Well Thrive Ltd v. High West Capital Partners, Llc

HCMP 1946/2019

[2020] HKCFI 500

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1946 OF 2019

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Before: Deputy High Court Judge MK Liu in Chambers

Date of the Plaintiff’s Submissions: 5 March 2020 & 11 March 2020

Date of the Defendant’s Submissions: 9 March 2020

Date of Decision: 23 March 2020

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DECISION

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1.By an inter partes summons dated 29 October 2019 (“the summons”), the plaintiff (“P”) seeks an order that the ex parte injunction granted on 28 October 2019 (“the injunction”) which, inter alia, restrains the defendant (“D”) from dealing with P’s shares in IntelliCentrics Global Holdings Ltd (“IntelliCentrics”) pledged[1] to D (“the Shares”) be continued. The costs order sought in the summons is that costs of and occasioned by the summons be reserved.

2.The parties have agreed that the summons be disposed of on paper without an oral hearing.  Both parties have provided full written submissions to the court.  I am grateful that the parties have agreed to adopt this approach, so that the summons can be disposed of without delay and the oral hearing time can be saved.

BACKGROUND FACTS

3.I would first set out the background facts which are not in dispute.

4.P is a limited company incorporated in Taiwan and serves as an investment holding company.  D is a company with limited liability incorporated in Saint Kitts and Nevis.  D is not registered as a non-Hong Kong company under the Companies Ordinance.

5.After about 2-month’s discussion with Yuanta Securities (Hong Kong) Company Limited (“Yuanta Securities”), P succeeded in acquiring 8,437,500 shares in IntelliCentrics in August 2019.

6.With a view to securing funds to acquire more shares in IntelliCentrics, P entered into two agreements dated 7 August 2019 with D:

(1)  By a Master Loan Agreement (“the MLA”), D agreed to extend a loan up to 55% of the current “Fair Market Value” of 23,467,636 shares of IntelliCentrics to P for a term of 3 years at 7% per annum.

(2)  By a Master Pledge Agreement (“the MPA”), P agreed to “… pledges and assigns to the Lender, and hereby transfers all rights, title, ownership and interest in… 23,467,636 shares of IntelliCentrics…”[2]

7.Subsequently, P opened a securities account of number 100266 (“the Account”) with Look’s Securities Limited (“Look’s Securities”) and transferred into the same 8,000,000 IntelliCentrics shares (“the Shares”) out of the block of shares previously acquired.  At about the same time, P, D and Look’s Securities executed a Collateral Management Agreement (“the CMA”) and adding additional securities accounts which, among other matters, designated the Account as securities under the MLA.

8.On five separate occasions respectively on 4, 10, 16, 17 and 28 October 2019, D advanced five tranches of loans to P under the MLA in the total “loan principal amount” of HK$7,251,970 through the Account.

9.Between 7 October 2019 and 28 October 2019, without P’s consent, D caused 2,310,000 IntelliCentrics shares to be transferred from the Account to an account of D with Look’s Securities (“D’s Account”), of which 2,181,500 shares were sold in batches between 7 October and 28 October 2019, generating net proceeds in the sum of HK$11,677,664.

10.On 28 October 2019, P made an ex parte application and obtained the injunction.  The injunction was continued by an order dated 1 November 2019 until the determination of the summons or a further order made by the court.

11.On 27 December 2019, P commenced arbitration against D in the Hong Kong International Arbitration Centre (case number HKIAC/A19270) by issuing a Notice of Arbitration.

THE ISSUES

12.There is no dispute that the court may grant an injunction as an interim relief pursuant to s.45(2) of the Arbitration Ordinance.

13.Mr Christopher Chain (together with Mr Lai Chun Ho), counsel for D, have in their written submissions clearly set out that D’s opposition to the summons is based upon the following[3]:

(1)  On a proper interpretation of the MLA, MPA, and CMA (collectively “the Contracts”), P simply has no proprietary interest in the Shares whatsoever, even on a serious issue to be tried threshold.

(2)  There is material non-disclosure on law by P in the ex parte application.

(3)  On a proper interpretation of the Contracts and application of “adequacy of damages” principles, damages are clearly an adequate remedy for P in the present case.

14.Naturally, Mr Ken TC Lee, counsel for P, does not agree to these.  I would examine these matters in turn in the paragraphs below.

SERIOUS ISSUE TO BE TRIED

15.It is well established that “serious issue to be tried” is not a steep hurdle.  All that has to be shown is that the claimant has prospects of success which in substance and reality exist, and odds against success do not defeat him.  As long as there is a serious issue, it matters not whether the court thinks that the chances of success at trial is 90% or 20%[4].  If the opposing party seeks to show that there is no serious issue to be tried, the threshold is high, as it would be necessary to demonstrate that the claim should be struck out[5].

16.Counsel for D submits that as a matter of law, shares cannot be pledged.  They argue that under the terms of the Contracts, the Shares are not held by D under a mortgage or a charge.  The Shares in fact have been transferred to D by the Contracts and the transaction is an outright transfer, subject to a repurchase obligation committed by P, ie a “repo”.  The true meaning of a repo has been explained by Blair J in Första AP-Fonden v Bank of New York Mellon[6], in which the learned judge said:

“In simple terms, a repo is a transaction in which one party sells an asset (such as fixed-income securities) to another party at one price, and commits to repurchase the asset at a different price in the future. Although a repo is structured legally as a sale and repurchase of the securities, it behaves economically like a secured loan, with the securities acting as collateral.”

17.Counsel for P submits that while shares as chose in action cannot be pledged, a share “pledge” may nevertheless take effect as a mortgage or charge.  The crux here is whether D enjoys only security interest or absolute ownership in the Shares.  Counsel for P argues that the answer must be D is having security interest in the Shares only.

18.Both sides have referred me to various provisions in the Contracts and various cases.  I have to say that both sides have put forward respectable arguments in support of their respective cases.  With no disrespect to counsel, I am not prepared to recite all the arguments put forward by counsel here.  It would be sufficient for me to say that having considered all the arguments and cases, I cannot say that P has no prospect of success in arguing that D is having security interests in the Shares only.  As to the true nature of D’s interest in the Shares, I am of the view that both sides have put forward arguable cases.  In the circumstances, in my judgment, there is a serious issue to be tried.  I would say no more on the merits of the parties’ respective cases, as the dispute between the parties would be resolved by an arbitral tribunal in due course.

MATERIAL NON-DISCLOSURE ON LAW

19.Having read the papers in the ex parte application, I am of the view that there is no material non-disclosure on facts by P in the ex parte application.  P did draw the ex parte judge’s attention to some clauses in the Contracts, and P also pointed out to the ex parte judge that D might rely upon those clauses to argue that D had absolute rights and interest in the Shares.

20.Counsel for D do not suggest that there has been any material non-disclosure by P on facts in the ex parte application.  Counsel for D argue that there has been material non-disclosure on law by P in the ex parte application, for P has failed to draw the ex parte judge’s attention to various authorities mentioned in D’s written submissions which, in counsel for D’s submissions, support that the transaction created by the Contracts is a repo and not a mortgage or a charge.

21.In relation to material non-disclosure on law, in 張才奎所託管中國山水投資有限公司股份相關員工 and Another v 張才奎 and Another[7], G Lam J said:

“113. …… And I accept that the duty of disclosure extends not only to facts but potentially also to matters of law: East Asia Satellite Television (Holdings) Ltd v New Cotai LLC [2011] 3 HKLRD 734, §82. I take note, however, that the submissions by the plaintiffs’ counsel (who was neither Ms Eu nor Mr MC Law) were made in an urgent application for substituted service, because there was then a perceived need to obtain an injunction urgently …… Mr Jat did not suggest there was any intention on the part of the plaintiffs’ counsel to mislead. Depending on the circumstances, there can be a real difference between omission of a material fact which must have been well known to the applicant, and the failure to cite, for example, an unreported case arguably relevant to the legal submissions. It would not be right to gauge whether the ex parte procedure has been abused by measuring that application against the very full argument and citation of authorities before me in the inter partes hearing. …… I have, after full argument, decided that the plaintiffs are essentially correct on the question of the governing law in their submissions to the Master. In these circumstances, I do not think that in relation to the first three matters there was any such non-disclosure as to warrant an order setting aside leave.”

22.There is no suggestion that counsel for P has done anything to deliberately mislead the court in the ex parte application.  The ex parte application was made on an urgent basis, ie shortly after discovering D had transferred some shares out from the Account.  Like what G Lam J has said in the Zhang case, it would not be right to gauge whether the ex parte procedure has been abused by measuring that application against the very full argument and citation of authorities before me in this inter partes application.  Further, having considered the authorities cited by counsel for D, my view is that there is still a serious issue to be tried.  Those authorities cannot be said as having a material impact on the outcome of the injunction application.  Taking all these into account, in my view, there is no material non-disclosure on law by P in the ex parte application.

DAMAGES AS ADEQUATE REMEDY?

23.It is trite that if damages 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 the interlocutory stage[8].

24.Counsel for D submit that P has committed a material non-disclosure on law by failing to draw the ex parte judge’s attention to this principle.  With respect, I do not agree. In P’s written submissions placed before the ex parte judge, counsel for P at [25] made submissions on why damages would not be adequate to compensate P for the losses P would suffer as a result of D’s breach of the Contracts.  Clearly, counsel for P did draw the ex parte judge’s attention to this principle.

25.Counsel for P submits:

(1)  Despite IntelliCentrics being a publicly listed company, the weekly trading volume of IntelliCentrics has often been below 1 million shares since March 2019 and has remained so after the injunction was granted in October 2019.  This explained why it had taken P much effort and two-month’s discussion through Yuanta Securities to secure some 8 million shares.

(2)  Further, the main shareholders of IntelliCentrics hold a total of about 83.27% of the issued shares.  No evidence has been produced to the effect that any of them may release a substantial part of their shareholding or that trading in IntelliCentrics shares may increase in the foreseeable future.

(3)  In the circumstances, should the injunction be refused, it would be difficult for P to acquire any IntelliCentrics shares in the market up to the level as expected by P.

26.Counsel for D do not challenge the matters set out in [25] above.  Counsel for D however submit that under the Contracts, D can simply make monetary payment to P, as an alternative to returning the same type of shares to P.  There is no suggestion that D would be unable to make its monetary payment obligation.  P therefore cannot legitimately argue that damages are an inadequate remedy.

27.Counsel for P submits that under the Contracts, D does not have an option to make monetary payment and not to return the shares to P.

28.As to whether D may simply make monetary payment and not to return the shares to P under the Contracts, I am of the view that this is an arguable issue.  However, the question before me is if there is no injunction and P is the successful party at the end in the arbitral proceedings, whether the loss and damage suffered by P as a result of D’s breach of the Contracts can be adequately compensated by damages.  In my view, if P ultimately entirely succeeds in the arbitral proceedings (including P’s construction of the Contracts in every aspect is held to be correct by the arbitral tribunal), by reason of the matters set out in [25] above, damages would not be an adequate remedy to P.

DISPOSITION

29.For the reasons set out above, I make an order that the injunction be continued until the disposal of the arbitration in HKIAC/A19270 or until a further order made by the court.

30.P seeks costs.  However, the costs order proposed in the summons is that costs of and occasioned by the application be reserved.  There has never been an application to amend the costs order sought in the summons.  Further, although I have make an order to continue the injunction, which party would ultimately succeed in the arbitral proceedings is not yet known.  Taking all these into account, I would order that costs of the summons be reserved.  With no disrespect to counsel for D, I am not prepared to grant a certificate for 2 counsel.  No doubt that each side has put forward detailed and respectable submissions.  However, in my view, the complexity of the application made by the summons does not allow me to give a certificate for 2 counsel.   

31.Lastly, it remains for me to thank counsel for the assistance rendered to the court.

Mr Ken TC Lee, instructed by Yu, Chan & Yeung, for the plaintiff

Mr Christopher Chain and Mr Lai Chun Ho, instructed by Deacons, for the defendant