INTERNATIONAL CAPITAL NETWORK HOLDINGS LTD. v. CAPITAL ACE HOLDINGS LTD. AND ANOTHER

HCA 1842/2002 & HCA 2066/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1842 OF 2002

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(Consolidated pursuant to the Order of the
Deputy High Court Judge Woolley dated 7 June 2002)

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D E C I S I O N

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Introduction

1. An injunction order was granted on 15 May 2002 on the plaintiff's ex parte application in the following terms:-

"The 1st and 2nd Defendants must not hold, or purport to hold, an extraordinary general meeting of the Plaintiff as requisitioned by them on 10th April 2002 and announced in the HK-iMail on 8th May 2002, either on 23rd May 2002 or any other day, until further order of the Court".

This is the plaintiff's application to continue that order until judgment in this action or further order. On the other hand, the defendants seek to have the ex parte order discharged. They contend further that no fresh order in the same (or similar) terms should be granted in the plaintiff's favour.

Background

2. The relevant background of this action has been succinctly set out in the judgments of Carlson DJ dated 5 August 2002 and Yuen JA dated 9 August 2002. I will only set out the outline necessary for the understanding of this decision.

3. The plaintiff ("ICN Holdings") is a company registered in the Cayman Islands. It has been listed on the GEM (Growth Enterprise Market) of the Hong Kong Stock Exchange ("HKSE") since 30 November 2001. At the time of listing, ICN Holdings' shares were held in the following manner. First, 39.46% were held by one International Capital Network Investor Limited ("ICN Investor"). There is no dispute ICN Investor is beneficially owned and controlled by Hui Chuen Kin Daniel ("Hui" or "Daniel Hui") and Lui Bing Kin Michael ("Lui" or "Michael Lui"). Secondly, according to ICN Holdings (this is denied by the defendants), 35.54% were held by the defendants' camp:-

(a) 24.33% were held by one International Technology Capital Limited ("International Technology"), a company beneficially owned and controlled by a Ms Chu Oi Wan Cecilia ("Cecilia Chu" or "Ms Chu");

(b) 3.36% were held by D2 (Wise Express Assets Limited ("Wise Express")), a company beneficially owned and controlled by a Ms Leung Yuk Kit ("Mona Leung" or "Ms Leung");

(c) 7.85% were held by D1 (Capital Ace Holdings Limited ("Capital Ace")), a company beneficially owned and controlled by one Digital World Holdings Limited ("Digital World").

Digital World's chairman is Chan Tak Hung ("Teddy Chan" or "Chan"). ICN Holdings' case is that Ms Chu, Ms Leung and Chan are the associates of one Cheung Chi Shing Kenneth ("Kenneth Cheung" or "Cheung") or have been acting under Cheung's control or direction.

4. Thus, according to ICN Holdings, 75% (35.54%+ 39.46%) of its shares were held by the above two sides at the time of listing. The remaining 25% were held by the investing public. Further, ICN Holdings' present board of directors consists of Hui, Lui and 2 independent non-executive directors.

5. Part of ICN Holdings' case relevant to this action is that Cheung's "camp" (which used to hold totally 35.54% of its shares) has acquired and, by 28 March 2002, held about 43.63% of ICN Holdings' shares. ICN Holdings claims herein that its shares have been acquired in breach of Rule 26 of the Takeover Code of the HKSE and s. 26A of the Securities and Futures Commission Ordinance (Cap. 24).

6. The relevant parts of Article 72 of ICN Holdings' articles of association provides:-

"The Board may, whenever it thinks fit, convene an extraordinary general meeting. General meetings shall also be convened on the written requisition of any two or more members of the Company deposited at the principal office of the Company in Hong Kong ... If the Board does not within 21 days from the date of deposit of the requisition proceed duly to convene the meeting, the requisitionist(s) themselves ... may convene the general meeting in the same manner ... ".

On 10 April 2002, the defendants deposited a requisition with ICN Holdings for convening an extraordinary general meeting ("EGM") within 21 days thereof to consider and approve the proposed resolutions set out therein. In the course of the legal proceedings (set out below), it became apparent that others have sided with the defendants in asking for such a general meeting. The defendants and their supporters have been called the requisitionists in the legal proceedings because of their support for the above requisition. The term "requisitionists" will be used herein to refer to the defendants and, depending on the context, may or may not include their supporters.

7. On the other hand, ICN Holdings' board resolved that the EGM be held on 2 December 2002 and notice to such effect was given on 29 April 2002. The requisitionists did not desist and published a newspaper announcement on 8 May 2002 to convene the EGM on 23 May 2002. That last move resulted ultimately in several sets of legal proceedings.

8. Up to now, 3 sets of legal proceedings have been commenced:-

(1) ICN Holdings commenced this action on 15 May 2002 naming Capital Ace and Wise Express as the defendants;

(2) Capital Ace and Wise Express commenced HCA No. 2066 of 2002 ("2066/02") on 30 May 2002 naming ICN Holdings, Hui, Lui, and the other 2 directors of ICN Holdings, Lo Wing Yan William and Wong Wai Ho, as the 5 defendants therein;

(3) on 9 August 2002, International Technology, a company said to be controlled by Ms Chu, took out a petition for ICN Holdings to be wound up.

9. Further to (1) above, on 15 May 2002, ICN Holdings applied for and obtained the above-mentioned ex parte order. On the other hand, further to (2) above (that is, commencing 2066/02), the requisitionists applied for and obtained another injunction order restraining ICN Holdings from issuing any shares, options or other securities convertible into equity securities, save with the approval of the shareholders in general meetings. The defendant directors in 2066/02 were restrained by that order from procuring or effecting the issue of such securities.

10. For completeness, I should mention that the defendants in 2066/02 (that is, ICN Holdings and the other 4 defendants) succeeded in having the 30 May 2002 order discharged on 5 August 2002. The above-mentioned winding-up petition was taken out several days later. Further, on 9 August 2002, Yuen JA ordered the discharge order to be stayed pending the requisitionists' appeal against the discharge. The appeal has been scheduled for hearing on 30 August 2002.

The Issues in this Application

11. The applicable legal principles are undisputed. The minimum first threshold which ICN Holdings has to surmount is to establish there is a serious question to be tried on its claim. The interlocutory relief sought in this application may have the practical effect of disposing of the whole action, in that the EGM convened by the requisitionists would have to be aborted by virtue of the ex parte order. The continuation of that order may well mean the EGM will not be held earlier than 2 December 2002. For this reason, the test referred to in NWL Ltd v Woods [1979] 1 WLR 1294, 1306 is applicable. In short, a heavier burden should be placed on ICN Holdings: in such a case the strength or otherwise of the claimant's case (which is higher than the threshold of a serious question to be tried) must be brought into the balance in weighing the risk of injustice to either party by the grant or refusal of the injunction sought.

12. Secondly, ICN Holdings has a duty to make full and frank disclosure to the court at the ex parte application and a failure to do so usually results in the ex parte order being discharge, with or without a fresh order being granted.

13. Finally, the court has to consider whether the balance of convenience lies in granting or refusing the interlocutory injunction order.

Serious Question to be Tried / Merits of the Claim

14. Irrespective of the proper test applicable to this application, no submission has been made by the requisitionists regarding this aspect. They are correct not to do so in view of the evidence adduced by ICN Holdings. I find that ICN Holdings has established this aspect of its application. It is strictly unnecessary to set out the evidence regarding this aspect but, since it may be relevant to the issues raised under the heading "Cross Undertaking as to Damages", I will mention it briefly in the paragraphs below.

15. ICN Holdings' case has been summed up at paras. 13 and 14 of the skeleton argument for use in this application:-

"It is the Company's case that Kenneth Cheung's group ... has set out to acquire and, on the information presently available, appears to have acquired, voting control of the Company by stealth and that in acquiring such control the group appears to have acted in breach of the Hong Kong Code of Takeovers and of s. 26A Securities and Futures Commission Ordinance.

It is also the Company's case that in fixing the date of the EGM on 2nd December 2002, the Board properly took into account the fact that time was required to complete the investigation into the breach of the Takeover Code and s. 26A of the Securities and Futures Commission Ordinance ... For the meeting to be held before the investigation is completed would not be in the interests of the Company or its shareholders, including in particular the public shareholders, who should be entitled to the benefit of the mandatory offer obligations, or at least to be informed that they have been improperly deprived of that benefit, before they would decide whether and how to vote at the EGM ...".

16. Evidence adduced by the ICN Holdings in support of its case that its shares have been acquired by stealth includes the following. First, Ms Leung, Ms Chu and Chan were known to have a close relationship with Cheung. Ms Leung used to share office with Cheung. She was described by some to be Cheung's "personal assistant". Chan was observed not to have acted independently when making decisions for Digital World but listened to Cheung. Ms Chu was introduced to Cheung to handle his personal business.

17. Secondly, pre-listing events show such association between Cheung and those individuals. A computer disk was found by ICN Holdings in Ms Chu's former office. On the disk was marked "K Cheung I" in Ms Chu's hand-writing. Among the documents stored in the disk were 2 draft declarations of trust showing that Ms Chu was holding shares in International Technology as nominee and Ms Leung was also holding shares in a Three Cheers Limited (a company which held shares in ICN Group's former group holding company before restructuring) as nominee. ICN Holdings contends that the beneficiary referred to in those documents was Cheung, because of (a) the marking on the disk and (b) other supportive documents. ICN Holdings also obtained documents which show that Chan was a nominee of the shares in Digital World. ICN Holdings drew attention to the fact that the above was not positively traversed by the requisitionists in evidence.

18. Thirdly, post-listing events also support ICN Holdings' case. Ms Chu, although apparently the holder of 24.33% of the shares, did not attend the listing ceremony or listing celebration and took no interest in the affairs of ICN Holdings. Companies and individuals believed to be associated with Cheung acquired substantial quantities of ICN Holdings' shares since December 2001. Ms Leung expressly admitted in this action that the requisitionists are seeking to obtain the control of the board of ICN Holdings. The reasons put forward by the requisitionists for doing so are the mismanagement of ICN Holdings by the present management and the alleged intention of Hui to issue ICN Holdings' shares at a low price.

19. Based on the above, ICN Holdings contends that the requisitionists breached Rule 26(1)(d) of the Takeover Code in failing to make a mandatory offer to the other shareholders. Further, ICN Holdings alleges that the defendants and International Technology appear together to control more than 35% of the voting power of ICN Holdings. That being the case, each of them shall not become a substantial shareholder of a registered person which is a corporation unless the Securities and Futures Commission has approved them to do so: s. 26A(1), Securities and Futures Commission Ordinance. Further, under s. 26A(9), a contravention of s. 26A(1) is a criminal offence. ICN Holdings submits that International Capital Network Limited ("ICN Ltd"), a wholly owned subsidiary of ICN Holdings, is a registered person within the meaning of s. 26A(1), because ICN Ltd is registered as an investment adviser under the Securities Ordinance.

Material Non-Disclosure

20. Counsel for the requisitionists identifies six items of material non-disclosure. In short, I disagree with the requisitionists' argument.

21. The first matter said to be material non-disclosure is that ICN Holdings failed to inform the ex parte judge of the existence of an option scheme whereby ICN Holdings could issue options to its employees, up to a maximum of 10% of its issued share capital. The requisitionists further contend that the options issued can be converted into shares which are not subject to any further regulation or scrutiny by the authorities. I agree with ICN Holdings' argument that this matter is only of peripheral significance to its claim herein (which is about the requisitionists' attempt to take over the board by stealth).

22. The second matter of alleged non-disclosure is that the date of the EGM fixed by ICN Holdings (2 December 2002) falls on the first business day after the period of prohibition on the disposal of shares expires. I agree with ICN Holdings that this allegation is factually not established. Hui's affirmation dated 14 May 2002 has expressly referred to (a) the date of expiration of the prohibition (30 November 2002) and (b) the date of the EGM (2 December 2002): paras. 29 and 41 thereof. The relationship between the expiration of the prohibition period and the date of the EGM should have been obvious to the ex parte judge.

23. Thirdly, the requisitionists contend that their reasons for objecting to the EGM being held on 2 December 2002 have not been fairly presented to the ex parte judge. They allege that ICN Holdings merely stated in Hui's affirmation dated 14 May 2002 that the requisitionists considered it unreasonable for ICN Holdings to postpone the EGM to 2 December 2002. The requisitionists' letter dated 2 May 2002, however, accused ICN Holdings of putting forward the purported investigations as an excuse for delaying the EGM. They also stated therein that ICN Holdings lacked the necessary investigation power and such work should be undertaken by the HKSE and/or the Securities and Futures Commission.

24. Fourthly, it is alleged that Hui misled the ex parte judge into believing that the relationship between Cheung and him deteriorated after Cheung made the unwarranted demand in December 2001. This matter is of some importance because Hui claimed that the deterioration in their relationship was caused by Cheung's unwarranted demand. Since it is now admitted that Cheung and Hui attended several social gatherings together after that date, the requisitionists complain Hui should have disclosed those social occasions at the ex parte stage. However, Hui's second affirmation only admits he and Cheung attended the social occasions together but Hui still denies that the relationship between him and Cheung was good. I do not find any proper basis for concluding that Hui has misled the court, or any material non-disclosure.

25. Fifthly, ICN Holdings is said to have failed to disclose that Hui also dealt in ICN Holdings' shares. This is an important matter because the shares allegedly purchased by Cheung could have been purchased by Hui. I accept the submission of ICN Holdings that, although no affidavit evidence has been filed to this effect, ICN Holdings does not accept the alleged share dealings by Hui to be true. Counsel informed me Hui in fact denies this allegation. There is no room for any non-disclosure when the allegedly undisclosed matter has been denied.

26. Finally, ICN Holdings is accused of not having expressly informed the ex parte judge that the 15 May 2002 order would have the effect of permanently preventing the EGM from being held before the expiration of the prohibition period. But again this must have been obvious to the ex parte judge. The making of the 15 May 2002 order, coupled with the EGM having been fixed by ICN Holdings to be on 2 December 2002, would most probably mean there would not be any EGM before 30 May 2002.

Balance of Convenience

27. In the written skeleton submissions, the requisitionists argue that the balance of convenience is against the continuation of the ex parte order, primarily because the purpose of ICN Holdings in delaying the date of the EGM has been achieved. Any new date for holding an EGM will most likely be not much earlier (if not later) than 2 December 2002.

28. That may be so, but if the ex parte order is not continued, it is possible the requisitionists may insist on holding the EGM on some other date(s). First, as stated above, whether the requisitionists can insist on holding an EGM on those other date(s) is a matter in dispute. The holding of any EGM by ICN Holdings when the requisitionists' voting rights at that meeting are uncertain will likely result in chaos at the EGM. The relief sought in this application is not one which can be adequately compensated by way of damages.

29. For the above reasons, I agree with ICN Holdings the balance of convenience is in favour of continuing the ex parte order.

Undertaking as to Damages

30. Just as the court cannot compel an individual to become a plaintiff, it has no power to compel an applicant asking for an interlocutory injunction order to give any undertaking, including an undertaking as to damages. However, since at least the middle of the nineteenth century, it has become a common practice for such applicants to offer an undertaking as to damages when applying for an interlocutory injunction: Hong Kong Civil Procedure 2002, para. 29/1/9 (p. 477) and para. 29/1/21 (pp. 480-1); Spry: The Principles of Equitable Remedies (2001) 6th Ed., p. 482. And although the court cannot compel an applicant to give an undertaking, it can refuse to grant an injunction unless he does so: Hong Kong Civil Procedure 2002, para. 29/1/21 (p. 481). In an exceptional case, such a practice will not be followed, for example, where a plaintiff is impecunious, or of limited means, and thus unable to give a credible undertaking: Hong Kong Civil Procedure 2002, para. 29/1/23; Spry, p. 483. At the end, whether an undertaking is required as a condition turns on the essential justice of the case: Hong Kong Civil Procedure 2002, para. 29/1/23 citing Allen v Jambo Holdings Ltd [1980] 1 WLR 1252.

31. The rationale behind requiring such an undertaking is this. When an injunction order is granted at an interlocutory stage of the proceedings, it is often not possible or appropriate for the court to determine the merits of the applicant's claim. The object of the interlocutory injunction is to protect the applicant against injury for violation of his right for which he could not be adequately compensated in damages recoverable in the action if the uncertainty (on the merits of his claim) were resolved in his favour at trial. But the applicant's need for protection must be weighed against the corresponding need of the respondent to be protected against injury resulting from his having been prevented from exercising his own legal rights. While the respondent may not always be adequately protected by the applicant's undertaking (and hence the need for the court to weigh the "balance of convenience"), the undertaking would at least enable him to obtain compensation by way of damages in case it is found that the interlocutory order was wrongly obtained by the applicant.

32. In the present case, ICN Holdings, being the only plaintiff in this action, has given an undertaking as to damages in Schedule 2 of the ex parte order dated 15 May 2002. It was in the following terms:-

"If the Court later finds that this Order has caused loss to the Defendants or any other party and decides that the Defendants or that other party should be compensated for that loss, the Plaintiff will comply with any Order the Court may make".

33. If ICN Holdings were not a listed company but a private company, the dispute between the present board and Cheung's "camp" may properly be considered a shareholders' dispute. Legal proceedings relating to disputes of this kind are usually commenced by shareholders in their own names. Although the company in question is often named as one of the defendants, it usually plays no active part in the proceedings and is often excused from appearing. The real opponents in such litigation are the rivalry shareholders.

34. In this action, ICN Holdings is a listed company and, for that reason, has been able to pray in aid of the Takeover Code and statutory provisions relating to listed securities to bring its claim. A question arises as to whether this action is a genuine "company's action", as opposed to a "shareholders' action". In the latter case, a further question arises as to whether it is appropriate for the company, rather than the shareholders who are really involved in the dispute, to give an undertaking as to damages. In the context of this application, Hui and Lui would have been the proper individuals to give such an undertaking.

35. Counsel for ICN Holdings does not argue that the court has no jurisdiction to make it a condition that a non-party should give an undertaking as to damages. It has been decided that the court can require an undertaking to be given by someone other than the applicant in appropriate cases: Spry, p. 485. Counsel rather submits that to require an undertaking from individuals standing behind a company when the company is the only plaintiff (applicant) will lay down a dangerous precedent and is unfair to the individuals concerned.

36. If it is appropriate for a personal undertaking to be given, consideration would need to be given to the form of the undertaking. This aspect has not been discussed in this application because Hui and Lui have declined to offer an undertaking. If it had been necessary to consider the form of the undertaking, the following would have been proposed for the parties' consideration:-

"If the Court later finds that this Order has caused loss (including costs incurred in this action and this application, whether by the Plaintiff or the Defendants) to the Defendants or any other party (including the Plaintiff's shareholders other than Hui and Lui) and decides that the Defendants or that other party should be compensated for that loss, Hui and Lui will comply with any Order the Court may make" (emphasis supplied).

37. Several matters ought to be mentioned before setting out how this aspect should be determined:-

(a) this point was first raised by the court. Although this was not raised by the requisitionists earlier, they support the point at the hearing of this application;

(b) because this point was not raised before the hearing of 27 August 2002, I thought it fair to raise it with the parties at the earliest opportunity so that proper consideration could be given to it. For that reason, I raised the point shortly after the hearing commenced. It appears from the way the point was dealt with that the parties had sufficient time to consider and deal with the point;

(c) there is a long line of authorities, and by now it must be regarded as trite law, that a company is a separate and independent entity than the individuals standing behind it, whether they be shareholders or directors. For this reason, when a company is the plaintiff, generally the undertaking as to damages should be given by the company and, save in special cases, the undertaking should not be required from either the shareholders or the directors.

38. Point (c) above should be elaborated. If in fact a "shareholders' action" has been dressed up as a "company's action", it will be rare that this will be expressly admitted. Therefore, there will usually be a need to determine if the interlocutory application is related to an action which is more properly regarded as a "shareholders' action". Because the court is dealing with the matter at an interlocutory stage, usually no definitive conclusion on this matter can be satisfactorily reached, save where, for example, the claim is so obviously bad that it is liable to be struck out under the rules of court or inherent jurisdiction. Accordingly, it is necessary to ascertain what the proper test is for determining this matter.

39. Because of point (c) above, namely, it is now settled that a company is a separate and independent entity in law, merely that there is a "serious question to be tried" as to whether the action is more properly to be regarded as a "shareholders' action" is insufficient. The applicable test may be called "a good arguable case", or "a strong prima facie case" or other similar names, but ultimately it depends on an assessment of the circumstances of the case, taking into account everything known to the court and the parties to the action, and bearing in mind the settled principle that a company is a separate and independent entity and that only in special cases should an undertaking as to damages be required from individuals behind the company. The phrase "everything known to the court and the parties to the action" should not be limited to the evidence, but also other matters such as the pleadings (if any) and the way in which the proceedings have been conducted, or the way the case was presented to the court earlier.

40. Having said so, it must be remembered, on the other hand, that an undertaking as to damages can only be invoked when the injunction order is discharged, set aside or refused. Even then, in appropriate cases, it may still be possible for the individual who has given the undertaking to show that he should not be held liable for it.

41. In his reply submissions made at the second day of the hearing (28 August 2002), counsel for ICN Holdings argued that this action is a "company action". Seven reasons were given in support:-

(1) there is compelling and unanswered evidence that the requisitionists sought to acquire voting control by stealth and (at least prima facie) have breached the Takeover Code and committed criminal offence. On the other hand, no such allegation has been made against Hui or Lui;

(2) the requisitionists are prima facie now in a controlling position regarding voting rights and they admitted they sought the EGM to take over the control of the board;

(3) ICN Holdings has been vested with the power to investigate by statute (s. 18, Securities (Disclosure of Interests) Ordinance (Cap. 396)) and has been doing nothing more than exercising such a power. Whether the requisitionists ought to have made a mandatory offer is a matter which can benefit the shareholders generally;

(4) the reason why the requisitionists wanted to control ICN Holdings' board, and why ICN Holdings wanted to prevent this, may be related to the unwarranted demand of Cheung for the sum of $18 million. Although this has been denied by Cheung, it provided a proper basis for ICN Holdings to commence this action;

(5) the board's decision to commence this action was approved by the 2 independent, non-executive directors;

(6) the requisitionists have recently taken out a petition for ICN Holdings to be wound-up. It is likely that because the requisitionists could not achieve their aim, they wanted to bring down ICN Holdings;

(7) there is no or insufficient evidence of bad faith on the part of Hui and Lui, as reflected by the judgment of Carlson DJ.

42. In relation to point (4) above, this was disclosed by Hui in his affirmation dated 14 May 2002 placed before the ex parte judge. Para. 18 thereof reads:-

"On 3rd December 2001, i.e. only the second trading day after the listing ... the Plaintiff's share price dropped ... I found such a fall of 15% in so short a time very unusual, and wondered if someone was orchestrating a massive selling of the Plaintiff's shares ... [Cheung] came to see me on that day after lunch. To my astonishment, he asked me to cause the Plaintiff to pay him HK$18,000,000.00, alternatively to effect payment of this sum to third parties or companies according to his instructions. He said that the Plaintiff would have obtained net proceeds from the listing in the region of HK$38,000,000.00, and that he should be given his 'fair share' ... I found his suggestion absurd and I told him so. I further told him that I would not agree to giving him any money which belonged to the Plaintiff, as this would be tantamount to stealing money from the company. He became very unhappy and thereafter, our relationship deteriorated ...".

Para. 20 thereof says:-

"On 4th December 2001, I met with the Plaintiff company's solicitor ... to discuss means to protect the Plaintiff and its assets, particularly the sum of HK$40,000,000.00 which the Plaintiff company had received ... Later on I instructed [the solicitors] to form a new company in the British Virgin Islands in the name of [ICN Finance]. ICN Finance ... has a total issued and paid-up share capital of HK$40,000,000.00 divided into 40,000,000 shares ... 20,000,000 shares are held directly by the Plaintiff, and the remaining 20,000,000 shares are held by me on trust for the Plaintiff ...".

43. Mona Leung responded to this as follows:-

"... I am very alarmed to learn from Mr Hui's Affirmation that the sum of HK$40,000,000.00 belonging to the Plaintiff has been moved to a company called [ICN Finance] set up by Mr Hui. I cannot understand why this sum ... moved from the Plaintiff into another company and HK$20,000,000.00 worth of shares in [ICN Finance] have to be held by Mr Hui as trustee for the Plaintiff. The arrangement does not make any commercial sense" (para. 25, Ms Leung's affirmation dated 29 May 2002).

Cheung also responded to this at para. 19 of his affirmation dated 29 May 2002:-

"... This is completely untrue. This allegation, together with the remainder of paragraph 18 of Mr Hui's Affirmation, is complete fiction. I never asked Mr Hui to give me any money which belongs to the Plaintiff. As Mr Hui is an educated man and a professional with over 10 years' experience in the corporate finance field, I would expect him to report to the police immediately if ever such an outrageous demand were made. Only a fool would have asked Mr Hui to hand over HK$18,000,000 of the Plaintiff's money. This is money that belongs to a public company in Hong Kong and Mr Hui would be in no position to comply with such a request ... ".

44. This matter was referred to in the judgment of Carlson DJ dated 5 August 2002 as the requisitionists' complaint of:-

"[unusual] and unjustified transfers of funds of the company, principally the transfer of $40 million to the personal control of Mr Hui for the alleged purpose of 'protecting' the funds".

ICN Holdings' counsel said that the learned Deputy Judge erred in concluding this as one of the matters giving rising to a "gradual breakdown of trust and confidence between [the board] and the other founders of the company". But whether he so erred is not relevant to the matters which need to be considered in this application.

45. Counsel for ICN Holdings argues that Hui's allegation if proven reflects adversely on the integrity of Cheung's "camp". Further, counsel argues the allegation was supported by the conduct of Cheung's "camp", such as, acquiring ICN Holdings' shares by stealth and in breach of the Takeover Code and the criminal law. Even if the last-mentioned matters are supportive of ICN Holdings' case that its assets need to be protected from Cheung's "camp", I do not find that it is more likely than not Hui's allegation will be accepted by the trial judge. I rather find that this is a matter over which there are cross-allegations made by the parties. Whereas the alleged unwarranted demand by Cheung was purely verbal (and has been denied), the objective fact that $40 million has been removed from ICN Holdings has been admitted by Hui. It is possible that the trial judge may need to hear Hui's explanation as to how this could protect the sum from being tampered with.

46. Once point (4) above has been shown to be nothing more than a triable issue, I do not find the other points can substantially improve ICN Holdings' position. Point (1) above (evidence which suggests that there was a breach of the Takeover Code and the criminal law) is needed by ICN Holdings to establish its claim, without which ICN Holdings lacks a proper ground for commencing this action. Point (3) above (power vested in ICN Holdings to investigate) falls within the same category. Point (5) above (the independent non-executive directors' approval of the board's decision to sue) has to be weighed against things like whether the directors are truly independent and what information they were given when their approval was obtained. Point (6) above (the winding-up petition) was originally described at para. 12 of the skeleton argument of ICN Holdings as:-

"... plainly a tactical move made after the Defendants' defeat before Deputy Judge Carlson".

That observation must be correct because if the requisitionists had really wanted to bring down ICN Holdings, they need not bother with opposing this application.

47. For the above reasons, with respect, I disagree with the seven grounds put forth by counsel and reject them all. It is to be noted that point (4) above was not referred to at all in the skeleton submissions of leading counsel for ICN Holdings used at the ex parte application. In the Statement of Claim dated 4 July 2002, the alleged unwarranted demand was referred to at para. 26 under the heading "Events after Listing". At para. 41 of the Statement of Claim, ICN Holdings avers that:-

"By reason of the matters pleaded hereinabove, the Board had reasons to believe that [Cheung's] group, together with companies and associates under their control or direction (including the 1st and 2nd Defendants), had acted in breach of Rule 26 ...and ... Section 26A ... ".

This averment is in essence repeated at para. 56 thereof. The need to protect ICN Holdings' assets has (at least expressly) not been pleaded.

48. While skeleton submissions and pleadings are drafted by legal representatives and may not necessarily reflect client's real complaint, it is noted that the gist of ICN Holdings' case put forward before the ex parte judge and in the pleadings is the above-mentioned breaches of the Takeover Code and the criminal law by the requisitionists. The alleged unwarranted demand was referred to by way of background.

49. There are two matters which may reflect on the fides of ICN Holdings' board. First, the reason given by ICN Holdings for fixing the date of the EGM on 2 December 2002 is difficult to understand. ICN Holdings explained that that date was fixed so as to enable it to continue its investigation into the said breaches: para. 41, Hui's affirmation dated 14 May 2002; para. 9, ex parte skeleton submissions; para. 44, Statement of Claim. It is also said that ICN Holdings was entitled to take into account the circumstances surrounding the requisition and the grave harm and chaos of holding an EGM earlier: para. 18, ex parte skeleton submissions; para. 64, inter partes skeleton argument.

50. At the risk of over-simplification, s. 18 of Cap. 396 gives power to a company to serve notice requiring information to be given by individuals as to their interests in that company's shares. S. 24 of Cap. 396 also empowers the company to apply to court for an order subjecting the shares in question to restrictions. But that is all the powers of investigation given to the company by Cap. 396. Under s. 20, the company is under a duty to notify the HKSE and the Monetary Authority of information obtained as a result of s. 18 notices. Presumably, any investigation deemed necessary will then be taken up by the relevant authorities. The affidavit evidence of ICN Holdings stated that there has been on-going investigation by the authorities. Further, at the hearing of this application, counsel disclosed that the Securities and Futures Commission has apparently commenced investigation work and the individuals concerned had been interviewed.

51. So far as the threat to ICN Holdings' assets is concerned, it must have been ICN Holdings' case that the removal of the funds into another company's account was adequate to protect the funds.

52. In these circumstances, it is difficult to understand why ICN Holdings felt it necessary to decide that the date of the EGM should be about 7 months from the date of the notice of meeting (29 April 2002).

53. By reason of the above matters, while it is impossible and undesirable to determine if this action is truly a "shareholders' action", I conclude that the circumstances are such that it is appropriate to make it a condition that the ex parte order should only be continued if and when Hui and Lui give an undertaking in the terms (or similar terms) set out above.

54. I understand from counsel for ICN Holdings that specific instructions have been taken from these two gentlemen and they declined to do so. The only reason given was in gist that they do not consider it right to do so.

Conclusion

55. By reason of the refusal of Hui and Lui to give an undertaking as to damages when invited to do so, I find it appropriate to refuse to continue the ex parte order. The application of ICN Holdings is accordingly refused.

56. The consequence of the dismissal of this application may not be as dire as it may appear to be. Now that a petition for the winding-up of ICN Holdings has been taken out, appropriate directions or orders can be sought in the petition to deal with any differences between the two sides in the interim. For example, if necessary, a provisional liquidator may be appointed under s. 192, Companies Ordinance (Cap. 32).

57. I understand this application was originally scheduled to be heard in January 2003. Since this application has already been dealt with, the hearing dates in January 2003 should be vacated.

Costs

58. Judging from the arguments raised by the parties in the course of the hearing of this application, it is possible arguments will be raised as regards the costs of this application. For this reason, no costs order nisi will be made herein. This, however, does not mean the court is either encouraging or discouraging arguments regarding costs to be advanced. The parties are to decide for themselves if they consider the usual costs order should be adopted.

Representation:

Mr Mark Strachan, instructed by Messrs Richards Butler, for the Plaintiff in HCA 1842/2002

Mr Clifford Smith, SC leading Mr Douglas T Y Lam, instructed by Messrs Stephenson Harwood & Co., for the 1st and 2nd Defendants in HCA 1842/2002

HCA1842&2066/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. HCA 1842 OF 2002

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(consolidated pursuant to order of Deputy High Court Judge Woolley on 7th June 2002)

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J U D G M E N T

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1. This is the return date for an ex-parte injunction made by Deputy Judge Woolley on 30 May. The order, which can be found in the pleadings bundle at page 37, is in these terms:

"Unless with the approval of the shareholders of the company in general meeting to be held;

(i) The company be restrained from issuing any shares, options or other securities convertible into equity securities ("the said securities").

(ii) The 2nd to 5th defendants to the counterclaim being directors of the company be restrained from procuring or effecting the issue of the said securities by the company."

2. The plaintiffs who had obtained this order seek to have it continued until trial. The defendants require me to discharge it.

3. In order to understand how this matter comes about, it is necessary for me to provide some explanation of the background, which is not without a little complication.

4. Central to this dispute is a company called International Capital Network Holdings Limited ("the company"). It is incorporated in the Cayman Islands and since 30 November 2001 its shares have been listed for trading on the Growth Enterprise Market of the Hong Kong Stock Exchange, also known as the GEM board. The company's principal activities, as described by its chairman, Daniel Hui ("Mr Hui"), who is a defendant in this matter, concern the provision of business development and corporate advisory services, including underwriting share issues for companies wishing to be listed on the Stock Exchange. There is an ongoing struggle between the present board of directors and another group of persons said to be under the direction of a person by the name of Kenneth Cheung ("Mr Cheung") for control of the company. This faction, if I may express it in this way, is represented by the two plaintiffs in this action, Capital Ace Holdings Limited ("Capital Ace") and Wise Express Assets Limited ("Wise Express").

5. The material statistics and dramatis personae can be stated shortly. The company, although publicly-listed, only has 25 per cent of its issued shares in the hands of the public. The remaining shares are held as follows:

(i) 3.36 per cent by Mona Leung ("Miss Leung"), one of the founders of the company through Wise Express;

(ii) 7.85 per cent by Digital World Holdings Limited ("Digital World"), a company listed on the main board of the Hong Kong Stock Exchange through Capital Ace;

(iii) 24.33 per cent by Cecilia Chu ("Miss Chu"), also one of the founders of the company, through a company called International Technology Capital Limited;

(iv) 39.46 per cent through a company called International Capital Network Investor Limited which in turn is held indirectly as to:

(a) 76.34 per cent by Mr Hui to whom I have already made reference; and

(b) 23.66 per cent by Michael Lui ("Mr Lui"), both of whom are also founders of the company and parties of this litigation as its chairman/managing director and executive director respectively.

6. Mr Hui and Mr Lui currently control the company. The other faction is Miss Leung and Digital World but what is said by the company is that these persons and their companies, together with Miss Chu, are under the control of Mr Cheung to the extent that they hold their shares as his nominees. This, of course, is strongly denied by them. Until he resigned on 18 June this year, Mr Cheung was chairman of Styland Holdings Limited, also listed on the Hong Kong Stock Exchange main board. Mr Cheung and his associates control 18.86 per cent of Styland's shares which in turn is a 9.9 per cent shareholder of Digital World.

7. From this, I come to the litigation itself.

8. There are in fact two actions which have been consolidated by an order dated 7 June. The lead action, as it is now described, was instituted by the company on 15 May. On the same day, it obtained an ex parte injunction from Deputy Judge Poon restraining the defendants in that action, who are Capital Ace and Wise Express, from holding an extraordinary general meeting of the company on 23 May 2002 or at all (which I will need to explain in a moment), or until further order of the court.

9. The background and reasons for the company's application to Deputy Judge Poon have been very helpfully set out in Mr Smith's written submission on behalf of Capital Ace and Wise Express starting at page 8. I will need to relate some of this as shortly as I can.

10. It all started with mandates given to the company's board of directors by the shareholders on 13 November 2001 to:

(i) grant options to subscribe for shares and to allot and issue shares of the company to a share option scheme; and (ii) a general mandate to allot, issue and deal with shares of the company with an aggregate nominal value up to the sum of 20 per cent plus any share capital repurchased by the company.

11. The present board had been restricted under the GEM listing rules from issuing such shares for six months beginning with the starting date for dealings of the company's shares on the GEM. That restriction expired on 30 May, which is the date when the injunction order now before me was granted. Against the board, it is said that there has been a gradual breakdown of trust and confidence between it and the other founders of the company. In summary, the basis for this are the following complaints coming from Miss Chu and Miss Leung, who are not directors, against the present board:

(i) The style of management, including a failure to implement or at least a delay in implementing its business plan and the frequent absences from the office of Mr Hui and Mr Lui.

(ii) Unusual and unjustified transfers of funds of the company, principally the transfer of $40 million to the personal control of Mr Hui for the alleged purpose of "protecting" the funds.

(iii) The intention of the directors to issue further shares notwithstanding the present climate of low share prices and the fact that the company has no obvious need for further funds.

12. These alleged concerns have caused a number of shareholders, including Miss Chu and Miss Leung, to say that they had no confidence in the present board. On 10 April 2002, Capital Ace and Wise Express, the plaintiffs, wrote to the company pursuant to Article 72 of the Company's Articles requiring it to convene an EGM within 21 days of the date of the letter. The agenda for the proposed EGM was to consider and approve three resolutions:

(a) the revocation of any mandate given to the directors to allot, issue and deal with shares of the company;

(b) to appoint seven new directors, including Miss Chu and Miss Leung;

(c) the maximum limit of directors was to be fixed to the existing four plus the proposed seven new directors.

13. The motive for this was to obtain control of the board through the additional directors. The company reacted on 29 April by announcing the calling of the EGM but it fixed the date for the meeting to 2 December 2002, some eight months later. The board gave reasons for this date. It said that it needed time to investigate recent share trading activity in the company's shares; whether this had caused a triggering of the mandatory take-over obligations under the Take-over Code and whether there had been breaches of the Securities (Disclosure of Interests) Ordinance, Cap. 396, and other regulatory requirements by, amongst others, Capital Ace and/or Wise Express in relation to their intentions and/or dealings in the company's shares.

14. Not surprisingly, Capital Ace and Wise Express say that this was a groundless ruse by the company to frustrate their legitimate right to place their resolutions before the shareholders at an EGM within a reasonable time. The company then refused to bring the date forward to no later than 29 May, the significance of that date being that on 30 May the GEM listing rules restricting the issue of further shares would have expired.

15. Faced with that refusal, the requisitionists, as they have been referred to in the course of the argument, then purported to exercise their rights under Article 72, where the board has declined to convene an EGM within a reasonable time, to fix one themselves which they did for 23 May, the notices for this meeting having been published on 8 May. It was the fixing of this meeting which has provided the spark for this litigation.

16. On 15 May, the company started what has been described as the lead action in the order of 7 June consolidating the two actions, that being HCA 1842 of 2002. On the same day, they went ex parte before Deputy Judge Poon and, on the basis that it is said that the EGM of 23 May was convened in breach of the Company's Articles under Cayman Islands law, obtained an order prohibiting the holding of that meeting. For reasons that are not absolutely clear to me, given the urgency of all this, the return date for the inter-partes hearing of that order is now fixed for 3 January next year.

17. The requisitionists were not be deterred. They have now brought this action and obtained an ex-parte order of their own from Deputy Judge Woolley which, as I hope is clear from the narrative, has the effect at least of giving them part of what they had hoped to achieve at their EGM on 23 May, which is to prevent the present board from issuing new shares, save with the approval of a general meeting of the shareholders which they are reasonably confident would not be forthcoming because they consider, as presently constituted, they will be able to garner sufficient votes to block such a proposal.

18. Of course, in a commercial sense, this is all most unfortunate, if not completely disastrous. The board is struggling to keep control against a powerful opposition which may in the end win the day unless it can be demonstrated that control has been obtained by irregular and/or unlawful means, so that this majority may have to be disarmed and disabled by the courts and the regulatory authorities. Mr Smith, if I may say so, in a most attractive submission, has urged me to hold the ex parte order so that the ring is held, to use his expression, until trial. In the meantime, by this combination of injunctions, the contestants are held apart. The present board remains in control, presumably irremovable for the time being, but prevented from issuing further shares and free to manage the company's affairs as it sees fit.

19. In order to do that, he needs to show me that he has a serious issue to be tried and that the balance of convenience favours the granting of the injunction (see American Cynamid v Ethicon) This therefore brings me to the substance of the case.

20. Mr Smith has descended into the detail of the matter in his written submission but he seeks to paint with a broad brush where and if possible. Firstly, he submits, rightly in my judgment, that the two cases are to be viewed very much as part of the same matter and that the two injunctions are two sides of the same coin. Referring to the numerous factual issues which are inevitably in sharp controversy on the affidavits, his approach is to say that given the nature of these disputes the court cannot at this stage form a definitive view about them. Provided he passes the required evidential threshold and shows that his case raises serious issues to be tried, then he says that he is on firm ground in saying that the balance of convenience must favour the retention of the present injunction.

21. On the question of the issues to be tried, he has the following to say: if the current main directors, Mr Hui and Mr Lui, are permitted to exercise their mandate to issue securities, they would be doing so purely for the purpose of preserving their control of the company rather than for the genuine and proper requirements of the company's business interests. If this were to be demonstrated at trial, the exercise of such a power would be improper and amenable to being set aside. Authority for this proposition is Howard Smith Limited v Ampol Petroleum Limited [1974] AC 821 at 837.

22. He pursues this by submitting that there is a high risk of them doing so in the hope of issuing securities to persons or bodies favouring them in this dispute and thereby ensuring that the proposed resolution to appoint additional directors would be defeated. In this regard, he draws attention to the date of the proposed EGM on 2 December, the day after the restriction on share disposal. In this way, if the ex parte goes, Messrs Hui and Lui could try and issue shares to their supporters and win the day at the EGM. If they fail to do so, they could still dispose of their shares before they would be forced to relinquish control. He also submits that the current board has expressed a willingness to issue such shares. He points to such a sentiment in Mr Hui's evidence to the Securities and Futures Commission (E, page 269).

23. Mr Smith says that there can be no commercial sense in issuing shares at present where the share price is so weak. At current prices, if all the permissible shares were issued, they would raise no more than $6.5 million. It had been only $4 million a few days ago but the share price has risen by 50 per cent since then. But even so, Mr Smith contends that this would be a meaningless amount, especially where the company has a $40 million reserve under the custodianship of Mr Hui. So on the figures, says Mr Smith, share issues could only represent an attempt by the present board to manage the electorate, as it were, for the EGM in order to ensure its survival, not the proper exercise of their powers in the general interest of the company. All these matters are said to raise a serious issue that needs to be tried.

24. Turning to the balance of convenience, Mr Smith submits that this strongly favours his clients. The prejudice to the company in the event that the injunction stays would not be substantial. It has no immediate need for additional funding. Even if it did, the proposed method of issuing shares would be senseless and any pressure could be alleviated if the court ordered a speedy trial to break the deadlock.

25. Attention is also drawn to the protection given in the proviso to the injunction that the securities could be issued with the sanction of its shareholders in general meeting. Lastly, the company also has the protection of the undertaking in damages. Mr Smith then contrasts this with the position of the company's shareholders, including Capital Ace and Wise Express, which he describes as irreparable. Once shares are issued to third parties, it would be extremely difficult to invalidate these. The issue of such shares to friendly parties would alter the current balance of voting power which would leave Messrs Hui and Lui in control. With only 25 per cent of shares presently issued to the public, it would be very difficult for shareholders, including Capital Ace and Wise Express, to compensate for the dilution in their shareholding by acquiring more shares on the open market. In all the circumstances, the current status quo should therefore be retained.

26. Mr Strachan for the company and its main directors has opposed retention of the current injunction on the broadest possible grounds. The traditional narrow basis, that the applicant for the injunction has failed to show a serious triable issue and/or that the balance of convenience favours the removal of the injunction, is only a part of a wide ranging series of arguments as to why the injunction should be discharged. Where it can so often be successfully argued that the affidavit evidence cannot be resolved at this stage and that what is said for the applicant for the injunction on paper raises a serious triable issue, he will then succeed provided the balance of convenience favours the injunction.

27. Perhaps sensing potential difficulties in this regard, Mr Strachan has started his case by appealing, in a particularly focused way, to the equitable nature of this jurisdiction and that a party seeking this form of relief must come to court with clean hands, as it is said. The heart of the defence is the assertion that Mr Cheung and his nominees have acquired voting control by stealth and in so doing this group of persons has acted in breach of the take-over regulations and committed a criminal offence, contrary to section 26A of the Securities and Futures Commission Ordinance. It has achieved its position by improper and criminal methods which it now seeks to preserve by means of the injunction of 30 May.

28. One has only to state the assertion to understand its gravity and consequently the high burden that Mr Strachan has taken on for himself, even at this interlocutory stage. But he has not shrunk from it and with great care he has taken me through the evidence that is currently available to him. I will need to refer to it presently but perhaps it is convenient to consider now Mr Smith's reply to these allegations.

29. In essence, whilst denying the interpretation placed on the evidence by Mr Strachan, he is able to return to his main theme by submitting that at best all that one can say at this stage is that these issues simply cannot be resolved on paper and at present the proper balance is held by both injunctions. Even if his clients have behaved in the way described by Mr Strachan, they are unable to exploit the position that they are currently said to hold by stealth or otherwise. The truth will emerge from the trial, a speedy one at that, and if the company and its present board are shown to be correct, then any improper or unlawful position now held by Mr Cheung and his alleged nominees will be unravelled and they will be seen off to an irredeemable defeat.

30. It is helpful to bear this in mind as I consider the evidential basis for this part of Mr Strachan's case. Mr Strachan and his junior have also prepared a most helpful submission in writing. I have had regard to everything that appears in it as developed by Mr Strachan in the argument. To attempt a reproduction of it here would serve no useful purpose. I propose to identify the main issues raised and the basis for those issues.

31. The first 18 of the 26 page document spoken to by Mr Strachan is a close analysis of the relative positions of the persons said to be operating under the control and direction of Mr Cheung and how that can be supported by evidence of a highly compelling quality. I have listened and read with care the evidence surrounding the alleged relationships between Mr Cheung, Miss Chu, through her company, International Technology Capital Limited, Miss Leung, through Wise Express and Digital World, through Capital Ace (see paragraphs 4-7 of the written submission).

32. Before the company was listed, it is said that this faction was able to obtain 34.54 per cent of the company's shares (see paragraph 9) with 39.46 per cent to Mr Hui and Mr Lui, and 25 per cent to the public. Then strong reliance is placed on the discovery of a computer disc marked KCheungI, in Miss Chu's handwriting, found in her former office at the company's premises which has stored on it two draft declarations of trust created a year before listing, one of which indicates that her shares in the company were held by her as nominee of a "beneficial owner". The other draft indicates that Mona Leung's shares in what had been the original group holding company were also held by her as nominee for "the beneficial owner". Whilst the identity of the beneficial owner is not filled in, it is said that given the fact that the disc is marked with Mr Cheung's name, the inference, even now, should be drawn that he is the intended beneficiary.

33. Also found in Miss Chu's former office was a list of saleable items which refers to assets belonging to companies controlled by Mr Cheung. An email communication has been found from Miss Chu sending this list to Mr Cheung or Mr Cheung's wife's secretary, Iris. Mr Teddy Chan, a director of Digital World, also has information stored on the same computer disc relating to his resignation from the board of Digital World and a draft instrument of transfer regarding his shares in Digital World.

34. Turning to events after the company was listed, suspicion is said to attach to the fact that despite owning a quarter of the company Miss Chu never bothered to appear for the listing ceremony and that thereafter she took no interest in the company. Then days after listing, on 3 December 2001, the share price dropped by 15 per cent from $1.01 to $0.86. This is suggestive of orchestrated massive selling to force the price down. That day Mr Cheung is said to have asked Mr Hui for $18 million being his fair share of the proceeds of the listing which came to $38 million (see paragraph 18 of the written submission). This is, of course, dismissed by Mr Cheung as complete fantasy.

35. Then on 4 December, Styland Holdings, Mr Cheung's company, through a subsidiary, purchased 10 million shares in the company representing 3.12 per cent of its issued share capital and on 4 December and 8 April this year, Digital World purchased over 6 million shares representing 1.9 per cent of its issued share capital. On 27 March this year, the company sought a ruling from the SFC under paragraph 8.1 of the Take-over Code that Mr Hui, Mr Lui and Miss Chu should be considered as acting in concert. The following day, Miss Chu informed the SFC that she did not regard herself as acting in concert with the other two.

36. Then during April, there was much frenetic activity described on pages 8 and 9 of the submission which is said to support the case showing a clandestine take-over by the Cheung group. An inkroll has been found from the fax machine in the office used by Mona Leung and Mr Cheung. This means that Mr Strachan has available to him all the faxes received on this machine. Two faxes dated 26 March and 28 March this year are particularly relied on, both marked for the attention of Mona Leung. The fax of 28 March shows the shareholdings in the company as of that date owned by her, Digital World, Mr Cheung and Miss Chu. This shows that these parties owned 43.63 per cent of the shares.

37. Miss Leung, in her affirmation, says that the requisitionists are seeking to obtain control of the board but not of the company through their voting rights as shareholders. She asserts that there is no general agreement or understanding to co-operate when exercising their voting rights in the company. Mr Strachan submits, that on a proper construction of the material that his clients have been able to assemble, a coup has been in the planning by Mr Cheung' s group well before the company had been listed. From this, Mr Strachan has sought to show breaches of the take-over code and of section 26A of the Securities and Futures Commission Ordinance. The argument is well set out from pages 13 to 16 of the submission.

38. It seems to me that provided it can be demonstrated, to the required standard of proof, that the activities catalogued by Mr Strachan are true, then there must be every prospect of demonstrating both limbs of that accusation. I am required at this stage to form a view of how far down the evidential road the current material goes where so much is denied or some form of explanation or excuse is proffered. Clearly this is not proof positive, nor I think does Mr Strachan make that claim. That having been said, he has been able to make out a compelling "case to answer", if I can borrow from another jurisdiction. Much of this cries out for an explanation from the requisitionists and from Mr Cheung and his associates. From this, Mr Strachan moves on to say that this impropriety is undeserving of the exercise of this court's equitable jurisdiction. The Cheung faction is now, through its improperly and illegally obtained position, seeking to preserve it by means of this injunction.

39. The principle upon which the court acts in regard to parties coming before it without clean hands is well settled. These principles are reflected in Spry, "The Principles of Equitable Remedies", 6th Edition, page 409 to 414 and 494 to 495 which Mr Strachan has referred me to. I am satisfied that the court would not do so where such conduct is proved. Here the difficulty Mr Strachan faces is that whilst the evidence is compelling, it falls short of being proved at this paper stage before the witnesses can appear for cross-examination.

40. The question then becomes this: should I merely set aside this compelling evidence of impropriety by the applicants and deal with it by just holding the ring, as Mr Smith contends, provided the American Cynamid tests are satisfied or should I somehow give it weight in the exercise of my discretion?

41. It seems to me that notwithstanding the progress that Mr Strachan has made with the evidence, that before he can effectively avail himself of this ground to prevent the injunction being made, he would have needed to at least make out his case on a balance of probabilities which, in my judgment, he has fallen short of. These are issues which will need resolution at the trial and, if resolved in the company's favour, will attract the strongest consequences for the parties against whom these things are said. But I feel unable, for the reasons that I have attempted to give, to shut the court's door on the applicants for the injunction on as yet unproven material. The defendants must therefore be left to resist on the merits alone, in terms of American Cynamid, on the application for the injunction.

42. But another matter arises on the plaintiff's good faith. Mr Strachan has also deployed an argument that the ex-parte injunction should be set aside peremptorily for want of material disclosure to Deputy Judge Woolley. The law is well settled in this regard (see Bank Mellat v Nikpour [1985] FSR 87 at 81 and the older standard authority of R v Kensington Income Tax Commissioners [1917] 1KB 486 at 509).

43. I have considered the extent of the disclosure made to Judge Woolley and also the matters of non-disclosure that Mr Strachan has identified at pages 19 and 20 of his submission. Mr Smith has euphemistically referred to them as titbits. Whilst they are more than that of course, I am of the view that as full a picture as was required had been presented to the judge ex parte. Accordingly, this limb of the objection must fail.

44. Now, perhaps not before time, I come to consider the case on American Cynamid principles. Mr Strachan says that the other side has failed to show any serious triable issue and that if they have, that the balance of convenience is against them. There is no evidence, contends Mr Strachan, that the directors are proposing to use the fiduciary powers over the shares in the company purely for the purpose of destroying an existing majority that did not exist (see Howard Smith v Ampol supra at 837G). The basic principle is that a company should be managed by its board of directors and not by its shareholders , nor the court. Article 112 of the Company's Articles expressly provides for its management by the board. I accept that the mandate given to the board on 13 November is one that directors of public companies in Hong Kong routinely ask for and are given by its shareholders (see paragraph 6 of the first affidavit of David Norman).

45. Is there a serious issue to be tried that these directors are now trying to abuse their power? I have already related the improper motive being ascribed to the board by the requisitionists which is to dilute the requisitionists' voting power at the EGM and to increase their own vote. The argument has been well rehearsed from page 22 to 23 of the submission. I am impressed by the point made by Mr Strachan that the blanket injunction sought by the requisitionists is a most unusual one. The cases relied on by them ex parte are cases where the court thought it right to prohibit a particular transaction where it had been demonstrated that the proposed issue was shown to be for improper motives. In those circumstances, the court scrutinises the particular transaction before deciding whether to grant the injunction.

46. I can find nothing beyond fear and suspicion, given the bad blood between the two factions, that this may happen. In saying this, I have had regard to Mr Hui's statements to the SFC about this matter. His statements appear to me to be above board and not worthy of the motives ascribed to them by Miss Leung and Miss Jennifer Cheung and so, in my judgment, there is no serious issue to be tried. That would be sufficient to dispose of this injunction but even if I am wrong about that and such an issue has been overlooked by me, then I would have found that the balance of convenience favours not granting the injunction. I am convinced that Mr Strachan is right when he says that the requisitionists are more than adequately protected by the regulatory safeguards that are currently in place. Mr Norman's affidavit deals with this sufficiently. The regime is there to ensure that the placees for the shares are independent. There are notice provisions and proper information needs to be supplied. This is then reviewed by the Stock Exchange and the SFC. I have been shown the relevant questionnaire that needs to be filled in. Added to this, there is a two week period for the requisitionists, who I am sure will be most vigilant, to return to the court, ex-parte if need be, to put a stop to any particular issue of shares said to be improper. The share option scheme covered by the mandate will present no threat to the requisitionists for the reasons explained by Mr Strachan. The numbers are very modest under that scheme for every 12 month period.

47. Lastly, it seems to me that where the requisitionists are adequately protected by the regulatory regime, the board should now be allowed to manage in the best interests of the company at a most difficult time. If it needs to raise capital for proper commercial motives, it should be free to do so. The $40 million already in place has been earmarked for projects set out in the prospectus, but the board must also realise that their conduct is now being scrutinised by parties hostile to it and it will be careful as to how it exercises this mandate. Accordingly, for these reasons the injunction must be discharged.

48. Given the urgency with which these actions should be resolved, I will certify it for speedy trial and at this stage leave it to the parties to establish a timetable to bring the case on for hearing. In the event of any dispute as to any further interlocutory orders, application will need to be made to the court in the usual way.

Representation:

Date of hearing:

Mr Clifford Smith, SC, leading Mr Douglas Lam, instructed by Messrs Stephenson Harwood & Lo, for the Plaintiffs in the subsequent action

Mr Mark Strachan, leading Mr Horace Wong, instructed by Messrs Richards Butler, for the Defendants in the subsequent action

Date of judgment:

Mr Douglas Lam, instructed by Messrs Stephenson Harwood & Lo, for the Plaintiffs in the subsequent action

Mr Mark Strachan, instructed by Messrs Richards Butler, for the Defendants in the subsequent action

Remarks:
Appeal by Plaintiff to Court of Appeal. Appeal dismissed. Please refer to Appeal Judgment of CACV000330A/2002.