Dragonrider Opportunity Fund Lp v. Lam Fung and Another

CACV 71 & 72/2013
(Heard together)

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 71 & 72 OF 2013

(On appeal from HCA No. 752 & HCMP No. 839 of 2012)

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CACV 71/2013

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CACV 72/2013

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D E C I S I O N

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1.This is an application for a stay of execution pending the hearing of two appeals in January next year.  The appeals are fixed for 14 January 2014.  The appeals are from a decision of Deputy Judge Le Pichon in relation to Order 14 proceedings.

2.In summary, the plaintiff (“Dragonrider”), was an investor in a project that was owned by the defendant.  The project involves a molybdenum mining operation in Mainland China.  The original intention was that the mining operations, which were held ultimately by a company called Fabulous Way Investments Limited, should be the subject of a listing on the Stock Market in Hong Kong.  With a view to such listing, Dragonrider invested in the project by making funds available to Mr Lam and companies associated with him.  As part of the overall arrangement under which the investment was made, there was provided to Dragonrider a put option under which Dragonrider would be able to require Mr Lam to buy back the shares in Fabulous Way that it had acquired, at a price equivalent to the purchase price plus an agreed rate of return of about 1.5 per cent per month.

3.The investment agreement also provided that Dragonrider could bring in other investors to take up part of the shareholding which it acquired and that such other investors would have the same benefits as Dragonrider had under the investment agreement.  The investment agreement was governed by Singapore law and in clause 5.7 of the agreement it was stated that any other investors who were brought in should have the same rights as Dragonrider and would have the benefit of the Singapore statutory provisions governing the rights of third parties under contracts that affected them; in other words, it seems to have been envisaged that the third parties could exercise, in their own names and for themselves, the same rights as Dragonrider had under the investment arrangements.  The agreement also provided that Dragonrider could exercise on behalf of the third parties the rights of those third party investors, if it should become necessary to do so.

4.As a result of the failure of the project to reach fruition, in that no listing was or appeared likely to be achieved, Dragonrider in due course served a put option notice requiring Mr Lam to buy back the shares in Fabulous Way which it had acquired.  By this time the shares had been parcelled out to four other investors in addition to Dragonrider.  These were companies called Stark Moly, SIG, Addgood and Angel Wise.  In the months prior to Dragonrider’s giving of its put option notice, Stark Moly and SIG had in fact served put notices of their own in respect of the shares in Fabulous Way which were held by them.  None of the put option notices, whether those of Stark Moly or SIG, or that served by Dragonrider, were honoured by Mr Lam in that he did not take any steps to comply with his obligation to purchase the Fabulous Way shares that were the subject of the notices.  This led to these proceedings.

5.In the course of the Order 14 proceedings, Mr Lam took a number of points as to Dragonrider’s entitlement to recover judgment against him.  I should add that by the time the matter came to the Order 14 stage the only shares that the proceedings were still concerned with were the shares owned by Dragonrider and Addgood.  The shares of Stark Moly and Angel Wise had been hived off to be dealt with in separate proceedings brought by Stark Moly and it had also been agreed that the shares held by SIG should not form part of the Order 14 proceedings.

6.The first point that were taken by Mr Lam was as to whether or not Dragonrider had authority to act on behalf of Addgood in serving the put option notice that it did on 30 March 2010.  As to this, the argument was that Dragonrider had failed to put forward any evidence that it did, in fact, have the authority of Addgood to issue the notice at the time that the notice was issued, whether by way of prior authority or subsequent ratification, and that there was therefore a triable issue as to whether or not it was authorised by Addgood to serve the put option notice on his behalf.  The way in which the matter arose was that specific points as to Dragonrider’s authority to act for Stark Moly and Angel Wise had been taken in a draft defence that had been prepared for Mr Lam, which was exhibited to his affirmation in opposition to the Order 14 proceedings.  Issue was taken as to Dragonrider’s authority to act for Stark Moly and Angel Wise on the basis of specific documentation which had come into the hands of Mr Lam which suggested that Dragonrider might not in fact have had the authority of those parties to issue the put option notice at the time when the put option notice was issued.  These consisted of a letter written by Stark Moly’s solicitors some months after the service of the put option notice and also a letter by the liquidators of Angel Wise to the effect that no person could deal with the assets of Angel Wise, which included Angel Wise’s shareholding in Fabulous Way, without the express authority of the liquidators.

7.In the event, it would appear that the liquidator, for the avoidance of doubt, subsequently authorised Dragonrider to proceed on their behalf and, in any event, it seems that there was a relationship between Stark Moly and Angel Wise which has resulted in Angel Wise’s shares being hived off to other proceedings.

8.In relation to Stark Moly, the position was that there appeared to have been previous documentation which would suggest that Stark Moly had in fact authorised Dragonrider to issue the put option notice on 30 March 2010 on its behalf because of concerns as to whether or not the earlier notice it had issued on its own was a valid notice.

9.So far as Addgood is concerned, there is nothing to suggest any reason for thinking that Dragonrider did not have the authority of Addgood to act on its behalf when it issued the put option notice.  The point was first raised in the course of the Order 14 hearing before the master when Mr Kwok, who appeared for Mr Lam then as he did before the judge and today, suggested to the master that there might be a question as to Dragonrider’s authority to act on behalf of Addgood.

10.The master appears to have taken the view that since this was not a matter that was raised either in the draft defence or in the affirmation evidence before him, it was not a matter that he needed to deal with.  In the event, he did not deal with the Order 14 summons, but adjourned it to be heard at the same time as another application by Stark Moly for intervention in these proceedings which was eventually heard by Deputy Judge Le Pichon.  Thereafter, matters proceeded and Mr Kwok’s essential point is that, given that a question had been raised and the point had been mentioned, albeit only in the course of his submissions, it was incumbent on Dragonrider to put forward evidence as to its authority to act on behalf of Addgood in time for the Order 14 proceedings.

11.Miss Lam, who appears for Dragonrider today, submits that the position is quite the opposite; that it is for Mr Lam, as the defendant, to raise the triable issue by putting forward a case, if he is able to, to the effect that Dragonrider did not in fact have the authority of Addgood to issue the put option notice on its behalf.

12.As far as this point is concerned, I am prepared to accept that it is one that is, to put it no higher, arguable on behalf of Mr Lam.  However, for the purposes of today’s hearing, which is concerned with whether or not a stay of execution should be granted in respect of the orders made by Deputy Judge Le Pichon, I would not be prepared to go so far as to say that the point is one which is bound to succeed, or almost bound to succeed, so as to entitle Mr Lam to a stay of the proceedings without demonstrating anything more.

13.As Ma J (as he then was) pointed out in both Star Play Development Ltd v Bess Fashion Management Ltd (unreported, HCA 4726/2001, 28 May 2002) and Wenden Engineering Service Co. Ltd v Lee Shing Yue Construction Co. Ltd (unreported, HCCT 90/1999, 17 July 2002), which are perhaps two of the best known cases on the grant of a stay of execution, in order for a stay of execution to be granted, an appellant will at least have to show that his claim has some realistic prospect of success.  Where he is able to show that his claim has very strong prospects of success, in the sense that something had gone grievously wrong in the court below or it appears to the Court of Appeal that the prospects of success on the application are so high that it can be said to be bound or almost bound to succeed, that would, in itself, suffice to justify a stay being granted.  However, as Ma J went on to point out, that will not usually be the case.  The vast majority of cases will be neither cases in which the appeal has virtually no prospects of success nor cases in which the appeal is bound or virtually bound to succeed.  Rather, the likelihood is that most cases will be cases in which an appeal will have some prospects of success but not such strong prospects as to be almost bound to succeed.

14.In my view, that is the position in relation to this point here.  In those circumstances, it is necessary for the appellant to put forward other factors that would justify a stay.  I will come back to deal with whether or not those factors have been established in due course.

15.I turn next to the other points that were raised by Mr Kwok that will be argued at the appeal.  The other points that were raised related to the form of the notice that was served by Dragonrider.  The Dragonrider notice referred, in its body, to the put option being exercised in relation to the entirety of the shares that had been initially transferred to Dragonrider. By way of a footnote it was made clear that the shares were in fact not all held by Dragonrider itself but were held by Dragonrider and the four other investors whom I have mentioned, with the respective shareholdings being indicated.

16.Mr Kwok’s point was that, on the face of it, the notice was therefore a notice for a single and indivisible shareholding, being the entirety of the shareholding which had initially been transferred to Dragonrider in the first place.  That being the case, he said, it was not possible for Dragonrider, in the Order 14 proceedings, to seek only to enforce the put option notice in respect of a part of that shareholding; namely, the shares that were held by it and Addgood.  The basis for this submission was, as I understood it, twofold.  First on a simple construction of the put option notice, whether the put option notice referred, as Mr Kwok suggested, to the entirety of the shareholding or should properly be read as being a put option notice served in respect of the entirety of the shareholding or the several parts of it held by the respective investors.  The second point, which followed on from this, was that if it was the case that it was for an inseparable and single shareholding, it was suggested that the earlier exercise of the put option serviced by Stark Moly and SIG of their option notices had, in effect, disposed of the put option in relation to their respective shareholdings so that it was not possible for a put option notice to be served in respect of the entirety of the shareholding, including those shareholdings which had already been dealt with.

17.These contentions were the subject of evidence as to Singapore law as to the interpretation of the put option and the relationship that was created as a result of it.

18.The Deputy Judge below took the view that on the basis of an objective construction of the put option notice, and having regard to the fact that the identity and quantities of the shareholdings of the five individual investors, including Dragonrider, were spelt out in the footnote to the put option notice, it was clear that the put option notice was intended to operate as a put option in respect of each of the five shareholdings severally.  She therefore held that the put option notice was not one in respect of a single lot of shares but was one that was served in respect of each of the shareholdings of the five investors.

19.Mr Kwok endeavoured to suggest that that was not, in fact, the correct interpretation of the put option notice.  But again, despite his efforts, I am not persuaded that the argument that he puts forward is one that is so strong that it can be said to be almost bound to succeed.  It is, again, at best one that is arguable.

20.In those circumstances, it seems to me that on this other ground too, Mr Kwok fails to establish that the appeal is such a strong one that a stay of execution should be granted without regard to the other factors that would otherwise have to be shown.  It therefore seems to me that it is necessary for the appellant to show that there is some other good reason why a stay of execution should be granted.

21.The most common reason why a stay of execution might be granted is that the appeal would be rendered nugatory if no stay is granted.  In this case, Mr Kwok is constrained by the evidence that his clients have been able to place before this court and is in my view unable to establish (for the most part) that there is any real risk that the appeal will be rendered nugatory.  I deal with this issue in two parts.

22.There are in fact two appeals before the court, the first in relation to the order of the court requiring that the put option notice be complied with.  This in essence requires the payment of money by Mr Lam to Dragonrider in exchange for the shares that are to be transferred pursuant to the put option notice.  Mr Lam’s obligation is simply one to pay money.  In that respect it is little different from any other money judgment.  In such cases, an appeal will only be regarded as likely to be rendered nugatory by the refusal of the stay if there is some basis for thinking that there is a real risk that the money, if paid over to the successful party below, will not be repaid to the appellant in the event that he is successful in his appeal.  There is, quite simply, no such evidence before me in this case; nor is there any evidence to suggest that if Mr Lam is unable to provide the funds, which he says he is unable to do, that the consequences to him will be so serious that he faces possible ruination.  There being no suggestion as to this, it seems to me that so far as the appeal in relation to the specific performance of the put option is concerned, there is nothing demonstrated that would suggest that that appeal would be rendered nugatory in the event that a stay is refused.  Accordingly, I refuse a stay of execution in relation to the order made in respect of those proceedings; that is, HCA 752/2012.

23.Turning to the second appeal, this relates to the enforcement of a share charge that had been provided in respect of Mr Lam’s shareholding in Fabulous Way and its subsidiary, Wiseking, through which the molybdenum mine was ultimately operated.  The quantity of Fabulous Way shares that were the subject of the investment agreement in the put option was some 23 per cent of the shareholding therein.  What was charged represented a 55 per cent interest in Fabulous Way and its relevant subsidiaries.

24.In relation to this, Mr Kwok accepted that there was no concrete evidence of any particular detriment that would be suffered if the share charge were to be enforced by requiring the transfer of the charge shares of the charge portfolio to the plaintiffs. However, Mr Kwok suggested that evidence of that was not really required, having regard to the mutually-accepted position that the shareholding in question related to unlisted companies and that they were therefore not a shareholding in which there was any real liquidity.  He relied on the fact that the purpose of the order that was sought was to put the shares into the hands of the plaintiffs to enable them to effect their recovery of the amount that they had claimed to be owed, and that it was obviously to be inferred that this would be achieved by way of a sale of the charged portfolio.  He pointed out that if the charged portfolio were to be sold, and particularly if it were to be sold at a relatively low price given its unlisted nature and given the fact that the sale would be effectively by a mortgagee in possession, it might well be impossible for his clients to be restored to the position that they should be in, if his appeal were to succeed and at the end of the day it were to be held the put option notice was defective.

25.Recognising this, Miss Lam for the respondent plaintiffs indicated that her clients had considered the position and were willing to seek to address Mr Lam’s concerns by offering an undertaking.  At the end of the day, the undertaking offered was, in effect, not to sell the charge portfolio without first giving 3 weeks’ notice of their intention to do so to Mr Lam. This, it was suggested, would give Mr Lam sufficient time to consider the proposed sale if a buyer could be found, so that he could consider whether to agree to the proposed sale or to take steps to oppose it, making, if necessary, an application to the court on whatever basis he might think appropriate to prevent the proposed sale from taking place.

26.Mr Kwok suggested that the same result could be achieved by accepting an undertaking from Mr Lam not to dispose of the Fabulous Way or Wiseking shares pending the hearing and ultimate determination of the appeal.

27.With respect, it seems to me that that would not be a sufficient means of addressing the plaintiffs’ concerns.  The plaintiffs are in the position of being successful below and, as has been recognised in many cases, the successful party should not be deprived of the fruits of his victory in the court below without good reason.  In the present case, I can see no reason why the plaintiff should not have (as it is entitled to on the basis of the order made below) transferred to it the charged shares.

28.Mr Kwok’s fallback position was to ask that a more substantial amount of time be provided.  He suggested a period of 5 weeks by way of notice and he suggested also that there should be an undertaking by the plaintiff not to interfere in the management of Fabulous Way, Wiseking or any other of their subsidiaries.

29.With respect, it seems to me that a period of 3 weeks’ notice should be quite sufficient for Mr Lam to decide what he wishes to do and to take such steps as he may be advised to in order to prevent a sale if it is the case that he wishes to do so.  Although Mr Kwok suggested that it might take time for a valuation of the charged portfolio to be obtained, it does not seem to me that there is any reason why steps cannot be taken for such a valuation to be obtained and kept up to date if Mr Lam is truly concerned about the prospect of the charged portfolio being disposed of.  It seems to me that a period of 3 weeks, which is an increase on the original period proposed of 2 weeks, should be sufficient for Mr Lam at least to get himself before the court so that directions may be given to have the matter dealt with, if that should be necessary.

30.As far as the question of exercise of rights arising out of ownership of the shares under the charged portfolio is concerned, it seems to me that in all the circumstances of the case it would not be right to prevent the plaintiffs from being in a position to exercise those rights if they should feel it necessary to do so.

31.In those circumstances, I am prepared to accept the undertaking that was offered by Miss Lam, the precise terms of which were read out to me by Miss Lam in the course of the argument and a copy of which is appended to this judgment.  On the basis of that undertaking by Dragonrider on behalf of the plaintiffs, I will dismiss this application.

Mr Tim Kwok, instructed by Kenneth C C Man & Co, for the 1st defendant/appellant in CACV 71/2013 and the defendant/appellant in CACV 72/2013

Miss Catrina Lam, instructed by Squire Sanders, for the plaintiff/respondent in both cases

Reed Smith Richards Butler, for the 2nd defendant/respondent in CACV 71/2013 and the Intervener/respondent in CACV 72/2013, absent

APPENDIX

The Plaintiff undertakes, pending final determination of the appeals herein to the Court of Appeal:

“not to sell or otherwise dispose of all or any part of the shares in Wiseking Mining Investment Company Limited or Fabulous Way Limited transferred into the Plaintiff’s name without providing three weeks’ prior written notice to the Defendant’s solicitors of its intention to do so.”