General Appliance (Hong Kong) Ltd v. Friendship Investments Ltd and Others

HCA 1607/2018

[2019] HKCFI 631

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1607 OF 2018

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Before: Deputy High Court Judge Le Pichon in Chambers

Date of Hearing: 19 February 2019

Date of Decision: 8 March 2019

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D E C I S I O N

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1.There are two summonses before the court issued by the plaintiff General Appliance (Hong Kong) Limited (“GAHK”) against the defendants Friendship Investments Ltd (“D1”), Chan Yuk Ying (“D2”), Leung Siu Kuen (“D3”) and Chan Hon Hung (“D4”) (collectively “the defendants”) for (1) summary judgment; and (2) an interlocutory mandatory injunction. At the conclusion of the hearing, the decision was reserved which I now give.

The summonses

2.The Order 14 summons was taken out on 16 November 2018 in this action for an order that the defendants deliver up to GAHK all the title deeds and documents (“the title documents”) of the four properties on the 11^thfloor of Wah Shing Centre (“the properties”) registered in GAHK’s name.  Several months earlier, on 11 July 2018, GAHK had taken out a summons for an injunction (“the injunction summons”) for a similar delivery up order.

3.GAHK’s position is that if summary judgment were not entered,it would still be just and convenient to grant the mandatory injunction.

Background

4.GAHK is a wholly owned subsidiary of General Appliances (Holdings) Limited (“the Parent Company”) which holds 1,999,999 shares in GAHK, with the remaining 1 share held by Li Kam Ming (“Li”) in trust for the Parent Company.

5.GAHK is engaged in the business of importing and selling domestic electrical appliances and carried on business at the properties.

6.The unfair prejudice petition (HCCW 197/2018) presented by D1 on 19 July 2018 as amended on 20 September 2018 (“the petition”) against the current majority shareholders of the Parent Company informs the background to the incorporation of the Parent Company and GAHK and traces the shareholding structure.  In HCCW 197/2018, the defendants seek an order that the Parent Company be wound up on the just and equitable ground or, alternatively, a buy-out order.

The petition

7.The following matters are derived from the petition:

(1)  Before the incorporation of the Parent Company on 28 March 2001, D2, D3 and D4 (collectively “the individual defendants”) were responsible for the management of General Appliance Company Limited (“the Old Company”), the predecessor of the Parent Company/GAHK.

(2)  Prior to the dissolution of the Old Company, the individual defendants wished to acquire and continue the Old Company’s businesses and/or trades and reached an agreement and/or mutual understanding (“the Agreement”) with Chan Chak Sang Simon (“Simon Chan”), Li and Hau Shek Wah (“Hau”) to do so on the basis that the individual defendants would be vested with the day-to-day management of the Parent Company/GAHK and be entitled to participate in their management and affairs.

(3)  Accordingly, the Parent Company was incorporated as the holding vehicle of GAHK, the operating subsidiary.  The individual defendants held their 30% interest in the Parent Company through D1 and Simon Chan, Li and Hau held the remaining 70% interest through CHL Enterprises Ltd (“CHL”), a company which they wholly owned and controlled giving rise to a quasi-partnership between the two groups of shareholders founded on the mutual trust and confidence of the parties.

(4)  At all material times, pursuant to the Agreement, the defendants managed and operated the day-to-day business and affairs of both the Parent Company and GAHK while Li and Hau (representing CHL) were directors of the Parent Company.  It was against this background that the defendants took custody of the title documents of the properties.

(5)  In 2008 CHL’s shares in the Parent Company were transferred to (i) Li’s wife, To Chun Fun (“To”); (ii) Simon Chan’s wife, Yu Chui Man Yvonne (“Yu”); and (iii) Hau.  Then, on 8 December 2017, unbeknown to D1, Hau transferred his shareholding in the Parent Company to Nuevopak Manufacturing Limited (“Nuevopak”) (a company wholly-owned by Simon Chan).

(6)  Notwithstanding those changes, it is the defendants’ case that the Agreement remained binding on the majority shareholders of the Parent Company and GAHK, namely, To, Yu, Simon Chan/‌Nuevopak (collectively “the majority shareholders”) (as well as their predecessors, namely CHL, Hau and Li) with regard to the management and operation of the Parent Company and GAHK.

8.The current shareholding structure is summarised in the diagram below:

9.Hau ceased to be a director of GAHK on 30 November 2017. As noted above, a week later, he sold his shareholding indirectly (via Nuevopak) to Simon Chan who became a director of GAHK on 12 March 2018.  The current directors of GAHK are Li and Simon Chan.

10.Between February and the end of June 2018, the individual defendants were gradually removed from office and management of the affairs of the Parent Company/GAHK having held their respective positions/office from inception.

Procedural history

11.GAHK’s former solicitors first sought the return of the title documents from D1 and D2 on 31 May 2018.  When these were not forthcoming despite repeated requests, GAHK issued the writ in this action on 11 July 2018 seeking, inter alia, their return.  On the same day, GAHK took out the injunction summons, returnable on 20 July 2018.

12.The defendants filed an acknowledgement of service on 19 July 2018 and on the same day presented the petition.

13.On the return date of the injunction summons, upon the defendants’ undertaking to transfer the title documents to their solicitors pending final determination, it was adjourned for substantive argument and is one of the summonses before the court at this hearing. 

14.With a view to saving time and costs, the defendants proposed to GAHK that the title deeds be delivered on condition that GAHK/the majority shareholders should not dispose of the properties pending the resolution of the petition without the defendants’ consent.  There was no response.

15.On 9 November 2018, the defendants took out a summons in HCCW 197/2018 (“the winding-up injunction summons”) for an interim injunction to restrain the majority shareholders of the Parent Company and GAHK from disposing of the properties pending the determination of the petition.

16.The first hearing of the winding-up injunction summons came before DHCJ To on 30 November 2018.  At that hearing, the defendants sought an order that it be adjourned to be heard together with the injunction summons and in so far as such a direction is not made, for an interim- interim injunction pending the substantive hearing of the Order 14 summons.

17.The judge refused the adjournment order sought. He considered that the winding-up injunction summons had the closest nexus with the petition rather than this action and should be adjourned to the Companies Judge and, as regards the interim-interim injunction, the judge saw no urgency to warrant its grant as GAHK was in no position to dispose of the properties in view of the undertaking.

18.The substantive hearing of the winding-up injunction summons is due to be heard on 19 June 2019.

19.On 10 and 14 December 2018, the defendants proposed to the majority shareholders/GAHK that the title deeds be returned upon condition that they should not dispose of the properties pending the substantive hearingof the winding-up injunction summons without the defendants’ consent.  That proposal was rejected.

The Order 14 summons

20.In this action, GAHK is seeking the return of the title documents to which, prima facie, it is entitled as a matter of law being the registered owner of the properties.

21.When the action first commenced, the defendants raised a defence based on matters that found the petition including the Agreement said to have been reached in May 2001 between the defendants (the minority shareholders) and the majority shareholders with regard to the management and operation of the Parent Company/GAHK.  A material term of the Agreement was that the defendants were to have a role or be involved in the management and affairs of the Parent Company/GAHK, vested with the powers to handle and control their day-to-day business and affairs. It was further alleged that the majority shareholders knew and agreed that D1 should hold custody of the title documents at the time the mortgage of the properties to the Bank of China (“BOC”) was discharged in 2012.

22.Mr Anthony Chan, counsel for GAHK, criticised thedefendants’ evidence as being devoid of particulars and without any objective evidence in support.  But as the defendants now have no objection to the title documents being handed over, subject to a condition that it only takes place “after the final determination” of the winding-up injunction application, GAHK submitted that the defendants’ position set out in their written skeleton for this hearing is a “concession” by the defendants that they have no defence to the claim, that their defence is unarguable and, in effect, taking a “U-turn” in their defence to the summary judgment application.

23.It was further submitted that the petition is not relevant and that it is illogical for the defendants to say that there is no defence to this action but at the same time maintaining that they have a good case on the winding-up injunction application since the evidence in support is the same.

24.Thus, GAHK submitted that the only dispute between the parties now turns on the terms of the order, namely, whether there is any legal basis for the delay sought in the delivery up of the documents.

25.Mr Alan Kwong who appeared for the defendants submitted that the proposal was not a concession that the defendants do not have a defence but reflected a practical view taken by the defendants who have been ousted from management (wrongfully, in their view).  He submitted that the real dispute is not just about the title documents but whether the majority shareholders can cause GAHK to sell the properties when the petition is pending resolution.

26.In my view, the petition remains extant and those proceedings will take their course.  What the defendants are seeking to do is to put the issue of custody of title documents in context, as part of a much broader ongoing dispute between the two camps of shareholders of GAHK.

27.This action and the petition have generated interlocutory applications.  Apart from the injunction summons and the winding-up injunction summons, there are other applications/proceedings between the two camps of shareholders: (a) HCA 1148/2018 commenced on 17 May 2018 by GAHK against D2 and D3 in respect of various alleged misappropriations.; and (b) a strike out summons taken out by GAHK (the 7^threspondent to the petition) on 27 November 2018 in HCCW 197/2018 under Order 18, rule 19.

28.The defendants who have managed GAHK for 16 years (since inception until 2018) and have a 30% stake via the Parent Company in GAHK consider that they have been wrongfully and without justification removed from office and excluded from participation in the affairs of GAHK.Not unnaturally, they are apprehensive and suspicious of the intentions of the majority shareholders.

29.The properties constitute the principal or major asset of GAHK.  The defendants have adduced evidence to the effect that various potential purchasers have visited the properties and that officers of BOC have been invited to provide a valuation of the properties and fear that once the title documents are returned to GAHK, the majority shareholders will sell the properties at a gross undervalue or may take the proceeds for their own benefit in preference to that of the minority shareholders.  GAHK’s conduct in relation to D2’s entitlement to GAHK’s MPF contribution was highlighted as a reason for believing that the majority shareholders are intent on injuring the interests of the defendants.

Whether the case management powers should be exercised

30.The defendants submitted that the court has wide powers under Order 1B, rule (3)(a) to impose a condition that the property is not to be sold pending the determination of the winding-up injunction summons (“the condition”). The court was referred to its case management powers under Order 1B, rule 1 which, in pertinent part, provides:

“ (2) Except where these rules provide otherwise, the Court may by order—

(e) stay the whole or part of any … judgment either generally or until the specified date or event;

…

(l) take any other step or make any other order for the purpose of managing the case and furthering the underlying objectives set out in Order 1A.

(3) When the Court makes an order, it may—

(a) make it subject to conditions …”

31.It was further submitted that once the title documents are returned to GAHK, the majority shareholders would be in a position to dispose of the properties.  The defendants cannot avail themselves of the protection afforded by section 182 (relating to validation orders) since any sale would be by GAHK and not the Parent Company.  Moreover, absent the condition, the winding-up injunction application could be stifled if the properties were sold in the interim.

32.As I understand it, the reasons underlying the defendants’ request for the imposition of the condition are two-fold: (1) to prevent apprehended damage or injury (viz sale as a gross undervalue and/or dissipation of the proceeds) from occurring, and (2) to avoid further proliferation of litigation between the two camps.

33.As to the first, while one can readily comprehend the defendants’ disquiet and suspicions concerning the actions of the majority shareholders, it is quite another matter to say that a sale would be at a (gross) undervalue.  It is not easy to comprehend why the majority shareholders would do so when they themselves have a 70% interest in those assets and consequently would have to bear 70% of the loss.

34.A sale is not the same thing as dissipation or misappropriation.  Dissipation/misappropriation involves misapplication of the proceeds and that has to be supported by evidence.  As matters stand, one can only speculate as to what may happen in the future.

35.It is apparent from §27 above that the dispute between the two camps has generated a great deal of litigation.  In so far as it is suggested that the condition would avoid further proliferation of litigation which would be in keeping with and promote the underlying objectives of Order 1A, that is also premised on the majority shareholders acting improperly once the title documents are returned that would prompt and ground further litigation.

36.In my view, an appreciable risk of misapplication and/or misappropriation has to be shown for such an inference to be drawn and to warrant the imposition of the condition that would constrain the exercise of full ownership rights, albeit on a temporary basis.

37.It was said that the condition does not prevent a sale in the interim,only that it would require the prior consent of the minority shareholders. Given the relationship between the two camps since the beginning of 2018 and the inevitable ill-will created by litigation, it is improbable that the opposing camps would be ad idem on the appropriate sale price. That is wishful thinking.

38.I have come to the conclusion not without some hesitation that no sufficient reasons have been shown to warrant the exercise of the case management powers conferred on the court to impose the condition.

Order

39.Accordingly, there is to be an order that the defendants to deliver up the title documents to GAHK within 7 days of this order.  For this action, costs should follow the event: there is to be an order nisi of costs in favour of GAHK with certificate for two counsel.

Costs of the mandatory injunction application

40.Those costs are reserved. 

Mr Anthony Chan and Mr Roger Phang, instructed by Cheung & Choy, for the plaintiff

Mr Alan Kwong and Mr Michael Ng, instructed by L & L Lawyers, for the 1^st to 4^th defendants