affects the 5^th to 9^th Defendants’ rights or interests as shareholders of Aeso, and thus they have standing to challenge the Injunction Order.

62.The 5 remaining grounds in Respondents’ Notices can be disposed of shortly.

63.First, it is contended that the Injunction Order does not disrupt the composition of the board of directors of Aeso, does not veto the decision of the shareholders, and do not appoint any new directors for Aeso.  What is important, it seems to us, is not what the Injunction Order does not do, but what it does.  It has, as we see it, the consequence of depriving Aeso of a functioning board of directors which we consider, for reasons stated above, to be unjustified.  We also fail to see how it can be said that the Injunction Order does not disrupt the composition of the board of directors of Aeso, or does not veto the decision of the shareholders.

64.Second, it is contended that the balance of convenience is strongly in favour of granting the Injunction Order as the court should not allow directors of a listed company whose appointment is arguably tainted by fraud or collusion to remain in control.  Quite apart from the fact that the issue of fraud remains an allegation yet to be tried, the important consideration, in our view, is whether the Plaintiffs can show, by evidence, that allowing the New Directors to act as directors of Aeso would cause it harm or damage.  This, we consider, the Plaintiffs have failed to do.  Further, we consider the undertakings offered by the 1^st to 4^th Defendants and 5^th to 9^th Defendants respectively referred to in paragraphs 54 and 55 above provide sufficient safeguards for Aeso’s interests, and proper checks and balances of the competing interests of the parties.

65.Third, it is contended that the Injunction Order is necessary to protect the interests and value of Aeso.  We repeat the observations made in paragraph 64 above.

66.Fourth, it is contended that no action is required by Aeso’s board of directors for the purpose of averting harm to it or its subsidiaries.  It seems to us to be obvious, however, that without a functioning board of directors, Aeso would not be able to comply with the numerous statutory and regulatory obligations required to be observed or complied with by it.  In any event, it is not sufficient for the Plaintiffs seeking an injunction to merely show that the injunction, if granted, would not cause loss or harm to Aeso. The Plaintiffs must justify why the injunction ought to be granted, which we consider the Plaintiffs to have failed to do.

67.Lastly, it is contended that the Injunction Order preserves the status quo pending trial, and do not give “selective effect” to the Disputed EGM Resolutions (in the sense of putting the parties back to the stage where the board of Aeso consisted of Jones Chan, HT Cheung, Zhang, Law, and the Initial INEDs).  In our view, the preservation of the status quo is not, by itself, a sufficient justification for the grant of the Injunction Order.   Further, the fact that the Injunction Order does not restore the board back to its original composition is, in our view, irrelevant for the present purpose.  What the Injunction Order does is to deprive Aeso of a functioning board of directors which, we consider, could not be justified.

68.In the Respondents’ Notices, the Plaintiffs also put forward an alternative form of injunction, which we consider does not materially differ from the Injunction Order granted by the Judge.  For the reasons that we have been given above, we do not consider it justifiable to grant the alternative form of injunction sought by the Plaintiffs.

DISPOSITION

69.Upon the undertakings given by the 1^st to 4^th Defendants and 5^th to 9^th Defendants respectively referred to in paragraphs 54 and 55 above, we allow their appeals, set aside the Judge’s Order dated 31 August 2017, and grant the following interlocutory injunction against Jones Chan, namely:-

“until the determination of this action or further order, the 2^nd Plaintiff be restrained from holding himself out as having authority to carry out act(s) on behalf of each of the 14^th, 15^th and 16^th Defendants, without the authorization of the respective boards of directors, and/or directly or indirectly obstructing resolutions from time to time passed by the respective boards constituted pursuant to the resolutions passed at the extraordinary general meeting of the 14^th Defendant held on 12 June 2017”.

70.We give liberty to the 1^st to 4^th Defendants to apply for an inquiry in damages which may have been caused to them as a result of the Injunction Order, and extend the time for the Plaintiffs to apply (if so advised) for leave to appeal against the order made herein to 14 days after the handing down of this judgment.

71.We also order the Plaintiffs to pay the 1^st to 4^th Defendants’ and 5^th to 9^th Defendants’ respective costs here and below, with certificate for 2 counsel, to be taxed if not agreed.

72.Lastly, it remains for us to thank counsel for their assistance rendered to the court.

Mr Clifford Smith, SC and Mr Kerby Lau, instructed by Titus & Co, for the 1^st and 2^nd Plaintiffs

Mr Ronny Tong, SC, Mr Anson Wong, SC, Mr Richard Yip and Ms Tara Liao, instructed by Bond Ng Solicitors, for the 1^st to 4^th Defendants

Mr Denis Chang, SC, Mr Jeffrey Tam and Mr Ian Chau, instructed by Alex To & Co, for the 5^th to 9^th Defendants

Attendance of JC Legal, for the 10^th to 12^th Defendants, was excused

The 13^th to 16^th Defendants acting in person and absent