Lucky Sun Development Ltd and Another v. Gainsmate International Ltd and Others
Read the full judgment text of HCCT 12/2007 on BabelCite. This 高等法院原訟法庭 judgment was delivered on 2 October 2007 before Deputy High Court Judge L. Chan.
In this construction and arbitration proceeding, the plaintiffs and defendants disputed the payment currency and completion of a share transfer in a Hong Kong company owning a Mainland enterprise. The defendants obtained a Mainland freezing order using the shares as security, which the plaintiffs sought to restrain by ex parte injunction in Hong Kong. The court found material non-disclosure by plaintiffs regarding potential tax liability which justified the defendants’ refusal to transfer shares and initiation of Mainland proceedings. The ex parte injunction was improperly granted without disclosure of mandatory and anti-suit injunction principles or urgency. The injunction was discharged except for an order securing release of shares from use as security. The tax liability and ownership issues were serious questions to be tried, likely for arbitration resolution. Costs were awarded to defendants. The case illustrates principles governing ex parte disclosure, anti-suit injunctions, and interplay between Hong Kong and Mainland legal actions in share transactions.
Legal issues: Material non-disclosure affecting ex parte injunction · Nature and justification of the ex parte injunction · Whether plaintiffs’ potential tax liability was a live issue at the time of the ex parte application · Disclosure of relationship between plaintiffs and Hebei Sunco · Disclosure of Hebei Sunco’s defense in Mainland Proceedings · Propriety of interlocutory injunction against 3rd defendant without claim
Outcome: Ex parte injunction discharged except order requiring release of Huigu shares which was re-granted.
Cited by 1 case · Cites 5 cases
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HCCT 12/2007 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE CONSTRUCTION AND ARBITRATION PROCEEDINGS NO. 12 OF 2007 ______________________
______________________ BETWEEN
______________________ Before : Deputy High Court Judge L. Chan in Chambers Dates of Hearing : 14–17 May 2007 Date of Decision : 2 October 2007 ______________________ D E C I S I O N ______________________ 1.This is an application by the defendants to discharge an ex parte injunction. BACKGROUND 2.The 1st and 2nd defendants are BVI companies. They are shareholders and directors of the 3rd defendant. The 3rd defendant owns the shares of and in a wholly foreign owned enterprise set up in the Mainland. It is called Shijiazhuang Huigu Ke Ji Cheng Kai Fa Company Limited (石家庄慧谷科技城開發有限公司) (hereinafter called “Huigu”). 3.The 1st and 2nd defendants have entered into a number of agreements in 2004 with the plaintiffs agreeing to sell them the shares of the 3rd defendant. The plaintiffs have paid them the purchase price in Renminbi for the shares and have taken over the management of Huigu. However, the 1st and 2nd defendants were entitled under the agreements to ask for payment to be made in Hong Kong dollars. Despite having handed over the management of Huigu to the plaintiffs, they are still the registered shareholders of the 3rd defendant. The transfer agreements have not been completed. 4.The plaintiffs have only raised sufficient Hong Kong dollars in October 2006 to pay the 1st and 2nd defendants. They then offered to pay the 1st and 2nd defendants Hong Kong dollars in exchange for the Renminbi that had been paid previously. By then, the 1st and 2nd defendants were unwilling to accept the Hong Kong dollars. They also did not agree to complete the transaction by transferring the 3rd defendant’s shares to the plaintiffs. This dispute has been referred by the plaintiffs to arbitration in Hong Kong on 4 January 2007 (hereinafter called “the Hong Kong Arbitration”). 5.Before the plaintiffs had raised sufficient Hong Kong dollars, the 1st and 2nd defendants had in August 2006 already procured the 3rd defendant to commence legal proceedings in the Intermediate People’s Court of Shijiazhuang City, Hebei Province (hereinafter called “the Mainland Court”) against Huigu. In these proceedings, the 3rd defendant also sued one Hebei Sunco Property Development Company Limited (河北順馳房地產開發有限公司) (hereinafter called “Hebei Sunco”), one Tian Baodong, the former general manager of Huigu and one Jiao Shouheng, the current general manager of Huigu. These proceedings are hereinafter called “the Mainland Proceedings”. Messrs Tian and Jiao had been deployed by the plaintiffs’ parent company to work in Huigu. Hebei Sunco is a member of the group of companies to which the plaintiffs belong. 6.The 1st and 2nd defendants through the 3rd defendant alleged in the Mainland Proceedings that Huigu had transferred more than RMB¥300 million to Hebei Sunco. The 3rd defendant has obtained from the Mainland Court a freezing order covering RMB¥150 million worth of assets of Hebei Sunco. In seeking the freezing order, the 3rd defendant has used its shares in Huigu (hereinafter called “the Huigu shares”) as security. THE EX PARTE APPLICATION 7.The ex parte injunction as applied for was mainly for stopping the Mainland Proceedings and undoing the freezing order. The application was supported by an affirmation of one Xu Huijun of the plaintiffs. Mr Xu described the background of the plaintiffs, the defendants and Huigu. He also referred to the business of Huigu which was a real property development project in Shijazhuang City, Hebei province. 8.He referred to various agreements made between the parties. The essential ones are:
9.He cited various clauses from the Framework Agreement, the Transfer Agreement, the 1st memorandum and some other agreements. He said that the plaintiffs had paid the 1st and 2nd defendants RMB¥597.8384 million being the total sum payable under the agreements. He then referred to the handing over by the 1st and 2nd defendants of the management of Huigu to the plaintiffs on 6 April 2007. He said despite full payment of the purchase price, the 1st and 2nd defendants had failed to transfer the 3rd defendant’s shares to the plaintiffs. He further commented that the 1st and 2nd defendants had, instead of transferring the shares of the 3rd defendant to the plaintiffs, asked the plaintiffs to pay the share price in Hong Kong dollars in exchange of the Renminbi already paid. He referred to the plaintiffs’ reply that the condition for paying Hong Kong dollars had not materialized. He however did not say a word about the potential tax liability of the plaintiffs as will be discussed below. This potential liability lies at the core of the dispute between the parties. 10.Mr Xu then referred to the 1st and 2nd defendants’ attempt to change the directors of Huigu. He also referred to the Mainland Proceedings, the Freezing Order and the use of the Huigu shares as security. He then referred to Hebei Sunco’s attempt to discharge or vary the Freezing Order, but failed. The application for review also met with the same fate. A further application by another member in the group of Sunco China Holdings Limited (“Sunco China Holdings”) for provision of other real property to replace the assets of Hebei Sunco also failed. Hebei Sunco also informally complained to the Courts of higher level but the complaints were not accepted. 11.Mr Xu then referred to the plaintiffs’ offer in late October 2006 to pay the 1st and 2nd defendants Hong Kong dollars for the purchase of the 3rd defendant’s shares and the subsequent correspondence leading to the plaintiffs’ issue of the notice of arbitration on 4 January 2007. 12.He then referred to the loss caused to the plaintiffs by the Freezing Order and the Mainland Proceedings. He said the Freezing Order had severely impeded the operation of Hebei Sunco, many buyers of properties from Hebei Sunco have cancelled their purchases and Hebei Sunco was suffering loss and damage. He further said that if the 3rd defendant should lose the Mainland Proceedings, it would be liable for the costs of those proceedings and had to pay compensation to Hebei Sunco. In that event, the value of the 3rd defendant’s shares would be diminished. Mr Xu also complained about the 1st defendant’s use of the Huigu shares as security without the plaintiffs’ consent. THE EX PARTE ORDER 13.The ex parte injunction order was granted by Deputy Judge D Pang on 12 February 2007. It required the 1st to 3rd defendants to secure the release of the Huigu shares from being used as security for the freezing order in the Mainland Proceedings within five days from 12 February 2007. It further enjoined the defendants from dealing with the shares, assets or business of Huigu, exercising voting rights as shareholders of Huigu or of the 3rd defendant, taking any step to remove the directors of Huigu, intermeddling with the business or management of Huigu, or continuing with the Mainland Proceedings against Huigu, Hebei Sunco and Messrs Tian and Jiao until the conclusion of the Hong Kong Arbitration. THE AFFIRMATIONS IN OPPOSITION 14.The defendants have filed an affirmation by one Li Cheng Jiang on 30 March 2007. It contained a number of grounds in support of the application to discharge. They are:
15.Mr Li emphasised the importance of having the purchase price for the 3rd defendant’s shares to be paid in Hong Kong dollars. He said the plaintiffs’ obligation to pay the 1st and 2nd defendants Hong Kong dollars did not depend on their success in raising funds. Alternatively, they should have raised the necessary funding and to effect payment within a reasonable time. A reasonable time should not have gone beyond 1 December 2004. He contended that if the plaintiffs should fail to pay Hong Kong dollars, the Framework Agreement would require them to pay the tax for the transaction to the Mainland tax authority. The tax liability arose out of their payment for the 3rd defendant’s shares in Renminbi and not in Hong Kong dollars. He further contended that the plaintiffs would only be treated as having complied with the contractual obligations after they had paid the tax. 16.He also said the plaintiffs had by their letters indicated that they were not prepared to pay in Hong Kong dollars. As a result, the 1st and 2nd defendants applied the Renminbi they received from the plaintiffs in their normal course of business. They were thus unable to return the same to the plaintiffs within a short time. Mr Li reasoned that because of the plaintiffs’ representation of inability to pay Hong Kong dollars and the 1st and 2nd defendants’ reliance on it, the plaintiffs were estopped from insisting that the 1st and 2nd defendants should accept payment in Hong Kong dollars. He also referred to the contractual documents and argued that the 1st and 2nd defendants had the right to demand Hong Kong dollars right after the signing of the share transfer agreement in early 2004. He also referred to later discussions for changing the transaction from a foreign one to a local one. 17.He then suddenly and for the first time asserted that the 1st and 2nd defendants had elected to accept Renminbi in the transaction, but they were still willing to assist the plaintiffs on how to reduce their tax liability. He did not say when the election was made. This assertion also does not appear to sit well with the stance of the 1st and 2nd defendants as shown in the correspondence in November to December 2006 as will be referred to below. However, he immediately changed his stance by saying that the 1st and 2nd defendants had decided in 2006 not to wait for the Hong Kong dollars and had proceeded to spend the Renminbi. It was for this reason that they could not return the Renminbi in full within a short time. If there was an election to accept Renminbi, I do not see why the 1st and 2nd defendants should consider the need to return the Renminbi at all. 18.Mr Li then alleged certain mismanagement of Huigu by the plaintiffs which resulted in a breach of contract with a third party. I do not see the relevance of this vis-à-vis the transfer of shares, the payment for the 3rd defendant’s shares in Hong Kong dollars or the commencement of the Mainland Proceedings. 19.Mr Li then referred to the audited report of Huigu which showed an account receivable from Hebei Sunco at about RMB¥308 million. He explained the need for the 1st and 2nd defendants to start the Mainland Proceedings. He said that the 1st and 2nd defendants were directors of the 3rd defendant and had a fiduciary duty to protect the interest of the 3rd defendant. The 3rd defendant as the sole shareholder of Huigu was also entitled to take action to protect Huigu. 20.Since the plaintiffs, Sunco Development and Hebei Sunco all belonged to the same group, the 1st and 2nd defendants worried that the value of Huigu might be depleted and the development project could not be completed for lack of funds. Since the plaintiffs had failed to pay the substantial Mainland tax, the 1st and 2nd defendants saw a great risk that the plaintiffs may simply default on the Framework and Transfer Agreements and not complete the sale of the 3rd defendant’s shares. They might just deplete the value of Huigu and default. In that event, the 1st and 2nd defendants would be left with the 3rd defendant, Huigu and its development project. But then Huigu and the project would be in tatters owing to the plaintiffs’ mismanagement for three years. The value of Huigu and hence that of the 3rd defendant would be substantially depleted because of the wrongful transfer out of funds. 21.Mr Li further said that according to the tax opinion obtained by the 1st and 2nd defendants, the Mainland tax could be at 20% or 33% of the Renminbi received by the 1st and 2nd defendants. The figures as assessed would be RMB¥120 million or RMB¥200 million. But he did not produce any tax opinion to back up what he said. He also said for the 1st time that since the Renminbi had been paid to the 1st and 2nd defendants for a long time and not exchanged into Hong Kong dollars, the Mainland tax would become payable despite the plaintiffs’ offer in late October 2006 to pay the Hong Kong dollars. However, he did not explain why such would be the case. Nor did he refer to any Mainland tax authority or statutory provision to back up his assertions. This also did not tally with what had been said by the 1st and 2nd defendants in their letters to the plaintiffs from November to December 2006. 22.Mr Li also said that the defendants in the Mainland Proceedings had not taken any step to defend those proceedings. No legitimate reason had been advanced to justify the transfer of assets from Huigu to Hebei Sunco. 23.In addition, he alleged that the plaintiffs had failed to disclose to the ex parte Judge certain events that took place between February and May 2004. I plainly cannot see how these events would be material to the grant of the injunction. These matters had nothing to do with the Mainland Proceedings or the Freezing Order. 24.Finally, Mr Li attacked the plaintiffs’ undertaking as to damages because the plaintiffs are BVI companies and their financial status is unknown. 25.The 1st and 2nd defendants have also filed an affirmation by its Chinese lawyer Wang Fei. Mr Wang said that he had tried to obtain a professional opinion on the amount of tax payable by reason of the plaintiffs payment of Renminbi in the Mainland to the associated companies of the 1st and 2nd defendants for the purchase of the 3rd defendant’s shares. But he could not get it even from leading tax experts. 26.He then produced a letter dated 9 May 2007 from the Hebei Province National Taxation Bureau which says that the price for transfer of shares owned by foreign enterprise less the costs of the shares was subject to tax. There was no mention that such tax would only be payable if the price was paid in Renminbi in the Mainland or that the tax would be exempted if the payment was made in foreign or Hong Kong currency and effected outside the Mainland. Indeed, it would sound unusual if there should be such exemption. 27.Based on the letter from Taxation Bureau, Mr Li calculated the amount of foreign companies profit tax at RMB¥111.7 million. Since the plaintiffs had paid the Renminbi to the associated companies of the 1st and 2nd defendants, he said the amount of tax payable would become RMB¥198 million. 28.Mr Wang went on to say that if the payment for the 3rd defendant’s shares was effected in the Mainland, the tax would be payable regardless of whether the payment was in Renminbi or in Hong Kong dollars. However, if the plaintiffs should pay for the shares in Hong Kong dollars and effect the payment in Hong Kong, then no tax would be payable. He gave the reason that the shares transacted are those of a Hong Kong company. However, regardless of the place and currency of payment, the shares transacted are still those of a Hong Kong company. I do not understand why tax would be chargeable if the price is paid inside the Mainland but not chargeable if it is paid in Hong Kong in Hong Kong dollars. This is indeed a curious situation, but Mr Wang, as a lawyer, did not provide any tax statute or expert opinion to back up what he said. AFFIRMATION IN REPLY 29.The plaintiffs also filed a 2nd affirmation by Xu Huijun to oppose the discharge application. He said that the 1st and 2nd defendants had in the 1st hearing of the Hong Kong Arbitration on 13 April 2007 confirmed their election to be paid in Renminbi. He also contended that a proper interpretation of the relevant clause in the Framework Agreement would result in no tax liability to the plaintiffs. He also said that the Mainland Proceedings had no basis. Regarding the relationship between the plaintiffs and Hebei Sunco, he confirmed that Hebei Sunco and the plaintiffs are controlled by the same people although Hebei Sunco is a separate legal entity. ANALYSES AND DECISIONS 30.I now deal with the submissions of both sides. The first ground of attack by the defendants is material non-disclosure. Mr Chan, leading counsel for the defendants, submitted that the plaintiffs were guilty of material non-disclosure of the issue of tax liability. Counsel said that such non-disclosure created a gross distortion to the picture as presented to the ex parte judge and the failure to address the tax issue was inexcusable and unforgivable. Counsel also said that such failure showed that the plaintiffs had made no attempt to be frank or fair and paid no regard to what might have been said in favour of the defence. 31.In the light of this submission, it is necessary to look at the contractual documents to understand what is this tax issue, whether it was a live issue between the parties at the time of the ex parte application and whether it should have been referred to by the plaintiffs at the ex parte application. Contractual provisions 32.I have been asked to consider a number of clauses in the Framework Agreement, the Transfer Agreement and the 1st Memorandum so as to understand this tax issue. The following clauses in the Framework Agreement are relevant:
(Clause 5.1 provides that the consideration for the transfer of the 3rd defendant’s shares would be provisionally calculated in Renminbi and would be finally settled by Sunco Development in Hong Kong dollars.)
(Clause 5.4 provides for payments to be made in four stages all in Renminbi. The four stages and the respective amounts payable are defined in sub-clauses 5.4.1 to 5.4.4.)
(The proviso to clause 5.4 stipulates that after the making of the Transfer Agreement and the commencement of joint management, the 1st and 2nd defendants would assist Sunco Development to raise finance from the outsidein the name of Huigu. If Huigu should succeed in raising finance, then Sunco Development would allow its related company to have financial transaction with Huigu. Huigu would transfer with priority the finance as raised to the related company and the related company would on behalf of Sunco Development pay the 1st and 2nd defendants the consideration for the share transfer.)
(By clause 5.6, Sunco Development confirms that the 3rd defendant is a company incorporated and lawfully exists in Hong Kong. Therefore Sunco Development should pay Hong Kong dollars in Hong Kong for the whole of the share purchase price. However, the 1st and 2nd defendants, after considering that Sunco Development at the time of signing the agreement did not have enough Hong Kong dollars in Hong Kong to pay, agree to have the price provisionally calculated in Renminbi and for Sunco Development to pay the 1st and 2nd defendants in the Mainland the share transfer price provisionally in Renminbi. In the light of the plan of Sunco Development or its related company to be listed in the Hong Kong Stock Exchange in 2004, and Sunco Development is at present diligently raising funds in Hong Kong through means other than listing, the 1st and 2nd defendants have also assisted Sunco Development all along to raise funds in Hong Kong, therefore the 1st and 2nd defendants will, at anytime after the signing of this agreement and Sunco Development having successfully raised the finance, all have the power to demand Sunco Development to pay the whole or part of the share transfer price in Hong Kong dollars. When the 1st and 2nd defendants demand Sunco Development to pay the share transfer price in Hong Kong dollars, Sunco Development should agree to do so. If at the time when the 1st and 2nd defendants make the demand, Sunco Development should have already paid the whole or part of the share transfer price in Renminbi, then they will return to Sunco Development the Renminbi as paid (without interest). At the same time Sunco Development should deposit Hong Kong dollars of equal value into an account designated by the 1st and 2nd defendants. Both sides confirm that the share transfer price shall be calculated in Hong Kong dollars. When exchanging Renminbi and Hong Kong dollars, the rate of exchange shall be the mid price for the exchange of Renminbi and Hong Kong dollars as quoted on the day of payment of Hong Kong dollars by the bank in which the account as designated by the 1st and 2nd defendants was maintained.)
(Clause 6.1 records the agreement of both sides that within three days after Sunco Development has according to clause 5.4.4 promptly and fully paid the whole of the share transfer price, the Hong Kong lawyers as jointly engaged by the 1st and 2nd defendants and Sunco Development shall be responsible to carry out the share transfer procedure at the Companies Registry.)
(Clause 6.3 records the agreement of both sides that after Sunco Development has paid the share transfer price, Sunco Development will immediately enjoy the corresponding shareholder’s right in the 3rd defendant although the share transfer procedure will only be carried out after Sunco Development has paid the whole of the share transfer price. The proportion of shareholder’s right to be enjoyed by Sunco Development shall be the same proportion as the amount of share transfer price as paid by Sunco Development stand to the whole of the share transfer price.)
(Clause 9.3 is very important. It provides for the remedy for breach of agreement. It says that if Sunco Development cannot pay Hong Kong dollars to the 1st and 2nd defendants in accordance with clause 5.6 of this agreement, then from the day after the due day for payment as provided in the payment notice of the 1st and 2nd defendants, Sunco Development shall pay the 1st and 2nd defendants damages for breach of contract on the ground of payment overdue. The damages are at 0.05% of the amount of overdue Hong Kong dollars per day until the day when Sunco Development has completed the exchange in accordance with the notice of the 1st and 2nd defendants. If Sunco Development cannot pay the share transfer price in Hong Kong dollars and thereby resulting in the 1st and 2nd defendants, by reason of their receipt of the Renminbi payment of Sunco Development, having attracted to them a tax liability within the Mainland, then such tax liability should be borne by Sunco Development.) (emphasis supplied) 33.The following clauses in the Transfer Agreement are also relevant:
(Recital clause 8 provides that Sunco Development has decided to have the 1st and 2nd plaintiffs to purchase all the shares of the 3rd defendant. The plaintiffs also confirm their full acceptance of all the obligations of Sunco Development in the Framework Agreement and acknowledge Sunco Development’s due diligence investigation the result obtained. The 1st and 2nd defendants have no objection to the above. On the precondition of the plaintiffs’ full acceptance of all the obligations of Sunco Development in the Framework Agreement, they agree to sell the plaintiffs their shares of the 3rd defendant.
(Clause 2.2 stipulated 31 December 2003 as the base day for the share transfer. That means on the precondition of the plaintiffs’ compliance of all their obligations in this agreement and in particular their prompt and full payments of the share transfer price, the plaintiffs will from the base day onwards enjoy all the profits of the 3rd defendant’s operation and correspondingly bear all the risks and responsibilities including those of Huigu.)
(By clause 2.5, parties to this agreement confirm that the 3rd defendant, whose shares are to be sold and transferred by the 1st and 2nd defendants to the plaintiffs, is a company incorporated and lawfully exists in Hong Kong. Therefore the plaintiffs should pay Hong Kong dollars in Hong Kong for the whole of the share purchase price. However, the 1st and 2nd defendants, after considering that the plaintiffs at the time of signing the agreement did not have enough Hong Kong dollars in Hong Kong to pay, agree to have the price provisionally calculated in Renminbi and for the plaintiffs to pay the 1st and 2nd defendants in the Mainland the share transfer price provisionally in Renminbi. In the light of the plan of the plaintiffs or their related institution to be listed in the Hong Kong Stock Exchange in 2004, and the plaintiffs or their related institution are at present diligently raising funds in Hong Kong through means other than listing, the 1st and 2nd defendants have also assisted the plaintiffs or their related institution all along to raise funds in Hong Kong, therefore the 1st and 2nd defendants will, at anytime after the signing of this agreement, (and?) the plaintiffs or their related institution having successfully raised the finance, all have the power to demand the plaintiffs to pay the whole or part of the share transfer price in Hong Kong dollars. When the 1st and 2nd defendants demand the plaintiffs to pay the share transfer price in Hong Kong dollars, the plaintiffs should agree to do so. If at the time when the 1st and 2nd defendants make the demand, the plaintiffs should have already paid the whole or part of the share transfer price in Renminbi, then they will return to the plaintiffs the Renminbi as paid (without interest). At the same time the plaintiffs should deposit Hong Kong dollars of equal value into an account designated by the 1st and 2nd defendants.)
(By clause 2.6, both sides confirm that the share transfer price shall be calculated in Hong Kong dollars. When exchanging Renminbi and Hong Kong dollars, the rate of exchange shall be the mid price for the exchange of Renminbi and Hong Kong dollars as quoted by the bank in which the account as designated by the 1st and 2nd defendants is maintained on the day of the demand for payment of Hong Kong dollars. Either the 1st or 2nd defendant has the power to represent the other defendant to give direction on the whole of the purchase price. In such circumstances, the other defendant shall not give direction again. Either plaintiff shall have the responsibility to pay the whole of the share transfer price.)
(Clause 2.7 provides that within three days after the 1st and 2nd defendants have received the whole of the share transfer price as paid by the plaintiffs in accordance with the time, amount and means as provided in this agreement, both sides should apply to the authoritative organization in Hong Kong to carry out the procedure for registering the transfer of the 3rd defendant’s shares, to change the shareholder of the 3rd defendant to be the plaintiffs. Each side shall bear half of the stamp duty as may be created by the registration of change of shareholders. After the completion of the change, the plaintiffs shall be the shareholders of the 3rd defendant and shall enjoy all the rights of shareholders. Both sides shall execute all necessary documents for carrying out the procedure for registration of change and shall provide all necessary proof and other relevant procedure.)
(Clause 9.4 stipulates that the Transfer Agreement and the Framework Agreement are not mutually exclusive, and should be complimentary to each other. But if the provisions of the Transfer Agreement and those of the Framework Agreement are in conflict, those of the Transfer Agreement will prevail.) 34.Clauses 6.1(2) and 8 of the 1st Memorandum are also relevant:
(Clause 6.1(2) provides that within three working days after the plaintiffs have in accordance with the share transfer agreement and this memorandum complied with the payment and other obligations, the 1st and 2nd defendants shall immediately arrange for the transfer of the share of the 3rd defendant and the plaintiffs should within the said three working days takeover Huigu. The details regarding personnel arrangement would have to be sort out between the parties before hand.)
(Clause 8 provides that this Memorandum has been signed by the authorized representatives of both sides and will take effect on the day when the plaintiffs furnish the 1st and 2nd defendants with an effective letter of deployment of personnel for joint management. It will have the same legal effect as the Transfer Agreement. If the provisions of the Transfer Agreement or of other legal documents that have been signed by both sides should conflict with those of this Memorandum, the provisions of this Memorandum shall prevail.) 35.The above clauses show that the plaintiffs should firstly pay the 1st and 2nd defendants the consideration in Renminbi. After that, the 1st and 2nd defendants would have the right to ask for payment in Hong Kong dollars in exchange for the Renminbi already paid. The plaintiffs have duly paid the 1st and 2nd defendants in Renminbi in full (subject to some minor adjustments and payments which do not assume much significance) and have taken over the control and management of Huigu. Dispute on when can demand be made for payment in Hong Kong dollars 36.There is a dispute on the time when the 1st and 2nd defendants can demand payment in Hong Kong dollars. The plaintiffs submitted that the 1st and 2nd defendants can make this demand only after the plaintiffs had raised sufficient finance in Hong Kong dollars to pay them (as provided in clause 5.6 of the Framework Agreement). The 1st and 2nd defendants however contested that they can make this demand immediately after the execution of the Transfer Agreement (and they choose to interpret clause 2.5 of the Transfer Agreement in this manner). 37.If the 1st and 2nd defendants should have the right to demand Hong Kong dollars right after the execution of the Transfer Agreement, one may wonder why it was necessary to refer to the plaintiffs’ success in raising finance in Hong Kong dollars in clause 2.5 of the Transfer Agreement. However, this is not a matter that should be resolved in this application and I would not do so. The potential tax issue 38.On the issue of tax, only clause 9.3 of the Framework Agreement is relevant. It provides that if a tax liability should be occasioned to the 1st and 2nd defendants by reason of both (i) the plaintiffs’ failure to pay in Hong Kong dollars and (ii) the 1st and 2nd defendants’ receipt of payment in Renminbi, then the plaintiffs should bear such tax liability in place of the 1st and 2nd defendants. Taking it logically, if the tax liability should accrue to the 1st and 2nd defendants not because of both (i) the plaintiffs’ failure to pay in Hong Kong dollars and (ii) the 1st and 2nd defendants having accepted payment in Renminbi, then the plaintiffs would have no liability for such tax. Alternatively, if the 1st and 2nd defendants should be liable to pay tax to the Mainland authorities for the profit made in the sale of the 3rd defendant’s shares regardless of whether they were paid by the plaintiffs in the Mainland or in Hong Kong or in Renminbi or in Hong Kong dollars, then the plaintiffs would also not be required to shoulder such tax. In that event, there would be no causation as the tax would have nothing to do with the place or the currency of payment. 39.I also note that so far, the defendants have not produced any tax opinion by any legal or taxation expert of the Mainland explaining how a tax liability would as a matter of law accrue to the 1st and 2nd defendants by reason of both (i) the plaintiffs’ failure to pay them the share transfer price in Hong Kong dollars in Hong Kong and (ii) the 1st and 2nd defendants’ acceptance of Renminbi paid in the Mainland instead. 40.I have already referred to the letter dated 9 May 2007 from the Hebei Province National Taxation Bureau which refers to the tax payable for profit made in the sale of shares owned by foreign enterprise. There is no mention of any exemption for payments made in foreign or Hong Kong currency effected in Hong Kong or outside the Mainland. 41.On the other hand, if payment for transfer of shares of a foreign owned enterprise in the Mainland should be effected outside the Mainland and the Mainland tax authorities are not apprised of the transaction, then the tax liability could be evaded, but that is unlawful evasion. I do not think clause 9.3 of the Framework Agreement has provided that the plaintiffs should indemnify the 1st and 2nd defendants their tax liability in the Mainland unless the plaintiffs could assist them to evade such liability by secretly paying them Hong Kong dollars in Hong Kong. That would be an absurd way to interpret clause 9.3. 42.Despite my analysis of clause 9.3 and the lack of any expert opinion, I do not think I can rule out the potential liability of the plaintiffs to indemnify the 1st and 2nd defendants certain tax liability pursuant to clause 9.3 of the Framework Agreement. This matter has to be canvassed further in future when more evidence is available. It is likely that this issue will be presented for resolution in the Hong Kong Arbitration. Correspondence up to the ex parte application 43.I now consider whether the plaintiffs’ potential tax liability was a live issue at the time of the ex parte injunction. For this purpose, I have to consider the correspondence exchanged between the parties since May 2004. 44.The 1st and 2nd defendants wrote their 1st letter to the plaintiffs on 9 May 2004. They demanded the plaintiffs to pay them Hong Kong dollars for the purchase of the 3rd defendant’s shares. By then, the plaintiffs had already made the provisional payment in Renminbi in full for the shares and had taken over the control and management of Huigu. The plaintiffs did not respond to this letter. 45.The 1st and 2nd defendants wrote again on 24 May 2004. They referred to their another letter dated 12 May 2004 which again demanded payment in Hong Kong dollars. They further said in this letter that if the plaintiffs should fail to pay in Hong Kong dollars and if the 1st and 2nd defendants should be liable to a huge tax liability in the Mainland because of the payment in Renminbi, the plaintiffs should assume the tax liability. They further estimated the tax liability at RMB¥60,000,000. In order to avoid such liability, the defendants urged the plaintiffs to pay the Hong Kong dollars as early as possible and to do so before 1 December 2004. They told the plaintiffs that if there should be no payment in Hong Kong dollars, then the plaintiffs should make a feasible proposal to shoulder the Mainland tax liability. 46.The plaintiffs replied by an undated letter. They said that the conditions that require them to pay in Hong Kong dollars had not matured. They further said that they had not successfully raised the Hong Kong dollar finance, hence the 1st and 2nd defendants had no right to demand payment in Hong Kong dollars for the shares. They ended the letter by saying that they were actively complying with the contractual conditions and had no intent to breach the contract. 47.The 1st and 2nd defendants then engaged a firm of Beijing lawyers. They wrote to the plaintiffs on 10 June 2004 and said that the plaintiffs only relied on the raising of finance as a condition, but did not explain to the 1st and 2nd defendants the progress of their attempt to raise the finance or confirm that they would just pay in Renminbi. They also said that the plaintiffs had procured Huigu to sell apartments without the necessary certificate. That resulted in a penalty being imposed by the Government on Huigu. They alleged that the plaintiffs had channelled Huigu’s income to other companies resulting in substantial losses in Huigu’s construction capital. They also charged the plaintiffs with having procured Huigu’s breaches of contracts with third parties. 48.They further said that since the plaintiffs did not pay in Hong Kong dollars and did not confirm that they would pay in Renminbi, the 1st and 2nd defendants could not use the Renmibi already paid by them. The 1st and 2nd defendants at the same time also faced the risk of a tax liability. This problem in conjunction with the improper operation of Huigu constituted a serious breach of contract by the plaintiffs. The 1st and 2nd defendants’ Beijing lawyers therefore required the plaintiffs to confirm the definite date for payment of Hong Kong dollars within three days. If they could not pay in Hong Kong dollars, then they should immediately pay the 1st and 2nd defendants the tax money. If the Renminbi already paid by Tienjin Sunco on behalf of the plaintiffs was to be the final payment, then the plaintiffs should immediately report and pay tax to the authorities. 49.The plaintiffs replied on 14 June 2004 also through Beijing lawyers. Their lawyers reiterated that the 1st and 2nd defendants had no right to demand payment in Hong Kong dollars before the plaintiffs had successfully raised the necessary funds. They further said that the plaintiffs had paid for the shares in Renminbi and had pursuant to clause 6.1 of the 1st Memorandum taken over the control of Huigu on 6 April 2004. They also denied improper operation of Huigu. On the channelling of funds, they said that since the transfer price had been paid in full in Renminbi, the plaintiffs as from 31 December 2003 had become the owner of all the profits of the operation of the 3rd defendant which included that of Huigu pursuant to clause 2.2 of the Transfer Agreement. The plaintiffs had taken over the operation of Huigu and had the right to decide the disposal of the profits of Huigu. Finally, they denied that the plaintiffs had committed any breach of contract and demanded the 1st and 2nd defendants to complete the share transfer in Hong Kong within three days. 50.The plaintiffs themselves also wrote to the 1st and 2nd defendants on 16 June 2004. They complained that the 1st and 2nd defendants had convened a directors’ meeting of Huigu and changed the directors. 51.The 1st and 2nd defendants’ Beijing lawyers replied on 21 June 2004 . They said that the plaintiffs had not in their letter confirmed the time of payment of Hong Kong dollars. They also avoided the question of taxation as brought about by their payment in Renminbi. Regarding their payment in Renminbi, the lawyers pointed out that such was only a provisional payment. They asked the plaintiffs to confirm if the Renminbi as paid was to be treated as the actual payment without further exchange into Hong Kong dollars. They said that in that event, the plaintiffs would have to bear the Mainland’s tax. 52.The plaintiffs wrote again on 6 July 2004, but it was not on the question of payment. There was then a meeting of the representatives of both parties on 7 August 2004. The 1st and 2nd defendants alleged that a Mr Ngai of the plaintiffs had said at the meeting that the time for paying Hong Kong dollars could not be fixed yet. One Mr Yen of the 1st and 2nd defendants then reminded the plaintiffs their tax liability as per the contract which was estimated at RMB¥60,000,000. 53.On 1 November 2004, the plaintiffs formally appointed a Mr Tai to represent them in negotiating with the 1st and 2nd defendants. There was no further development in 2004. 54.There was then another meeting on 20 August 2005 when the 1st and 2nd defendants’ representative repeated that the share transfer could be carried out after Sunco had paid the tax. 55.There was also a proposal apparently coming from the plaintiffs and bearing a fax date of 6 September 2005. It proposed to change the nature of the transfer from a foreign one to a local one with the tax on the transaction to be borne by the transferee. After this proposal, there was no further exchange. 56.As mentioned above, the 1st and 2nd defendants procured the 3rd defendant to commence legal proceedings in August 2006 in the Mainland Court against Huigu, Hebei Sunco and two other persons. The 3rd defendant also obtained an order freezing RMB¥150 million worth of assets of Hebei Sunco by using the Huigu shares as security. 57.On 28 October 2006, the plaintiffs’ Beijing lawyers wrote to the 1st and 2nd defendants proposing, among other things, to pay them the transfer price in Hong Kong dollars by stages and that the payment should be completed before 31 December 2006. This was to exchange the Renminbi already paid. The letter also sought a temporary stay of the Mainland Proceedings. This offer appeared to be the result of the Mainland Proceedings procured by the 1st and 2nd defendants, but it was indeed an offer to pay what the 1st and 2nd defendants had been demanding since mid-2004. 58.The plaintiff’s lawyers wrote again on 1 November 2006 seeking a reply from the 1st and 2nd defendants on whether they would like to be paid in Hong Kong dollars. They wanted a reply no later than 5 p.m. on 3 November 2006, failing which they would deem the 1st and 2nd defendants as not wanting to be paid in Hong Kong dollars anymore. They said in that event the 1st and 2nd defendants should go to Hong Kong to complete the transfer of the 3rd defendant’s shares immediately. 59.The 1st and 2nd defendants replied on 3 November 2006 through their Beijing Lawyers. They said that the plaintiffs had in the negotiations which took place from 2005 to October 2006 insisted on turning the foreign deal to a Mainland deal. The 1st and 2nd defendants had already indicated that they could work it out with the plaintiffs. Both sides had already assigned people to consider how the change could be carried out and what would be its taxation aspect. Though the plaintiffs had repeatedly promised to perform the agreement, they had invariably defaulted. It was therefore difficult for the 1st and 2nd defendants to have faith in the plaintiffs. If the plaintiffs were indeed sincere in honouring the obligation arising from their breach of contract and in complying with the unfinished obligations, they should fulfil as soon as possible their promises made in the course of the many negotiations. But they did not particularize what promises they were referring to. They further said that the amount involved was great and the plaintiffs had failed to give a positive reply despite the 1st and 2nd defendants having asserted their rights for over three years. Hence the 1st and 2nd defendants would not feel obliged to confirm whether to accept payment in Hong Kong dollars within the time limit imposed by the plaintiffs. 60.The plaintiffs’ Beijing solicitors replied on 13 November 2006. They said that the plaintiffs had by letters of 28 October and 1 and 2 November proposed to complete the deal in accordance with the Transfer Agreement, however, the 1st and 2nd defendants refused to do so without reasons. They referred to the 1st and 2nd defendants’ refusal to reply to the question of payment in Hong Kong dollars. They then declared that the refusal of the 1st and 2nd defendants had been irrevocably deemed to be their abandonment of the demand to be paid in Hong Kong dollars and changed that demand to a demand to be paid in Renminbi. The lawyers also said that the 1st and 2nd defendants had thereby agreed to shoulder the taxation, foreign exchange and other adverse consequence and duty arising therefrom. 61.Up to this point, the stance of the 1st and 2nd defendants was only that they would not feel obliged to confirm within the plaintiffs’ time limit whether to accept the Hong Kong dollars. They did not say anything about the tax or that the plaintiffs offer to pay in Hong Kong dollars was too late to avoid the tax or anything like that. They simply ignored the plaintiffs’ time limit. 62.The correspondence was then taken over by Hong Kong solicitors. On 27 November 2006, the plaintiffs’ Hong Kong solicitors wrote to the 1st and 2nd defendants. They said that the plaintiffs had raised the necessary Hong Kong dollars in October 2007 and had offered to pay the 1st and 2nd defendants the same in early November; however, there was no concrete reply from the 1st and 2nd defendants. They therefore asked the 1st and 2nd defendants to reply within the next 15 days on whether they would take the Hong Kong dollars, otherwise, the plaintiffs would regard them as having accepted the Renminbi for the share transfer. The plaintiffs’ solicitors further demanded them to transfer the shares of the 3rd defendant to the plaintiffs either within seven days after the exchanging the Renminbi for Hong Kong dollars or within the next 22 days if they did not want Hong Kong dollars or should be deemed to be so. 63.The plaintiffs’ solicitors further said that if the 1st and 2nd defendants did not accept the plaintiff’s demand, then they would refer the dispute to arbitration in Hong Kong. Finally, the solicitors said that the 1st and 2nd defendants had wrongfully used the shares of Huigu as security in the Mainland Proceedings against the plaintiffs related company Hebei Sunco thereby causing loss to the plaintiffs, they therefore demanded compensation from the 1st and 2nd defendants. 64.The 1st and 2nd defendants’ Hong Kong solicitors replied on 4 December 2006. They said that only the 1st and 2nd defendants had the right to ask to be paid in Hong Kong dollars and the plaintiffs had no such right. In any case, they said that the plaintiffs had no right to set a deadline of 15 days for an answer. They pointed out that the plaintiffs had refused the demand of the 1st and 2nd defendants for three years and it was unreasonable for the plaintiffs to demand an answer within 15 days and to complete everything within two months. They also asserted that the 1st and 2nd defendants had the right to demand payment in Hong Kong dollars at anytime. On the taxation issue, they said that if the Renminbi already paid should be assumed to be the payment for the share transfer (which assumption the 1st and 2nd defendants resolutely deny), the plaintiffs would still have to bear all the tax. On the Mainland Proceedings, they deny that the proceedings were wrongful or that they had wrongfully used the Huigu shares as security. They pointed out that Hebei Sunco had also applied to the Mainland Court for review, but the application was rejected. Commencement of Hong Kong Arbitration 65.The plaintiffs’ solicitors did not reply to this letter. On 12 December 2006, they wrote to Mr Philip Yang with a view to appoint him as an arbitrator. Mr Yang confirmed his agreement to do so by an e-mail of the same day. 66.On 13 December 2006, the plaintiffs’ solicitors gave notice of arbitration to the 1st and 2nd defendants’ solicitors. The issues for arbitration were:
There were also some other issues and allegations made in the notice which had nothing to do with taxation or payment in Hong Kong dollars. Was Mainland tax a live issue at the time of the ex parte application? 67.From the letter of 28 October 2006 onwards, the 1st and 2nd defendants had not suggested that because the plaintiffs had fail to pay the Hong Kong dollars between 2004 and October, 2006, they should pay the Mainland tax in any event. There was already the plaintiffs’ offer to pay the Hong Kong dollars. This offer had been sought by the 1st and 2nd defendants since mid-2004 for the purpose of avoiding the tax. The1st and 2nd defendants did not say that the offer had come too late and/or the tax had become unavoidable. The only issue raised by the 1st and 2nd defendants was whether they were entitled not to confirm whether to accept payment in Hong Kong dollars within the deadline set by the plaintiffs. From that time to the ex parte application on 12 February 2007, there was nothing to indicate that there was still be the problem of the tax despite the plaintiffs’ offer to pay Hong Kong dollars. In short, nobody had during this period raised any question that the plaintiffs should bear the defendants’ Mainland tax despite having offered the 1st and 2nd defendants Hong Kong dollars. It is thus clear that the plaintiffs’ liability to pay the 1st and 2nd defendants’ Mainland tax was not a live issue at the time of the ex parte application. Was Mainland tax still an issue to be disclosed? 68.As can be seen from the correspondence referred to above, the 1st and 2nd defendants had been earnest in seeking payment in Hong Kong dollars for the sale of the 3rd defendant’s shares. They worried over the tax liability. They did not transfer the 3rd defendant’s shares to the plaintiffs because this was their security for the tax liability in case the plaintiffs should be liable. To transfer the shares to the plaintiffs without getting paid in Hong Kong dollars could leave them in an unsecured position in relation to the plaintiffs’ potential liability to pay their tax. It was obviously for this reason that the plaintiffs did not take action to compel the 1st and 2nd defendants to transfer the shares despite having paid for them in Renminbi. 69.Mr Xu in his affirmation only asserted that the 1st and 2nd defendants had been paid in full in Renminbi but had refused to transfer the shares. His presentation of what happened in mid 2004 to late October, 2006 was unfair to the 1st and 2nd defendants. He did not say a word on why the 1st and 2nd defendants had refused to do so. He also said nothing about the plaintiffs’ potential tax liability. In gist, he told the ex parte Judge that the 1st and 2nd defendants had been unreasonable right from the start, and that they were wrong in not transferring the shares to the plaintiffs. 70.In fact, it is arguable whether the 1st and 2nd defendants were liable to transfer the shares before receiving the Hong Kong dollars. Clause 5.6 of the Framework Agreement provides for payment to be made in Hong Kong dollars and that the Renminbi was only a temporary or provisional payment. Clause 2.5 of the Share Transfer Agreement is of the same effect. On the tax liability, leading counsel for the defendants went even further and submitted that this liability was undisputable. I think that is going too far. I would accept that there is a serious question to be tried on whether this liability exists. 71.I also agree with counsel that the failure to mention the plaintiffs’ potential tax liability must have left the ex parte judge wondering why the 1st and 2nd defendants should have started the Mainland Proceedings. On the picture as painted by the plaintiffs, the 1st and 2nd defendants had been paid in full in Renminbi. They had parted with the management of Huigu. They were only waiting for the Hong Kong dollars. There did not appear to be any reason or need for them to start the Mainland Proceedings. The 1st and 2nd defendants thus appeared unreasonable in so doing. But the ex pate Judge was not aware of the plaintiffs’ potential tax liability to the 1st and 2nd defendants which could mean a liability between RMB¥100 million to 200 million. The ex pate Judge was also not aware that this was the cause for the 1st and 2nd defendants not transferring the 3rd defendant’s shares to the plaintiffs. 72.The picture would have been complete if the plaintiffs’ potential tax liability was explained and brought to the forefront. This potential liability was at the core of the dispute between the two sides. Unfortunately, there was the same omission in counsel’s submissions to the ex parte judge. The failure to present to the ex parte Judge this core element of the dispute by way of background information has also resulted in a distorted picture of the conduct of the 1st and 2nd defendants prior to October 2006. The mere fact that this issue could be gleaned from the exhibits is not enough. To the extent of this omission, the plaintiffs were guilty of material non-disclosure. It was material as it affected the assessment of the ex parte judge of the reasonableness of the defendants’ attitude in not transferring the shares and of their cause for starting the Mainland Proceedings. 73.The plaintiffs argue that there was in fact no tax liability. Though the 1st and 2nd defendants’ case on this issue does not appear to be overwhelming, it would be going too far to say at this stage that there was no such liability. This issue will be decided in the Hong Kong Arbitration and I should not discuss it any further. In any event, the plaintiffs’ belief that they did not have such liability did not excuse them for not telling the ex parte judge that there was this issue between the parties. I however accept that the failure to make this disclosure was because of the plaintiffs’ belief that the tax liability was so tenuous that it hardly exists. Disclosure of relationship with Hebei Sunco 74.The defendants submitted that there was no disclosure of the fact that the plaintiff s and Hebei Sunco belonged to the same group of companies so that Hebei Sunco appeared to be an independent third party. 75.Mr Xu when referring to the Mainland Proceedings said that Hebei Sunco (河北順馳), 荊州市順馳are members of Sunco China Holdings. These companies and Sunco Development all bear the English word Sunco or the Chinese characters順馳. This connection and the fact that Huigu had transferred substantial sums of money to Hebei Sunco should be enough for the ex parte Judge to know that these companies all belong to the same group or were all related to one another. It was of course better for the relationship to have been expressly mentioned. 76.However, even if I were wrong and there was non-disclosure of this relationship, the failure to disclose was not a deliberate one because the relationship had been referred to repeatedly in the correspondence exhibited by Mr Xu. The non-disclosure was committed simply because of the misapprehension of the plaintiffs that the independent legal personality of Hebei Sunco could justify it to be treated as an independent third party. 77.Though I have found that there was no material non-disclosure on the relationship between the plaintiffs and Hebei Sunco, I must make it clear that the fact that Hebei Sunco was an independent legal person did not mean that its relationship with the plaintiffs was not a material fact that should have been disclosed. This is certainly a matter that should have been disclosed or made known to the ex parte Judge so that the learned Judge would have known that the Freezing Order was not hurting an independent third party but was directed at the plaintiffs’ related company. The ex parte judge should have been told that the plaintiffs were trying to save the assets of those who control them rather than to avoid the 3rd defendant from being sued by an independent third party. In money terms, the effect of the Freezing Order may be the same whether Hebei Sunco is an independent third party or not. If the relationship was disclosed, the ex parte judge would also have been aware that the 1st and 2nd defendants were alleging transfer of Huigu’s money to an associate of the plaintiffs and not to an independent third party. I reiterate the well-known principle that it is not sufficient disclosure for the issue to be mentioned only in the exhibits but not in the affidavit in support of the ex parte application (see Standard Chartered Securities Ltd v Arthur Lai & Ors [1993] 1 HKC 375 at 281C-G and 388 G-I). Disclosure of the defence of Hebei Sunco in the Mainland Proceedings 78.The next attack is the plaintiffs’ failure to disclose the defence, if any, of Hebei Sunco in the Mainland Proceedings. I think this attack is extending the boundary of disclosure too far. If this point were valid, it would result in the fighting in this jurisdiction the same battle as fought in the Mainland Proceedings. If Hebei Sunco is not yet required to file its defence in the Mainland Proceedings, I see no reason why its defence should be revealed by its associated company in this jurisdiction. Such disclosure may well jeopardize the interest of Hebei Sunco in the Mainland Proceedings. If this court should require such disclosure, it may well amount to interference with the Mainland Proceedings. Loss caused to the plaintiffs by the Mainland Proceedings 79.The defendants further argued that the plaintiffs would suffer no loss from the Mainland Proceedings as those proceedings were to recover money for the 3rd defendant. This argument is artificial. Huigu’s assets were transferred out rightly or wrongly by the plaintiffs or those who control them. When they made the transfers, they rightly or wrongly regarded the assets as owned by them through corporate vehicles. This issue had in fact been raised in June 2004 in the correspondence between the parties. The plaintiffs were then relying on clause 2.2 of the Transfer Agreement as quoted above. The Mainland Proceedings were brought to reverse what the plaintiffs had done and against the plaintiffs’ will. The Freezing Order has put RMB¥150 million worth of Hebei Sunco’s assets on hold. Those who control the plaintiffs and Hebei Sunco would surely feel the hurt. Urgency 80.The defendants’ also submitted that there was no urgency for the ex parte application and that the ex parte Judge had not been addressed on the question of urgency. I think the true attack is that there was no justification for the application to have been made ex parte despite with notice to the defendants’ solicitors. On this point, I refer to what Rogers VP has said in para. 6 of L v C [2004] 2 HKC 387:
I would add that this principle applies to ex parte applications as well as ex parte applications on notice to the opposite party. Even if notice of the ex parte hearing is given to the opposite party, that party is not given the proper or full opportunity to ventilate its case on affidavit. 81.The Freezing Order was granted by the Mainland Court on 9 August 2006. The ex parte application was only made on 13 February 2007. The Freezing Order had already been there for six months. I cannot see any injustice that had to be avoided by making the application ex parte. Nor can I see any action the defendants could have taken to nullify the order if the application were made inter partes. The plaintiffs submitted that there was urgency as there was the risk that the 1st and 2nd defendants would further interfere with the 3rd defendant or its shares. I do not think there was enough evidence to justify this fear. I find that there was no justification for making the application on ex parte basis. However, I accept that the error in going ex parte was because of the innocent miscalculation of risk that the 1st and 2nd defendants would continue to interfere with the 3rd defendant or its shares. Mandatory injunction 82.The next argument is that because the injunction is of mandatory effect, the defendants therefore submitted that it should only have been granted if the court had felt that there was a high degree of assurance that at the trial of the action, it will be shown that the injunction was rightly granted (see TKI Ltd v New Happy Ltd [1995] 1 HKC 551 and Music Advance Ltd & Anr v The Incorporated Owners of Argyle Centre Phase I, HCA 2574/2002 at para. 12. The plaintiffs disagree with this approach. They submitted that the court is only concerned to take the course which appears to carry a lower risk of injustice (see Films Rover Ltd v Cannon Film Sales Ltd [1987] 1 WLR 670. 83.Though the 1st and 2nd defendant’s case against the plaintiffs on the tax liability does not appear to be overwhelming, the issue of whether the 1st and 2nd defendants should have transferred the shares to the plaintiffs ahead of their offer to pay them in Hong Kong dollars is a different question. The plaintiffs may or may not succeed in arguing this issue. If they should succeed, then they can of course say that the 1st and 2nd defendant had no right to procure the 3rd defendant to start the Mainland Proceedings. If they should lose the issue, then they cannot say so. 84.Whether the principle for granting the mandatory injunction should be a high degree of assurance that the plaintiffs will succeed on this issue at the Hong Kong Arbitration or a choice of the option that carries a lower risk of injustice, the ex parte judge should have been told about it. The fact is that the ex parte Judge was not so told. I also think that there is insufficient justification in this case to justify an interference with the Mainland Proceedings. Save the order for releasing the Huigu shares as security for the Freezing Order, I do not think the rest of the ex parte injunction can survive this attack. But I accept that counsel for the plaintiffs did not deliberately fail to advise the ex parte Judge about this principle. This principle is well known and often not regarded a point that needs to be expressly mentioned. Anti-suit injunction 85.The defendants further argued that the ex parte judge was not told that part of the injunction was an anti-suit injunction. There is no dispute that anti-suit injunction can only be granted after paying regard to the question of comity and the jurisdiction to grant it must be exercised with caution. Lord Goff of Chieveley said in Airbus Industrie CIE v. Patel & ors [1999] 1 AC 119 at p. 133D to F:
The learned Judge further said at p. 138 G to H:
(see alsoFirst Laser Ltd v. Fujian Enterprises (Holdings) Co Ltd & anor, HCA 4414/2001 and China Reit Limitedv. Su Ping and OrsHCA 1831/2006) 86.The plaintiffs, however, argued that the injunction was not anti-suit as the plaintiffs were not trying to stop the defendants from suing them in the Mainland. I disagree. This injunction is indeed for anti-suit purpose. It seeks to stop the defendants from suing Hebei Sunco, another wholly owned member of the Sunco China Holdings group to which the plaintiffs belong. The ex parte judge was not told about the nature of such injunction. The question of comity or forum was not addressed to at all. I cannot see how this court should interfere with the 3rd defendant’s attempt to recover in the Mainland its assets from another company incorporated and operated in the Mainland. The assets were also transferred in the Mainland. If the plaintiffs at or before the ex parte application had already owned all the rights and interests in the 3rd defendant’s shares, that would have been different as the 1st and 2nd defendants would not have been entitled to procure the 3rd defendant to commence or continue the Mainland Proceedings. But the ownership of the rights and interests of the 3rd defendant’s shares is still a question to be determined. I, of course, accept that this omission was because of the plaintiffs’ misunderstanding of the nature of anti-suit injunction and that resulted in the failure to advise the ex parte Judge about the principles for granting such injunction. Undertaking as to damages 87.The defendants further submitted that the plaintiffs’ undertaking as to damages is meaningless as the plaintiffs are BVI companies and nothing is known about their assets. But the 1st and 2nd defendants have already received about RMB¥600 million from the plaintiffs for the transfer of the 3rd defendant’s shares. Even if the plaintiffs should have transferred RMB¥400 million out of Huigu, the 1st and 2nd defendants still have the comfort of RMB¥200 million which is enough to cover the plaintiffs’ potential tax liability. There is no suggestion that Huigu is a worthless company. 88.Assuming that RMB¥400 million had indeed been transferred out of Huigu. If the plaintiffs should default on the potential tax liability and fail to complete the transaction, they would stand to lose RMB¥200 million. I reiterate that the 1st and 2nd defendants’ claim on the potential tax liability is not overwhelming. No expert opinion or tax statute has been produced to support it. In the event of the plaintiffs not completing the transaction, the RMB¥200 million now kept by the 1st and 2nd defendants is already a good security for them. On the whole, I do not think the plaintiffs should be asked to provide any fortification for their undertaking. No claim against the 3rd defendant 89.The defendants’ last point is on the propriety of granting an interlocutory injunction against the 3rd defendant when there is no claim against it. Leading counsel for the plaintiffs tried to formulate some cause of action against it, but I do not think this task was discharged successfully. The 3rd defendant’s shares are merely the subject matter of the sale and purchase (see Xinyuan Trading Co. Ltd & Anr v Bank of China [1999] 4 HKC 686. The 1st and 2nd defendants’ attack must be right and the injunction should not have been directed at the 3rd defendant. 90.There are some other minor points raised by counsel in the course of submissions, but I do not think it necessary to go into them for the purpose of this decision. DECISION ON APPLICATION TO DISCHARGE 91.I have found that the plaintiffs have committed material non-disclosure of their potential tax liability to the 1st and 2nd defendants. That resulted in a distorted picture being presented to the ex parte Judge. The distorted picture was that the 1st and 2nd defendants had no reason not to transfer the 3rd defendant’s shares to the plaintiffs or to start the Mainland Proceedings. I have also found that the plaintiffs did not have any cause to have applied ex parte. I have further found against the plaintiffs on their failure to advise the ex parte Judge about the nature of ex parte mandatory injunction and anti-suit injunction. In the circumstances, I must discharge the ex parte injunction with a costs order nisi that the plaintiffs do pay the defendants the costs of the ex parte application and of the application for discharge and I so order. The costs of the ex parte application are also covered by the order nisi because the defendants’ solicitors had attended the hearing upon notice from the plaintiffs. But the order nisi does not cover any costs already covered by earlier orders. REGRANT OF PART OF THE ORDER 92.I now consider the plaintiffs’ application for re-grant. For the same analysis and reasons given above, I will only consider the re-grant of the order requiring the 1st and 2nd defendants to secure the release of the Huigu shares from being used as security for the Freezing Order. The parties have referred me to Standard Chartered Securities at 387 and Yau Chi Wah v Gold Chief Investment Ltd, HCA 807/2001 at pages 18 to 24. 93.I have already held that the non-disclosure of material fact and the failure to advise the ex parte Judge on certain legal issues were not done deliberately. I do not think there was any deliberate attempt not to make full and frank disclosure of material facts or not to fully inform the court of the relevant legal principles. I also take the view that if all these matters and legal principles should have been fully ventilated to the ex parte Judge, the learned Judge, subject to the question of applying ex parte, would still have made an order requiring the release of the Huigu shares. 94.Although there was no need to apply ex parte for the order requiring the release of the Huigu shares, it is a justifiable inter partes order. I would exercise my discretion to regrant this order for the reasons below. 95.The 1st and 2nd defendants have received RMB¥600 million. Even if RMB¥400 million has been transferred to Hebei Sunco, they still have the comfort of RMB¥200 million and whatever that is still left in Huigu. The development project is still on the way and there is no suggestion that Huigu at present has no or very little worth. The only significant claim of the 1st and 2nd defendants against the plaintiffs is this potential tax liability. There are other minor sums due to them, but they have never constituted any issue between the parties. The potential tax liability has been assessed at different figures, but never exceeded RMB¥200 million. 96.Even if the plaintiffs do not complete, the 1st and 2nd defendants’ tax liability will still be covered by the RMB¥200 million. The 1st and 2nd defendants want the Freezing Order to keep another RMB¥150 million worth of assets of Hebei Sunco as additional security for its own protection. The Mainland Court has allowed it to do so. I would not interfere with it. But if the Mainland Court should require security for the Freezing Order, it is for the 1st and 2nd defendants to provide their own security. They should not use the Huigu shares for such purpose. The plaintiffs have already paid for such shares through their payment for the 3rd defendant’s shares. The 1st and 2nd defendants may argue that the plaintiffs have already got back RMB¥400 million through Huigu and they may just not complete. But I have already pointed out above that in that event, the plaintiffs will stand to lose RMB¥200 million. Furthermore, the tax liability of the plaintiffs is only a potential one and at present it does not appear to be overwhelming. 97.I also find that there is a serious question to be tried on whether the plaintiffs have acquired the rights and interests of the 3rd defendant’s shares and hence the Huigu shares. Alternatively, there is a serious question on whether the 1st and 2nd defendants are still entitled to use the Huigu shares as security to obtain the Freezing Order when it has already received RMB¥600 million from the plaintiffs for the 3rd defendant’s shares and have handed over the operation of Huigu to the plaintiffs. 98.I also do not think that damages are an adequate remedy to the plaintiffs should they succeed at the trial. Such damages is likely to be equivalent to the loss of Hebei Sunco as caused by the Freezing Order. That is very difficult to assess. There is no evidence of the existence or whereabouts of the assets of the 1st and 2nd defendants which are BVI companies. 99.On the other hand, the loss of the 1st and 2nd defendants that may be caused by this order is the revocation of the Freezing Order. That means there will not be the additional security of RMB¥150 million worth of assets of Hebei Sunco. It is certainly a quantifiable loss. It is the amount of loss of the 1st and 2nd defendants not indemnified by the security of RMB¥150 million in case this order should turn out to be wrongly made. Though the plaintiffs are also BVI companies and their assets save what they had paid the 1st and 2nd defendants, if any, are not known, they have however paid RMB¥600 million for the 3rd defendant’s shares and there is at least a net sum of RMB¥200 million still held by or under the control of the 1st and 2nd defendants. This RMB¥200 is only to cover the potential tax liability of the plaintiffs. The 1st and 2nd defendants’ position on this liability is secured. They should provide their own security other than the Huigu shares if they want the extra comfort of the Freezing Order. 100.The 1st and 2nd defendants may worry that since Huigu is in the hands of the plaintiffs or those who control the Sunco China Holdings, further dissipation of assets of Huigu may take place. However, that is not a matter covered by the Freezing Order. The Freezing Order only freezes assets of Hebei Sunco, it does not prevent further transfer of funds by Huigu to anyone. I also record that the plaintiffs have offered to the 1st and 2nd defendants a non-voting seat on the board of Huigu for them to monitor the flow of funds or assets of Huigu. I think such offer can at least be put on trial before being rejected. It may well protect the position of the 1st and 2nd defendants against further dissipation of Huigu’s assets. But it was rejected when made. THE ORDER 101.I therefore re-grant this order as follows:
Ms Teresa Cheng, SC and Mr Hectar Pun, instructed by Messrs Fairbairn Catley Low & Kong, for the 1st and 2nd Plaintiffs on 14 and 15 May 2007 Ms Teresa Cheng, SC and Ms Sonia Chan, instructed by Messrs Fairbairn Catley Low & Kong, fo rthe 1st and 2nd Plaintiffs on 16 and 17 May 2007 Mr Anthony Chan, SC and Mr Herbert Au Yeung, instructed by Messrs Mallesons Stephen Jaques, for the 1st, 2nd and 3rd Defendants A stay pending appeal granted: see CACV341/2007 dated 15 November 2007 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cases cited in this judgment
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Further hearings and rulings under HCCT 12/2007