Velatel Global Communications Inc and Another v. Chinacomm Ltd and Others
Read the full judgment text of HCA 1978/2011 on BabelCite. This High Court CFI judgment was delivered on 26 October 2012.
1. The Plaintiffs apply for continuation of 2 ex parte Mareva injunction orders, whereas the Defendants apply for their discharge on the ground of material non-disclosure.
Cited by 6 cases · Cites 6 cases
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HCA 1978/2011 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO 1978 OF 2011 ____________
Before: Deputy High Court Judge Au-Yeung in Chambers Date of Hearing: 19 July 2012 Date of Decision: 26 October 2012 _____________ D E C I S I O N _____________ 1.The Plaintiffs apply for continuation of 2 ex parte Mareva injunction orders, whereas the Defendants apply for their discharge on the ground of material non-disclosure. SUBJECT MATTER OF THE INJUNCTIONS 2.The Injunction Orders seek to freeze assets of D1 (Chinacomm), D4 (Smart Channel) and D10 (Feng Xiao Ming) up to US$4,749,599 (“the US$4.7 million”), including money in 3 bank accounts (collectively “the subject accounts”):
It is the Plaintiffs’ case that items (i) and (iii) had to be operated jointly by Mr Colin Tay of the Plaintiffs and Qiu Ping (D6) (“the double signature arrangement”). However, D1/Qiu Ping wrongfully changed the signatory arrangement and removed the bulk of the US$4.7 million. The 2nd Injunction Order is against D10 to whom part of the funds were transferred. BACKGROUND 3.This action is essentially a dispute between foreign investors (the Plaintiffs) and Mainland domestic entities (the Defendants) over a joint venture investment in D1 which is a Cayman Islands company. P1 is a United States listed company engaging in telecommunication business. It was formerly known as Mortlock Ventures Inc and ChinaTel Group Inc. P2 is a Hong Kong company. Colin Tay was and is president of P1 and authorized representative of the corporate director of P2. He was and is the person in control and ownership of P2. At all material times, he was the central figure in the Plaintiffs’ camp. 4.Qiu Ping was the central figure in the Defendants’ camp. D1 was used by D6 to D8 as a special purpose company for the implementation of the joint venture between Colin Tay and Qiu Ping’s camps. The relationship of the Defendants is tabulated as follows:
(The highlighted Defendants will feature significantly in this Decision.) 5.The parties’ relationship originated from negotiations between Colin Tay and Qiu Ping to develop and operate 3.5 GHz spectrum wireless broadband services in 29 major cities in Mainland China (“the Project”). It culminated in an agreement, in broad terms, whereby Colin Tay’s camp was to purchase up to 49% equity interest in D8 at a consideration of US$196 million and then have the shares of D1 floated. The intention was for Colin Tay’s camp to provide, amongst others, financial resources, and D8 to provide the licences to operate wireless broadband network. 6.Anyway, the intention was for funds from D1 to flow to its wholly owned subsidiary, Smart Channel (D4), and then to Yunji, a Chinese wholly owned foreign invested enterprise (“WOFIE”) engaging in telecommunication business. The profits made by D8 (the licence holder) would be indirectly transferred to a WOFIE and further absorbed by Colin Tay’s camp (49%) and Qiu Ping’s camp (51%) through D1. This indirect method of absorbing profits was used to get round the complicated legal restrictions against foreign investments in the telecommunications industry imposed by the Chinese government and to enable parties to achieve the listing of D1 on a stock exchange as agreed. 7.Initially there was a Build to Suit Agreement (“BSA”) dated 1 November 2007 setting out the broad terms of the joint venture. It was made between a company (“Trussnet Delaware”) from Colin Tay’s camp and D8. At that time, D8 held 2 licences issued by Ministry of Industry and Information Technology, namely,
Of these, one city (Qingdao) overlapped with the 5 Cities. Therefore, at the date of the BSA, D8 held licences covering a total of 29 cities in Mainland China. 8.The parties subsequently entered into various agreements to govern the joint venture and the subscription for the shares in D1:
For easy reference, the material terms of these agreements are set out in the Annexure to this Decision, and are in bold print whenever referred to in this Decision. 9.Some features of these agreements concerning the parties, payment structure, signatory rights and timing need to be highlighted. 10.Insofar as parties were concerned, Colin Tay’s camp used various entities (Trussnet Delaware, Trussnet Nevada, Gulfstream, and P2) to enter into those agreements, but P1 never appeared as a party. P2 only appeared as a party to the TCPSSA and the Addendum. 11.Insofar as payment structure was concerned, the terms governing the dates of payment and the amount of each tranche of the US$196 million had been changed from agreement to agreement. 12.Insofar as signatory rights were concerned, in Article 1(b) of both the TDFA and TNFA, each of Trussnet and D8 was required to appoint one person as bank signatory of the bank accounts of inter alia D1, Smart Channel (D4) and Yunji after the first US$5 million (“the First Payment”) had been made to D1. Article 1 of the Supplementary Agreement likewise contained a term for payment of part of the subscription price to a bank account jointly controlled by the parties. 13.Insofar as timing was concerned, when the TDFA was executed and as all the parties were aware, the 25 Cities Licence would expire in half a month’s time on 29 February 2008. The TNFA was entered into after expiry of the 25 Cities Licence. 14.Indisputably, pursuant to the TCPSSA, on 23 February 2009, D1 issued a share certificate to P2 (“the Share Certificate”), representing 2,450,000,000 (49%) shares of D1, even though a very substantial part of US$191 million remained unpaid. On the same day, P2 signed 2 notes (“the 2 Notes”), one to acknowledge that the Share Certificate was borrowed, the other agreeing to pledge to D1 the shares representing the unpaid balance of the subscription price. 15.As background information, the First Payment had been made in tranches in March/April 2008 to Chinacomm Account 2 and by cash, before the GSSA was signed. THE PLAINTIFFS’ CASE AT THE STAGE OF THE EX PARTE INJUNCTIONS 16.According to Colin Tay, he was allegedly told in early 2010 that D1 was in need of funds to meet government deadlines. If those deadlines were not met, the licences could be revoked. So Colin Tay negotiated with Qiu Ping in good faith to find a way to save the Project and the Plaintiffs’ investment. 17.According to Colin Tay, Qiu Ping’s camp had never satisfactorily accounted for expenditure of the First Payment. So he, on behalf of the Plaintiffs, and Qiu Ping on behalf of D8, orally agreed for the Plaintiffs to inject “another US$5 million in tranches as equity to Chinacomm Limited, with the condition that new bank accounts of Chinacomm Ltd and Smart Channel would be established with the double signature arrangement”. The money was for the specific purpose of using in the joint venture. The Plaintiffs were funding the investment ahead of deadline because D8 had not yet renewed the licences for 29 cities as required by Article 3.2(b) of the TCPSSA[1]. 18.It is not in dispute that the Chinacomm Account 1 and Smart Channel Account were first set up in April 2010 and were subject to a double signature arrangement, with Colin Tay and Qiu Ping being the signatories. Nor is it disputed that the US$4.7 million was paid in tranches in April to June 2010 by Colin Tay’s camp into the Chinacomm Account 1. What was in dispute was the underlying agreement. Colin Tay claimed that the 2 Accounts were opened pursuant to the oral agreement. 19.Apart from the US$4.7 million, no other party had put funds into Chinacomm Account 1. 20.In November 2011, Colin Tay learnt from the Bank that he was removed as an authorized signatory of Chinacomm Account 1. 21.On 18 November 2011, the Plaintiffs obtained an ex parte Mareva injunction against D1, D2, D3, D6 and D7 (the 1st Injunction Order) from Deputy Judge L Chan (as he then was). D1, D6 and D7 were ordered to disclose by affidavits the details of the subject accounts, any other accounts under their names, details of fund movements and payees. 22.It transpired that without notification to the Plaintiffs, Qiu Ping and Yuan Yi (D7) convened a board meeting of D1 on 24 May 2011 and removed Colin Tay’s signatory rights from Chinacomm Account 1. Less than a month later, on 21 June 2011, Qiu Ping as sole signatory transferred US$4.5 million to the account of Feng (D10) in DBS Bank. 23.On 8 December 2011, the Plaintiffs obtained ex parte from Deputy Judge Lok the 2nd Injunction Order against D10 to freeze his assets up to US$4.5 million. D10 was ordered to disclose by affidavit, the purpose and movements of the US$4.5 million. 24.This is the substantive hearing for the continuance of the 1st and the 2nd Injunction Orders. The Defendants, however, apply to discharge them on 4 principal grounds:
SECTION A MATERIAL NON-DISCLOSURE The legal principles 25.There is no dispute on principles. An applicant must make full and frank disclosure in an ex parte application.
26.What is material is for the judge to decide. Suppression of material facts will cause the court to discharge an ex parte order without going into the merits.
In Brink’s Mat Ltd v Elcombe [1988] 1 WLR 1350, at 1356F-1357F, per Gibson LJ. See also Gee on Commercial Injunctions,5th ed, at p 241. 27.In considering what matters should be disclosed to the court, the test is whether the facts are relevant to the exercise of the discretion, regardless of whether they are relevant to the merits of the claim, and irrespective of whether the matters, if disclosed, would have caused the court to refuse to grant the ex parte application. The court was not concerned with whether the matters not disclosed would, if they had been disclosed, have caused it to refuse to grant the ex parte order. The test was whether the court should have these matters in the weighing scales: Standard Chartered Securities Ltd v Lai Arthur & ors [1993] 1 HKC 375,at 380-381. 28.The test of materiality is objective.
29.The materiality of matters undisclosed or misstated, if relevant, will depend on the importance of the facts to the issues which were to be decided by the judge on the ex parte application: Pacific Base Services Ltd & Anor v Silver Gain Development Ltd & ors [1996] 1 HKC 610at 617I-618A. 30.The duty to disclose cannot be fulfilled by simply exhibiting voluminous documents mentioned in the supporting affidavit without making any distinct reference to the points in the body of the affidavit itself or when addressing the judge at the hearing: Standard Chartered Securities Ltd v Lai Arthur, page 388Gfollowed in Rever (AMA) Salon Ltd v Kung Wai For Danny & others [2001] 1 HKC 241, 246E-F. 31.Where there has been material non-disclosure in an ex parte application, the practice of the court is to discharge the order without going into the merits: R v Kensington Income Tax Commissioners, ex parte de Poliganc [1917] 1 KB 486, 514-515;Manor Electronics Ltd & Anor v Dickson & ors [1988] RPC 618at 624. The bases of the Plaintiffs’ application before Deputy Judge L Chan 32.At the ex parte stage, the causes of action endorsed on the writ of summons were: (i) breach of the TCPSSA by unilaterally removing Colin Tay as an authorized signatory to Chinacomm Account 1; and (ii) breach of the “agreements under the joint venture” by failure to secure the licences. 33.In the 1st affirmation of Colin Tay (which constituted the supporting affirmation for the 1st Injunction Order), the 4 incidents of breach could be summarized as:
34.At the ex parte hearing, it was only item (iv) that the Plaintiffs relied on in their skeleton and oral submissions (page 8R-9E of the transcript). There was no exchange between the Court and the Plaintiffs’ counsel relating to the legal bases of the causes of action. 35.Deputy Judge L Chan confirmed that the Plaintiffs were not relying on “all these other things about misrepresentation, about breach of warranty to renew a license or forged license …” (page 9F of the transcript). He granted the 1st Injunction Order solely on the basis of breach of the double signature arrangement (page 12R-T of the transcript). 36.The statement of claim filed subsequent to the ex parte hearing relied also on other causes of action. For the purpose of this discharge application, those additional causes should be disregarded. The alleged non-disclosure 37.In substance, Mr Scott SC’s submission is that the Plaintiffs had failed to draw to the Court’s attention material contractual provisions which contradicted Colin Tay’s assertion of an oral agreement, his case of “no licence, no payment”, and showed the Plaintiffs’ breach of various contractual provisions. Mr Scott SC submits that the non-disclosure was such as to undermine the Plaintiffs’ causes of action and demonstrate that it was inappropriate for the Court to grant the Injunction Orders. These alleged non-disclosed facts will be analyzed in accordance with the following topics:
A1. Non-disclosure in respect of the double signature arrangement 38.Colin Tay alleged in his 1st affirmation that despite the express provision in Clause 1b of the TNFA which provided that each of Trussnet Nevada and D8 shall appoint one person as bank signatory of D1, D8 and WOFIE after the First Payment has been made, D8 had been refusing to implement the double signature arrangement. Colin Tay asserted that this was an incident of breach of the TNFA and the TCPSSA[2]. 39.The following non-disclosure was not disputed:
40.The undisclosed facts under (ii) and (iii), if made known, might cause the Court to query whether the double signature arrangement had been waived, or whether there could have been an oral double signature arrangement amidst the series of written agreements. I am of the view that if the Injunction Orders were obtained solely to pursue a cause of action for refusing to implement the double signature arrangement under the TNFA and TCPSSA, they must be discharged. 41.However, the Plaintiffs did not just rely on one cause of action. They also relied on the failure to renew licences, D8’s unilateral selection of equipment of supplier and secret removal of Colin Tay’s signature authority. As will be seen in Section B below, these causes of action did raise serious issues to be tried. 42.Mr Scott SC queries how the oral double signature arrangement in respect of such a substantial sum as US$4.7 million could have arisen. He submits that P2 had breached a prior obligation to pay the balance of the Subscription Price. Article 3.2 of the TCPSSA envisaged payment to be made for the 49% shares. Once payment was made, D1 did not have to share control with the Plaintiffs since they were not on the board of D1. Therefore, viewing the parties’ conduct objectively, Mr Scott SC submits that the US$4.7 million must have been part of the Subscription Price. Mr Scott SC also submits that Deputy Judge L Chan had granted the 1st Injunction on the basis of breach of the TNFA and TCPSSA. The Plaintiffs’ current position is reprobation from that taken before Deputy Judge L Chan. 43.With respect to Mr Scott SC, he has confused 2 parts to the Plaintiffs’ case summarized in paragraph 33(i) and (iv) above. The 1st part formed background to the Plaintiffs’ case. It was the 2nd part relating to the distinct oral double signature arrangement that Deputy Judge L Chan made the 1st Injunction Order. Leaving aside the question of whether the Plaintiffs were in breach of a prior obligation to pay (see Section A2 below), the pertinent question to ask was whether the double signature arrangement was capable of belief. 44.Qiu Ping’s version of how the accounts under the double signature arrangement were opened was as follows. He claimed that Colin Tay did not ask for joint signatory rights for the First Payment for he was well aware that all the money received was properly disbursed to meet the overheads and day-to-day operation of the Project. He claimed that Colin Tay kept on giving empty promises as to payment of funds. A promise was made on 11 May 2010 that US$15 million would go into the Chinacomm Account 1 by 30 June 2011[5]. According to his 4th affirmation (para 11), after the Share Certificate was borrowed and pledged, in early January 2010, Colin Tay promised that he would pay US$30 million instead of the whole US$50 million to Qiu Ping before March 2010 as part payment of the outstanding Subscription Price. As the Project was in need of funding, Qiu Ping agreed and on that basis accepted him as one of the joint signatories to the Chinacomm Account 1 and Smart Channel Account. Qiu Ping said that he made it clear to Colin Tay that his right of joint signatory to Smart Channel’s Account and that of Yunji’s account was conditional upon his paying in full the US$30 million but not any lesser amount. However, Colin Tay breached his promise and paid only US$4.7 million. 45.This explanation was incredible in the light of the objective circumstances. Of the 3 subject accounts, Chinacomm Account 2 was mentioned in the agreements and was the account into which the First Payment was made. If the Subscription Price was already due, Colin Tay could have been asked to pay into Chinacomm Account 2 solely under the control of D1. There was no need to set up 2 new accounts, 2 years after the joint venture had started, to receive the US$4.7 million. Colin Tay was not a director of Chinacomm. That he was made a signatory to the Chinacomm Accounts and Smart Channel Accounts clearly reflected some separate agreement with Qiu Ping/D1/D8. 46.The TCPSSA provided for how the First Payment already paid was to be treated as part of the Subscription Price, but no written agreement provided for why the US$4.7 million should be paid and how it should be dealt with. For over a year, the US$4.7 million had sat in the Chinacomm Account 1 despite Qiu Ping’s alleged need to obtain funds to operate the Project. 47.In his 9th affirmation, Colin Tay clarified what he meant by “the Plaintiffs shall inject another US$5 million in tranches as equity to [D1].” He said he meant an injection of capital to keep the WOFIE going. The injection of this US$5 million was not written down in any agreement between the parties. It was not part and parcel of the Subscription Price because the Defendants had failed to renew the licences by then. Payment was ahead of schedule. Moreover, there were outstanding issues (such as vendor selection) to deal with. As can be seen under Section A2 below, his views were tenable. 48.Mr Chan, counsel for the Plaintiffs pointed out that even Qiu Ping relied on oral promise of Colin Tay to pay US$15 million (Qiu Ping’s 1st affirmation); and US$30 million (Qiu Ping’s 4th affirmation). It was thus not surprising that parties might have oral arrangements between them from time to time. 49.Viewing these circumstances, the oral double signature arrangement as alleged by Colin Tay was capable of belief and at least raised a serious issue as to its existence for the Court to try. 50.Qiu Ping’s explanation as to why funds were withdrawn was equally incredible. In May 2011, the expiration of the 12 Cities Licence drew nearer. Allegedly experiencing the same pain of unfulfilled promise of payment, and receiving market information that Colin Tay had exploited the Defendants’ trust and used the Share Certificate to borrow to enable him to take control of a US listed company, Qiu Ping decided to terminate the relationship with Colin Tay. Qiu Ping said the first thing he did was to cancel his signing right to the Chinacomm Account 1. 51.Mr Scott SC submits that the double signature arrangement was not irrevocable. He may well be correct but there was no agreement to have it revoked either. Nor was there evidence of notice of revocation to Colin Tay’s camp. Colin Tay said he discovered the revocation of the signing rights some 6 months after the withdrawals rather than being informed about any termination. His people had worked at D8’s office until they were told to leave in October 2011. In my view, even if there had been termination of relationship, should not Qiu Ping clarify how to dispose of the US$4.7 million before unilaterally removing the same? 52.Having regard to the analyses in Section A1, it can be seen that the non-disclosure in paragraph 39(ii) and (iii) was not material. Deputy Judge L Chan could not be faulted. He decided what was material. He was aware of the Plaintiffs’ bases for application, ie loss of double signature arrangement to operate the 2 accounts. There is no reprobation from the position before Deputy Judge L Chan. A2. No licence, no payment 53.The Plaintiffs’ case was that the pre-condition for payment was D8’s renewal of licences (“the pre-condition”). The Defendants denied and claimed that it would be essential for the required funds to be available to prove the financial ability of D8 to continue with the Project, before the licences could be renewed. Colin Tay was allegedly aware of this because at the time the TNFA was entered into, both camps knew that the 25 Cities Licence had already expired. Mr Scott SC submitted that this was highly indicative of Qiu Ping’s case. But the Plaintiffs had breached prior obligations to pay. Mr Scott SC’s arguments under this head are that:
A2.1 The Plaintiffs case was contradicted by terms in the various agreements, to which the Court was not referred during the ex parte hearing 54.Mr Scott SC relies on the provisions in the BSA, TDFA, TNFA and GSSA to show that the pre-condition did not exist. 55.With respect to Mr Scott SC, the governing agreements at the time of payment of the US$4.7 million were the TCPSSA and the Addendum. The provisions in the preceding agreements could not be material to the injunction application, but I will deal with them for completeness’ sake. 56.In the BSA, it is true that Article 6.03 provided that D2 shall assume the responsibility of obtaining licences but it was not expressed to be the pre-condition. Recital O provided that D1 should first be provided with a US$10 million line of credit before the addendum to agreement could be entered into. However, the BSA only set out the parties’ agreement in broad terms. Further negotiation of terms of cooperation was anticipated and there had been various specific agreements entered into subsequently. Mr Scott SC’s reliance on Recital O was misplaced because clause 4(a) of the TDFA provided that Recital O and the relevant provisions of the BSA shall be void. 57.The TDFA and TNFA did not contain the pre-condition. 58.The GSSA contained the pre-condition. Paragraph (j) of Schedule 3 to the GSSA permitted oral approval of the renewal of the licences. According to Qiu Ping, paragraph (j) had been fulfilled when, in June 2008, one Mr Xie of the Science and Technology Committee of the Ministry responsible confirmed to Colin Tay, his legal advisers and Qiu Ping that renewal of the 12 Cities Licence would not be a problem because construction works had started. It would be imperative to start construction works for the remaining 17 cities or else the licence might not be renewed. It was in this context that the Supplementary Agreement was entered into[6]. 59.Mr Scott SC refers to clause 4.7 of the GSSA and submits that D1 only had to provide to Gulfstream the documentary evidence in relation to the valid renewal of Chinacomm’s 3.5G licences within 90 business days from the Completion Date, ie well after payment by GSSA. 60.I accept that the GSSA contradicted Colin Tay’s assertion of no licence, no payment. However, the GSSA had been overridden by the Supplementary Agreement which contained the pre-condition. 61.Article 1(b) and 2 of the Supplementary Agreement clearly stipulated for payment after the licences “have been duly renewed and all open issues between the parties have been mutually agreed”. Faced with this clear provision, Mr Scott SC pointed to Article 4 and contended that the intention was for D1 to receive US$50 million first by the end of November 2008 before it was required to renew the licences by the end of December. The joint signatory right would kick off only if Colin Tay paid the US$50 million but Colin Tay never did, despite being aware that funds were essential to have the licence renewed. 62.I set out Article 4 of the SupplementaryAgreement in full:
63.With respect to Mr Scott SC, he had left out sub-Article 4(b). That sub-Article stipulated for payment to be made “in accordance with Article 3.2(b) as amended in Article 1”, ie when “the 3.5G licences of [D8] have been duly renewed and all open issues between the Parties have been mutually agreed.” Article 4(b) should also be read with Article 2, which obliged D8 to deliver to P2 (a) evidence for the renewal of the 3.G licences; and (b) the Share Certificate after the renewal. 64.The correct sequence of events under Article 4 would be for P2 to show it was in receipt of funds (not to pay D1/D8) by November 2008. Then Chinacomm shall have licences renewed by December. After that, payment shall be made. Since D8 had failed to renew the licences by December, the Supplementary Agreement would have been void under Article 4. These Articles support “no licence, no payment”. 65.Next came the governing TCPSSA. Clause 3.2 of the TCPSSA clearly stipulated for payment of the Subscription Price within 35 days after the licences of Chinacomm have been renewed in accordance with paragraph (j) of Schedule 3 of the TCPSSA. 66.The Plaintiffs alleged that the Defendants were in breach of (i) clause 6.2; and (ii) clause 4.2 of Part 2 of Schedule 4 to the TCPSSA in that the Warrantors (D8 and D9) were not able to renew the licences of the 29 Cities. Colin Tay has set out in his 1st affirmation (paras 24-31) the various licences with which he was provided. There was a 5 Cities Licence valid up to 31 December 2008. In early 2009, there was a copy licence dated 12 February 2009 for 29 cities for 5 years about to be awarded shown to Colin Tay. (There was a dispute between the 2 camps as to who was responsible for forging this licence which need not be resolved here.) The latest licence was dated 17 July 2009 for only 12 cities for 2 years, and nothing more thereafter. 67.The Plaintiffs’ case of “no licence, no payment” was consistent with contractual provisions since the GSSA. There was no breach of prior obligation to pay as submitted by Mr Scott SC. 68.Colin Tay further denied that he was ever told about the risk of not having the licences renewed if funds were not available to show to PRC authorities. He pointed out that without financial backing, D8 or its predecessor had obtained the licences for a number of cities from 2002 to 2009. It was thus complete nonsense to say that in order to seek renewal of the 29 Cities Licence it was essential for D8 be put in funds from the Plaintiffs. 69.In my view, the need for the Plaintiffs to come up with funds should be determined by the parties’ agreement and not Colin Tay’s awareness of a situation. Having regard to the contractual provisions referred to in Section A2, I am satisfied that the pre-condition existed but was not fulfilled at the time the US$4.7 million was paid. The non-disclosure was immaterial and, even if the relevant facts were disclosed, they would not have affected the Court’s decision. A2.2 Plaintiffs were in prior breach of an agreement in failing to arrange for a US$3-5 million loan, rendering it unnecessary for the Defendants to discharge their obligation in getting renewal of the licences 70.It is the Defendants’ case that the Plaintiffs had failed to disclose the breach of a prior obligation under Article 6 of the Addendum. Article 6 provided for P2 to arrange a loan of US$3 to 5 million for D8 before 15 March 2009. Mr Scott SC submits that the tight deadline of 15 March 2009 could have expired even before the Completion Date and that meant the parties had agreed that P2 shall arrange funding for D8 even before D8 should perform its obligations concerning the licences. What P2 had purportedly arranged could be seen in a letter dated 8 May 2009, well after the deadline, contents of which did not in any way assist the arrangement of the loan. Colin Tay admittedly[7] failed to bring the breach of this prior obligation to the attention of Deputy Judge L Chan although he had exhibited this document. 71.Qiu Ping also stated, in his 1st affirmation, that “the subsequent payments starting from 26 April to 21 June 2010, if they were loan pursuant to this obligation, came too little and too late.” He said the Defendants could and did treat the TCPSSA as repudiated, rendering it unnecessary for the Defendants to perform their part of the obligations. 72.Colin Tay denied that there was a breach of obligation. The parties also disputed as to whether the credit line eventually obtained by D8 was the result of the Plaintiffs’ arrangement. 73.It is not necessary to resolve these disputes here. Article 6 of the Addendum obliged P2 to arrange a loan. Qiu Ping never asserted that the US$4.7 million was in purported discharge of the obligation under Article 6. In fact, the Defendants’ case[8] was that the US$4.7 million must be part of the Subscription Price for the 49% shares. Moreover, there was no evidence that Qiu Ping had purported to terminate the TCPSSA or Addendum at any stage on the ground of the Plaintiffs’ breach of the obligation under Article 6. The parties’ relationship had continued until 2011. Qiu Ping cannot say that the Defendants were discharged from the obligation to renew the licences. 74.I find that non-disclosure of the breach, if at all, of the prior obligation to arrange a loan was plainly immaterial to the injunction application. I find that the Plaintiffs had ample contractual backing to say “no licence, no money.” These findings reinforce my view on the credibility of the oral double signature arrangement. A3. Failure to exhibit the note of borrowing and pledge note (“the 2 Notes”) 75.It was not in dispute that although Colin Tay had disclosed to the Court the issuing of the Share Certificate and the pledge of shares, he had failed to disclose the fact that the Share Certificate was borrowed from D8. He also failed to disclose:
76.Mr Scott SC submits that the non-disclosure would evidence that P2 was not a shareholder of D1 and hence did not have the right to claim proprietary interest in the money sitting in the frozen accounts. 77.The terms in the pledge note were as follows:
The contractual terms in Article 3 of the Supplementary Agreement to the GSSA and Article 4 of the Addendum were in the same vein. 78.I am unable to see how the borrowing, the pledge and failure to exhibit the 2 Notes would affect the Plaintiffs’ ownership of the shares. Under Articles 4.1 and 4.2 of the TCPSSA, P2 was to become the owner of the shares on closing. Article 1 of the Addendum fixed the closing date as 16 February 2009. Accordingly P2 had the status of a shareholder of D1 and was so recorded on the Share Certificate. As P2 had not failed to comply with the payment schedule in the TCPSSA (because the licences were not renewed), D1 would not be entitled to withdraw the shares. The pledge, which only created a security, would have no effect on P2’s ownership of the shares or proprietary interest in the US$4.7 million. The non-disclosure was not material. A4. Failure to disclose P2’s sale of D1’s shares to P1 (“the Sale”) 79.Qiu Ping alleged that there had been a series of transactions over the shares in the USA. P1 was acquired by Colin Tay on 6 March 2008 by means of a reverse takeover. By a reorganization plan between P1 and Trussnet Nevada, the latter’s shareholders (who was Colin Tay) acquired a controlling interest in P1. Since then, P1 had attempted to dispose of a substantial part of its shareholding to third parties, including one ASSAC, Runcom and Olotoa, but none of the attempts bore fruit. 80.On 9 March 2009, P2 purportedly sold the 49% shares to P1 for US$196 million. P1 paid P2 cash of US$5 million and the balance of US$191 million by a promissory note that bore interest of 8% per annum, to be secured by a pledge of the shares back to P2. The Sale was without D1’s knowledge, and without P2 having paid for those shares in full. It was in breach of the pledge by P2 and Article 4 of the Addendum. 81.Qiu Ping alleged that P2 had wrongly represented that it was “the lawful record and beneficial owners of the 49% share in D1, free and clear of any and encumbrances whatsoever, and the sale would convey to P1 lawful, valid and indefeasible title”. Those representations ignored the fact of borrowing and the pledge. They were made in public documents to P1’s shareholders and the United States Securities and Exchange Commission (“USSEC”). The last of such public documents was filed on 14 November 2011[9], just 4 days before the 1st Injunction Order. 82.How Colin Tay used the shares in D1 to raise funds, whether P1 was in breach of duties to shareholders or USSEC, and whether the Defendants might claim against P2 for breach of the non-disposal provisions were plainly not the concern of the Court in the injunction proceedings. 83.The importance of the undisclosed Sale as submitted by Mr Scott SC, was that:
84.The documents relied on by Mr Scott SC showed that the Sale had been cancelled and replaced by an assignment by P2 to P1 (see Section A5 below). The non-disclosure could not be material. Moreover, as discussed in paragraph 78 above, the right of D1 to have the proportion of unpaid shares returned had not yet arisen. Further, the Plaintiffs’ claim for damages was not limited to the US$9.7 million it had already paid. At this stage of the action, it cannot be said that the shares formed security beyond the Plaintiffs’ loss to disentitle them to an injunction. A5. Failure to disclose the assignment by P2 to P1 (“the Assignment”) 85.By the Assignment dated 4 April 2011, P2 agreed:
86.The Assignment was in direct contravention of the non-assignment clause in Article 30.3 of the TCPSSA, which provided that:
87.No Deed of Adherence[11] was ever executed. The assignment was also in breach of the share pledge. 88.Mr Scott SC submitted that it was very doubtful whether an unlawful transferee was effective and was in accordance with Article 30.3 of the TCPSSA. The implication of the purported assignment was that only P1 or P2 could be the proper plaintiff to sue upon the TCPSSA. During the ex parte hearings, when the purported assignment was concealed from the Court, there was simply no legal or factual basis for Colin Tay to maintain an action by P1. 89.There is substance in Mr Scott SC’s submission. P1 was not a party to any of the agreements and its capacity to sue was never made clear. The endorsement on the writ vaguely described P1 and D8 as joint venture partners (para 1). Agreements including Framework Agreements were entered into at various stages between the Plaintiffs of the one part and D8 and D9 on the other pursuant to the joint venture (para 2). US$5 million (apparently referring to the First Payment) was injected by the side of P1 (para 4). “By the [TCPSSA], Mr Colin Tay Yong Lee, the President of [P1] and the authorized representative of the corporate director of [P2]” and D6 were appointed as the joint signatories of the Chinacomm Account 1 and Smart Channel Account. Apparently, these pleas were based, wrongly in my view, on P1 being a contracting party to the various agreements. 90.In the 1st affirmation, Colin Tay said nothing about P1’s right to sue, nothing about his acting on behalf of P1 as the authorized signatories to the Chinacomm Account 1 and Smart Channel Account, and nothing about the US$4.7 million being injected by P1. It was not until paragraph 93 of his 7th affirmation that he said that P1, as the ultimate holding company of most of the entities on the Plaintiffs’ side “having beneficial interest in all the Subscription Agreements, and having paid or caused to pay the subscription price, has a right to sue. This is in addition to the intellectual property rights that Qiu Ping mentioned.” Having regard to the care in which Colin Tay chose the contracting entities from his camp, there was little room for P1 to rely on beneficial interest to establish its locus to sue. There was no proof of P1 paying or causing to be paid the Subscription Price. Moreover, what intellectual property rights P1 owned and was infringed were never made clear. 91.The transaction which purportedly gave rise to P1’s interest in the joint venture and hence the capacity to sue was the Assignment. I find that the non-disclosure of the Assignment to be material in the circumstances of this case. A6. Failure to disclose the agency relationship between the Plaintiffs 92.In paragraph 79 of the statement of claim filed subsequent to the grant of the Injunction Orders, it was pleaded that P2 signed the TCPSSA as agent for P1. Mr Scott SC pointed out that such an undisclosed agency was diametrically inconsistent with the alleged sale by P2 to P1 on 9 March 2009, because no agent would have sold an asset back to the principal for full consideration. This means either the plea of agency in the statement of claim was false or the alleged sale was a sham. 93.Mr Scott SC went on to comment that if the Sale was a sham, then the reports filed by P1 with the USSEC would have contained false information. P1 would then have exhibited those reports in support of the continuation of the Injunction Orders knowing that they contained false information relating to the sham Sale. 94.Colin Tay explained in the 9th affirmation that he was authorized by P1 to use P2 to sign the TCPSSA. He said that the Sale was merely a way of raising money by P1. Colin Tay was just acting as agent of P1 and did not get any benefit out of the sale of the equitable interests in the shares. He was holding on behalf of some nominees. He was of the view that he did not need to disclose the transactions because they were not relevant to the wrongdoings of the Defendants. It was impossible to transfer ownership of the shares without the approval of the board and without proper registration with the Registered Agent of the Cayman Islands. The legal title in the shares remained the same. 95.It is difficult to understand Colin Tay’s explanations. But again, what P1 did with the USSEC and whether it could be penalized for putting forth false information were irrelevant. Even if there had been an agency, there could be valid reasons for an agent to assign rights under its name back to his principal. In any case, it is not appropriate to have a mini-trial on affirmations to determine the effect of various relationship and transactions. The non-disclosure was not material to the Plaintiffs’ case based on the oral double signature arrangement. A7. Failure to disclose the Plaintiffs’ financial inability to pay the balance of the subscription price A8. Failure to disclose that the Defendants have various defences and a counterclaim for return of the 49% shares 96.Mr Scott SC relies on Exhibit CTYL-35 wherein it was stated by P1 that it “attempted to raise capital to make the required payments, but was unable to do so within the time specified”. Mr Scott SC took that to mean that P1 admitted that at all material times, it had no ability to pay the outstanding subscription price of US$191 million to D1 and was desperate to raise funds. Mr Scott SC submitted that non-disclosure of such impecuniosity was relevant to cast the genuineness of the Sale and hence P1’s locus to sue for breach of the TCPSSA in doubt. Further, in some agreements, the obligation of Colin Tay’s camp to pay came before D8’s obligation to renew the licences. It was thus highly arguable that Colin Tay’s camp remained unable to perform its contractual obligations to pay, even if the licences were duly renewed. Finally, given the impecuniosity, the Plaintiffs would be unable to pay for the balance of the subscription price, so P2 was obliged to give up part of the shares in D1 proportionate to the unpaid subscription price. In other words, there is a strong counterclaim by the Defendants against P2, the damages of which could easily exceed the US$4.7 million now sought to be frozen by the Injunction Orders. 97.I do not think the Plaintiffs’ duty of full and frank disclosure extended to reveal facts concerning potential defences and counterclaim of the Defendants. I repeat my analyses under Section A2 on “no licence, no payment”. There are serious issues to be tried as to which party was first in breach and hence whether the Plaintiffs were obliged to return the unpaid portion of the Shares. The double signature arrangement was an agreement on its own. I do not find any alleged non-disclosure under this head to be material. Summary on non-disclosure 98.On the evidence before me, I find the oral double signature arrangement to be capable of belief and Colin Tay’s version to be more probable than Qui Ping’s. Having considered the full set of Mr Scott SC’s submission, I reject most of the allegations on non-disclosure and find that the only material non-disclosure was the failure to refer to the Assignment to show the locus of P1 to sue. Should a fresh injunction be granted? 99.It is not every omission that will cause an injunction to be automatically discharged. The court has a discretion, notwithstanding proof of material non-disclosure which justifies or requires the immediate discharge of the ex parte order, nevertheless to continue the order, or to make a new order on terms. When the whole of the facts, including that of the original non-disclosure, are before the court, it may well grant a second injunction if the original non-disclosure was innocent and if an injunction could properly be granted even had the facts been disclosed. Brink’s Mat Ltd v Elcombe [1988] 1 WLR 1350, at 1357F. 100.In Yau Chiu Wah v. Gold Chief Investment Ltd, HCA 807/2001, 15 May 2001, Recorder Ma (as he then was) set out the guidelines as follows:
Those principles were approved by the Court of Appeal in Cheung Kam Wah v Cheung Hon Wah,CACV 53/2004, 11 January 2005,at paras 43-45. 101.Where a plaintiff does not have capacity to sue, an injunction will not be granted to him. In the present case, P2’s capacity to sue was not in doubt, it being a party to the TCPSSA, holder of the Share Certificate and party to the double signature arrangement. However, P1’s capacity to sue was in doubt. 102.However, I find that the failure to highlight P1’s capacity or the assignment before Deputy Judge L Chan was not deliberate. The circumstances in which the Plaintiffs came for an ex parte injunction were urgent. Within a few days, investigation was made with the bank as to why Colin Tay was not sent the bank statements, documents had to be amassed and the endorsement of claim prepared. The series of agreements between the Plaintiffs and Defendants’ camp and the transactions between P1 and P2 were not straightforward. All the information that formed the subject of the Defendants’ complaints were disclosed in the Plaintiffs’ exhibits or filings with USSEC. It was not one of those cases that the applicant withheld part of a series of interlinked facts that would render the disclosed facts misleading. 103.The Assignment did not meet the requirements for assignment under the TCPSSA for reasons given in section A5. Nor did it constitute a legal assignment for lack of notice to the relevant Defendant. However, both the assignor and assignee were joined as Plaintiffs to complete the locus to sue. The evidence before the Court was not such that the locus of P1 to sue was clearly and obviously non-existent. 104.Ultimately, in the circumstances of this case, it is a question of whether the merits and justice warrant the grant of a Mareva injunction. Subject to proof of meeting the requirements of American Cyanamid v Ethicon Ltd [1975] AC 396,the Injunction Orders should be continued. SECTION B SERIOUS ISSUES TO BE TRIED 105.There are serious issues to be tried in this case, including locus standi of the Plaintiffs, causes of action, interpretation of terms in the various agreements, which party was first in breach and damage caused. The analyses under Section A already covered the issues of the double signature arrangement and “no licence, no payment”. There was also another cause of action concerning whether D8 had engaged suppliers without consent of the Plaintiffs. 106.The requirement for P2’s consent for capital expenditure exceeding US$10,000 was stipulated by contract: Article 10.8 and Schedule 5, item (r) of the TCPSSA. Yet D8 awarded technical equipment supply contracts to Samsung and Huawei without involving P2 in the negotiation or obtaining its written approval. 107.Qiu Ping claimed that the contractual obligations under Article 10.8 had come to an endbecause the investor had not fulfilled its obligation to pay the Subscription Price. 108.In my view, Article 10.8 did not appear to be conditional on any obligation to pay the Subscription Price. In any case, since the licences were not renewed, P2 was not in breach of the obligation to pay. There is a serious issue to be tried on breach of Article 10.8, to which Mr Scott SC made little comment. SECTION C DISSIPATION OF ASSETS 109.Qiu Ping withdrew part of the US$4.7 million from Chinacomm Account 1 allegedly for the following purposes:
110.Colin Tay disputed the nature of the legal expenses or the work done by the unidentified lawyers. He also disputed D1’s authority to sign that surety agreement and to withdraw the money in the joint signatory account to guarantee the private loan of D8. 111.There was no documentary proof of such payments or the loan. The surety agreement was very suspicious for the following reasons:
112.What was more suspicious was why D10 removed approximately US$4.28 million on the following day instead of holding it for one month as surety. There were 2 other withdrawals of US$20,000 in August and about US$190,000 in November 2011, the latter of which was made a day after the 1st Injunction Order was served on Qiu Ping. 113.These queries point to dissipation of the US$4.7 million. 114.Mr Scott SC submits that there was no evidence that the Defendants intended to dissipate the funds in the frozen bank accounts so as to render any future judgment obtained by the Plaintiffs empty. There had been no movement of funds in the SCB accounts since June 2011, well before commencement of this action in November 2011. 115.With the greatest respect to Mr Scott SC, this line of submission blatantly ignored the history of fund movements. There was not much movement of funds since June 2011 simply because the bulk of it had been secretly removed before then. 116.In addition, there was evidence that D1, D6 and D7 had not complied fully with the disclosure orders made by Deputy Judge L Chan. It was pointed out in the affirmation of Li Aibain, legal counsel for the Plaintiffs, that amongst others, the statements of the Smart Channel account were not produced. No explanation of the movement of funds and contacting details of the payees of any funds were given. In particular, the contact details and bank account numbers of D10 were not disclosed. 117.As a side note, upon the disclosure (through Lam Ping Cheung’s affirmation) by D1, Qiu Ping and Yuan Yi (D7), it was discovered that D1 had, through Qiu Ping, withdrawn the First Payment to some payees without consent of the Plaintiffs, instead of transferring the funds to Smart Channel (D4) and then to Yunji as agreed. 118.As for D10, his affirmation was far from being full and frank disclosure required under Deputy Judge Lok’s order. Among the many complaints of the Plaintiffs, the so called personal account number held by D10 with the DBS Bank was not an account number but just a transfer code of the SCB. Moreover, D10 did not exhibit a single bank statement until pressed upon in correspondence. 119.It was only in his 2nd affirmation that D10 disclosed for the first time that: (i) the money was transferred to unidentified nominees of the shareholder of the lender; and (ii) that the loan had been settled. 120.In my view, there had been shameless efforts by Qiu Ping’s camp to remove the US$4.7 million out of reach of the Plaintiffs and to conceal the true picture. Dissipation was not only a risk but a fact in the present case. SECTION D BALANCE OF CONVENIENCE 121.D6-D10 are domiciled in the Mainland. D8 is the most substantial entity and the others are not worth much. There would be difficulty over enforcement of a judgment in the Mainland. 122.Indisputably, Smart Channel (D4) was dissolved on 22 October 2010. Likewise, Yunji was dissolved on 21 October 2011 by the Beijing Administration of Industry and Commerce for failure to participate in annual inspection. 123.After all the dissipation, the bank balance in the Chinacomm Account 1 and 2 totalled US$213,000; and the Smart Channel Account had zero balance. The freezing of the accounts would cause minimal disturbance to the Defendants as they should not have dealt with the subject accounts anyway. In fact, Mr Scott SC had not said much about balance of convenience in his submission. 124.So far Qiu Ping and D10 had not made full and frank disclosure of the money trails and the particulars of the transferees. They still failed to disclose their assets and bank accounts outside Hong Kong which might throw light on the disposal of the US$4.7 million. 125.There is no issue as to why the respective Defendants were made subject to the Injunction Orders. The analyses under Sections B and C there suggest that there was a joint enterprise among those Defendants to transfer the US$4.5 million to D10’s account. 126.The balance of convenience is clearly in favour of the Plaintiffs. CONCLUSION 127.The Plaintiffs have shown a credible case on the existence of the oral double signature arrangement. There had been material non-disclosure of P1’s capacity to sue at the ex parte stage. The original Injunction Orders should not have been made in favour of P1. However, the non-disclosure was not deliberate. By virtue of the Assignment, P1 did have capacity to sue. Had it been disclosed, the Injunction Orders would have been granted. The Plaintiffs have met the tests in American Cyanamid. Having considered the merits and justice of the case, and in the light of the overwhelming evidence of dissipation of the bulk of the US$4.7 million, the Injunction Orders ought to continue. 128.I therefore dismiss the Defendants’ application to discharge the Injunction Orders. The Plaintiffs’ summons for continuation of the Injunction Orders is granted. The time taken for argument on the Assignment was relatively short. The Plaintiffs are the overall winners. I make an order nisi that costs of both summonses be to the Plaintiffs to be taxed and payable forthwith. OTHER COMMENTS 129.Nineteen affirmations have been included in the hearing bundle. The way the affirmations were arranged (by grouping all affirmations of each affirmant together) did not facilitate the understanding of each party’s case, the cross allegations and the manner in which disclosure was made pursuant to the disclosure orders. Moreover, classifying bundles by various titles (such as “pleadings bundles”, “Plaintiffs’ bundles”, “PA-1”, “PA-2”, “DA-1, “DA-2”) instead of the conventional alphabetical series made reference to documents confusing. It is hoped that careful thought be made by the parties in future in the preparation of hearing bundles. 130.I thank counsel for their assistance. ANNEXURE Relevant Articles under the Various Agreements TDFA dated 15.2.2008 (Exhibit No. CTYL-3)
Article 2. The Payment of Acquisition Price
Article 3c
TNFA dated 7.4.2008 (Exhibit No. CTYL-4) [The terms are largely similar to the TDFA.] GSSA dated 23.5.2008 (Exhibit No. CTYL-6)
One of the “Completion Conditions” set out in Schedule 3, paragraph (j) of the GSSA was that “the Investor representatives has met with the relevant officials of the Ministry of Information Industry who are in charge of the issuance and extension of 3.5G licenses, and such officials has (sic) orally approved the extension of Chinacomm’s 3.5G licenses.” Supplementary Agreement dated 17.11.2008 (Exhibit No. CTYL-7)
TCPSSA dated 16.2.2009 (Exhibit No. CTYL-8) Article 3.2
Item (j) of Schedule 3 provided that one of the subsequent payment conditions was “the delivery to [P2] of the adequate evidence in relation to the valid extension of [D8’s] 3.5G licenses which are expired at the time of this Agreement”. Article 4.1
Article 4.2
Article 6.2
Clause 4.2, Part 2, Schedule 4: Warranties Relating to Chinacomm:
Article 10.8
Schedule 5 set out a list of matters requiring consent of P2/the Investor, including:
Article 30.1
Article 30.3
Addendum dated 16.2.2009 (Exhibit No. CTYL-10) Article 1
Article 3
Article 4
Article 6
Mr Edward T C Chan, instructed by Lawrence K Y Lo & Co, for the Plaintiffs Mr John Scott, SC leading Mr John Hui, instructed by Lam & Co, for the Defendants [1] Para 37 of Colin Tay’s 1st Affirmation. [2] Para 20 of Colin Tay’s 1st affirmation. [3] See Exhibit CTYL-35, being P1’s public announcement in Form 10-Q filed with the United States Securities and Exchange Commission for the quarterly period ended 30 September 2011. [4] Mr Scott SC also submits that the GSSA did not contain a double signature arrangement but Article 1 of the Supplementary Agreement to the GSSA did contain such an arrangement. [5] According to Colin Tay, the year should be 2010. [6] See Qiu Ping’s 1st affirmation and para 4 of his 4th affirmation. [7] Paragraph 57 of Colin Tay’s 7th affirmation filed after the ex parte hearing. [8] Paragraph 57 of Mr Scott SC’s skeleton submission. [9] See Exhibits QP-14 to16 and Exhibit CTYL-35. [10] The assignment was subsequently confirmed in paragraphs 89-91 of the statement of claim. [11] This was to be in the terms of Schedule 7 of the TCPSSA. The assignee was to agree with D1 and its shareholders to be bound by the terms of the TCPSSA. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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