Achieve Goal Holdings Ltd v. Zhong Xin Ore-material Holding Co Ltd

HCA 1987/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1987 OF 2005

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(by original action)

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(by counterclaim)

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Before:  Hon Chung J in Chambers

Date of Hearing:  20 October 2008

Date of Handing Down Decision:  27 October 2008

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D E C I S I O N

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Introduction

1.Various parties have been named in this action.  To facilitate the comprehension of this decision, the parties’ actual names will be used below.

2.This is an application taken out by Clarigain Enterprises Ltd. (“Clarigain”), Zhong Xin Ore-material Holding Co. Ltd. (“Zhong Xin”) and Bai Jun Tian Cheng Ltd. (“Bai Jun”) (collectively “the applicants”) for the appointment of interim receivers and managers of Zhong Xin (“interim receivers”) until judgment or further order (and for other related orders).  It was taken out in September 2008, some 3 years after the commencement of this action.

3.This application is opposed by Achieve Goal Holdings Ltd. (“Achieve Gold”), Ng Chi Kong (“Ng”), Angola Group Holdings Ltd. (“Angola”) and Zhao Bing (“Zhao”).  They are collectively called “the opposing parties” below.

Background

4.The background has been helpfully set out in the judgment of Hon Fung J dated 6 March 2008:-

“5. CLB is a joint venture mining company in Yulin on the Mainland.  The joint venture shareholders are Yulin Company investing RMB 21.3 million (30%) and Zhong Xin investing RMB 49.7 million (70%).

6.  Originally, Zhong Xin was wholly owned by Bai Jun.  Bai Jun entered into a joint venture agreement with Angola whereby Angola was to invest RMB 50 million in Zhong Xin which would in turn be invested in CLB, and Angola was to pay Bai Jun RMB 7 million.  In return, Bai Jun would transfer 50% of the shares in Zhong Xin to Angola.  The 50% share transfer was completed, and Bai Jun also transferred the remaining 50% shares to Clarigain holding as its nominee.

7.  At present, the shareholders in Zhong Xin are Angola and Clarigain holding 50% each.

8.  Angola was supposed to invest the RMB 50 million in 3 instalments of RMB 20 million, RMB 20 million and RMB 10 million within 2 years, and Angola was to pay Bai Jun RMB 7 million in 3 instalments of RMB 2 million, RMB 2 million and RMB 1 million.

9.  Angola did not pay Zhong Xin the 1st instalment of RMB 20 million.  Instead, it procured Achieve Gold to make a loan of RMB 20 million to Zhong Xin.  Angola did not pay the 2nd and 3rd instalments of RMB 30 million.

10.    Angola paid Bai Jun the 1st instalment of RMB 2 million, but did not pay the 2nd and 3rd instalments of RMB 5 million.

11.    In July 2005, Bai Jun commenced HCA 1284/2005 against Angola for breach of the joint venture agreement in failing to make the 1st instalment.  The defence was that the RMB 20 million loan by Achieve Gold was supposed to be the 1st instalment.

12.    In October 2005, Achieve Gold commenced the present action against Zhong Xin for repayment of the RMB 20 million loan.  Zhong Xin and Bai Jun counterclaimed against Achieve Goal, Angola, Zhao (director of Zhong Xin whose wife is the only director of Angola), and Ng (4th defendant by counterclaim, director of Zhong Xin, Angola and Achieve Gold).  Bai Jun alleged that the loan agreement was induced by the misrepresentation that Angola had financial problem and Achieve Gold was an independent third party, but it turned out that Achieve Gold was related to Angola.  Zhong Xin and Bai Jun sought a declaration that the loan agreement had been rescinded, the RMB 20 million paid by Achieve Gold was in fact the 1st instalment, damages for fraudulent misrepresentation, and/or specific performance of the joint venture agreement by Angola.”

Yulin Company will be called “Yulin” below for convenience.

S. 21L, High Court Ordinance (Cap. 4)

5.The applicants rely on s. 21L(1), Cap. 4 in bringing this application:-

“The Court of First Instance may by order (whether interlocutory or final) … appoint a receiver in all cases in which it appears to the Court of First Instance to be just or convenient to do so”.

6.The legal principles are undisputed.  The court has recognised the need for circumspection in appointing interim receivers in relation to companies which are going concerns, because such appointment is an extremely serious matter for such companies: Re Chime Corporation Ltd., HCMP 4146/2001 (25 June 2003), para. 41.  Typically, such orders are granted in cases where a deadlock in management results in harm being caused to companies, such as the dissipation of their assets.

7.Three grounds are put forth in support of this application:-

(a) interim receivers are required to properly represent Zhong Xin in a litigation commenced by Yulin in the Mainland and to properly present Zhong Xin’s defence therein;

(b)    Xie He Ping (“Xie”) has been Zhong Xin’s legal representative in the Mainland.  In 2005 and 2008, Ng sought unsuccessfully to have him removed from that office.  Xie has been kept in custody by the Mainland authorities since May 2008.  Because of the deadlock in Zhong Xin’s management, interim receivers are needed to take care of the affairs of Zhong Xin in the absence of its legal representative;

(c) A coal mine has been flooded in March 2008.  It has ceased operation ever since.  Interim Receivers are needed to drain the flood and resume its operation.

The applicants contend that the appointment of interim receivers is required as a matter of urgency.

PRC Litigation

8.The urgency of the matters is built on the following facts.

9.As stated earlier, Yulin commenced an action in the Mainland.  Yulin challenges the propriety of Zhong Xin’s contribution to CLB’s capital (of about RMB29.5 million paid by Bai Jun (through Clarigain) on Zhong Xin’s behalf).  Yulin claims therein that it became entitled to have a pre-emptive right to acquire 42% of CLB’s shares.  If Yulin succeeds in its claim, Zhong Xin’s 70% share interest in CLB would be substantially reduced (to 28%).

10.Xie (as Zhong Xin’s representative) has instructed lawyers to defend the claim.  The deadlock in Zhong Xin’s management resulted in no board resolution being passed about the instruction.  The matter was worsened by the following developments.

11.At a hearing before the Mainland court on 14 October 2008, Angola (being made a third party by Yulin) suddenly challenged the authority of the lawyer who appeared for Zhong Xin.  In addition, Angola deposed in the opposing affirmation that there was no need for Zhong Xin to enter an appearance in the Mainland.  And, for various reasons (also advanced in the opposing affirmation), the applicants argue Zhong Xin should adopt a neutral stance.

12.As a result of the above, Zhong Xin was compelled at the said Mainland hearing to seek, and was granted, an adjournment for about 30 days to enable proper authorization to be given for lawyers to be engaged.

13.Thus, Zhong Xin needs an order from this court for the purpose set out in para. 7(a) above.

14.The opposing parties changed their stance at the hearing before me (albeit only after some encouragement from the court).  In short, they offer to give an undertaking in the following terms:-

“[The opposing parties] … agree to instruct a qualified PRC Lawyer to act for and represent the interests of [Zhong Xin] in the PRC Litigation currently ongoing against [Yulin] in the Intermediate People’s Court of Shaanxi Province, PRC (the ‘PRC Litigation’)”;

“In relation to [the] above, [the opposing parties] shall nominate one firm of PRC Lawyers known as ‘King and Wood PRC Lawyers’ to act for and represent the interests of [Zhong Xin] in the PRC Litigation”;

“[The opposing parties] further undertake to fully co-operate to cause the Board of [Zhong Xin] to formally instruct the said PRC Law Firm to represent and act for the interests of [Zhong Xin] in the PRC Litigation, and shall provide all necessary instructions to enable the said PRC Law Firm to defend the rights and interests of [Zhong Xin] in the PRC Litigation”.

15.The applicants argue that the above undertaking is inadequate.  They contend that conflicting instructions would still be given by the opposing parties, making it impossible for any lawyer acting for Zhong Xin to present a proper defence in the Mainland.

16.There is no evidence that such will necessarily be the case.  One, the main complaint in the supporting affirmation is the opposing parties’ challenge to the lawyer’s authority to appear, as well as the deadlock in management.  Two, the reasons given in the opposing affirmation for taking a neutral stance are unrelated to the merits of the Mainland litigation.

17.Moreover, the undertaking offered by the opposing parties to:-

“provide all necessary instructions to enable the [PRC lawyers] to defend the rights and interests of [Zhong Xin] … ” (emphasis supplied)

should mean that any instructions which may be given ought to promote that end.  Giving conflict instructions to the lawyers is unlikely to meet the objective of that undertaking.  But whether the opposing parties will provide instructions consistent with those to be given by the applicants, or will merely refrain from providing instructions, is not a matter for this court to comment on.

18.In any event, should conflicting instructions in fact be given by the applicants and the opposing parties, the appointment of interim receivers is unlikely to improve the situation.  It will be asking too much of the interim receivers to make them decide which of the conflicting instructions should be treated as Zhong Xin’s (as the applicants contend is what they should do).

Management of Zhong Xin

19.I agree with the opposing parties that merely because there is a deadlock in management is not a sufficient ground for appointing interim receivers.

20.Zhong Xin’s management has been at a deadline since at least May 2008 (if not earlier); that is, at least 4 months before this application.  Delay by itself is not a bar of an application of this kind, although it is a factor to be taken into account.

21.The importance of the delay in this application is that there is no evidence that the interests of Zhong Xin have been prejudiced by the deadlock, whether by way of a dissipation of its assets, or any diminution in asset value, or a disruption to its daily operation: see Re Full Billion Shipping Ltd., HCMP 2423/2002 (28 March 2003), para. 35 to 42, especially para. 36.  (The flooding of the coal mine will be discussed under the heading “Resumption of Coal Mine Operation”)

22.The above observations apply equally to the lack of a legal representative (of both Zhong Xin and CLB) since the incarceration of Xie in May 2008.

23.Further, the opposing parties draw attention to the legal requirement in the Mainland that a company’s legal representative must be a Mainland resident.  It is undisputed the interim receivers proposed by the applicants are not Mainland residents.

Resumption of Coal Mine Operation

24.An examination of the accident reports exhibited to the opposing affirmation discloses the following.

25.Flooding occurred on 10 March 2008 at one of CLB’s coal mines as a result of water leakage.  An investigation report dated 29 March 2008 was compiled by CLB.  It was apparently submitted to the authorities soon after.  The report was referred to in a report dated 19 June 2008 compiled by the authorities in Shaanxi, which approved a number of the remedial measures recommended by CLB.

26.The internal documents of CLB exhibited to the supporting affirmation show that remedial work has been carried out.  The difficulties in remedial work appear to be technical in nature, and not related to the deadlock in management.

Conclusion

27.In view of the above matters, I do not consider it appropriate for interim receivers to be appointed.

28.This application is accordingly dismissed.  To avoid doubt, the dismissal is subject to the opposing parties’ undertaking referred to in para. 14 above.

Costs Order Nisi

29.The parties have made their respective submissions on costs.  The applicants appear to agree that the usual rule of costs following the event should apply, whereas the opposing parties seek those costs to be in the cause of this action.

30.Having heard them, there is no proper reason to depart from the usual rule.  There will therefore be a costs order that the costs of this application be paid by the applicants to the opposing parties to be taxed in any event if not agreed.

Mr Alan Leong, SC leading Mr T M Lee, instructed by Messrs Anthony Siu & Co., for the Plaintiffs in Counterclaim

Mr Lawrence Cheung, instructed by Messrs LCP, for the 1^st Plaintiff in Original Action and 4^th Defendant in Counterclaim

Mr Dennis Kwok, instructed by Messrs Wong & Chan, for the 2^nd & 3^rd Defendants in Counterclaim