Chen Lingxia v. 中國金谷國際信託有限責任公司 and Others

HCA 2012/2018

[2019] HKCFI 379

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2012 OF 2018

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D E C I S I O N

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1.On 27 August 2018, the Plaintiff (“Chen”) issued these proceedings and, at the same time, applied by summons (returnable on 31 August 2018) (“Summons”) for interlocutory relief against the named Defendants.

2.Chen is resident on the Mainland and claims to be the beneficial owner of 51% of the shareholding in the 7^th Defendant (“South Asia”), a company incorporated in Hong Kong.  South Asia’s key asset is its wholly owned subsidiary on the Mainland, 香山國際遊艇俱樂部(厦門)有限公司(“XS”).  XS is South Asia’s corporate vehicle to hold and develop a yacht club in Xiamen on the Mainland by the name of 香山遊艇俱樂部項目(“Project”).  At the material time when South Asia was incorporated, Chen and her husband (“Husband”) were the holders of 80% and 20% respectively of the shares in South Asia.  Chen was a director of South Asia, and the legal representative and director of XS.

3.In around 2010, to obtain funding for the development of the Project, a series of agreements were made, whereby a financing loan of a total of RMB 2,300,000,000 (“Total Loan”) was to be extended to XS, and provided by a Mainland company, which is the 1^st Defendant in these proceedings, Jiangsu International (“JI”).  The Total Loan included a financing loan of RMB 700 million, in consideration of the transfer by XS to JI of the right to the earnings from the yacht piers under the Project.  The assignment of earnings was evidenced by or contained in an Assignment Agreement made between XS and JI (“Assignment Agreement”).  A Strategy Cooperation Agreement (“SCA”) was also made on 15 January 2010 between South Asia, XS and JI.  Under a Supplemental Agreement to the SCA dated December 2010 (“Supplemental Agreement”) which was made between South Asia, XS, Chen and JI, Chen agreed to transfer her 51% shareholding in South Asia (“Subject Shares”) to JI or its nominee, as security for the obligations of XS under the Assignment Agreement.

4.It is not disputed that pursuant to the SCA and the Supplemental Agreement, the Subject Shares were transferred from Chen to JI’s nominee, a Hong Kong company and the 2^nd Defendant in these proceedings (“Silver Grant”), which executed a declaration of trust in favor of JI in respect of its holding of the Subject Shares.  With Chen’s approval, JI’s nominees were appointed to the board of South Asia.

5.In about 2015, JI alleged and purported to rely upon XS’ breach of the agreements relating to JI’s loans to XS, including breach of the Assignment Agreement.  It attempted to enforce its rights under the SCA and the Supplemental Agreement, by applying to the Beijing Notary Public for a certificate of enforcement/execution to enforce its rights.  A Certificate of Enforcement was granted by the Beijing Notary Public on 26 May 2015 (“Certificate of Enforcement”).  JI then applied to the Higher People’s Court of Fujian Province (“FJ Court”) for an order for enforcement, which was granted by the FJ Court.  In August 2015, Chen applied to the FJ Court for “non-execution of the Certificate of Enforcement” (“Non-Execution Application”), but this was declined by the FJ Court on 15 December 2015.  Chen successfully appealed to the Supreme People’s Court (“SPC”), and by its decision dated 28 October 2016, the SPC allowed the appeal, set aside the FJ Court’s decision, and ordered a retrial of the matter by the FJ Court.  These proceedings in the FJ Court are still pending.

6.In the interim of the Non-Execution Application, the appeal and the pendency of the retrial by the FJ Court as ordered by the SPC, in late 2017, JI sold the outstanding loans due from XS by way of auction on Taobao (an online auction platform) (“Taobao Sale”) to the 3^rd Defendant 廣東金恒資產管理有限公司, Guangdong Jinheng (“JH”), a Mainland company.  The outstanding loan was RMB 2,702,633,995.02, comprising the principal debt of RMB 1,073,250,000 and outstanding interest of RMB 1,629,383,995.02, and JH as the winning bidder allegedly paid RMB 2,389, 882, 297.52.

7.Pursuant to the Taobao Sale, JI assigned to JH all its rights in the debt due from XS, under a Debt Assignment Agreement dated 29 November 2017.  The rights assigned include the collateral and security in the debt assigned (including the Subject Shares).  Chen claims that she only received notice of assignment of XS’s debt to JI in early January 2018.  In October 2016, she had filed notice of objection when she became aware of JI’s announcement of its intention to dispose of the debt due from XS, but there was no indication then of any dealings in the Subject Shares.

8.In purported exercise of the rights in the Subject Shares, JI’s appointees on the board of South Asia called for a meeting of the directors on 9 August 2018, to approve their resignation as directors and the appointment of 5 new directors nominated by JH.  The new directors also called for: (1) a board meeting to be held on 14 August 2018 to discuss whether to raise capital for South Asia by allotting new shares; and (2) an EGM to be held on 14 September 2018 to approve the removal of Chen as a director of South Asia.

9.Chen claims that her transfer of the Subject Shares to Silver Grant as nominee of JI was only by way of security to guarantee XS’s obligations under the Assignment Agreement, and was not an outright transfer of her beneficial interests in the Subject Shares.  She claims that she was ready, able and willing to pay the outstanding debt due from XS to JI, which she claims is RMB 1,726,348,867.  She further relies on expert evidence on PRC law, that the Taobao Sale was illegal and void, being improper circumvention of the necessary execution and enforcement procedures of the Mainland court which are required, such that there was no valid sale to JH. Chen claims that at all material times of the Taobao Sale, JH had express notice of Chen’s claims in the Non-Execution Application, and was not a bona fide purchaser without notice.  It should take subject to her beneficial interests in and claims to the Subject Shares.

10.On the basis of these claims, Chen applied by the Summons for firstly, injunctions to restrain JI, Silver Grant, JH and JH’s nominees (the 4^th to 6^th Defendants, in whose names the Subject Shares are currently registered, pursuant to the Taobao Sale to JH) from: (1) taking any steps to dispose of, deal with, transfer, charge, encumber or diminish the value of the Subject Shares (“Disposal/Diminishing Injunction”); and (2) exercising any power or right attached to the Subject Shares to increase the share capital of South Asia, remove Chen from the Board of South Asia, or take steps to effect the change of the legal representative and directors of XS (“Voting/Exercise of Rights Injunction”). 

11.By the Summons, Chen further sought interim orders, pending the hearing and determination of the Summons, for South Asia to adjourn the meetings called for August and September 2018; and to be restrained from convening any further general meeting to increase the share capital, change the composition of its board, or to effect the change of the legal representative and directors of XS. 

12.On 31 August 2018, substantive argument on the Summons was adjourned, but the Court granted interim injunctions (“Interim Injunctions”), substantially in terms of those sought against the 1^st to 6^th Defendants.   As against South Asia, the Court restrained it, until the determination of the Summons or further order, by its officers and agents, from convening or holding any general meeting for the purposes of: (1) resolving on the issue and allotment of new shares or otherwise diluting the shareholding of the Subject Shares; (2) removing Chen from the board of directors; and/or taking any further steps to effect the change of the legal representative and directors of XS (South Asia’s wholly-owned subsidiary), or from carrying such resolution into effect. 

13.On 13 September 2018, JH applied for the Interim Injunctions to be discharged, and alternatively for Chen’s cross-undertaking in damages to be fortified.   Its grounds are that there is no serious question to be tried at all on Chen’s claims against JH, that JH was entitled to deal with the Subject Shares upon Chen’s default in payment, and further, that there had been material non-disclosure in Chen’s application for the Interim Injunctions.

14.At the hearing of the substantive arguments on the Summons, South Asia also opposed the continuation of any injunction against it.   It did not issue any summons for discharge of the Interim Injunctions, but argued that the Interim Injunction should never have been made against South Asia, against which Chen has not asserted any cause of action. 

15.As for JI, its stance is that it is “nugatory and useless” for Chen to seek any injunction against JI, when (as Chen knew at the time of the issue of the Summons) the Subject Shares were no longer in the possession or control of JI.

Whether any serious question to be tried on Chen’s claims against the defendants 

16.The claims and evidence relied upon by Chen are that the Subject Shares were only transferred, or pledged, to JI as security under and pursuant to the SCA and the Supplemental Agreement, to guarantee the indebtedness and obligations of XS under the Assignment Agreement.  She claims that she remains the beneficial owner of the Subject Shares, and further alleges that JI’s attempts to enforce the security by sale of the Subject Shares to JH on the Mainland are illegal under PRC law.  On its part, JH claims that it was the bona fide purchaser of the debt and the security, being the Subject Shares, and that it was entitled to exercise all its rights as legal and beneficial owner of the Subject Shares.  JH highlighted the fact that all the relevant agreements between Chen and JI are governed by PRC law.

17.There are accordingly competing claims to the proprietary rights in the Subject Shares, which are shares in a company incorporated under the laws of Hong Kong.  Property and contractual claims to shares in a company should be determined by the lex situs, and shares have their situs in the place of incorporation of the company (Chen Hongqing v Ds, [2018] HKCFI 1170 at paras 33- 45, Dicey, Morris & Collins, The Conflict of Laws, 15^th ed, para 22-044). 

18.I accept the submissions made by Leading Counsel on behalf of Chen, that under Hong Kong law, the arrangement and the transfer of shares evidenced by the provisions of the SCA and Supplemental Agreement support a charge, legal mortgage or trust created in the Subject Shares.  Even if PRC law should apply, the expert evidence produced by Chen is that the effect of the relevant agreements is that the transfer from Chen to Silver Grant was in the nature of a guarantee arrangement, that true ownership of the Subject Shares remained with Chen, and that in the absence of any demonstrated serious breach, JI and Silver Grant were nominal holders of the Subject Shares, and obliged to act in accordance with Chen’s direction and interests.

19.JH has pointed out that Chen does not dispute the fact of XS’ default in payment under the Assignment Agreement.  Under the express terms of the Supplemental Agreement (namely, clause 2.2 (1) thereof), JI/Silver Grant as JI’s nominee are entitled upon XS’ breach of the Assignment Agreement to deal with or dispose of (處置) the Subject Shares, including the right to transfer same to a third party.  Clause 2.3 of the Supplemental Agreement also refers to the right of JI to “directly deal with” (直接處分) the Subject Shares in the event of XS’ breach of the Assignment Agreement.  It was emphasized that even if the Subject Shares had only been offered as security under a charge/guarantee, JI was entitled to exercise its contractual rights to enforce the security, as it did when it sold the Subject Shares, together with the debt due from XS, by the Taobao Sale to JH.

20.According to Chen’s PRC expert, upon a debtor’s default or failure in compliance with its obligations, a creditor may apply to the court for enforcement, and in the event of a security provider failing to pay the debt due, the security holder may agree with the security provider to sell the security, and in default of agreement, the security holder may commence legal proceedings.  The PRC Notary Law and the Guarantee Law are cited by the expert, in support of the view expressed that when the conditions for the exercise of any security rights are satisfied, the holder of the security cannot directly sell the security, and must apply to the Mainland court for enforcement of the rights in the security.  According to the expert, any direct sale of the security by the security holder, other than by way of enforcement proceedings through the Mainland courts, constitute self-help, is contrary to PRC law, and is invalid. 

21.On behalf of JH, Leading Counsel referred to and relied upon the Acknowledgment of Indebtedness dated 26 May 2010 (“Acknowledgment”) which was signed by XS and JI, and an Acknowledgment of Indebtedness Supplement dated 12 January 2012 (“Supplemental Acknowledgment”) signed by the same parties.  Under the Acknowledgment, XS (inter alia) acknowledged its indebtedness under the Assignment Agreement.  Under the Supplemental Acknowledgment, the parties apparently agreed (clause 2.1) to process a notarial certificate for the enforcement of the Acknowledgment.  Under clause 2.2, XS and JI agreed that the Acknowledgment was a document which could be enforced.  In the same clause, XS further agreed that in the event of its non-compliance with the obligations under the Acknowledgment: it “accepted enforcement by the judicial authorities” (自願接受司法機關的強制執行), without the need of legal proceedings (無需經過訴訟程序); that JI would be entitled in accordance with the Law of Civil Proceedings (民事訴訟法) to “directly apply to a People’s Court with jurisdiction for enforcement”, and that XS would forgo its defence. 

22.Clause 2.4 of the Supplemental Acknowledgment provides that if XS should fail to comply with a document which has been notarized as enforceable, JI should notify XS in writing that if such breach was not rectified within 5 working days, JI would apply to the notary for an “enforcement certificate” (申請出具執行証書).

23.Notarial certificates had been issued by the Beijing Notary Public in February and December 2012, in respect of the Acknowledgment and Supplemental Acknowledgment and their being enforceable(賦予強制執行效力).

24.According to Chen’s PRC expert, any notarized documents of indebtedness only enable the creditor to proceed directly to court enforcement, without the necessity of a trial of the underlying debt.  The expert maintains that this does not mean that the creditor has the right to seize or directly sell the property of the debtor, without going through the courts or a sale by the courts.  Chen has highlighted the fact that the Taobao Sale was not conducted through the judicial sale/auction platform.

25.The PRC expert’s opinion, that as a creditor and holder of security under the Assignment Agreement with XS and the Supplemental Agreement with Chen and XS, JI had to apply to the Mainland court for enforcement of its rights to sell the Subject Shares, is in fact supported by the actions taken by JI itself.  In May 2015, JI applied to and obtained from the Beijing Notary Public the Certificate of Enforcement in respect of the relevant agreements made with XS and Chen, including the Acknowledgment and the Supplemental Acknowledgment, which Certificate of Enforcement was issued against identified property of XS and Chen, including the land owned by XS, and all the personal property of Chen.

26.Pursuant to and on the basis of the Certificate of Enforcement issued by the Beijing Notary Public, JI then applied to the FJ Court in May 2015 for enforcement (“FJ Enforcement Proceedings”), and on 10 June 2015, the FJ Court issued a decision, determining that the property of XS and Chen be seized, frozen, auctioned and sold.  However, that was set aside by the SPC on 28 October 2016, on Chen’s appeal.  Following the FJ Court’s decision for enforcement in June 2015, Chen had applied to the FJ Court for “non-execution”, which was dismissed by the FJ Court in December 2015.  On her appeal, the SPC ordered a retrial of the FJ Enforcement Proceedings, and in its decision dated October 2016, the SPC pointed out that the court should (inter alia) verify the matters referred to in the notarized documents and the subject liabilities of the guarantor. 

27.It is not disputed that the FJ Enforcement Proceedings are still ongoing and have not been determined.  According to Chen’s PRC expert, the status and validity of the Certificate of Enforcement awaits determination and verification by the FJ Court in the FJ Enforcement Proceedings (as ordered by the SPC).

28.On behalf of JH, Mr Ho SC argued that the reference to and any necessity for an application to the Mainland court is for an order for “execution”, similar to an order for execution by a writ of fi fa in our jurisdiction, but that any such requirement does not prevent a creditor from exercising its rights to “enforce” the debt due.

29.On reviewing the Certificate of Enforcement issued by the Beijing Notary Public, the notice and the decision issued by the FJ Court in the FJ Enforcement Proceedings, I fail to see any clear distinction between “enforcement” and “execution”, which is sought to be made by Mr Ho.  There is no expert evidence before me in that regard.  On a plain reading of the relevant provisions of the Supplemental Acknowledgment, which refer to enforcement by the judicial authorities (司法機關強制執行) and application to the court for enforcement (直接向法院申請強制執行), the parties had contemplated enforcement of the acknowledged debt by an application to the relevant court.  The Certificate of Enforcement issued by the Beijing Notary Public in May 2015 referred to assets of XS and the assets of Chen, to be enforced (可供執行).  The notice and the decision issued by the FJ Court similarly refer to enforcement (強制執行), with express reference to such enforcement by way of auction or sale.

30.In the light of all the evidence filed, and despite the suggestions made by JH that Chen’s PRC law expert is not truly independent, there is in my view a serious question to be tried: as to the nature of JI’s rights to the Subject Shares under the Supplemental Agreement, and in particular, as to the manner of its exercise of any of its security rights to the Subject Shares by way of enforcement, whether such enforcement/execution otherwise than under an order of the Mainland Court is permissible, and in particular, whether the Taobao Sale was valid under PRC law and capable of conferring on JH any interest in and claims to the Subject Shares - when such sale was made otherwise than under or pursuant to an order of the Mainland court for enforcement. 

31.On the evidence, express notice of the disputes raised as to JI’s rights to the security in the debt offered to be sold, Chen’s opposition to the FJ Enforcement proceedings and the fact that such dispute had remained unresolved by the court, had been given in the notice of and documents relating to the Taobao Sale.  I do not accept that JH had acquired the Subject Shares without notice of Chen’s claims and disputes.  Further, on the evidence filed by Chen, as to the possible relationship between JH and Silver Grant/its majority shareholder (Silver Grant at all material times being a nominee only of JI), there is a serious question to be tried as to whether JH can indeed be said to be a bona fide purchaser which is truly unrelated to JI/Silver Grant. 

32.As for Chen’s claims against South Asia, it seeks in the Indorsement and Statement of Claim an order for rectification of the register of members.  In the Summons, Chen seeks interim orders that South Asia should adjourn the extraordinary general meetings called for 31 August 2018 and 14 September 2018, as well as interim injunctions to restrain South Asia from convening any further general meetings to increase its share capital, change the composition of its board of directors, or to effect the change of the legal representative and directors of XS (South Asia’s subsidiary).

33.Counsel for South Asia argued that none of the directors of South Asia have been made defendants, and there was no basis to seek an injunction against the company itself, South Asia.

34.Being satisfied on 31 August 2018 that there was a serious question to be tried as to whether JI’s interests in the Subject Shares are in the nature of security interests only, and that Chen would suffer irreparable damage either if her shareholding was to be diluted, or if she was to lose her representation on the board of South Asia, the Interim Injunctions made by the Court were directed at the officers and agents of South Asia.  These Interim Injunctions restrained South Asia by its officers and agents, until the determination of the Summons or further order of the Court, from convening or holding any extraordinary general meeting for the purposes only of resolving on the issue and allotment of new shares or diluting the holding of the Subject Shares currently held in the name of JH’s nominees (the 4^th to 6^th Defendants), from removing Chen from the board of directors, and from effecting any change of XS’ legal representative and directors (which included Chen).  That was necessary to preserve the status quo ante as well as to preserve the subject matter of these proceedings.  There was no order prohibiting South Asia from raising capital, or seeking such funds or making such payments as it may require, for the purposes now said to be necessary to continue the operations or for the survival of South Asia/XS.   

35.Chen has valid causes of action against JI, JH and their respective nominees.  The cause of action against South Asia is for rectification of its share register.   South Asia may have been joined as a defendant in these proceedings simply to ensure that it is bound by any order which the Court may make as to the shareholding, and the validity of the transfers of shares made from one of the other defendants to another of them, but it cannot be said that the Court has no power to make an interim injunction against the company in order to give full effect to the orders which the Court makes against the other parties to the action, and for the interim preservation of the subject matter of the proceedings.

Whether there was material non-disclosure in the application for the Interim Injunctions

36.On the return day of the Summons, when Chen applied for the Interim Injunctions, she dealt with the Special Notice which had been issued by and on behalf of South Asia for a general meeting to be held to remove Chen and Husband as directors of South Asia.  In her affidavit in support of the application for the injunctions, Chen disclosed the fact that in November 2017, she had been found by the People’s Court of Xiamen to be guilty of unlawfully soliciting public funds.  She explained that this was a result of JI’s failure to meet its obligations under the loan arrangements with XS.  She claimed that the Xiamen Court had expressly acknowledged that her unlawful fundraising was conducted for the development of the Project, and had accepted her defence that the private fund raising was a last resort because of JI’s refusal to provide further funding for the Project.  She pointed out that as a large part of the funds raised by her had already been repaid, the Xiamen Court had imposed a lesser punishment on her.  On the evidence, she had been sentenced to 3 years’ imprisonment (suspended for 3 years), fined RMB 250,000, and ordered to pay compensation of RMB 82,072,000.

37.On the evidence filed by South Asia in September 2018, it is disputed that Chen’s acceptance of deposits from the public only took place after JI had failed to provide funds to XS. 

38.The fact of Chen’s conviction was disclosed to the Court when the Interim Injunctions were granted, to preserve her beneficial interest in the Subject Shares and her status as director and legal representative of South Asia and XS.  What Chen failed to disclose, and as now emphasized by South Asia, is that she was subject to restrictions under PRC law, and cannot as a result of her conviction by the Xiamen Court act as a director or legal representative of XS.  South Asia also referred to instances of Chen’s breach of duties to XS, but these are disputed facts.

39.According to the evidence of South Asia, XS had received written notification from the relevant regulatory authority of Xiamen (“Authority”) on 1 March 2018 (“Notification”), that both Chen and Husband were prohibited under the PRC Company Law from acting as a director, supervisor or senior manager of any company as a result of their conviction for soliciting public deposits.  XS was required, under the Notification, to undertake the necessary procedures within 30 days to effect the changes in the registered particulars of XS.  Chen had in fact signed on 8 March 2018 to acknowledge receipt of the Notification.

40.The legal principles are clear as to an applicant’s duty to make full and frank disclosure in its application to the Court for discretionary relief, in circumstances when the Court only has the evidence presented by one side, and the other parties who may be notified and are present at the hearing of the application have not had the fair and reasonable opportunity to present their evidence and arguments in opposition (Muginoho v Vimiu unreported, HCMP 107/2012, 24 February 2012, Relevant Employees v Zhang Caikui [2018] HKCFI 194). 

41.The Summons was an inter-partes summons, giving the requisite 2 clear days’ notice of the hearing of the application for relief (as required under Order 32 rule 3 RHC).  The intention of the rule is to ensure that the respondents to an application have proper notice of both the hearing and the material upon which the applicant intends to rely (para 32/3/1 HK Civil Procedure, PCCW-HKT Telephone Ltd v Telecommunications Authority, unreported, CACV 274/2003, 7 September 2004).  By the time of the hearing on 31 August 2018, JI, JH, the 4^th Defendant, South Asia and the 8^th Defendant had been served with the Summons and attended by their lawyers (save and except the 8^th Defendant whose attendance was excused), but none of the Defendants had been able within the limited time to prepare any evidence in opposition. 

42.Although the Summons was inter-partes, Chen was not absolved from her duty to make frank disclosure of all facts known to her and which are material to the Court’s determination of whether to exercise its discretion to grant the interim relief which she sought, on the evidence she presented unilaterally.  Chen’s withholding of the fact that she was, by reason of her conviction by the Xiamen Court, disqualified and not able under PRC law to remain as a director and legal representative of XS was deliberate, since she had knowledge of the Notification which required XS to effect the change of directors and supervisor by reason of Chen’s and Husband’s conviction.  Even by the time of the substantive hearing of the Summons in October 2018, Chen has not offered any explanation as to why the fact of the Notification and her inability to continue to act as director and legal representative of XS was not disclosed in her affidavit filed in support of the Summons.  By presenting a partial picture of the criminal charge and proceedings before the Xiamen Court, disclosing only the facts which were helpful to and in mitigation of her case, but withholding other material facts relating to her disqualification to act and remain as a director and legal representative of XS, she had knowingly misled the Court into granting the Interim Injunctions in her favor, on the incomplete information which she presented.  The matter of her fitness and qualification to act is clearly relevant and would have weighed in the scales in the exercise of the Court’s discretion whether or not to grant the Interim Injunctions (Citibank NA v Express Ship Management Services Limited [1987] HKLR 1184).

43.I agree that in considering the balance of convenience as to whether the injunctive and other relief sought in the Summons should be granted, it is relevant to bear in mind the public policy considerations (Love & Lugg v Herrity (1991) 23 HLR 217 at 222) of permitting Chen to remain as director, senior manager or supervisor of XS, contrary to the provisions of and requirements under PRC law as to her qualification and fitness to act as such.  XS has been required by the Authority to remove Chen as a director, on the basis that she is no longer fit to act.  The directors of South Asia collectively exercise direct control over XS, and have the duty to act in the best interests of XS.  They cannot ignore the Notification and fail to take the appropriate steps and also ensure that XS takes the necessary steps to comply with the Notification, including the removal of Chen as a director of South Asia, and as a director, senior manager and legal representative of XS.  According to the evidence of South Asia, if XS fails to comply with the Notification to remove Chen and Husband as directors, legal representative or senior manager of XS, the Authority may take enforcement action against XS, including a fine and the revocation of XS’s business registration.

44.Having regard to all the foregoing matters, I discharge the Interim Injunctions for Chen’s material non-disclosure of material facts which had misled the Court in making the orders on 31 August 2018. 

The relief sought in the Summons

45.Despite the discharge of the Interim Injunctions on the ground of material non-disclosure, the Court should still consider whether it should, on review of all the evidence made available at the substantive hearing of the Summons, exercise its discretion to grant the Disposal/Diminishing Injunction and the Voting/Exercise of Rights Injunction sought against JI, its nominee Silver Grant, JH and its nominees (the 4^th to 6^th Defendants).  In this regard, I accept that there are serious questions to be tried, as outlined in the earlier parts of this Decision.   The key issue to be tried relates to whether Chen has retained proprietary interests in the Subject Shares, whether JI is entitled to enforce its rights and remedies in respect of the Subject Shares without the appropriate order from the Mainland Court, and whether JH is indeed a bona fide purchaser of the Subject Shares without notice.

46.JI and JH emphasize the fact that Chen does not dispute that a debt (in the region of RMB 1.7 billion, on her case) is due and payable by XS to JI, as guaranteed by her, and that only the amount of indebtedness is disputed, to be resolved in the FJ Enforcement Proceedings.  On her part, Chen claims that the debt and the underlying security including the Subject Shares had been sold by JI at over RMB 2.38 billion, such that her indebtedness has been discharged with a surplus to be accounted to her - which has never been acknowledged by JI.

47.Chen objects to the proposal for the shareholders of South Asia to vote on the allotment of new shares, claiming that once her 51% shareholding in South Asia is diluted, it would be extremely difficult to reverse the position, and damages would not adequately compensate her for such loss.  South Asia holds a unique asset, by virtue of its shareholding in XS, which in turn holds the development rights and interests in the Project.  It would be difficult to have a reliable valuation of the lost investment which is still in the course of development.

48.On the balance of convenience, JH claims by reference to various matters that there is urgent need for South Asia to raise capital to enable XS to repay its debts and to complete the Project, that Chen’s speculation of dilution is groundless, and it undertakes (together with the 4^th to 6^th Defendants) to take up any offer by South Asia to subscribe for new shares to be allotted, to avoid the possibility of the 51% shareholding falling into the hands of unrelated parties.  In the event that the Court finds that Chen is entitled to the Subject Shares, JH and its nominees undertake to return to Chen the Subject Shares, and any new shares allotted under the capital increase, provided that Chen would pay back to them the money for the subscription.  In the meantime, both Chen and JH would benefit if the value of the Subject Shares is preserved.

49.In view of the evidence of Chen’s questionable fitness and qualification, as a result of her criminal conviction, to be a director of XS, I decline to grant any injunction to restrain the Defendants from exercising their power or rights to remove Chen from the board of directors of South Asia, or to effect the change of legal representative and directors of XS, which is sought in the Summons as part of the Voting/Exercise of Rights Injunction.

50.In view of the undertaking offered by JH and its nominees (the 4^th to 6^th Defendants) as recorded in paragraph 48 above, which is accepted by the Court, the balance of convenience is against the grant of an injunction to restrain or restrict the Defendants’ exercise of their voting and other power or rights to increase the share capital of South Asia.  However, in view of the serious questions to be tried as to the validity of the transfer of the Subject Shares from JI to JH (as I have found), and to preserve the status quo and the subject matter of these proceedings, the balance of convenience is in favor of the grant of an order in terms of the Disposal/Diminishing Injunction against JH and the 4^th to 6^th Defendants. 

51.In considering the balance of convenience, I bear in mind that when JH accepted the assignment of the debt from JI, after its bid for and purchase of the debt and underlying security in the Taobao Sale, it had been given notice and had knowledge of the dispute in the Non-Execution Application, and of the “serious defects” in the debt as described in the Debt Assignment Agreement between JI and JH, which defects included the opposition to enforcement made by Chen as guarantor, and the risk of the security being invalid, or refused enforcement by the court.  JH had accepted the risk of these claims made by Chen.

52.Leading Counsel for Chen also pointed out that JH, as purchaser of the underlying security for the debt, is still entitled to look to other assets of XS for enforcement of its rights acquired in the debt. It is also entitled to pursue the necessary enforcement proceedings in the Mainland courts.

53.Since the Taobao Sale, JI had transferred the debt due from XS and the Subject Shares to JH/its nominees.  At the meeting of the board of directors of South Asia held on 26 June 2018, resolutions were passed to approve the transfer of the Subject Shares, the resignation of all the directors who had been appointed by JI to the board of South Asia, and the appointment of 5 new directors nominated by JH.  By the time of the Summons, JI had relinquished its rights to the Subject Shares, which have been held in the names of the 4^th to 6^th Defendants.  As Counsel for JI pointed out, as from 26 June 2018, JI no longer controlled the conduct and affairs of South Asia and there is no evidence from Chen, and no basis to suggest, that JI has any further power to convene or hold any general meeting of South Asia, or to dispose of, deal with, transfer, charge, encumber or diminish the value of the Subject Shares.  I agree, that there is no basis to grant either the Disposal/Diminishing Injunction or the Voting/Exercise of Rights Injunction against JI.

Disposition of the injunctions sought

54.For the above reasons, I grant on the Summons the Disposal/Diminishing Injunction against JH and the 4^th to 6^th Defendants.  For the avoidance of doubt, the injunction granted does not restrain JH, the 4^th, 5^th and 6^th Defendants from voting, requisitioning meetings and/or proposing resolutions to increase the share capital of South Asia or to raise funds for South Asia.  There will be the usual order of costs in the cause. 

55.Since the Interim Injunctions are discharged for material non-disclosure, the costs of and occasioned by the initial grant and their discharge (pursuant to JH’s summons dated 13 September 2018) are to be borne by Chen and paid to the Defendants, with certificate for two Counsel.

Fortification

56.On the question of the fortification sought by JH and the 4^th to 6^th Defendants for any injunction that is granted against them, it is clear that a cross-undertaking in damages from the applicant is a necessary part of the mechanism for granting interlocutory injunctions (see paragraph 32 of the judgment in Wah Nam Holdings Company Limited v Excel Noble Development Limited CACV 241/1999, 23 December 1999).  The judgment of North J in AG v Albany Hotel Co [1896] 2 Ch 696 was cited in the judgment in Wah Nam:

“In considering whether an interlocutory injunction should be granted or not, at a time when the case is only in an early stage of development, the Court aims at keeping matters in status quo, as far as possible, without prejudicing the rights of the parties; and it is often induced to make in favor of the plaintiff, in the belief that the defendant will be sufficiently protected against damage by the undertaking, an order which the Court would not have made if the defendant had been left without such a protection and there was a reasonable probability that he might sustain serious damage if the injunction should be ultimately discharged.”

57.In the case of Wah Nam Holdings Company Limited v Excel Noble Development Limited itself, Ribeiro J (as His Lordship then was) stated at paragraph 40 of the judgment:

“For the protection given to the Defendant by the cross- undertaking to be real and not illusory, the Plaintiff must obviously be able to honour it if required. In American Cyanamid (at p 408), Lord Diplock saw the need for a realistic ability to meet any liability in damages as a symmetrical requirement applying both to the Plaintiff and the Defendant when considering the adequacy of damages and the cross- undertaking in damages, as follows:-

‘If damages in the measure recoverable at common law would be an adequate remedy and the defendant would be in a financial position to pay them, no interlocutory injunction should normally be granted, however strong the plaintiff’s claim appeared to be at that stage.  If, on the other hand, damages would not provide an adequate remedy for the plaintiff in the event of his succeeding at the trial, the court should then consider whether, on the contrary hypothesis that the defendant were to succeed at the trial in establishing his right to do that which was sought to be enjoined, he would be adequately compensated under the plaintiff’s undertaking as to damages for the loss he would have sustained by being prevented from doing so between the time of the application and the time of the trial.  If damages in the measure recoverable under such an undertaking would be an adequate remedy and the plaintiff would be in a financial position to pay them, there would be no reason upon this ground to refuse an interlocutory injunction.’ (Italics supplied)”

58.In the more recent authorities, it has been emphasized that like the grant or refusal of a freezing order itself, the question of the extent of the cross-undertaking is a matter of discretion for the judge who grants the injunction.  In JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2015] EWCA Civ 139, the English Court of Appeal highlighted that so far as the cross-undertaking in damages is concerned, the “default position” is that an applicant for an interim injunction is required to give an unlimited cross-undertaking in damages, and it is not for the defendant to show that the freezing order is likely to cause him a loss before a cross-undertaking of an unlimited amount is required (see paragraph 78 of the judgment).  On the question then of whether fortification is required of the cross-undertaking, Lewison LJ referred (at paragraph 89 of his judgment) to Tarasov v Nassif (unreported) 29 June 1994 where Dillon LJ stated:

“It is quite correct that normally fortification of the cross- undertaking is only required on a foreign plaintiff who has no assets here. That is quite correct in the sense that the majority of applications for fortification of a cross-undertaking are likely to be applications where the plaintiff is a foreign plaintiff with no assets here… The essential question is whether there are assets readily available to satisfy any liability under the cross- undertaking… The key question is whether there are assets within the jurisdiction…”

Lewison LJ emphasized, however, that that is not the end of the inquiry because in Tarasov v Nassif the court had proceeded to consider whether the defendants had shown any risk of loss and since they had not, there was no need for the fortification.

59.The requirements for an order for fortification, as set out in Harley Street Capital Ltd v Tchigirinski [2005] EWHC 2471 (Ch), are then referred to in Lewison LJ’s judgment:

“first, that the court has made an intelligent estimate of the likely amount of loss which might result to a defendant by reason of the injunction; secondly, that the applicant for fortification has shown a sufficient level of risk of loss to require fortification; and, thirdly, that the contemplated loss would be caused by the grant of the injunction.”

60.In the present case, the Defendants claim in their evidence filed for the substantive hearing of the Summons that Chen, who is resident outside Hong Kong, is heavily indebted not only to JI, but to other creditors under loans and judgments said to be for over RMB 2.4 billion.  She has also been declared a “person lacking credibility” by reason of her failure to satisfy more than 15 monetary judgments against her on the Mainland.  It has not been shown that Chen has any assets in Hong Kong.

61.Much of the evidence which has been adduced of the likely loss and damage that may be sustained by South Asia and JH, relate to their alleged possible damage if South Asia and JH should be restrained from raising capital, or making payments required for XS and for the continuation of development of the Project, or if the change of directors and senior management of South Asia/XS should be prohibited.  No such injunction has now been granted.

62.On its own evidence, JH is a special purpose vehicle for specific projects and to carry out investments.  However, the only investment which has been identified is its acquisition of the debt and security from JI, and there is no other evidence of JH’s activities, the nature of the deals or investments it has made and is likely to make, any indication of its investment patterns or asset portfolio, to show the likely damage that it may incur as a result of the injunction against its further dealings in the Subject Shares.  The assets of XS have apparently been frozen by the Mainland court, and any loss caused by JH’s inability to realize those assets would not be the result of the Disposal/Disposition Injunction.

63.On the entirety of all the evidence, I agree that Chen’s offer of HK$2.5 million by way of fortification of her cross-undertaking as to damages would be sufficient.  That amount has to be paid into Court within 21 days from the date of the handing down of this Decision. In the alternative to a payment into Court, Chen shall within the same period of 21 days cause a written guarantee in favor of JH, the 4^th to 6^th Defendants to be issued from a bank having a place of business in Hong Kong, such guarantee being in respect of any order the Court may make pursuant to the cross-undertaking as to damages, and Chen shall forthwith upon such issue cause a copy of the guarantee to be served on JH, and the 4^th to 6^th Defendants.

64.The costs of the application for fortification should be in the cause.

Mr Anson Wong, SC, Ms Rachel Lam, Ms Cherry Xu & Ms Tiffany  Chan, instructed by Wilkinson & Grist, for the plaintiff

Mr Alex Tang, instructed by Peter Yuen & Associates (name changed to Fangda Partners since 3 December 2018), for the 1^st defendant

The 2^nd defendant was not represented and did not appear

Mr Ambrose Ho, SC and Mr Gary Lam, instructed by Jones Day, for the 3^rd to 6^th defendants

Mr William Wong, SC, Mr Allen Lam and Ms Sharon Yuen, instructed by Ambrose Lam & Co, for the 7^th defendant

Attendance of the 8^th defendant was excused