張才奎所託管中國山水投資有限公司股份相關員工 and Others v. 張才奎 and Another

HCA 1661/2014,
HCA 1766/2014,
HCA 2191/2014,
HCA 623/2015 &
HCA 939/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NOS 1661, 1766, 2191 OF 2014 &

623 AND 939 OF 2015

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BETWEEN

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DECISION
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1.There are before me applications for the appointment of receivers issued by the plaintiffs in 3 actions which have been heard on an inter partes basis.  Identical applications for receivers have also been made by the plaintiffs in 2 further actions, which have not been formally served on the defendants.  There are also outstanding applications for injunction by the plaintiffs in the first 3 actions which I heard on 1 April 2015 on which I have reserved judgment. 

2.The background of the matter has been set out in paragraphs 1 to 44 of my judgment handed down on 13 May 2015 in respect of certain jurisdictional applications in the first three actions, and the claims of the plaintiffs have been described in paragraphs 55 to 60 of that judgment. I refer to that judgment generally and shall not repeat everything I said there again.  I shall continue to use the abbreviations defined in that judgment. 

3.The summonses for injunction were taken out in November 2014.  The injunction sought is an order requiring Mr Zhang to attend the EGM of CSI requisitioned by the minority shareholders and to vote certain number of shares, to which the plaintiffs claim to be entitled, in accordance with the written instructions of the plaintiffs as set out in K&L Gates’ letter dated 17 November 2014 and the written instructions to be given by the plaintiffs in relation to that meeting.  K&L Gates’ letter asked Mr Zhang to vote in favour of the appointment of 5 minority shareholders, namely, Mr Dong Chengtian, Mr Zhao Liping, Mr Zhao Yongkui, Mr Mi Jingtian and Mr Li Maohuan, as directors of CSI.  The EGM of CSI was originally to take place on 5 December 2014, but as I understand the position it has been agreed that it will not take place until after the hearing of the injunction application.

4.The receivership summonses were taken out in the first three actions on 24 March 2015.  The receivers proposed, being 3 professional accountants, are to be receivers of all together 384,961 of the 817,421 shares in CSI registered in the name of the 1st defendant, representing the proportion of CSI shares to which the plaintiffs in the first three actions claim to be beneficially entitled.  It is proposed that if appointed, the receivers will take possession of the relevant CSI shares and become registered holders thereof, receive any income in respect of those shares, and be entitled to exercise shareholders’ rights including the right to requisition, attend and vote at general meetings.

5.The grounds for the injunction and receivership applications overlap.  While the injunction application came first in time, it is said that the receivership application was issued upon certain developments which took place after the summonses for injunction were issued.  As the submissions developed I think it is fair to say that the primary interim relief sought by the plaintiffs is the appointment of receivers, and accordingly I shall deal with that application first.

6.The court has jurisdiction to appoint a receiver under s. 21L of the High Court Ordinance (Cap. 4) “in all cases in which it appears to the Court of First Instance to be just or convenient to do so”.  The power is expressed generally.  The general ground on which the court appoints an interim receiver is the protection or preservation of property, pending some suit or proceedings, for the benefit of persons having an interest in it.  The appointment is typically made at the instance of a party to proceedings to take possession of and get in the property, being the subject matter of the action, the title to which is in dispute between the parties.

7.In Capewell v Revenue and Customs Commissioners [2007] 1 WLR 386, Lord Walker stated:

“19. The Court’s power to appoint a receiver, as part of its auxiliary equitable jurisdiction, is of very ancient origin. It was described in Hopkins v Worcester & Birmingham Canal Proprietors (1868) LR 6 Eq 437, 447, as one of the oldest remedies in the Court of Chancery. It was used in a wide variety of situations in which there was a need for the interim protection of property (and the income of property), including disputes about partnerships, sales or mortgages of land, and administration of estates. Receivers could also be appointed by way of equitable execution. The receiver, being appointed by the Court, was an officer of the Court. His duty was to act impartially, and in accordance with the directions of the Court, in administering the property to which the receivership extended.

20. In short, the appointment of a receiver was in many cases the most effective way of ‘holding the ring’ between warring litigants until the disputed issues could be finally determined. …”

8.There is no dispute between the parties that, at least in this jurisdiction, the power to appoint receivers on an interlocutory application is a discretionary power to be exercised flexibly on a similar basis to that for an interlocutory injunction, and that the principles in American Cyanamid Co v Ethicon Ltd [1975] AC 396 generally apply: Chinese United Establishments Ltd v Cheung Siu Ki[1997] 2 HKC 212 at 223; Re Niceline Co Ltd [2003] 2 HKLRD 725, §§50-53; Re Full Billion Shipping Ltd [2003] 2 HKLRD 674 at §§17-18.

9.In deciding whether to appoint an interim receiver the court must be cautious.  It is a drastic remedy, never to be granted as of course.  The court does not act on slight grounds.  In deciding whether to appoint a receiver, the adverse consequences of receivership both for the defendant, and potentially for third parties, have to be considered. 

10.The present case is one where, as is common ground, the property is held on trust and the 1^st defendant is trustee.  The 1^st defendant does not assert any absolute beneficial interest in any CSI shares.  The contest in the actions lies between the BVI trusts which are absolute discretionary trusts and the constructive trusts for which the plaintiffs contend. 

11.When it comes to the question of appointing receivers of trust property, the freedom of settlors to choose their trustees needs to be taken into account.  But it is clear the court may appoint a receiver of trust property where that is necessary for the well being of the trust.  This may be justified if the security of the trust property is in jeopardy, such as where the affairs of the trust are in disorder and the appointment is necessary to secure continuity of management, where the trustees deny or dispute the trust, where the trustee is guilty of conduct that endangers the property, or where the trustee is of such character as is likely to lead to the jeopardy of trust property.  The grounds have to be strong but assessing the degree of risk or jeopardy involves a qualitative judgment.  See: Yunghanns v Candoora No 19 Pty Ltd (No 2) (2000) 35 ACSR 34 at §66-70, 83-84; Picarda, The Law Relating to Receivers, Managers and Administrators (4^th ed), pp. 363-364.

12.For the plaintiffs Ms Eu relied upon a number of matters.  She contended that the plaintiffs have a strong prima facie case on the actions, that there are matters from which it can be seen that the 1^st defendant is of low commercial morality, that the assets in the form of shares in CSI and the plaintiffs’ interests therein are in jeopardy, that pending the trial of the actions, the appointment of independent professionals as receivers can protect and preserve the trust assets and their value for both parties.

13.Ms Eu submitted that where the assets as here are shares in a company in turn holding assets then the remedy of appointing a receiver is likely to be particularly appropriate and a Mareva injunction in respect of the shares will not in itself be sufficiently effective protection: Gee, Commercial Injunctions (5^th ed) §7.010.

14.For the 1^st defendant, Mr Jat does not dispute there are serious issues to be tried in the actions.  He opposes the receivership application mainly on the grounds that there is no jeopardy to assets, that the appointment of receivers is a drastic remedy of last resort, that the appointment of receivers is inefficacious, there is likely to be potential prejudice to third parties especially Shanshui Cement, that the court should preserve the status quo by refusing to appoint receivers, and that damages are in any event an adequate remedy for the plaintiffs.

15.I turn first to the matters giving rise to concerns on the part of the plaintiffs and leading to the applications for interim relief.  First, Ms Eu relied on the substantive complaint in the actions itself.  She submitted that given that the plaintiffs paid for and owned equity interests in Shandong Shanshui under the employees stock ownership scheme, there is a strong case for substantive relief in the actions in light of the fact that their entitlements have purportedly been turned into a mere “hope” under two absolute discretionary trusts with no actual interest in any CSI shares.  In my view there are serious issues to be tried; in fact the contrary is not being suggested by Mr Jat.  The 1^st defendant in his first affirmation stated (at §26) that the employees were aware and content that after the overseas restructuring, they would only have the right to receive economic benefits, and that there was therefore nothing they could now complain about.  The problem with that however is that on the basis of the BVI trusts and on the 1^st defendant’s case, the employees do not even have any “right” to receive economic benefits.  They are, so far as receiving any benefit from CSI is concerned, entirely at his mercy, with no right at all to speak of.  The 1^st defendant has not yet been able to point to any document or clear evidence which shows that the plaintiffs gave any informed consent to that result.

16.Although the 1^st defendant was entrusted to manage and protect the participating employees’ interests in a “fair, just and impartial (or selfless)” manner (see paragraph 6 of the letter of confirmation signed by the employees in April 2008, quoted in paragraph 27 of my judgment dated 13 May 2015), the plaintiffs complain that the 1^st defendant has involved himself in situations with conflicting interests and duties, and has preferred his own interests to that of the trusts.

17.In November 2013, the 1^st defendant presented a proposal to the participating employees to buy them out of the BVI trusts.  It was proposed that the purchase price would be calculated with reference to the share price of the listed company, but at a discount.  The payment would be completed in 3 terms of 10 years each.  The capital payments would be derived from and funded by the income of the trusts, ie dividends received by the trustee from CSI.  The plaintiffs allege that the plan would involve the 1^st defendant using “their money” to buy them out.  There is no direct evidence from the 1^st defendant to contradict this.  Mr Jat submitted however that this plan was not implemented and is “water under the bridge”.

18.The next significant event is the agreement to allot 563,190,040 shares in Shanshui Cement to CNBM at HK$2.77 per share, representing approximately 20% of the then existing issued share capital and 16.67% of the enlarged issued share capital of Shanshui Cement.  This took place after the first two actions were commenced by the plaintiffs, who were not privy to the detailed information relating to the placement.  The placement was completed on 3 November 2014, after the third action was commenced.  As can be seen from Harris J’s decision in HCMP 360/2015 dated 17 March 2015, the grounds upon which the placement was challenged by the 6 minority shareholders included (i) that the subscription agreement was not entered into bona fide in the interests of CSI but in the interests of Mr Zhang , CNBM and Mr Song Zhiping (the Chairman and Secretary of Party Committee of CNBM), pursuant to the Zhang-Song agreement referred to in paragraph 108 of my judgment; (ii) that the subscription price of HK$2.77 per share was suspiciously low (compared for example to a net asset value exceeding HK$4.10 per share as at 30 June 2014); (iii) that there was no evidence to show the transaction between CNBM and Shanshui Cement was at arm’s length; and (iv) that Shanshui Cement had no immediate need of funds.  On the evidence before him, Harris J concluded that:

“the Applicants have demonstrated a basis for suggesting that Zhang Sr engineered the agreement with CNBM for his own reasons rather than simply because he thought it was a good commercial deal” (at §38)

and

“there is a serious question to be tried as to whether the subscription agreement was introduced and approved for impermissible reasons and without it being given proper consideration by the board” (§39).

19.Ms Eu relied also on the 2015 share options resolved to be granted by Shanshui Cement to Mr Zhang, his son and a number of employees (including Li Cheung Hung who has filed affirmations on behalf of Mr Zhang in opposition to the receivership application), referred to in the decision of Harris J in HCMP 360/2015 and also in paragraphs 38-39 of my judgment.  As can be seen there, the options were challenged by the 6 minority shareholders on the grounds, which Ms Eu adopted, that (i) while share options had only been granted once by Shanshui Cement between June 2008 and January 2015, viz. in May 2011, for only 7.3 million shares, and against the background of the profits having doubled between 2010 and 2011, the share options granted or to be granted in 2015 were for a total of 207.3 million shares, against the background of a very substantial drop of net profits for 2014; (ii) the fact that some of the options were granted to employees who had made little contribution and some of whom had already retired from the group was inconsistent with the stated purpose of the grant of options; (iii) the evidence revealed no discussion by the directors of the decision to grant the options; and (iv) the written board resolution appeared to have been passed by directors including Mr Zhang, his son and Mr Hou, a beneficiary under the Zhang Trust whose independence was in doubt.  His Lordship concluded:

“There is nothing unusual about a listed company having an option scheme for its employees. However, there is a material difference between the way in which Shanshui Cement proposes to deal with employee options this year and how it has dealt with them historically. There is no written explanation prepared for or by the board explaining why this is the case. I accept that there is a serious question as to whether or not this departure from previous practice has been instigated by Zhang Sr to dilute [CSI] in order to reduce its ability if its board is reconstituted as a result of the Trust Actions to prevent the necessary members’ resolutions approving further allotments of shares.”[1]

20.The proposed share options included options to be granted to Mr Zhang to subscribe for 23.6 million shares and to his son to subscribe for 20 million shares at HK$3.68.  The options (including those granted to other employees), when fully exercised, would reduce CSI’s interest in Shanshui Cement from 25.09% to 23.64%.  The options were granted or proposed to be granted at the time when the plaintiffs’ application for injunction herein was pending.  The options granted to the Zhang’s can only be approved by the independent shareholders of Shanshui Cement.  In the face of criticism from the minority shareholders of CSI, the 1st defendant caused Shanshui Cement to convene an EGM on 20 March 2015 to consider approving the grant of the share options to himself and his son.  It was only put off to a date after the hearing of the minority shareholders’ application for injunction to be heard in July 2015 when Harris J indicated he was prepared to grant an interim injunction restraining the holding of the EGM.  While CSI could not vote in favour of the share options, there is no dispute that CSI can vote against them.  Ms Eu submitted, which I accept, that there is a conflict between the 1^st defendant’s and his son’s personal interests and his duties as trustee.  Left to himself, it is clear that the 1^st defendant will not cause CSI to vote against the share options at the EGM. 

21.Ms Eu also complained that Mr Zhang appeared to be treating CSI as his own company.  Thus he caused CSI, presumably using its own funds, to resist leave for the statutory derivative unfair prejudice petition that was in substance being brought against Mr Zhang personally and which Harris J concluded it was in CSI’s interest to bring.  The position was summed up by Harris J’s observation in his decision in HCMP 360/2015 at §34 that CSI’s position in the litigation before him was “effectively that of the Zhangs”.  Ms Eu also stated that the 1st defendant caused Shanshui Cement to oppose the minority shareholders’ application for injunction to restrain the holding of an EGM on 20 March 2015, when the only matter to be resolved upon at the EGM was the grant of share options to the Zhangs.  In my view these matters also raise legitimate concerns from the point of view of the plaintiffs because plainly CSI’s interests cannot be identified with those of Mr Zhang.

22.Furthermore, since the hearing on 1 April 2015, a grave and most disturbing matter has been revealed in the following way.  On 10 and 20 April 2015, a solicitors firm in Hong Kong, Messrs Siao Wen & Leung, claiming to be acting for 489 of the plaintiffs in the first four actions, delivered pro forma letters said to have been signed by those 489 plaintiffs to Messrs. K&L Gates (solicitors on record for the plaintiffs in these actions), purporting to revoke their authority to act and asking for all proceedings herein to be terminated and withdrawn so far as the 489 plaintiffs are concerned.  This was referred to in the 3^rd affirmation of Mr Zhang in these proceedings filed in opposition to the receivership application on 22 April 2015, to which the documents he relied on were exhibited.  Mr Zhang referred to them as indicating that not all of the more than 1,800 plaintiffs fully understood or agreed with the claims being made in the actions.

23.Upon investigation by K&L Gates and others, however, it now appears:

(1) 220 of those 489 employees, whom K&L Gates and their agents managed to contact in the time available, stated they had never heard of Siao Wen & Leung, let alone instructed that firm to represent them.

(2) When confronted with this, Siao Wen & Leung stated they were “instructed to act for the 489 plaintiffs … simply in the delivery of 489 original withdrawal letters … to [K&L Gates]” (original underlining) and that their “duty to the said 489 plaintiffs have been duly performed and the matter has come to an end”.

(3) 56 of the 489 plaintiffs have since submitted declarations, apparently written in their own hand, detailing the circumstances in which they were effectively forced by their superiors in the group to sign the pro forma withdrawal letter on pain of demotion, relocation to remote regions, deprivation of bonuses, outright dismissal or other hostile consequences.

(4) 335 of the 489 plaintiffs have since executed further written retainers confirming their instructions to K&L Gates to prosecute these actions.

24.In the recent draft 4^th affirmation initialled by Mr Zhang, he stated that he himself did not force or threaten those 489 plaintiffs and did not take any part in the matter of their signing revocation letters to K&L Gates.  He said he was informed by Mr Tian Guang, one of the plaintiffs, by letter dated 21 April 2015 and also by letters by 6 other plaintiffs, of the fact that over 400 plaintiffs had written to revoke their authority to K&L Gates.  Mr Zhang said that he thought it necessary to disclose those letters to the court in his 3^rd affirmation.  As to the fact that 335 of those plaintiffs have since re-confirmed their instructions to K&L Gates and 220 of those plaintiffs have stated they had not authorised Siao Wen & Leung, Mr Zhang said that these are matters between those plaintiffs and those solicitors’ firms on which he had no comment.

25.However, according to the letters from the employees, various individuals occupying senior positions in the group took part in trying to force the employees to withdraw this litigation. These attempts took place in two main periods in mid October 2014 and late March 2015 respectively.  In the March episode, the participating employees were told to attend assemblies, when they were told of “the group’s stance” which was that they had to withdraw their claims in Hong Kong.  The superiors then followed up with private meetings with the employees in question putting pressure on them to withdraw from these actions and threatening them with various consequences if they did not comply.  The October episode was similar although it is not clear if there were mass assemblies.  There appears overwhelmingly to have been an orchestrated campaign within the group to put pressure on the plaintiffs to force them to withdraw their claims.  There would seem to be little for those superiors themselves to gain from this exercise.  Moreover, Siao Wen & Leung issued their letters and Tian Guang wrote to the 1^st defendant just in time for him to exhibit them in his 3rd affirmation which, according to my directions, had to be filed on 22 April 2015.  Despite Mr Zhang’s 4th affirmation, to my mind there remains a serious doubt whether these acts were done with his connivance or at least knowledge or tacit approval.  I note that Mr Zhang in his draft 4th affirmation (paragraphs 13 and 14) has not denied that he had knowledge of the campaign, whereas in relation to the forced purchase of shares, which I shall presently mention, he specifically said (in paragraph 15) that he had no knowledge. 

26.In any event, there is no denial at all that some of the plaintiffs have been bullied and threatened. The 1^st defendant, having produced to the court Mr Tian Guang’s and Siao Wen & Leung’s letters as relevant evidence in the first place, has not seen fit to inform the court whether he tried to find out what had happened and if so his findings.  All he said in reply was that he did not personally exert any threat, he did not take any part, and that he declined to comment further.

27.Mr Jat at one point made a submission trivialising the intimidation faced by the plaintiffs, suggesting that if the plaintiffs had felt able to renege shortly after signing the withdrawal letters and to re-confirm their instructions to K&L Gates, the threat could not have been very serious after all.  I reject this argument.  I need only refer to one of the 56 letters from the employees to show that this submission is unacceptable:

“我是山東水泥廠有限公司機電車間職工楊希茂，年齡52歲。前期我自願在維權辦公室簽訂了起訴書上簽字，然而廠裏領導知道後，車間主任袁傳軍叫我到辦公室對我說：“不簽撤訴書就回家”，當時我並未簽字。10月16日袁傳軍再次找我，並對我說：“如果你回家了怎辦，像你這樣的年齡，回家也找不到工作”。我本意不想簽撤訴書，但考慮到妻子有腦出血後遺症，小腦萎縮，半身不遂，每月不少的醫藥費，我身體又不好，兩小腿患靜脈炎，並有高血壓，可以說我的工作收入是家庭最主要的經濟來源，所以迫於壓力被逼無奈之下，違心的在撤訴書上簽了字。”

(In English translation, as follows)

“I am Yang Ximao, aged 52, a machinery workshop worker of Shandong Cement Factory Limited Company. Previously I voluntarily signed a document of complaint at the office for protecting rights. However, after the leaders in the factory learnt of it, Workshop Supervisor Yuan Chuanjun asked me to go to the office and said to me, “Go home if (you are) not going to sign the Notice of Withdrawal.” At that time I did not sign it. On 16 October, Yuan Chuanjun approached me again and said to me, “If you go home, what would happen? Given your age, (you) won’t be able to find a job if (you) go home.” I originally did not want to sign the Notice of Withdrawal. However, my wife was suffering from the residual defects of cerebral haemorrhage, spinocerebellar atrophy and hemiplegia. Monthly medical expenses were considerable. I was in poor health too, and suffered from phlebitis in (my) lower legs and hypertension. It could be said that the income from my job was the main source of finances of the family. Therefore, under such pressure, (I) had no alternative but sign the Notice of Withdrawal, which was against my will.”

In my view, the fact that such an employee managed to revoke the document signed under pressure is, if anything, a sign of his fortitude.  It is not a point in favour of the 1^st defendant.

28.There is also evidence that in April 2015, certain participating employees were told to sell their “shares” in the trusts to some unknown persons.  The documents involved included the same pro forma letter to K&L Gates to withdraw from the actions.  The attesting witnesses to the draft documents were senior officers in the management of the group.  In his 4th affirmation the 1^st defendant denied he exerted any threat or took any part in this, and stated that he had no knowledge of any transfer of shares by the plaintiffs to third parties.  He did not say, however, that the event did not happen, or that the senior officers whose names appear on the documentation did not exert pressure on the plaintiffs to “sell out” their interests.

29.Mr Jat argued that Ms Eu’s references to these recent events are pure prejudice and mud-slinging and ultimately irrelevant.  I do not agree.  In my view they relate directly to the very interests the plaintiffs are asserting in these actions.  They are evidence that some of the plaintiffs, as beneficiaries of a trust, have been threatened to make them give up their claims being brought in the court of Hong Kong against the trustee, and have been pressurised to sell out their interests in the trust to some unknown persons, possibly acting for the trustee.  A purchase by the trustee from his beneficiary is always a transaction which the courts will watch with the “utmost jealousy” (Ex p Lacey (1802) 6 Ves Jr 625).  In my view these matters cry out for the intervention of the court and interim protection of the plaintiffs as beneficiaries.

30.These matters which raise concerns and fears on the part of the plaintiffs, viewed as a whole, demonstrate serious issues – and of course I cannot make any finding at this stage – of the sole trustee’s conflict of interests, of acts done by the trustee in disregard of the beneficiaries’ interests, of attempts to obstruct the beneficiaries’ access to the court for relief, and of attempts to acquire the beneficiaries’ interests using the trust funds or intimidation and illegitimate pressure.  There is in my view clear risk of jeopardy to the trust property as well as the plaintiffs’ interests in the trust property.

31.Mr Jat submitted that it has not been shown that damages would be an inadequate remedy for the plaintiffs.  He submitted that damage suffered by way of dilution of one’s shareholding in a company can be compensated by damages: Leung Pik Wa v Poh Po Lian (HCA 681/2011; 4 July 2011), §§36-39.  But this depends on the circumstances.  CSI’s shareholding in Shanshui Cement has been reduced to 25.09%.  Any further dilution would remove CSI’s ability to block a special resolution, a loss which would be difficult to quantify in monetary terms. Moreover, it is not just a question of dilution.  The jeopardy or risk of jeopardy here has to be assessed qualitatively having regard to the matters that evidence the character, conduct and proclivities of the sole trustee. There is in addition the jeopardy to the interests of the plaintiffs themselves whether under the BVI trusts or the trusts the plaintiffs contend for.  They are faced with intimidation and pressure to give up their claims and to part with their interests under the trusts.  Plainly these are not matters that can be, or ought to be relegated to be, redressed by damages.

32.Mr Zhang stated in his affirmation that the receivers would only have voting rights in respect of approximately 38.5% of the shares of CSI, that CSI only holds 25.09% of issued shares of Shanshui Cement, that CSI is a holding company with no actual business operations, and that the receivers as officers of the court would exercise voting rights having regard to the interests of CSI without being accountable directly to the plaintiffs.  This is correct, and in my view it shows, not that the appointment of receivers would be inefficacious to redress the matters complained of (as the 1^st defendant argues), but that the appointment of receivers in these circumstances is a measure that befits the interests asserted by the plaintiffs, and is a far cry from an order giving the management of the listed company to the plaintiffs.

33.The receivers, acting independently of the parties and under the supervision of the court, could see how best to exercise voting rights in relation to the block of shares in question (approximately 38.5% counting the plaintiffs in the first 3 actions, or approximately 43.3% counting the plaintiffs in all 5 actions commenced so far).  They could properly perform the function of trustee of a substantial parcel of shares in a company, i.e. act in a manner that is necessary to safeguard that investment (Bartlett v Barclays Trust Co [1980] 1 Ch 515, 532-534), without being bedevilled by the conflicts of interests that beset the 1st defendant.  The 1st defendant would remain the registered holder and in control of the balance of the 81.74% interest he has hitherto held in CSI.  The 7 minority shareholders would continue to hold their shares which in aggregate represent an 18.26% stake.  As things stand the receivers would not have a controlling stake in CSI, but as substantial shareholders they would be able to influence the voting power that CSI in turn has in Shanshui Cement.  They would be able to take a disinterested stance in how the affairs of CSI should be conducted, particularly in relation to the complaints and litigation against Mr Zhang and in relation to its investment in Shanshui Cement, preventing the invidious conflicts affecting Mr Zhang.  They could ensure that an independent mind is brought to bear, from the point of view of a shareholder of CSI, on the grant of the share options to the Zhang’s.  They would be able to help ensure that the relevant shares in CSI are not improperly encumbered or otherwise utilised for improper purposes and that any dividend income CSI receives and any dividend downstream are properly accounted for.  It is true that CSI only has 25.09% in Shanshui Cement and that, as I shall refer to below, another shareholder has overtaken CSI as the largest shareholder of Shanshui Cement, but 25.09% is nevertheless a substantial interest in a listed company.  If the affairs of Shanshui Cement are being prejudicially conducted, the receivers would be in a much better position than the plaintiffs to cause CSI as a shareholder to take action.  The directors of Shanshui Cement would be kept in check. 

34.Furthermore, the receivers could ameliorate the position of the plaintiffs as far as the intimidation and bullying is concerned.  By an order for the appointment of a receiver the court assumes control of the property affected, both in terms of the legal estate and any equitable title.  No transfer of the relevant shares in CSI could take place without the involvement of the receivers.  Any transfer of any equitable interest under the trust, if it could take place at all, would also properly have to involve the receivers who would have temporarily displaced the trustee.  The receivers would of course be officers of this court.  Any interference with them or with property in their possession would be a contempt of court: Angel v Smith (1804) 9 Ves 335. As such the receivers could insulate and give protection to the plaintiffs not only as against the 1^st defendant but also as against any other person trying to put pressure on them or intimidate them whether or not acting on behalf of the 1^st defendant.

35.Mr Jat submitted that the appointment of receivers is a last resort.  I accept that the court would not normally appoint receivers if there is a less invasive form of protection that would be equally effective for the purposes: see Re Zealot & Co Ltd [2008] 1 HKLRD 386, §§34-35.  But in the circumstances of this case, which are in my experience exceptional, I consider an appointment of receivers to be amply justified. 

36.Mr Jat relied on the fact that there is a pending application for interim injunction in the statutory derivative unfair prejudice petition (HCMP 593/2015) scheduled to be heard on 6 July 2015.  The injunction is sought to restrain Shanshui Cement from issuing shares pursuant to the 2015 share options.  This in my view is no justification for refusing relief to the plaintiffs.  The plaintiffs are not party to those proceedings.  I cannot second-guess the outcome of the application before Harris J, but must determine the present application on the basis of the materials before me.  Even if an injunction is granted it only gives symptomatic relief to restrain the listed company from issuing shares pursuant to the share options, and does not address underlying problems and all the other matters complained of by the plaintiffs.

37.Further, it is to be noted that receivers are proposed for a block of shares in CSI, not for CSI itself or for any of its property such as its shareholding in Shanshui Cement. The registration and notification requirements such as in ss. 299 and 300A of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) do not apply.  The risk of stigma is correspondingly reduced.  In any event, CSI is an investment holding company whose sole function is to hold shares in Shanshui Cement.  It has been recognised in the cases that appointing receivers over a company that is merely an asset holding company generally involves less adverse effect on the operation of the company than is the case for a company with an active business: Guo Jing Jing v Art Master Investment Ltd (HCA 1008/2009; 11 December 2009), §74.  A fortiori, the appointment of receivers over 40% of the shares in such a company as CSI is fundamentally different from, and less drastic than, appointing receivers and managers over a trading company.  The present application is for appointment of receivers only, not receivers and managers.

38.The 1^st defendant, whilst saying that the appointment of receivers would not be an efficacious remedy because of the limited shareholding at the level of both CSI and Shanshui Cement, asserts in the same breath that appointing receivers would mean wholesale replacement of the sitting management of the listed company.  I do not think this is right.  There are at present 3 executive directors of Shanshui Cement, namely, Mr Zhang, his son Mr Zhang Jr and Mr Li Cheung Hung; 1 non-executive director, namely, Mr Xiao Yu; and 3 independent non-executive directors, namely, Mr Wang Jian, Mr Hou Huailiang and Ms Wu Xiaoyun.  Even if the plaintiffs wish to remove all of them, the receivers may not necessarily agree.  They are not appointed to act for the plaintiffs, and are independent from the plaintiffs, the 1st defendant and the 7 minority shareholders.  Moreover, directors are of course usually appointed by the company in general meeting.  CSI is now far from being the controlling shareholder of Shanshui Cement, holding but 25.09% of the shares.  Other substantial shareholders include Tianrui (28.16%), Asia Cement Corporation (20.90%) and CNBM (16.67%).  Credit Suisse appears also to hold a 3.75% net long position.  The composition of the board of Shanshui Cement is a matter for the shareholders.  There is nothing to indicate that the receivers would be able to dictate the wishes of these shareholders.

39.In fact, an annual general meeting of Shanshui Cement will be held on 22 May 2015, at which Mr Hou will retire and motions will be considered for the re-election of Mr Wang Jian (as an independent non-executive director), and for the appointment of 4 new directors, namely, Mr Chen Xueshi, Mr Chang Zhangli, Mr Lee Kuan-chun and Ms Zeng Xuemin.  Mr Chang and Ms Zeng are persons nominated by CNBM, whereas Mr Lee Kuan-chun is nominated by Asia Cement Corporation, an independent substantial shareholder of Shanshui Cement.  It will be for the shareholders of Shanshui Cement to attend and vote according to their preferences.

40.The 1^st defendant also prays in aid potential prejudice to third parties especially Shanshui Cement.  It is said that there are provisions in certain loan notes issued by Shanshui Cement due in 2016 (“the 2016 Notes”) requiring Shanshui Cement to make an offer to repurchase, at a price equal to 101% of the principal amount of the notes together with accrued and unpaid interest, all the notes within 30 days following a “Chang of Control”.  A 2-page letter written by a law firm to Shanshui Cement for the purpose of this hearing stated that “Change of Control” is defined-

“to include the situation where the Permitted Holders (i.e. [Mr Zhang] and his related parties) cease to be the beneficial owners (as defined in Rule 13d-3 under the US Securities Exchange Act of 1934) of more than 25% of the total voting power of voting shares in [Shanshui Cement]”.

The letter further stated that:

“Under Rule 13d-3, a person is deemed to be the beneficial owner of shares if he, directly or indirectly, has (1) voting power including the power to vote (or direct the voting of) the shares, or (2) investment power including the power to dispose (or direct the disposition) of those shares.”

It is said that “related parties” are listed in the definition of “Permitted Holders” but the letter failed to explain what “related parties” mean.  Nor is it clear what “Permitted Holders” means – the letter stated it means Mr Zhang and his related parties, whereas Mr Li Cheung Hung’s affirmation stated Mr Zhang and CSI are two of the “Permitted Holders” (without specifying who else there are).  The letter then asserted:

“If Mr Caikui Zhang’s control of [CSI] is reduced from 81.74% to 43.23%, and he or his related parties listed in the definition of ‘Permitted Holders’ no longer can direct the voting or disposition of the approximately 25% shares in your company owned by [CSI], a ‘Change of Control’ would occur under the 2016 Notes …” (underlining added)

Because of the uncertainties over the definitions, I find this statement impossible to understand and wholly lacking in reasoning and analysis.

41.Ms Eu also pointed to a plethora of problems with this purported expert opinion.  It was issued in the name of a firm, not an individual.  It failed to identify the expert together with his or her qualifications.  It failed to contain a declaration of compliance with the Code of Conduct for Expert Witnesses.  It was not verified by a statement of truth (Order 41A, r. 7).  Finally, and in my view surprisingly, it failed to annex the central documents referred to, in particular the 2016 Notes or at least relevant extracts from the indenture.  It is elementary that if crucial documents on which an expert opinion is founded are not made available, the court is entitled to accord no weight to the opinion: see Re Chan Yu Nam [2006] 1 HKC 392, §§48-51.  The court is not bound to accept the say-so of an expert on foreign law, even if uncontradicted by contrary evidence: Full Wisdom Holdings Ltd v Traffic Stream Infrastructure Co Ltd [2004] 2 HKLRD 1016, §23; Traffic Stream Infrastructure Co Ltd v Full Wisdom Holdings Ltd (2004) 7 HKCFAR 442, §22.  The failure to make available the underlying documents means that, quite unfairly, the plaintiffs have had no opportunity of instructing experts to make a reply.  Despite criticisms being made in the plaintiffs’ reply affirmations, these defects have remained wholly unexplained and unremedied, even as the 1^st defendant sought leave to file supplemental evidence in relation to other topics.  In these circumstances, even if the letter were admissible, I would not place any weight on it.

42.Furthermore, a substantial shareholder in Shanshui Cement, namely, Tianrui (International) Holding Company Limited (“Tianrui”), has since 15 April 2015, through acquisitions of shares from the market, become at present the largest shareholder of Shanshui Cement, holding 28.16% of the issued share capital.  It is accepted that this constituted a Change of Control and in fact an offer has already been made by Shanshui Cement to repurchase the 2016 Notes.  It is said that if there is another Change of Control, such as (as the 1^st defendant contended) arising from the appointment of receivers of certain shares in CSI, then literally under the terms of the 2016 Notes, another offer to repurchase them would have to be made.  Mr Jat however accepted that given the offer to repurchase already made as a result of Tianrui’s ascent, the potential prejudice to Shanshui Cement in this respect has been reduced.

43.Moreover, there is no dispute that the share options granted to the other employees to acquire 163.7 million shares, if exercised, would lead to CSI’s shareholding in Shanshui Cement being diluted from 25.09% to 23.93%.  It is said on behalf of the 1^st defendant that it is unlikely that the employees would all exercise their options in full at the same time, but if the share price remains near the recent levels (well over HK$5 per share, with the last trading price being HK$6.29 per share, compared to the option exercise price of HK$3.68 per share) when the vesting period of the share option expires (i.e. July 2015), it would not be surprising if many grantees decide to cash in.  It is unclear whether any consideration was given to the implications for the 2016 Notes when the share options were granted.  It seems to me the risks are being exaggerated on this application and in any event there is no proper evidence to show that an appointment of receivers over approximately 40% of the shares in CSI would trigger an obligation to make an offer to repurchase the notes.

44.Further, it is asserted that the appointment of receivers would constitute a “change of actual controller” in “the Group”, which would constitute an “event of default” in some of the bank loan agreements entered into by the Mainland operating subsidiaries.  A PRC legal opinion issued by a Beijing law firm to Shanshui Cement was exhibited, again without any supporting underlying documentation. It stated that the loan documents refer to “transfer of shares in the borrower”[2] but do not expressly exclude a situation such as the appointment of receivers over roughly 40% of the shares in CSI.  It surmised that lenders may possibly regard such a situation as tantamount to “transfer of shares in the borrower”.  For the reasons indicated above in relation to the US legal opinion, I consider that no weight can be placed on the PRC legal opinion.

45.I am not satisfied therefore that there would be any prejudice caused by the appointment of receivers of certain shares in CSI to Shanshui Cement or its subsidiaries arising from the group’s financial arrangements.  In the 1st defendant’s argument there are references to some even less substantiated risks of prejudice to the listed company and its shareholders.  In my view those assertions do not assist the 1st defendant in resisting the appointment of receivers over a parcel of shares in CSI.

46.I reject the defence of delay.  In my view the picture is a developing one, and the matters justifying the appointment of receivers have to be taken as a whole.  Patches of that picture such as the threat and pressure exerted on the plaintiffs have only happened after the summonses were issued.  Even if there were delay, it was not in the circumstances a valid ground of opposition as the 1st defendant has not shown that the delay has caused him any prejudice: see Re Wako Giken (HK) Co Ltd [2010] 4 HKLRD 121, §§23-25.

47.It was submitted that the cost of receivership would be substantial.  However, one is here concerned with receivership of certain shares in CSI, which does not have a business to run.  In any event, given the very valuable assets involved, the cost of receivership is in my view not a highly significant factor in the scheme of things.

48.Finally, the 1st defendant questioned whether the plaintiffs could meet their cross-undertaking as to damages if it turns out receivers were wrongly appointed.  As to this, I have already dealt with the alleged potential prejudice to Shanshui Cement.  It is not clear what real damage anyone else would have suffered.  Further, if the 1st defendant is ultimately successful and is proved to have suffered damage, he would have the entire trust property at his disposal as discretionary trustee under the BVI trusts including what he called the “economic benefits” of the plaintiffs.

Application for injunction

49.In the light of my decision above it is unnecessary to deal with the plaintiffs’ application for injunction, which is not sufficient in my view to deal with all the complaints that have arisen and has essentially been superseded.

1^st defendant’s summons dated 27 March 2015

50.The 1^st defendant’s summons dated 27 March 2015 seeks to adduce an affidavit of Mok Yee Wing, which was not opposed, and an affirmation of Huang Kehua, which was opposed, for the purposes of resisting the application for injunction.  That affirmation refers to certain internal disciplinary investigations of the Shanshui group relating to the 5 minority shareholders proposed to be directors of CSI.  The investigations referred to however had started long ago, and certain findings are mentioned which were also mostly available some months before.  No explanation was given why the evidence was not adduced in accordance with the timetable laid down by Mimmie Chan J in November 2014, and was instead only put in at the last minute before the injunction hearing.  The plaintiffs did not have a proper opportunity of responding to it.  I refuse leave for admitting that evidence.

Applications in the 4^th and 5^th actions

51.As stated in paragraph 32 of my judgment dated 13 May 2015, a fourth identical action (HCA 623/2015) was commenced by further participating employees as plaintiffs against the same defendants.  A fifth action (HCA 939/2015) has also been commenced by a further 331 participating employees (180 as 1^st plaintiffs and 151 as 2^nd plaintiffs) on 29 April 2015 claiming to be entitled to 22,402 shares or 2.24% of the issued share capital of CSI.  The plaintiffs in the fourth and fifth actions have also issued summonses for receivership dated 26 March 2015 and 18 May 2015 respectively returnable before me on the same date, though as the jurisdictional issues had not been resolved until last week the two actions have not yet been served.  They cover another 25,498 and 22,402 shares respectively in CSI (together 4.79%).  Ms Eu SC has sought to proceed with the receivership application in those two actions as well.  Mr Jat SC contends that the applications in the fourth and fifth actions should not be dealt with given that the 1^st defendant has not been served with the writs and has there is no urgency.  In my view the 1st defendant’s position elevates form over substance.  The receivership applications are identical in all 5 actions.  If the 1st defendant maintains the position that he has not been served with the 4th and 5th actions and is not a proper party to the inter partes receivership summonses, the receivership applications in those two actions can be treated as having been heard ex parte on notice.

Conclusions and orders

52.For the foregoing reasons I accede to the plaintiffs’ applications in all 5 actions for the appointment of receivers in respect of the relevant shares in CSI.  There will therefore be the following orders:

(1) (a) an order in terms of the draft minutes of order annexed to the summonses for the appointment of receivers in all 5 actions;[3] (b) a costs order nisi that the 1^st defendant do pay the plaintiffs their costs of those summonses forthwith with a certificate for two counsel;

(2) (a) leave be given to the 1^st defendant to file and serve the relevant additional affirmations pursuant to his summonses dated 12 May 2015 in the first 3 actions; (b) a costs order nisi that the 1^st defendant do pay the plaintiffs their costs of those summonses forthwith with a certificate for two counsel;

(3) (a) there be no order on the plaintiffs’ summonses for injunction dated 24 November 2014 in the first 3 actions and the summons for injunction dated 26 March 2015 in the 4^th action; (b) a costs order nisi that the plaintiffs’ costs of those summonses be in the cause with a certificate for two counsel;

(4) (a) leave be given to the 1^st defendant to file and serve the 2^nd affidavit of Mok Yee Wing pursuant to his summonses dated 27 March 2015 in the first 3 actions; (b) subject as aforesaid, the summonses are dismissed; (c) a costs order nisi that the 1^st defendant do pay the plaintiffs their costs of those summonses with a certificate for two counsel;

(5) (a) the plaintiffs’ summonses dated 18 May 2015 for orders for substituted service in the 4^th and 5^th actions and the plaintiffs’ summonses dated 18 May 2015 in all 5 actions for consolidation be adjourned for hearing with half an hour reserved to be fixed on a date after the expiry of 14 days from the date of my judgment dated 13 May 2015; (b) costs reserved;

(6) the time for the 1^st defendant to file and serve his defence (and counterclaim, if any) in the first 3 actions be extended to 11 June 2015;

(7) liberty to apply.

Ms Audrey Eu SC and Mr Law Man-chung, instructed by K & L Gates, for the 1^st and 2^nd plaintiffs

Mr Jat Sew-tong SC and Mr Bernard Man SC, instructed by Norton Rose Fulbright Hong Kong, for the 1^st defendant

The 2^nd defendant was not represented and did not appear