Guo Jing Jing v. Art Master Investment Ltd and Others

HCA 1008 / 2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1008 OF 2009

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BETWEEN

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AND BETWEEN

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Before: Hon Au J in Chambers

Dates of Hearing:      3 December 2009

Date of Judgment:     11 December 2009

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DECISION

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A.      Introduction

1.The Plaintiff (Ms Guo) applies by Summons for (a) the appointment of interim receivers of Art Master Investment Ltd (the 1^st Plaintiff), and (b) an interim payment of RMB62,666,667 into Court by  Mr Ng (the 2^nd Defendant) and Ms Fang (the 3^rd Defendant).

2.For the present purpose, there is little dispute that:

(1)  Ms Guo, Mr Ng and Ms Fang are the shareholders of Art Master, which is a company incorporated in BVI.

(2)  Art Master’s only asset is its holding of a hotel in Shanghai (“the Hotel”).

(3)  Art Master has contracted out the management of the Hotel, and its only income is the monthly rental paid by the management agent. 

(4)  At the material times, Mr Ng and Ms Fang have been the directors of Art Master and in control of its management.

(5)  Mr Ng is a practising solicitors, and the step son-in-law of Ms Fang. 

(6)  Wing Li Trading Co Ltd (the 4th Defendant) is a company owned by Mr Ng and his father-in-law, Mr Lo (i.e., Ms Fang’s husband).

(7)  Ms Fang is a friend of Ms Guo.

3.Ms Guo was also a director of Art Master, until 6 September 2006, when a Form D2 was filed with the Companies Registry saying that Ms Guo resigned or ceased to become its director.  The form was signed by Mr Ng.  Ms Guo says the form was filed without her notice or consent, and she has never resigned or ceased to be a director of Art Master.  Mr Ng and Ms Fang however say Ms Guo was removed as a director.  I will deal with this dispute more below.

4.For the purpose of these applications, Ms Guo is now saying that Mr Ng and Ms Fung are in breach of their directors’ duties (fiduciary and otherwise) and have (a) committed various wrongs against Art Master, as a result of which, substantial assets of the company, including the rental income in the region of tens of millions of RMB, have been misappropriated, and (b) caused the company to enter into various transactions which were not in its best interest but only to benefit themselves personally.   I will also elaborate on these claimed wrongdoings later.

5.Ms Guo also says by reasons of these various wrongdoings, Mr Ng and Ms Fang are not trustworthy, and there is a real risk that the company’s assets will continue to be dissipated or misappropriated by them.  

6.Thus, under the derivative claim presently brought against Mr Ng and Ms Fung, Ms Guo now asks for the appointment of interim receivers to preserve and protect the assets of the company, and to carry out investigations, and if necessary, to bring action in the Mainland against potential parties liable to the company. 

7.She also says they have no defence to Art Master’s claim for the return of the rental income and rental that it ought to have earned if not because of their wrongdoing.  There should therefore be an interim payment order to the extent of RMB64.3 million.

8.Mr Ng, Ms Fang and Wing Li Group all oppose these applications.

9.In order to properly understand the allegations of the wrongdoings, and the parties’ contentions, it is necessary for me to set out some of the relevant background as follows.

B.      Background

10.Unless otherwise stated, the following are uncontroversial.

B1.    The purchase of the Hotel by Art Master

11.In about October 2005, through Ms Guo’s contact, she came to know that the Hotel was for sale.  She told Ms Fang about it, and eventually, they decided to set up Art Master to purchase the Hotel at the price of RMB230 million. 

12.They themselves however did not have enough funds to pay the full purchase price.  The initial plan was to make a deposit of some RMB110 million whereby the seller of the Hotel would transfer the property ownership certificate “房地產權證”  (“the Land Certificate”) to them, and Ms Fang would be responsible to use the Land Certificate to borrow from the banks sufficient fund to pay for the balance of the purchase price.

13.Ms Fang and Ms Guo then each contributed RMB35 million and RMB25 million respectively to Art Master by way of shareholder’s loans, which were then paid as deposit for the purchase of the Hotel. 

14.As they still did not have sufficient fund to secure for the release of the Land Certificate, through Ms Fang’s suggestion, Ms Guo, Ms Fang and Art Master agreed with Mr Ng that he would lend a bridging loan of HK$50 million to Art Master at an interest, to be secured by 51% of Art Master’s shareholding.  Mr Ng was further appointed as a director of Art Master.    

15.Mr Ng advanced the HK$50million loan as agreed in January 2006.    Thereafter, the Land Certificate was issued to Art Master.  Mr Ng was also entrusted with the task of dealing with the necessary procedures to complete the purchase of the Hotel.

16.The sale and purchase agreement for the purchase of the Hotel was signed by Mr Ng for Art Master. On the contract, it was stated that the sale price was RMB108 million instead of RMB230 million and the completion date was 31 of May 2006.   The understated price was apparently put in to assist the seller to pay less tax.

17.Later, Ms Guo was told by Ms Fang that it was impossible to raise sufficient loans from the banks to pay for balance of the purchase price and to repay Mr Ng the HK$50 million loan.  It was said that, as the purchase price was stated only to be RMB108 million under the sale and purchase agreement, the banks were not prepared to lend sufficiently for their purposes.

18.Eventually, all three of them decided to solve the financial problem in purchasing the Hotel by:

(1)  Converting Mr Ng’s HK$50million loan into his beneficial acquisition of 51% of the shareholding in Art Master. In other words, he would become a beneficial shareholder of Art Master.

(2)  With this arrangement, Mr Ng would be a 51% shareholder, Ms Fang a 29% shareholder and Ms Guo 20%.

(3)  Each of them as shareholder would provide a shareholder’s loan to Art Master in proportion to his or her shareholding to complete the purchase of the Hotel.  The net position of contribution would thus be Mr Ng would provide RMB117.3 million, Ms Fang RMB66.7 million, and Ms Guo RMB46 million.

19.Mr Ng and Ms Fang later provided further funds to Art Master, and the purchase of the Hotel was completed sometime in June 2006.

B2.    The income of the Hotel

20.Before the Hotel was sold to Art Master, it was leased to and occupied by two companies.  For convenience, I will call them respectively “Shanghai Shen Garden F&B” and “Shanghai Shen Garden Management”, and collectively “the Shen Companies”. 

21.Respectively by 2 leasing agreements entered into in March and May 2006, Art Master agreed to lease the Hotel to one Mr Zhang and his company Shanghai Sheng Rong Hotel Management Company Limited (“Shanghai Sheng Rong) at the rental of RMB1 million per month.  I will call these respectively the 1^stand 2^nd Leases.   The duration of the 1^st and 2^nd Leases is the same, from 1 April 2006 to 31 March 2016.  The 1^stLease was signed by Ms Fang for Art Master, and the 2^ndLease by Mr Ng.

22.Mr Zhang is the uncle of Ms Fang, and Shanghai Sheng Rong is a company incorporated in the Mainland by Mr Zhang.

23.By a sub-lease dated 28 June 2006 (“the Sub-lease”), Shanghai Sheng Rong sub-leased the Hotel and its management to Shanghai Shen Garden F&B for management and use at a monthly rental of RMB1.5 million (i.e., yearly rent of RMB18 million) between 1 August 2006 and 31 July 2007.  Thereafter until 31 July 2011, the yearly rental would be increased to RMB 19 million. 

24.Shanghai Shen Rong therefore makes a profit of some RMB500,000 odd or so per month under these arrangements.

B3.    The acquisition of Shanghai Shen Garden Management

25.In December 2006, Mr Zhang incorporated a company in the Mainland called Xin Jia.

26.In August 2008, Mr Zhang and Xin Jia took over the entire equity interest in Shanghai Shen Garden Management for the consideration of RMB2. 

B4.    The borrowing transactions of Art Master

27.In late May 2006, HSBC granted to Wing Li a term loan of HK$100 million (“the HSBC Loan”).  The loan was secured on, inter alia, Art Master’s corporate guarantee (“the HSBC Guarantee”) for the same amount.

28.In July 2006, the Bank of China (“BOC”) granted a term loan facility of HK$60 million to Art Master.  The loan agreement dated 21 July 2006 was signed by Ms Fang for and on behalf of Art Master.   Under the loan agreement, Art Master is to repay the loan with interest with 120 monthly instalments^[1].   The BOC loan is secured on a mortgage (“the BOC Mortgage”) over the Hotel created by Art Master in favour of BOC.

29.At the same time, by a loan agreement also dated 21 July 2006 (“The Personal Loan Agreement”) entered into between Art Master as lender, and Ms Fang and Mr Ng as borrowers, Art Master on-lent the HK$60 million under the BOC Loan to Ms Fang and Mr Ng at an interest rate of 6% above the interest charged by BOC under the BOC Loan.    However, it is provided under the Personal Loan Agreement that Ms Fang and Mr Ng are only required to repay the interest and the principal together on the following events:

(1)  The expiry of the term of the BOC loan, i.e., 10 years from 21 July 2006;

(2)  Completion of the sale of the Hotel;

(3)  Completion of the transfer of the shareholding of Art Master; or

(4)  BOC calling the entire loan.

30.In other words, until and unless any of the above listed events occur, Mr Ng and Ms Fang need not make any repayment either of interest or principal to Art Master, while at the same time, Art Master has to make substantial monthly repayments to BOC.

31.The Personal Loan Agreement was signed by Mr Ng on behalf of Art Master.  

32.Mr Ng and Ms Fang accept that they have split up the HK$60 million in the ratio of 61:39.  Ms Fang explains in her affirmation that such ratio was so divided “as between 51% for Mr Ng and 29% for [her] reflecting [their] respective equity holding in [Art Master], [Ms Guo’s] 20% being equally divided between Mr Ng and [her]…”.

C.      The alleged wrongdoings of Mr Ng and Ms Fang as directors

33.In light of the above background, Ms Guo says Mr Ng and Ms Fang in breach of their directors’ and fiduciary duties have committed the following wrongdoings against Art Master:

(1)  They have misappropriated (by themselves or though their nominees of Mr Zhang and Shanghai Sheng Rong) the rental income, in that (a) despite repeated demands from Ms Guo, they have failed and refused to account for the rental income of the Hotel for the past three years or so, and (b) they have through Zhang and Shanghai Shen Rong misappropriated RMB500,000 odd rental a month, which ought to have been earned by the Hotel.  

(2)  They have misused Art Master as the borrower and security provider for the purposes of obtaining HK$60 million loan from BOC and the HK$100 million from HSBC for personal use.  These were not carried out in the best interest or for the benefit of the company.

(3)  They have through Mr Zhang and Xin Jia as their nominees misappropriated the equity interest in Shanghai Shen Garden Management.  It is Ms Guo’s case that it should have been Art Master which was to take over the equity interest in Shanghai Shen Garden Management.  This is so because through an agreement (“the Shen Agreement”) reached between Art Master (through Ms Guo and Ms Fang) and Mr Shen (who initially owned Shanghai Shen Garden Management) in February 2006, whereby it was agreed that:

(a)   Mr Shen would assist Art Master to establish a company in the Mainland with authorization to engage in hotel management business so as to take over the business then carried on at the Hotel by Shanghai Shen Garden Management; and

(b)  If the new company could not be established within 2 years, Mr Shen would procure all the equity in Shanghai Shen Garden Management to be transferred to Art Master.

(4)  They without Ms Guo’s knowledge filed the Form D2 with the Companies Registry falsely representing to the outside world, in particular HSBC and BOC, that Ms Guo was no longer a director of Art Master.  Ms Guo says this is false and wrongful, as she has never resigned as director.   She was also not aware of any EGM to remove her. 

34.Based on these allegations of wrongdoings, and the fact Mr Ng and Ms Fang are in control of Art Master, Ms Guo therefore brings a derivative claim against them for these breaches of directors’ and fiduciary’ duties.

D.      The application for the appointment of interim receivers

35.Ms Guo says in light of above wrongdoings of Mr Ng and Ms Fang, they should no longer be entrusted with management of the company, and there is also a real risk that they, if still in control of the company, would further dissipate Art Master’s assets.  The Court should therefore appoint interim receivers over Art Master to preserve and protect its assets.

D1.    Applicable principles

36.There is no dispute as to the applicable principles for appointment of interim receivers.   They can be summarized as follows:

(1)  The Court may appoint a receiver in all cases in which it appears to it to be just and convenient to do so:  Section 21L(1) of the High Court Ordinance (Cap 4).

(2)  The power to appoint receivers on an interlocutory application is discretionary, and is to be exercised flexibly and the principles in American Cyanamid Co v Ethicon Ltd [1975] AC 396 apply.  In other words, the Court needs to consider the following questions to decide whether an interim receiver should be appointed:

(a)   Whether there is a serious question to be tried.

(b)  Whether there is a real risk of dissipation of assets.

(c)  Whether there is no or no current effective protective regime, and some form of interim protection should be given to preserve the status quo.

(d)  The risk of damage to the company if the appointment is made, and whether it can be adequately compensated by a cross-undertaking in damages. 

See:  Tan Man Kau v Chime Corporation Ltd^[2], per Kwan J (as she then was) at paras 39-40; Cenky Ltd v Zealot & Company Ltd & Another^[3], per Kwan J at paras 30, 35

37.Bearing these principles in mind, I now proceed to consider the present application.

D2.    Serious question to be tried

38.With the evidence placed before me, and reminding myself that this is an interlocutory application, I am of the clear view that there are serious questions to be tried on whether Mr Ng and Ms Fang have commited the alleged wrongdoings and are in breach of their fiduciary duties.  My reasons are as follows.

D2.1  The BOC Loan

39.Mr Ng and Ms Fang frankly admit in the evidence that the HK$60 million BOC Loan borrowed by Art Master was on-lent to them for their personal use.    Further, from the evidence filed by them, there is nothing to suggest that in causing the company to enter into the BOC Loan, the BOC Mortgage and then to on-lend it to them, they had discussed the same with Ms Guo (when even on the Defendants’ case she was then still a director of the company). 

40.Mr Ng and Ms Fang’s case is however that this transaction was also to the benefit of Art Master, because it would enable the company to earn a profit in the form of the difference in the interest rate charged by BOC under the BOC Loan and the rate that they are paying the company under their personal loan. 

41.After looking at the evidence, I am of the view that it is at least seriously arguable that the BOC Loan was not entered into in the best interest of the company:

(1)  There is nothing to suggest that the company at that time needed the extra “profit” to be earned.  In the circumstances, it is questionable whether it was in the best interest of the company to (a) tie up its only asset (ie., the Hotel) under the BOC Mortgage, and (b) incur substantial liability, so as to borrow the $60 million for the purpose of on-lending it to the Defendant directors for their personal use.

(2)  Further, the terms of the personal loan are very favorable to Mr Ng and Ms Fang, in that they are not required to repay either the interest or principal until say 10 years later.  On the other hand, not only that the company would not be able to earn the interest for a long period under the loan, the company at the same time would also have to make substantial monthly repayment to BOC for interest and principal under the BOC Loan.

(3)  The prima facie position that Mr Ng and Ms Fang had not disclosed and discussed the BOC Loan, the BOC Mortgage and the Personal Loan Agreement with Ms Guo (the other director and shareholder of the company) is per se suspicious without an explanation, and no explanation has been given. 

42.I am therefore also satisfied that there is a serious question to be tried as to whether Mr Ng and Ms Fang are in breach of their fiduciary duties in relation to the BOC Loan, the BOC Mortgage and the Personal Loan Agreement transactions.

D2.2  The HSBC Loan and the HSBC Guarantee

43.It is accepted by Mr Ng that the HK$100 million loan was provided to Wing Li Group.  It is his case that he used this loan to finance him to provide his part of the shareholder’s loan to Art Master.  He says when Ms Guo, Ms Fang and him discussed on his becoming a beneficial 51% shareholder of Art Master and to provide the necessary shareholder’s loan to complete the purchase of the Hotel, he had made it clear to Ms Guo that he would need to borrow money from the banks by using Art Master and his other assets as securities.    In support of his case, Mr Ng in his opposing affirmation also produces, inter alia, a copy of a shareholders’ resolution dated 5 June 2006 approving the company to grant the HSBC Guarantee to secure the HK$100 million loan to be made to Wing Li.  The resolution was on the face of it signed by Ms Guo.

44.Ms Guo however says that when Mr Ng was invited to become a beneficial shareholder of Art Master by converting his initial loan of $50 million into investment in the company, it was agreed amongst all of them that each of them would have to come up with his or her own resources the respective share of shareholder’s loan to complete the purchase of the Hotel.  Thus, she was never told that Mr Ng would have to use Art Master to assist him to borrow money for that purposes.  Ms Guo also says her signature now appears on the said board resolution is forged, as she had never attended such a meeting or signed the resolution. 

45.It is also pertinent to note that even Ms Fang now says in her affirmation that she was not aware of the HSBC Guarantee until July or August 2007, when she was given a draft agreement by Mr Ng which was prepared for the intended sale (which eventual fell through) of all the shares of Art Master to a company called RECP Garden Ltd.   Ms Fang describes the HSBC Guarantee at paragraph 72 of her affirmation as “dubious”.    This tends to support Ms Guo’s case.

46.The conflict of the evidence cannot be resolved in one way or the other at this stage, in particular there is now an allegation of forgery.  As such, it is inappropriate for me to comment on the respective merits of their case, suffice to say that Ms Guo’s case poses at least a triable and arguable issue.

47.In the premises, there is also a serious question to be tried as to whether in causing Art Master to provide the HSBC Guarantee to raise the HSBC Loan for Mr Ng’s own use through Wing Li, it was not made in the best interest of the company and Mr Ng was in breach of his fiduciary duty.

D2.3  Misappropriation of the rental income

48.Since May 2006, Ms Guo has been demanding Mr Ng and Ms Fang to give an account of the rental income of the Hotel, which is the only revenue of Art Master.  They have not done so.

49.It is Ms Guo’s case that for the three years up to 31 August 2009, Art Master should have received some RMB62,666,667 million as rental income: RMB41 million of it should come under the 1^stand 2^nd Leases, and another RMB21,666,667 is attributable to sum total of the RMB583,333 monthly rental income that ought to have been received by Art Master for that period but have instead gone to Mr Zhang and his company.

50.In answer to the various allegations on the misappropriation of rentals, the evidence filed in late November 2009 by Mr Ng and Ms Fang can be described as vague and evasive, which is effectively as follows:

(1)  There is an allegation by Ms Fang that she has been personally carrying the monthly rental income in cash from Shanghai to Hong Kong to have it deposited into Art Master’s bank account in Hong Kong.   She also appears to say that she has sometimes used the rentals to repay the monthly instalment (which is about HK$700,000) under the BOC Loan due by Art Master. 

(2)  However, none of these allegations are supported by any documents, such as bank account statements.   No explanation is given as to why these documents could not be produced.

(3)  She has also provided a self-made chart as an exhibit setting out the rental income of Art Master between July 2006 and November 2009.  This purports to show the total rental income over this period is RMB30,250,000, but the net income (after deducting certain expenditures which do not include any instalment repayments under the BOC Loan) is in the sum of RMB25,948,366.86.   There is however nothing to indicate the present whereabout of this net income.  Again, no underlying documents such as bank statements or expenditure receipts or vouchers are produced to support this chart.   No explanation is given as to why these documents could not be produced.

(4)  Mr Ng on the other hand says he is not involved in the handling of the rental income, and it is Ms Fang who is solely responsible for that. 

(5)  Ms Fang explains that, in February to March 2006, as the existing tenancies with Shanghai Shen Garden B&F and Shanghai Garden Management would be terminated, she proposed to Mr Ng and Ms Guo that, in order to preserve the value of and income from the Hotel after Art Master’s purchase of the Hotel, the Hotel be leased to Mr Zhang (her uncle).  She says Mr Ng and Ms Guo agreed to that.  That was why the 1^st Lease was executed. Later, Mr Zhang suggested that it would be more convenient for him to operate and manage the Hotel through a company (i.e., Shanghai Shen Rong), and that was why the 2^nd lease was executed   

(6)  These explanations fail to adequately explain why Mr Zhang and Shanghai Shen Rong should then be rewarded with RMB500,000 profit a month, when the effective management of the Hotel was still carried out by the Shen Companies under the Sub-lease, paying RMB1.5 million for their management rights.   This is particularly puzzling as Ms Fang says the arrangements were supposed to be put in place to “preserve the value of and the income from the Hotel.”

(7)  Similarly, Mr Ng says he has no knowledge of the dealing between Ms Fang and Mr Zhang in relation to the 1^stand 2^nd Leases as well as the Sub-lease.

51.Ms Guo denies she had prior knowledge or has ever agreed to those arrangements with Mr Zhang and the entering into the 1^st and 2^nd Leases, and the Sub-lease.  Mr Ng’s above-mentioned evidence also contradicts that of Ms Fang and tends to support Ms Guo’s case.

52.In light of the conflict of the evidence, coupled with the lack of evidence as to the use and whereabout of the rental income of the Hotel over the past three years, the unexplained lack of underlying documentations to support the use and whereabout of the rental income, the lack of explanations as to why Mr Zhang and his company should be rewarded with some RMB500,000 a month out of the rental income,  I have also come to the clear view that there is at least a serious question to be tried on whether Mr Ng and Ms Fang have misappropriated the rental income as alleged by Ms Guo.    This is further underlined by the fact that in the audited accounts produced by Mr Ng, Art Master was recorded to have a revenue of only HK$16,758 up to March 2007.

D2.4  Misappropriation of Art Master’s interest in Shanghai Shen Garden Management

53.In defence of this allegation, Ms Fang simply denies that there is the Shen Agreement.  

54.Mr Ng again denies having any knowledge of the Shen Agreement, but he says that he was told by Ms Fang that Mr Zhang and Xin Jia were merely holding the interest for Art Master as its nominees.

55.In light of these denials, it must at least be triable as to the existence of the Shen Agreement, and thus whether it was wrongful for Mr Fang and/or Mr Ng, as directors of Art Master, to allow Mr Zhang and Xin Jia to take up all the equity in Shanghai Shen Garden Management.

D2.5  The filing of a false Form D2

56.Ms Fang says in evidence that she was told by Mr Ng sometime in April 2007 that they should remove Ms Guo as a director, because they discovered that Ms Guo had tried to produce a forged sale and purchase contract for the Hotel (stating in it the purchase price was RMB230 million instead of RMB108 million in the original sale and purchase agreement) in trying to obtain a bank loan from ICBC.    She however left that all to Mr Ng to deal with it, and she was not involved in the process, if any.

57.Mr Ng says that Ms Guo was in fact properly removed in an EGM of Art Master held on 6 September 2007, and Ms Guo was fully aware of that.  In support of his case, he has exhibited to his affirmation (a) a copy of a notice addressed to the directors and shareholders of Art Master dated 28 August 2006 (signed by him as director) for the holding of the said EGM to remove Ms Guo as a director, and (b) a copy of the minutes of the EMG said to have been held on 6 September 2006 stating that it was resolved by the members at the meeting that Ms Guo be removed as a director.   The minutes was signed by Mr Ng and Ms Fang as the present members, and by Mr Ng as the Chairman.

58.Ms Guo says she has never received the EGM notice, and has no knowledge of the EMG being held.    

59.Mr Tong, leading counsel for Ms Guo, submits that the EGM notice and the minutes now produced must be viewed with circumspection in light of the following:

(1)  Ms Guo has been repeatedly demanding for Art Master’s records since February 2008 but Mr Ng has never responded.   The notice and minutes were all of a sudden only produced now for the purpose of this hearing.

(2)  Ms Guo’s solicitors have asked Mr Ng’s solicitors for inspection of the original of these documents on 25 November 2009 (the day after Mr Ng filed his affirmation) and 26 November, but again no response was provided.

(3)  It is only pleaded by way of an amendment in Mr Ng’s defence on 24 November 2009 (the day of the filing of Mr Ng’s affirmation) that Ms Guo was removed in an EGM held in September 2006.

(4)  It is highly suspicious that if there were in fact the EGM and the notice that was sent to Ms Guo, these would not have been produced to Ms Guo and her solicitors much earlier even notwithstanding her repeated demands and complaints about the filing of the false Form D2.

(5)  Ms Fang’s own evidence does not say that she attended the said EGM to remove Ms Guo.  Her evidence is that she knew nothing about the removal save that Mr Ng told her in April 2006 that they should remove Ms Guo as a director.  This contradicts the minutes and Mr Ng’s evidence.

60.I find force in Mr Tong’s submissions and criticisms. 

61.But this is only an interlocutory application, and I have reminded myself that there has yet to be full discovery and the filing of evidence.  For the present purpose, I would therefore not say anything more about Mr Ng and Ms Fang’s defences raised in relation to the allegation of their breach of fiduciary duty in filing a false Form D2 with the Companies Registry, other than that I find this constituting a serious question to be tried.

D3.    Real risk of dissipation of assets and no protective regime

62.Given the above evidence and my conclusion that there are serious questions to be tried on the breaches of duties by Mr Ng and Ms Fang in committing the alleged wrongdoings against the company, I am satisfied that there is a real risk of dissipation of assets if Mr Ng and Ms Fang are allowed to be in control of the company and its assets.

63.The risk of dissipation of assets relate to:

(1)  The rental income that has so far been received by Art Master:  Up till today, Mr Ng and Ms Fang are still coy about the whereabout of these incomes, and how much of it is still left within the company’s control and possession. In the circumstances and in light of their evasive attitude in accounting for these incomes, there is still a risk that any of rental income that is still left in the company’s possession might be dissipated.   

(2)  The future rental income to be received by Art Master:  For the same above reasons, there is a real risk that this would be dissipated.  Art Master’s loss could continue to accrue at a rate of some RMB1.5 million odd per month. 

(3)  The equity interest in Shanghai Shen Garden Management.   Mr Ng’s case is that Mr Zhang and Xin Jia are only holding their interest in Shanghai Shen Garden Management for Art Master.  However, this is not Ms Fang’s case, and Ms Fang is related to Mr Zhang.  In the circumstances, there is a risk that this asset may be dissipated before the final resolution of the dispute. 

64.I am also satisfied that if Mr Ng and Ms Fang are allowed to be in continued control of the company, there is currently no protective regime under which Art Master’s assets can be properly protected and preserved for the benefit of the company.   This is so because:

(1)  The evidence I have seen so far, in particular the way Mr Ng and Ms Fang have responded to the various allegations of wrongdoings as discussed above, has demonstrated that there is at least a doubt on the integrity and commercial morality of Mr Ng and Ms Fang in managing the company. Cf:  Honsaico Trading Ltd v Hong Yiah Seng Co Ltd^[4].

(2)  This is further underlined by the fact that Mr Ng and Ms Fang are now blaming each other for those alleged wrongdoings that neither of them could provide a satisfactory explanation at this stage.  Ms Fang has even filed a counterclaim against Mr Ng in this action.  In the circumstances, it is difficult to see how they could properly and effectively manage the company and protect its assets in the interim.

(3)  Both of them have continued to refuse to account for the whereabout of rental income of Art Master received over the past three years.

65.In the premises, I am further satisfied that some form of protective measure should be put in place to preserve the assets of the company and to maintain the status quo.

66.The question is whether this should take the form of the appointment of interim receivers.

D4.    Any risk or damage to Art Master if a receiver is appointed

67.Mr Yuen, leading counsel for Mr Ng and Wing Li, and Mr Gary Lam (counsel for Ms Fang) both submit that the appointment of interim receivers is inappropriate.  This is so because it would not only be very costly, but would also have a serious adverse impact on the operation of the company.      In support, they rely on the proposition that, generally, the court should be slower to appoint interim receivers than to grant an interlocutory injunction, as interim receivership is more intrusive, more expensive and less reversible than the granting of an injunction. The applicant must show that the appointment of receivers is appropriate because other less invasive remedies would be inadequate:  Cenky Ltd v Zealot, supra, para 34.

68.Mr Yuen further says that the appointment of receivers is inherently likely to have an adverse effect on a company and its business:

(1)  There is likely to be damage to the goodwill of the company which will be difficult to quantify.

(2)  The appointment of receivers is likely to be disruptive of the company’s business.

(3)  It would be difficult for those in the outside world to distinguish between receivers appointed on the grounds of insolvency and receivers appointed for other reasons and the inevitable slur which a receivership will case on the assets of a company and its business, and that these are factor which should weigh with the court against appointing receivers.

See: Jaber v Science and Information Technology Ltd [1992] BCLC 764 at 789g-h; Re Full Bullion Shipping Ltd [2003] 2 HKLRD 674 at paras 47-51; Cheng Hon Wah v Cheung Kam Wah (unrep., HCMP 2686/2003, 27 October 2003, Barma J) at para 36; Re Niceline Co Ltd [2003] 2 HKLRD 725 at para 72.

69.Both counsel therefore say that, in the present case, instead of appointing interim receives, the company’s assets would be sufficiently protected by the less drastic measure of a suitably framed undertaking to be given by Mr Ng and Ms Fang. 

70.In fact, a few days before this hearing, Mr Fang and Mr Ng offered to Ms Guo the following undertakings to protect and preserve the company’s assets from dissipation:

(1)  A joint account to be opened with HSBC and any cash currently held by Art Master and all future rental income received by it be deposited into the joint account.  No money shall be paid out of the account without the consent of Ms Guo, Ms Fang and Mr Ng.

(2)  Mr Ng and Ms Fang shall give 7 days’ notice to Ms Guo on any change in the terms of the tenancy of the Hotel with Xin Jia.

(3)  Ms Fang and Mr Ng shall within 14 days provide Ms Guo with copies of the relevant receipts or documents in respect of the income and expenses of Art Master from the date of its incorporation to 31 October 2009.

(4)  Ms Fang and Mr Ng shall within 14 days provide Ms Guo with copies of documents relating to the BOC Loan to the company including any monthly statement and the present indebtedness owed by Art Master to BOC which are now available and in the possession of Ms Fang and Mr Ng.

(5)  Ms Fng and Mr Ng shall within 14 days provide Ms Guo with copies of the documents relating to the HSBC Loan to Wing Li, including any bank transactions records and the present indebtedness owed by Wing Li to HSBC which are now available and in the possession of Mr Ng.

(6)  There be a speedy trial of the claim.

71.The offer is repeated at the hearing.   

72.All these are a matter of degree and balancing exercise.   The question that I need to consider is whether these undertakings, which only come at the eleventh hour, would now give sufficient protection or should a receiver be appointed, after measuring against any potential adverse effect the appointment might have on the company. 

73.I will first look at the potential adverse effect that might be caused to Art Master by the appointment of receivers.

74.I am not persuaded that the appointment of receivers would have any significant or serious adverse effects on the operation of the company:

(1)  The company is merely an asset holding company, with the Hotel its only asset.  Its only revenue is the regular rental income.    The day-to-day management of the Hotel is undertaken by a third party.   

(2)  As result, the day-to-day running or operation of the company is likely to be minimal and not costly.  There is no evidence to suggest otherwise.

(3)  There is also no evidence to suggest that the potential customers and suppliers of the Hotel know or associate the Hotel (which is in Shanghai) with Art Master (which is a BVI company).

(4)  In the circumstances, I do not think the inherent adverse effect of the appointment of receivers as identified by Mr Yuen above is likely to be of a significant degree or extent in relation to Art Master.  

(5)  There is also no evidence before me to show what is the likely quantum of the cost to be incurred by the appointment of interim receivers.    There is thus nothing to support the submissions that the cost would be disproportionate or unjustified in the circumstance of the present case, in particular given the substantial amount of the assets said to have been and would be misappropriated.  This is particularly so as there is unlikely to be substantial administrative cost to be incurred in the day-to-day running of the company.

75.On the other hand, given that (a) quite a number of the serious allegations of wrongdoing have not been adequately explained in the evidence by Mr Ng and Ms Fang, (b) these undertakings only came at the eleventh hour, and (c) Mr Ng and Ms Fang are now pointing their fingers against each other, on balance, I am persuaded that independent professionals, instead of Mr Ng and Ms Fang, should be appointed to manage the affairs of Art Master and to preserve and protect its assets.

D5.    Whether the applicant is able to provide an undertaking as to damages

76.Ms Guo has offered the usual undertaking as to damages.  Her present 20% shareholding in Art Master worth RMB70 million (based on a valuation report made in 2005 that the Hotel is worth some RMB350 million). 

77.None of the Defendants have filed any evidence to challenge this. 

78.I will accept this undertaking as to damages as sufficient.

D6.    Delay

79.It is Ms Guo’s own case that:

(1)  She was denied information relating to the Hotel and Art Master since June 2006 and that her demands for account of rental were ignored by Mr Ng and Ms Fang.

(2)  She discovered the leasing of the Hotel to Mr Zhang in early 2007.

(3)  She discovered the HSBC Loan and HSBC Corporate Guarantee sometime in August 2007.

(4)  She found out that she was removed as a director in February 2008.

(5)  She discovered the BOC Mortgage in March 2008.

80.She only took out the application for interim receivers on 2 November 2009.

81.Mr Ng and Ms Fang both now say that there is a serious and unexplained delay by Ms Guo in taking out the present application, and the court in the exercise of discretion should refuse her application.

82.However, there is evidence to show that Mr Ng and Ms Guo have been engaged in on and off settlement negotiations since mid-2008.  It was only on 22 October 2009 that Ms Guo through her solicitors issued a final warning to Ms Fang and Mr Ng to demand for account for the rental income and to provide the management accounts of Art Master.     They again did no accede to Ms Guo’s request.

83.After that, Ms Guo took out the present application for appointment of receivers.

84.In light of the above, I am satisfied that there is no culpable delay on the part of Ms Guo in making the present application.

D7     Conclusion on the application for appointment of receivers

85.For the above reasons, I am satisfied that on balance, and subject to Ms Guo’s undertaking as to damages, I should appoint interim receivers of Art Master. 

E.      Interim payment application

86.Ms Guo seeks interim payment against Mr Ng and Ms Fang for the sum of RMB64.3 million.    This sum represents all the rental income Ms Guo says Art Master have and should have (i..e the monthly sum of some RMB500,000 earned by Mr Zhang and Shanghai Sheng Rong) received over the past three years up to 30 September 2009.   

87.An application interim payment is made under O. 29 r. 11(1)(c) of the Rules of High Court.  

88.The test for granting interim payment is a high one and is well settled:

(1)  The court must be satisfied that the plaintiff “would” obtain judgment for substantial damages against the defendant, not “would likely to”, and the standard of proof is a high one, on the balance of probabilities:  Shenzhen Envirotex Electronics Co Ltd v Cellplus (HK) Ltd [2005] 4 HKLRD 217 at para 19.

(2)  The court must be satisfied that the defendant has no arguable defence, such as one that would warrant the grant of unconditional leave in an O.14 application:  Commonwealth Holdings Plc v Quadrex Holdings Inc [1989] 3 All ER 492 at 519b.

89.Mr Tong for Ms Guo says interim payment should be ordered as Mr Ng and Ms Fang have no triable defence to the claim for the RMB64.3 million because:

(1)  Mr Ng and Ms Fang have failed to account for the rental income and have practically offered no explanation for such failure.

(2)  Insofar as if some of the rental income has been used for repayment of the BOC Loan, it must be improper as they have used the loan for personal purposes.

(3)  They are thus clearly in breach of their fiduciary duty in causing the company the loss of this RMB64.3 million.

90.With respect, I am unable to accept Mr Tong’s submissions.  My reasons are as follows:

(1)  Insofar as the RMB42 million or so (i.e, the rental income that should have been paid by Shanghai Shen Rong and Mr Zhang to Art Master) of the RMB64.3 million is concerned, Ms Fang has set out in her affirmations that the company has in fact received a net income of only RMB25 million odd (after deducing expenses).    She also explains that for various reasons, Shanghai Shen Rong at times has only been able to pay Art Master lesser rental  than the contracted sum of RMB 1 million.      

(2)  Although there are no underlying documents to support Ms Fang’s case at this interlocutory stage, I am unable to say that what she says is unworthy of belief without a trial and without proper discovery.

(3)  As to the RMB25 million net income, it is unclear from Ms Fang’s evidence as to whether she has used some or all of it to settle the instalment payments for the BOC Loan. 

(4)  Insofar as the same has been used to repay the BOC Loan instalment, whether this is wrongful depends on whether the Personal Loan Agreement could be set aside against Mr Ng and Ms Fang.  They have explained that this was in the best of the company as the company could earn a higher interest.  Based on the terms of the agreement, it is correct that the company would be able to earn higher interest by on-lending the BOC Loan to them.  Although the repayment terms in the Personal Loan Agreement are, as I explained above, very favourable to Ms Fang and Mr Ng, I cannot say at this stage that their case is not triable.  They should therefore be allowed a chance to explain at trial why the BOC Loan and the Loan Agreement were for the benefit and interest of Art Master.

(5)  For the rental income said to have been pocketed by Mr Zhang and his company (in the region of RMB21 million odd), it is Ms Fang’s case and evidence that Ms Guo was fully aware of and had consented to the use of Mr Zhang and Shanghai Shen Rong to enter into the 1^stand 2^nd Lease as well as the Sub-lease.  Although Ms Guo denies this, this must be triable given the conflict of the affidavit evidence.   

91.For these reasons, Ms Guo has not shown to my satisfaction that there is at this stage no triable defence to the derivative claim for RMB64.3 million.  I therefore refuse to make an order for interim payment.

G.      Conclusion

92.Subject to Ms Guo’s undertaking as to damages, I will make an order for the appointment of receivers over Art Master.  I will however dismiss Ms Guo’s application for interim payment.

93.Mr Tong has provided this Court with a draft order for the appointment of the receivers, with the proposed powers set out therein.   Despite the Court’s invitation, Mr Yuen and Mr Lam have both decided not to comment on the draft order at this stage.  They however want to reserve their position on the terms of the proposed appointment, as they want to first see the reasons upon which the Court decides to make the appointment, if it so decides. 

94.In light of the stance taken by Mr Yuen and Mr Lam, I would make an order in terms of the draft order proposed by Mr Tong, with liberty to apply to vary it.

95.I further make an order nisi that:

(1)  Ms Guo’s costs of the application for interim receivers be in the cause.  

(2)  Costs of the interim payment application be to Ms Fang and Mr Ng, to be taxed if not agreed, with certificate for two counsel (for Mr Ng).  I would apportion one-sixth of the hearing time before me to the interim payment application.   

96.Unless any of the parties applies to vary the same by Summons, the costs order nisi shall be made absolute 14 days from today.

Representation:

Mr. Ronny K.W. TONG, S.C. leading Ms. Linda CHAN and Ms. Zabrina S.Y. LAU, instructed by Messrs Siao, Wen and Leung, for the Plaintiff (by original action) and for the 1^st Defendant (by counterclaim).

Mr. Rimsky K.K. YUEN, S.C. leading Mr. Victor DAWES, instructed by Messrs Tse Yuen Ting Wong, for the 2^nd Defendant (by original action & by counterclaim) & 4^th Defendant (by original action).

Mr. Gary C.C. LAM, instructed by Messrs Lam, Lee & Lai, for the 3^rd Defendant (by original action) and for the Plaintiff (by counterclaim).

[1] See clause 7.1(a) to (c) of the BOC loan agreement.

[2] Unrep., HCMP 4146/2001, 25 June 2004.

[3] [2008] 1 HKLRD 386.

[4] [1990] 1 HKLR 235.