Securities and Futures Commission v. China Metal Recycling (Holdings) Ltd and Others

CACV 138/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 138 OF 2014

(ON APPEAL FROM HCCW NO 210 OF 2013)

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J U D G M E N T

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APPEAL

1.By an order dated 23 June 2014, Harris J ordered Mr Chun Chi Wai (“Mr Chun”) to execute the original of the documents attached to Appendixes 1 and 2 of the order in the presence of the provisional liquidators (“PLs”) of China Metal Recycling (Holdings) Ltd (“the Company”) or their staff by 5 pm on 27 June 2014 (“the Order”).  Those documents are letters (“the Letters”) to various Administrations for Industry and Commerce (“AICs”) and Public Security Bureaus (“PSBs”) in the Mainland for the purpose of assisting the PLs to apply for cancellation and replacement of business licenses and company chops and seals of 6 indirect wholly-owned subsidiaries of the Company in the Mainland (“the 6 Subsidiaries”).

2.This is Mr Chun’s appeal against the learned Judge’s order.

3.The background circumstances may be summarized as follows.

BACKGROUND

4.Incorporated in the Cayman Islands, the Company was registered as a non-Hong Kong company under section 333 of the Companies Ordinance, Cap 32 on 12 June 2008.  On 10 June 2009, it issued a prospectus for a global offering.  On 22 June 2009, its shares were listed on the main board of the Hong Kong Stock Exchange.

5.The Company is the ultimate holding company of its group which carries on the business of producing and trading scrap metal primarily conducted in the Mainland.  One of the Company’s principal subsidiaries is Central Steel (Macao Commercial Offshore) Limited (“Macao Steel”), the sourcing arm of the group.  Since 8 August 2012, the PLs have been appointed provisional liquidators for Macao Steel.

6.Mr Chun is the chairman of the Company and CEO of its group.  Through his company Wellrun Limited Mr Chun holds 53% shareholding in the Company.  Until the appointment of the PLs on 26 July 2013, Mr Chun was the key management figure of the group, responsible for its overall strategic planning and management of the business.

7.In December 2009, SFC began investigations into allegations that false and misleading information had been included in the prospectus.  They found that there had been substantial exaggeration of Macao Steel’s sale figures and that a significant number of Macao Steel’s purchases between 2007 and 2009 were bogus.

8.On 26 July 2013, SFC petitioned to wind up the Company pursuant to section 212 of the Securities and Futures Ordinance, Cap 571 on the basis that the Company employed a device, scheme or artifice with intent to defraud or deceive and engaged in fraudulent and deceptive acts such that it was in the public interest to wind up the Company.  On the same day, Harris J appointed the PLs as provisional liquidators over the Company (“the Appointment Order”).

9.The Appointment Order empowers the PLs to take control of the Company and protect its assets; and under Clause 4 to exercise all rights which the Company may have in relation to any of its subsidiaries and protect the assets of the subsidiaries in these terms :

“(k) Take control of and exercise all rights which the Company may have in relation to any of its joint-ventures, subsidiary or associated companies or other entities in which the Company holds an interest (‘Subsidiary’) (in accordance with the provisions of any relevant constitutional or related documentation of such entities), or such shares of such Subsidiary as are owned (directly or indirectly) by the Company, as may be necessary to obtain control or management of any such entities including, without prejudice to the generality of the foregoing, the power to appoint or remove all or any directors and other officers and agents of any such entities (including for the avoidance of any doubt, the legal representative of any entities incorporated in People’s Republic of China) and to take all such steps as the Provisional Liquidators think fit to protect the interests of the Company therein and for the purpose of protecting the assets and managing the affairs of the Company;

…

(x) By reason of the taking control of, or the exercise of all rights (arising from the Company’s holding of shares whether directly or indirectly) which the Company may have in relation to, any Subsidiary whether in Hong Kong or overseas, to do or, as a shareholder cause or compel a Subsidiary to do or permit the doing of, all acts in accordance with the provisions of any relevant constitutional documentation of such Subsidiary, and the relevant laws of the jurisdiction in which the Subsidiary is situated, which may include but are not limited to the following :

i. enter upon or take possession of the property of the Subsidiary including, without limitation, any premises of the Subsidiary, or any site or branch office where the Provisional Liquidators have reason to believe that there are assets, property or books and records of the Subsidiary, and, if necessary by force, to change locks and open safes and other strongboxes;

ii. ascertain, take into their possession, custody and control, collect, give valid receipts for and protect as necessary all the property and assets including, without limitation, all money, properties, stock, securities, choses in action and all records, books and documents, to which the Subsidiary is or appears to be entitled, whether legally equitably or beneficially or which the Subsidiary has in its possession, custody or control, whether as principal agent or trustee, whether in its own name or otherwise (collectively the ‘Subsidiary Assets’), and all documents of title, certificates and other instruments relating to title concerning the Subsidiary Assets; and not to distribute or part with any of them save for the exercise of the powers hereunder or until further order;

iii. Demand, review, secure, receive from previous and current auditors, accountants, company secretary, customers, suppliers, advisors and / or any other agents of the Subsidiary, all books and records relating to the Subsidiary in their possession or under their control and to take copy thereof;

iv. ascertain and conduct all investigations into the Assets [of the Company], business, affairs and dealings of the Subsidiary as the Provisional Liquidators shall think fit;

…

vi. take such measures as the Provisional Liquidators deem fit to safeguard and preserve the Subsidiary Assets and carry on and manage the business, Subsidiary Assets and affairs of the Subsidiary as the Provisional Liquidators see fit;

vii.  close or cease to operate all or any part of the Subsidiary’s business operations, as the Provisional Liquidators shall think fit, but so far only as may be necessary for the purpose of protecting the Subsidiary Assets and managing the affairs of the Subsidiar.”

10.Clause 3 of the Appointment Order compels the directors and officers of the Company to :

“… co-operate fully with the [PLs] and their staff as they may request from time to time and shall provide as soon as reasonably practicable all and any assistance reasonably requested of them by the [PLs] in the exercise of any of their powers, including but not limited to the provision of unrestricted access to documents, information, premises and computer systems and attendance on the [PLs] for interviews”.

11.On 11 and 21 August 2013, the PLs procured resolutions to be passed by the sole shareholder of each of the 24 subsidiaries of the Company in the Mainland, including the 6 Subsidiaries, resolving to remove all the legal representatives and directors and replacing them with the PLs and their nominees.  Despite the removal resolutions, according to the records maintained by the AICs, Mr Chun remains registered as the legal representative of 4 of the 6 Subsidiaries and a director of the remaining two.

12.In May 2014, the PLs applied to the AICs to update the records of the 6 Subsidiaries on the identity of the legal representatives and directors.  However, the applications could not be properly processed because of the objections raised by the Subsidiaries with the AICs; the absence of signatures by Mr Chun (as outgoing legal representative and director) on the application forms; the absence of the seals of the Subsidiaries affixed on the applications forms; and the inability of the PLs to produce originals and copies of the business licenses.  Without the original business licenses and company seals of the Subsidiaries, the AICs are unwilling to update the records to reflect the changes in legal representatives and directors.

13.The PLs’ case is that they applied for and obtained the Order to assist them to gain control over the 6 Subsidiaries so as to protect the Company’s assets.

JUDGMENT BELOW

14.In his judgment, the Judge first found that Mr Chun had not been cooperating with the PLs.  He said :

“ The provisional liquidators have taken steps since July 2013 to obtain control of the Company’s operating subsidiaries in the Mainland. They have made a number of applications to the Court for orders for this purpose. On 17 March 2014 I made an order for Mr Chun to take various steps to assist in the process of changing the legal representatives of the subsidiaries in the Mainland and obtaining control of various bank accounts. On 7 April 2014 I made a further order requiring Mr Chun to assist the provisional liquidators obtain the company seals and business licences and other documents of the subsidiaries. Mr Chun has in my view clearly not been cooperating with the provisional liquidators and has only taken the steps required of him after an order has been made. An additional practical problem faced by the provisional liquidators is that the local management of the subsidiaries has failed to cooperate with them. One example of this is their failure to provide company seals and original business licences which are required in order to change legal representatives of the companies. That these are required is demonstrated by a letter from the Shanghai Administration for Industry and Commerce, Trial Free Trade Zone Branch dated 20 May 2014, which rejects an application to change, amongst other things, the legal representative of China Metal Recycling (China) Co, Ltd, because the application is not affixed with the seal of the company and neither has the original or duplicate business licence been provided.”

15.After referring to the contents of the letters that the PLs asked Mr Chun to sign and noting that the facts stated are factually correct, the Judge dealt with the two objections raised by Ms Tong, for Chun thus :

“6. … Ms Tong raised two objections to the application. First, she said it was premature and that the better course would be for the provisional liquidators to meet the management of the six subsidiaries. She referred me to correspondence from Mr Chun’s solicitors indicating their willingness to meet and recording the provisional liquidators’ refusal to do so. I disagree.

7. The management’s suggested willingness to meet arose not in the context of the request for them to provide the company seals and business licences. It was made in the broader context of a suggestion by the provisional liquidators that a working group might be formed which would consider how best to preserve the value of the Company’s valuable operating subsidiaries. However, before the provisional liquidators met the management they required to be provided with information about the operations and finances of the companies. It speaks volumes for the lack of cooperation the provisional liquidators have experienced that they have been provided with no information about the operations or finances of the companies since they were appointed by me over 10 months ago. It seems to me that it is demonstrably reasonable for them to want to be provided with such information before they meet management in order that they can have informed discussions. The protestations of Mr Chun’s solicitors that Mr Chun cannot facilitate the provision of this information rings very hollow. It seems to me that the only sensible conclusion that can be reached given the history of the provisional liquidation is that nothing will be done by Mr Chun and those of his associates who are still in control of the Company’s operating subsidiaries in the Mainland unless they are compelled to do so.

8. The second objection is that directing Mr Chun to sign the letters would be inconsistent with legal provisions in the Mainland.  I do not accept that the law of the People’s Republic of China is relevant to the matter before the Court.  Mr Chun has filed similar expert evidence, some of questionable veracity, for the early applications.  On those occasions Mr Chun’s then counsel, Mr Lawrence Li, accepted that issues of PRC law are not relevant to directions given to Mr Chun, who is a director of the Company and is resident in Hong Kong, pursuant to paragraph 3 of the order of 26 July 2014.  Whether or not a letter of the sort I have directed Mr Chun signs has any effect in the Mainland is a different matter, and not one with which I am concerned.”

DISCUSSION

16.It is trite that the Court of Appeal will not disturb the Judge’s exercise of his discretion in making the Order unless it is demonstrated that the Judge misunderstood the law or evidence; or that the exercise of his discretion was plainly wrong such that it was outside the generous ambit within which a reasonable disagreement is possible : see Wong Kar Gee Mimi v Severn Villa Ltd [2012] 1 HKLRD 887, per Kwan JA at §31.

17.In contending that we should disturb the Order, Mr Yan, SC, leading Ms Tong, advanced a number of points.

18.First, Mr Yan argued that the Order was premature and unnecessary because Mr Chun had complied with the previous orders made by the Judge and had rendered assistance to the PLs and because the senior management of the 6 Subsidiaries is willing to carry out meaningful discussions with the PLs.  This can be disposed of shortly.

19.We have carefully considered all the evidence, which we need not detail.  We agree entirely with the Judge’s reasoning and conclusion on this matter in §7 of his judgment quoted above.

20.Second, Mr Yan argued that the PLs should have followed through another order of the Judge dated 7 April 2014.  The PLs should have continued with and completed the confirmation proceedings in the Mainland so that their status as provisional liquidators of the Company could be confirmed by the PRC courts.  The PLs should not have “short‑cut” the confirmation proceedings by applying for the Order.  However, as we observed in the course of argument, unless Mr Chun could pinpoint some specific form of prejudice that he would personally suffer if he were to comply with the Order, the PLs are quite entitled to adopt what they perceive as the most effective way of exercising their functions and powers under the Appointment Order to get control of the 6 Subsidiaries so as to protect the Company’s assets.  The court will not lightly interfere with the PLs’ decision.  This brings us to the third point which concerns the alleged prejudice that Mr Chun would suffer.

21.Before coming to that point, we need to dispose of Mr Yan’s complaint that the Judge erred in holding that PRC law is irrelevant : see §8 of his judgment.

22.With respect to the Judge, we think the PRC law is relevant in two aspects :

(1)   Whether Mr Chun would suffer the alleged prejudice if he were to sign the Letters as contended;

(2)   Whether the PLs acted reasonably in making the intended applications to the AICs and PSBs by way of the Letters, which is in essence Mr Yan’s fourth point.

23.However, as will be seen in a moment, even if the Judge had taken into account the PRC law, the end result would just be the same.

24.Returning to the third point about prejudice, Mr Yan submitted that according to Mr Chun’s PRC law expert, Mr Chen Hui, he would be exposed to personal liability if he were to sign the Letters :

“ 按照香港臨時清盤人所述，秦志威先生已被其免除董事及法定代表人的職務，則秦志威先生無權簽署致境內相關工商行政管理部門及公安部門有關聲明作廢中國境內公司公章及營業執照的書面函件，無權對公司事務作出確認及聲明，或以法定代表人名義作出任何行動。根據《民法通則》第六十六條有關‘沒有代理權、超越代理權或者代理權終止後的行為，只有經過被代理人的追認，被代理人才承擔民事責任。未經追認的行為，由行為人承擔民事責任’的規定，秦志威先生簽署該文件屬於無效的民事行為，並可能導致損害公司的利益而被公司起訴索賠”

Thus it would be oppressive to ask Mr Chun to sign the Letters.

25.We are unable to accept Mr Chen’s evidence.  He had not cited any authority to support his argument that Mr Chun had no authority to sign the Letters.  His view is also contradicted by the PLs’ expert, Mr Zhou Qiang : see §§4(9) to (11) of his opinion dated 4 April 2014, where he referred to the relevant PRC regulations in support of his view that Mr Chun did have the authority to do so.  We prefer Mr Zhou’s evidence.  In any event, even if assuming that Mr Chun has no authority to sign the Letters, it has been expressly provided in the Letters that Mr Chun is signing them as out-going legal representative and director. Any suggestion that he might be exposed to personal liability for doing something not authorized by the 6 Subsidiaries must be fanciful.

26.We finally come to Mr Yan’s fourth point, that is, the PLs had failed to prove that the intended applications to the AICs and PSBs would work.  Failing that, they should not have asked Mr Chun to sign the Letters.  In this regard, Mr Yan also sought to rely on Mr Chen’s expert evidence, which is countered by Mr Zhou’s evidence.  It is not necessary for us to resolve the difference between the two experts.  The short answer is this.

27.Whether or not the AICs and PSBs would accede to the PLs’ applications by way of the Letters is of course a matter for the AICs and PSBs.  The PLs’ application of asking Mr Chun to sign the Letters cannot be criticized when it is supportable by Mr Zhou’s advice, unless it can be demonstrated that the Mr Zhou’s view is plainly wrong.  That we do not think Mr Chen has done.

28.Further, Mr Zhou’s view is reinforced by the latest decision of the People’s Supreme Court in the 大姆指 case.  We do not find Mr Chen’s attempt to distinguish that case convincing.

DISPOSITIONS

29.For the above reasons, we can see no merits in Mr Chun’s appeal.  We dismiss it accordingly.

30.We further order Mr Chun, on a nisi basis, to pay the PLs costs of the appeal including the costs of the admission of further evidence before us, to be taxed if not agreed with a certificate for two counsel.

Mr John Yan SC and Ms Sara Tong, instructed by Li & partners, for the 2^nd respondent/ appellant

Ms Linda Chan SC and Mr Justin Ho, instructed by Hogan Lovells, for the provisional liquidators/ respondents