HONG KONG CENTURY PROPERTY DEVELOPMENT LTD v. HUI NEI NA

HCA2284 / 2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2284 OF 2008

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D E C I S I O N 

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A.  Introduction

1.  In this action, the Plaintiff in gist claims that the Defendant was in breach of her director’s duty or fiduciary duty owed to the Plaintiff.  It seeks various injunctions and an account by her of her dealings with an auction sale of certain property development in the Mainland and the sale proceeds thereof.  I will explain the basis of the claim and reliefs sought in greater detail below. 

2.  Before me now is the Plaintiff’s application to strike out substantial parts of the Defence on the basis that (a) they disclose no reasonable defence, (b) they are scandalous and embarrassing, or (c) they amount to an abuse of process.

3.  It is worthy to note that other than the present action, there are already on foot 3 other High Court actions which involve directly or indirectly these two parties (with others).  They are respectively HCMP 3216/2004, HCMP 652/2009 (both of which were taken out under s. 168A of the Companies Ordinance (Cap 32)), and HCA 1314/2006. 

4.  To understand the basis of the Plaintiff’s present application, it is necessary for me to set out some of the relevant background leading to the present claim as follows.

B.  Background

5.  The Plaintiff is a company incorporated in Hong Kong. 

6.  Winsway Inc (“Winsay”) is the largest shareholder in the Plaintiff.   Serene International Ltd (“Serene”) is one of the other shareholders of the Plaintiff, and the Defendant in turn holds and controls Serene.    Wealth Best Developments Ltd (“Wealth Best”) is another shareholder of the Plaintiff, and is controlled by one Mr Cheung Sek Ki Kenneth (“Cheung”), who is the husband of the Defendant.  There are other shareholders of the Plaintiff.

7.  The Plaintiff is a 90% joint venture partner of a company in the Mainland called Liuzhou Century Lunde Land Development Ltd (“the PRC JV Company”), which owns a commercial and residential property development (‘the Development”) in Liuzhou City.  The other 10% partner of the JV Company is known as Liuzhou Anching Development Ltd.

8.  It is the Plaintiff’s case that under the joint venture agreement which set up the PRC JV Company, the chairman of the PRC JV Company was to be nominated and appointed by the Plaintiff, and the chairman would automatically become the PRC JV Company’s legal representative as well.   This is denied by the Defendant.

9.  The Defendant was appointed as a director of the Plaintiff.  She was also appointed as the chairman and legal representative of the PRC JV Company.  

10.  It is also the Plaintiff’s case that the Defendant’s office as the chairman and legal representative of the PRC JV Company came to an end in the following scenarios:

(1) On 7 July 2004, the Plaintiff’s board of directors resolved to remove the Defendant as the PRC JV Company’s chairman and legal representative.  This board resolution was endorsed by the Plaintiff’s members at an EGM held on 2 August 2004.

(2) In any event, the Defendant’s office as chairman and legal representative of the PRC JV Company expired by effluxion of time by the end of January 2005.

11.  Further, in November 2006, the Plaintiff instead appointed one Hui Sung Sat (“Hui”) to be the chairman of the PRC JV Company. 

12.  The Defendant disagrees that she had been properly removed as the chairman and legal representative of the PRC JV Company, as she says the Plaintiff’s board resolution to remove her was made in breach of a shareholder agreement and/or in breach of an understanding amongst the shareholders and was thus unlawful and invalid.  Under HCMP 3216/2004, she seeks to, inter alia, set aside the said board resolution and declare that the purported removal of her as the chairman and legal representative of the PRC JV Company was of no effect. 

13.  The Defendant also denies that her office as the chairman and legal representative of the PRC JV Company has expired by effluxion of time.   It is the Defendant’s case that she continues and remains to be the only properly appointed legal representative and chairman of the PRC JV Company under the relevant PRC laws and also at the request of the Mainland authorities to do so.   She therefore continues to act as such.

14.  It is common ground that the Defendant, acting as the chairman and the legal representative of the PRC JV Company, consented to and participated in a public auction of parts of the Development in December 2006 (“the December 2006 Auction”).   It is alleged by the Plaintiff in this action that the auction resulted in obtaining sale proceeds in the region of RMB139million but only RMB21 million was paid to the PRC relevant Tax Bureau as part of the tax arrears due by the PRC JV Company.  The rest of the sale proceeds has not been accounted for.

C.  The Plaintiff’s claim in the present action

15.  Looking at the Statement of Claim, and as explained and confirmed by Mr Chong (counsel for the Plaintiff) at the hearing, the Plaintiff’s bases of its claims against the Defendant in the present action can be summarized and are confined to as follows:

(1) Notwithstanding the Plaintiff’s case that her office has come to an end, as long as the Defendant continues to purport to act as the chairman and legal representative of the PRC JV Company means that she continues to owe a fiduciary duty to the Plaintiff. 

(2) Thus, when she consented to and participated in the auction of part of the Development in December 2006 purportedly as the chairman and legal representative of the PRC JV Company, as a fiduciary, she owed a duty to the Plaintiff to account for her dealings in the transaction and the proceeds of the sale. 

(3) In breach of the said fiduciary duty, she has not given any such account to the Plaintiff despite repeated demands.

(4) Further, in breach of her duty as a fiduciary and a director of the Plaintiff, the Defendant has wrongfully:

(a)  prevented Hung from registering as a legal representative of the PRC JV Company in the PRC by taking out various legal proceedings in the Mainland.

(b) continued to keep the company seal of the PRC JV Company and refusing to deliver up the same upon demand.

(c) continued to purport to act as the legal representative of the PRC JV Company. 

16.  The Plaintiff seeks the following (and only the following) reliefs in its prayers:

(1) An injunction to restrain the Defendant from continuing to act or purport to act as the legal representative of the PRC JV Company.

(2) An injunction to compel the Defendant to deliver up the company seal of the PRC JV Company.

(3) In relation to the December 2006 auction:

(a)  An order that the Defendant do provide an account of all her dealings in connection with the December 2006 auction and her dealings with the net proceeds of sale thereof;

(b) An inquiry into the Defendant’s said dealings of the auction and the proceeds thereof;

(c) An order that, upon the taking of the account or inquiry, the Defendant to pay the Plaintiff all sums as may be found due and payable.

17.  In support of the Plaintiff’s striking out application, Mr Chong confirms that, notwithstanding what has been pleaded in the Statement of Claim^[1], other than the above reliefs prayed for, it is not part of the Plaintiff’s claim for any damages arising from the Defendant’s alleged breaches of her duty as a director or fiduciary of the Plaintiff in (a) preventing Hung from registering as the legal representative of the PRC JV Company, (b) continuing to act as the legal representative of the PRC JV Company in defiance of the resolution to remove her, (c) the Defendant’s failure to deliver up the company seal of the PRC JV Company, and (d) the Defendant’s consent and participation in the December 2006 auction. 

18.  In other words, Mr Chong emphasizes that it is not part of the Plaintiff’s complaints in support of the present action that the Defendant had (purporting to act as the legal representative of the PRC JV Company) consented to and participated in the December 2006 auction of parts of the PRC Development.  Counsel confirms that the same was pleaded in the Statement of Claim by way of background only.

19.  It is premised on the above bases of the Plaintiff’s claim that Mr Chong mounts his application to strike out substantial parts of the Defence.

D.  Amended Defence produced at the hearing

20.  At the hearing, given Mr Chong’s above clarification of the Plaintiff’s claim, and certain observations coming from the Court in relation to various paragraphs of the Defence pleading allegations of conspiracy[2], the Defendant proceeded to amend the Defence and produced a draft Amended Defence to this Court.  

21.  The Plaintiff was still not satisfied with the Amended Defence, and submitted that the same substantial parts as that of the original Defence should be struck out.

22.  In light of the Plaintiff’s position, what I propose to do is to give leave to the Defendant to amend the Defence in the form of the Amended Defence, and then proceed to consider below in detail the striking out application on the basis of the Amended Defence.  I will therefore treat this application as one to strike out the complained paragraphs of the Amended Defence. 

E.  The striking out application

E1.    The principles applicable to striking out

23.  It is trite that:

(1) The Court will only strike out a claim when it is clear and obvious that the pleading discloses no reasonable cause of action or defence, or that it is frivolous, scandalous or vexatious. 

(2) A “reasonable cause of action or defence” is a cause of action or defence with “some chance of success when only the allegations in the pleading are considered”.

See:    Hong Kong Civil Procedure 2009, para 18/19/4, 18/19/6-8.

E2.    The complained paragraphs of theAmended Defence

24.  The Amended Defence is of 34 pages long with 46 paragraphs.  The Plaintiff asks to strike out paragraphs 2(b), 5, 10-11, 13(a)-(e), 15-20, 23-39 and 42-44 of the Amended Defence.

25.  I will set out in greater detail the Defendant’s pleaded case under these paragraphs when I discuss the application to strike them out.

E3.    Discussion

E3.1  Paragraphs 2(b) and 15 of the Amended Defence

26.  Reading together with paragraph 9 of the Amended Defence, the Defendant’s case as pleaded under these paragraphs can be summarized as follows:

(1) The Plaintiff was founded upon the basis of a personal relationship of trust and confidence.  There was also an agreement of the Plaintiff’s shareholders (‘the SH Agreement”) or understanding or expectation (“the Understanding and Expectation”) amongst them that the Defendant, amongst others, would participate in the general management of the Plaintiff and the PRC JV Company.  The removal of the Defendant as the chairman and legal representative of the PRC JV Company was in breach of the SH Agreement, the Understanding and Expectation and/or the relationship of trust and confidence.

(2) The resolution (“the Removal Resolution”) of Plaintiff’s board passed on 7 July 2004 to remove, inter alia, the Defendant as a director, and the chairman and legal representative of the PRC JV Company was invalid because it was made in breach of the SH Agreement and/or the Understanding and Expectation.

27.  Mr Chong (for the Plaintiff) submits that the Defendant’s plea based on a breach of the SH Agreement and/or the Understanding and Expectation discloses no reasonable defence to the Plaintiff’s claim that the Defendant had been properly removed as the chairman and legal representative of the PRC JV Company.  This is so (Mr Chong contends) as the SH Agreement and the Understanding and Expectation, even if existed, are only binding between the shareholders but not on the Plaintiff.  Any breach of the SH Agreement and/or the Understanding and Expectation would therefore only give the Defendant a personal right against the other shareholders, but not the Plaintiff in passing the board resolution to remove her to act as its agent to be the chairman and legal representative of the PRC JV Company.  Thus, the Defendant’s said allegations of the SH Agreement and the Understanding and Expectation (even if proved) could not amount to any defence in law to set aside the board’s removal resolution.

28.  In support of its submissions, the Plaintiff relies on Russell v Northern Bank Corp [1992] 1 WLR 588 (HL), where the House of Lords approved^[3] and followed the often cited dictum of Lord Davey in Welton v Saffrey [1897] AC 299 at 331 as follows:

“Of course, individual shareholders may deal with their own interests by contract in such a way as they may think fit.  But such contracts, whether made by all or some only of the shareholders, would create personal obligations, or an exceptio personalis against themselves only, and would not become a regulation of the company, or be binding on the transferees of the parties to it, or upon new or non-assenting shareholders…”

29.  I accept the Plaintiff’s submissions.    I cannot see how the SH Agreement or the Understanding and Expectation, where the Plaintiff is not a party thereto, could have given rise to a right of the Defendant to set aside the Plaintiff’s board resolution to remove her as its agent to be the chairman and legal representative of the PRC JV Company.

30.  The Defendant has not cited any authorities to suggest otherwise or to support the proposition that a breach of personal shareholders’ agreement or an understanding between the shareholders could give rise to a right to the innocent shareholder to set aside a board resolution passed by the company.

31.  I therefore would strike out paragraphs 2(b) and 15 of the Amended Defence on the ground that they disclose no reasonable defence.

E3.2 Paragraphs 5, 10,11, 13(a) – (e), 16 and 26 of the Amended Defence

32.  The defence under these paragraphs is that:

(1) The majority shareholder of the Plaintiff, Chen Shenan (“Chen”), and his associates had been in control of the financial matters of the PRC JV Company.  As a result of their wrongful acts, they had misappropriated substantial sums of the PRC JV Company and the PRC JV Company has as a result incurred large amount of tax penalty and/or surcharge and/or fine.  Chen has since absconded from the Mainland and wanted by the Public Security Bureau:  paragraphs 5, 10,11 and 13(a) – (e) of theAmended Defence.

(2) The removal of the Defendant by way of the Removal Resolution was invalid as it was made for an improper purpose to exclude the Defendant from participating in the management of the PRC JV Company thereby allowing Chen and his associates to control the same, and to prevent the Defendant from discovering the above wrongful tax evasion activities instigated by Chen (and others): paragraph 16 of theAmended Defence.

33.  It trite that where a complaint relates to a matter of internal management of a company which is valid if done with the approval of the majority of the shareholders or is capable of being confirmed by the majority, the court will not interfere.  However, this rule does not extend to a case where the directors have acted in abuse of their powers or where the act is unfair and oppressive as against the minority shareholders.  Such a situation comes within one of the exceptions to the rule in Foss v Harbottle (1843) 2 Hare 461; Kwok Ping Sheung Walter v Sun Hung Kai Properties Ltd [2008] 3 HKC 465, para 30 per Kwan J.

34.  Applying the above well-known principles, I cannot say that the Defendant’s plea (and looking purely at the pleaded allegations) as a defence to the Removal Resolution is plainly unarguable. 

35.  Mr Chong for the Plaintiff however submits that the Defendant’s said defence could not stand as it should and can only be brought as a form of derivative action since the alleged damage brought by the wrongful acts of the directors is caused to the company but not the shareholder.  In the premises, (Mr Chong further says) this plea in the Amended Defence should be struck out as it does not properly constitute a derivation action, given that the following essential elements of a derivative action are lacking: 

(1) It is not pleaded by the Defendant that the alleged delinquent directors were in control of the Plaintiff to prevent an action to be brought against them.

(2) The delinquent directors are not even parties to the present action. 

See:   Prudential Assurance v Newman Industries [1982] 1 Ch 204, 210E-211A, 221H-222A.

36.  I am not persuaded by the Plaintiff’s arguments. 

37.  The Defendant is only pleading a defence to say why the Removal Resolution was invalid and thus why the Plaintiff is not entitled to rely upon it to claim against her for an injunction to restrain her from continuing to act as the chairman and legal representative of the PRC JV Company.  She is not seeking to mount a claim to recover damages for the wrong done to the company.  I am therefore not satisfied that the plea on this defence must plainly fail (as submitted by the Plaintiff) as it does not include all the elements necessary for pursuing a derivative claim. 

38.  I will therefore not strike out these paragraphs of the Amended Defence.

E3.3 Paragraphs 17 and 18 of theAmended Defence

39.  The pleaded case under these 2 paragraphs of the Amended Defence is as follows:

(1) By a resolution passed in a purported shareholders’ meeting of the Plaintiff held on 2 August 2004, one Peng YC was appointed as the chairman and legal representative of the PRC JV Company.    Further, at a purported directors’ meeting of the PRC JV Company held also on 2 August 2004, Peng YC were appointed as the chairman and legal representative of the PRC JV Company, and two others were appointed as its directors.   These appointments were not duly made.  Since June 2005, Peng YC, Chen and one Peng Liangching were wanted by the Public Security Bureau of Liuzhou and have since absconded from the Mainland: paragraph 17 of theAmended Defence.

(2) On about 1 August 2004, Chen wrongfully stole the seal of the PRC JV Company through his agent or servant and to apply to the relevant authority to change the legal representative of the PRC JV Company to Peng YC.  As a result of the Defendant’s complaint, the seal was cancelled by the Public Security Bureau and a replacement seal was made for the PRC JV Company:  paragraph 18 of theAmended Defence.

40.  These are pleaded in reply to paragraph 9 of the Statement of Claim, which pleads the removal of the Defendant as the chairman and legal representative of the PRC JV Company by reason of the Removal Resolution.

41.  I cannot see how these allegations concerning the appointment of Peng YC is relevant to the validity or otherwise of the Removal Resolution.   It is pertinent to note that (a) these 2 paragraphs are not relied on in the Amended Defence to support the plea that the Removal Resolution was passed for an improper motive^[4], and (b) the Plaintiff’s claim on the Defendant’s alleged threat to continue to act as the PRC JV Company’s legal representative and chairman unless restrained by the Court is premised on her conduct in opposing Hui’s registration as the legal representative but not Y C Peng. 

42.  In the circumstances, I will strike out paragraphs 17 and 18 of the Amended Defence on the basis that they disclose no reasonable defence.

E3.4 Paragraphs 19 and 20 of the Amended Defence

43.  By way of these 2 paragraphs, the Defendant pleads the following.

44.  On 13 December 2004, the Defendant and two other minority shareholders issued the Petition under HCMP 3216/2004 under s. 168A of the Companies Ordinance seeking (a) a declaration that the purported appointment of the alternate directors on 17 May 2004 was invalid and of no legal effect, (b) a declaration that the July board meeting and the resolutions to remove her to be invalid and of no effect, and (c) a declaration that all the acts and deeds purportedly done in pursuance of the resolutions were unlawful and of no legal effect, which acts and deed included the board meeting held on 2 August 2004.

45.  Again, these are pleaded in reply to paragraph 9 of the Statement of Claim.

46.  I do not see how the fact of the issue of the proceedings under HCMP 3126/2004 amounts to a defence to the claim for an injunction to restrain the Defendant from continuing to act as the chairman and legal representative of the PRC JV Company.    The mere fact of the issue and the existence of the petition do not constitute a defence that the Removal Resolution was invalid.

47.  I will also strike out these 2 paragraphs for disclosing no reasonable defence.

E3.5 Paragraphs 23, 25, 27(1), (2), 30, 35, 38 and 39 ofthe Amended Defence

48.  The Plaintiff claims that the Defendant would continue to purport act as the chairman and legal representative of the PRC JV Company unless restrained by the Court.   In aid of this part of the claim, the Plaintiff pleads the Defendant’s various acts and conducts in preventing Hung from registering with the PRC relevant authority as the legal representative.  See: paragraphs 10-14, 19-20 and paragraph (1) of the Prayers of the Statement of Claim.

49.  On the other hand, paragraphs 12 and 13 of the Amended Defence effectively pleads that (a) whether someone is to be properly appointed as the legal representative of the PRC JV Company is to be determined by the PRC laws and not automatically by reason of one being its chairman as alleged by the Plaintiff, (b) the Defendant continued to act as the legal representative of the PRC JV Company because she was duly approved and/or registered under the PRC laws, or alternatively she had been requested by the relevant PRC government authorities to do so.   The Plaintiff does not seek to strike out these 2 paragraphs.

50.  Paragraphs 23, 25, 27(1), (2), 30, 35, 38 and 39 of Amended Defence then in gist pleads the following.

51.  The setting aside of Hung’s said registration instigated by the Defendant was made because Hung was not properly appointed as the legal representative of the PRC JV Company and his registration with the relevant authority as such was erroneous.   Hung was not properly appointed because (a) the Public Security Bureau advised that there should be no transfer of shares of the Plaintiff held by Chen through Winsway, (b) Chen in breach of an agreement with other shareholders of the Plaintiff transferred all the shareholding of Winsway to a company called Seaco, the said transfer was thus wrongful and of no legal effect and so was Seaco’s purported acquisition of the interest in the Plaintiff, (c) Chen after absconding from the Mainland and after Hung agreeing to act as his façade or puppet, caused Hung to become the only shareholder and director of Seaco, (d) thus the subsequent appointment by the Plaintiff of Hung as its director, and the further appointment of Hung as the legal representative and chairman of the PRC JV Company were wrongful and of no effect, (e) in any event, Hung as the puppet of Chen, who was a wanted person in the PRC, has no right to be registered as the legal representative of the PRC JV Company under PRC laws.

52.  I am not convinced that the matters pleaded under these paragraphs, when read together with the defence raised under paragraphs 12 and 13 of the Amended Defence, can be said to be obviously irrelevant or amounting to an unarguable defence.    Read together these pleas, it cannot be said that the fact (if proved) that Hung was not properly appointed could not amount to a defence to the claim (a) that the Defendant (when she should be duly regarded as the legal representative of the PRC JV Company under the PRC laws or otherwise) had been wrongly preventing Hung from registering as the PRC JV Company’s legal representative, (b) for an injunction to prevent her from continuing to act as a legal representative.

53.  I therefore will not strike out these parts of the Amended Defence.

E.3.6 Paragraphs 24, 27(3)-(7), 28, 29, 31, 32, 33, 34, 42 and 44 ofthe Amended Defence

54.  The Defendant’s case pleaded under these paragraphs can be summarized as follows.

(1) The Defendant’s consent to the auction of the Development was justified and necessary in all the circumstances in particular given Hung and Chen’s wrongful acts in (a) obstructing the Mainland authorities from recovering the defaulted tax and/or tax penalty and/or surcharge and/or outstanding land use fees from the PRC JV Company, (b) preventing the Defendant as the legal representative of the PRC JV Company from complying with the lawful demands and/or orders made by the authorities and the courts in the Mainland, and (c) obstructing the auction of the Development and thereby causing further surcharge on defaulted tax and tax penalty to be levied against the PRC JV Company: paragraphs 24, 27(3)-(7), 28, 29, 31, 32, 33, 34 of the Amended Defence.

(2) By November 2008, the PRC JV Company had incurred tax penalty, fine or surcharge in the sum of RMB90,000,000.00, and that all auctions of the Development were held openly and under the supervision of the Public Security Bureau, and the Plaintiff through its directors and/or Hung knew or should have know that the PRC JV Company’s bank accounts were subject to a charging order or garnishee order issued by the Mainland court for recovering the tax fines: paragraphs 42 and 44 of the Amended Defence. 

55.  Mr Hung for the Defendant submits that these paragraphs are pleaded to show the justifications for the Defendant’s consent given to the auction of the Development.

56.  Mr Chong for the Plaintiff confirms at the hearing that, in relation to the matters concerning the December 2006 Auction pleaded at paragraphs 16 to 20 of the Statement of Claim, the Plaintiff’s claim concerns only with the Defendant’s obligation to account for the dealings of, and the proceeds arising from, the said auction.  The Plaintiff is not seeking any relief in relation to the Defendant’s consent to the auction in her purported capacity as the legal representative and chairman of the PRC JV Company, notwithstanding the fact that it is the Plaintiff’s position that she had already been properly removed in that capacity.   In the Prayers of the Statement of Claim, other than seeking the relief of an account, the Plaintiff has not sought for any reliefs in relation to the Defendant’s consent to the auction.

57.  Given the Plaintiff’s above confirmation as to the nature and limit of its claim in relation December 2006 auction, I agree with the Plaintiff’s submissions that the Defendant’s pleas under these paragraphs are irrelevant and do not amount any defence to the claim.  There is no issue arising in the pleadings which relates to the Defendant’s consent of the December 2006 auction.  Therefore, why she needed to give such a consent is neither here nor there.  This is further underlined by Mr Hung’s submissions (for the Defendant) that these pleas are not intended to give an account (as sought by the Plaintiff) of the 2006 December Auction.

58.  I therefore will strike out paragraphs 24, 27(3)-(7), 28, 29, 31, 32, 33, 34, 42 and 44 of the Amended Defence for want of a reasonable defence.

E3.7 Paragraph 37 of the Amended Defence

59.  Paragraph 37 of the Amended Defence pleads as follows:

“37.  On 2^nd July 2008, despite the judgment of Madam Justice Kwan, [Hui] caused the [Plaintiff] to purportedly sue the Defendant and the auctioneers and seek for the setting aside of the sale and purchase of the units of the Development made in the auction held in October 2006 on, inter alia, the ground that the Defendant had acted against an injunction order of the High Court of Hong Kong.”

60.  The judgment of Madam Justice Kwan referred to in this paragraph is pleaded at paragraph 34 of the Amended Defence, which is a judgment setting aside the pleaded injunction.  The plea effectively alleges that Hung wrongfully caused the Plaintiff to sue the Defendant and to seek to set aside another auction of the Development by relying on an injunction which had already been set aside.

61.  Mr Hung (for the Defendant) submits that this part of the defence is related to the Plaintiff’s claim that the Defendant had been wrongfully continuing to act as the legal representative of the PRC JV Company.

62.  I cannot see how a plea that Hung had wrongfully trying to sue the Defendant and to seek set aside the auction of the Development basing on an interlocutory injunction which had been set aside, constitutes a defence to a claim that the Defendant had been wrongfully acting as the legal representative of the PRC JV Company.  This has nothing to do with the validity of the Removal Resolution and whether the Defendant was duly appointed as the legal representative under the PRC laws. 

63.  I will also strike out paragraph 37 of the Amended Defence for lack of a reasonable defence. 

E3.8 Paragraph 43 of Amended Defence

64.  Under this paragraph of the Amended Defence, the Defendant denies that the Plaintiff has suffered any loss or damage as pleaded in paragraph 19 of the Statement of Claim.

65.  Notwithstanding that the Plaintiff has not pleaded any relief for damages in the prayers, given that the Plaintiff has pleaded in paragraph 19 of the Statement of Claim that it has suffered loss and damage by reason of all the matters pleaded in the pleading, I cannot say this part of the Amended Defence, which is effectively putting the Plaintiff to straight proof, is plainly irrelevant or discloses no reasonable defence. 

66.  I will not strike it out.

E3.9 Paragraph 36 ofthe Amended Defence

67.  The Plaintiff claims that the Defendant, in breach of her fiduciary duty or director’s duty, has refused to deliver up the company seal of the PRC JV Company as directed by the Plaintiff, and continued to use the same in her purported capacity as the legal representative. The Plaintiff asks for a mandatory injunction to compel her to deliver up the company seal.   See: paragraphs 10, 15, 19-20 and paragraph (2) of the Prayers of the Statement of Claim.

68.  In reply to this part of the claim, the Defendant’s case pleaded at paragraph 36 the Amended Defence can be summarized as follows.

69.  Upon the Defendant commencing an administration proceedings in the Mainland to set aside Hung’s registration as the legal representative of the PRC JV Company in December 2007, the Defendant delivered the company seal of the PRC JV Company to the Court for safe custody pending the outcome of the proceedings.  The Public Security Bureau came to know about the administration proceedings and disapproved the use of the new company seal and the manufacturer of that new seal declined to deliver the same to Hung.

70.  Mr Chong (for the Plaintiff) submits that these pleas relate only to a new company seal of the PRC JV Company, while the Plaintiff’s complaint is in relation to the old or another seal of the company.  They therefore do not constitute a proper defence to the claim.

71.  I am not sure it is plainly the case that this paragraph of the Amended Defence deals only with the new company seal of the PRC JV Company.  Part of the plea is as follows:

“… meanwhile on 7^th December 2007 the Defendant commenced proceedings (‘the administration legal proceedings’) in the People’s Court of Central District of Liuzhou City … for setting aside the erroneous registration of [Hui] as the legal representative of [the PRC JV Company]; at the request of the court the Defendant delivered the Company seal of [the PRC JV Company] to the Court for safe custody pending the outcome of the administration legal proceedings; at the same time the Public Security Bureau came to the knowledge of the administration legal proceedings and disapproved the use of the new company seal; the manufacturer was accordingly informed of the same and hence declined to delivered [sic] the new company seal to [Hui]; …”

72.  Properly reading this paragraph, it appears to me that the Defendant is referring to two incidents:  one concerning the company seal of the PRC JV Company which had been delivered to the PRC Court by her at the request of the PRC Court, and the other is in relation to a new company seal apparently manufactured and to be delivered to Hung, which was stopped by the Public Security Bureau.

73.  Given that it is not clear from the Plaintiff’s claim whether it is alleging that the Defendant has been wrongfully refusing to deliver which one (or both) of these seals^[5], I am not satisfied that the Defendant’s above pleas plainly disclose no reasonable defence as submitted by the Plaintiff.

74.  I will therefore not strike out this paragraph of the Amended Defence.

E3.10  Abuse of process

75.  It is also the Plaintiff’s submissions that insofar as the Defendant is raising allegations in the complained paragraphs of the Amended Defence similar to those raised in the other two s. 168A petitions, they amount to an abuse of process and should be struck out.   These allegations are mainly in relation to the setting aside of the Removal Resolution on the bases of (a) it being in breach of the SH Agreement and/or the Understanding and Expectation, and (b) it being passed by the directors for an improper motive.

76.  I do not agree with the Plaintiff’s submissions.

77.  The Plaintiff brought this separate action against the Defendant based partly on the Removal Resolution.   I cannot see why the Defendant is not entitled to raise those allegations in defence, if they show an arguable case, even if these allegations have been raised in the other actions.  There have not been any final determinations in the other two petitions on these matters.  There is no question of res judicata whether in the traditional sense or the wider sense under the Yat Tung principle.

78.    As I understand it, the Defendant has also taken out an application for consolidating all these actions, which is yet to determined.

79.  I would not strike out the complained paragraphs of the Amended Defence on the basis that they amount to an abuse of process.

F.  Conclusion

80.  For the reasons given above, I will order striking out paragraphs 2(b), 15, 17, 18, 19, 20, 24, 27(3)-(7), 28, 29, 31, 32, 33, 34, 37, 42 and 44 of the Amended Defence for want of a reasonable defence. 

81.  The Plaintiff has substantially succeeded in this application.  There is no reason why costs should not follow the event.  I will further make an order nisi that costs of this application be to the Plaintiff to be taxed if not agreed.

[1] Paragraph 19 of the Statement of Claim pleads: “By reason of the matters aforesaid, the Plaintiff has suffered loss and damage.”

[2]Where the Plaintiff sought to strike out these paragraphs on the basis that, inter alia, they amount to embarrassing and scandalous allegations.

[3] At 593C-E per Lord Jauncey.

[4] See paragraph 16 of the Defence, which refers only to matters pleaded before it to support the case that the Removal Resolution was made for an improper purpose.  It therefore does not include matters pleaded under paragraphs 18 and 19.

[5] Paragraph 15 of the Statement of Claim pleads: “Despite repeated demands, the Defendant refused to deliver up the Company Seal of [the PRC JV Company] then in her possession, custody and control to the newly appointed Legal Representative of [the PRC JV Company] as directed by the Plaintiff and she continued to make use of the same in her purported capacity as the Legal Representative of [the PRC JV Company].”

HCA 2284/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2284 OF 2008

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D E C I S I O N

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1.  I have before me an application by the Plaintiff for an interlocutory injunction.  The Plaintiff mainly seeks two reliefs:

(1) An order to restrain the Defendant from acting as the Legal Representative (法定代表人) and/or director of Liuzhou Century Lunde Land Development Company (柳州世紀龍地房地產開發有限公司) (“Liuzhou Century”), and consequentially, for an order to compel the Defendant to deliver up the company seal of Liuzhou Century;

(2) An order that the Defendant should give an account:

(i)   of all her dealings with the use of Liuzhou Century’s company seal issued on or about 6 December 2007;

(ii) of (a) the proceeds of sale and (b) rental income arising from dealings with the properties in a large commercial and residential development belonging to Liuzhou Century known as “Five Stars Street” (五星街) (“the Development”) for the period from 3 September 2006.

Introduction

2.  Liuzhou Century is a joint-venture company incorporated in the Mainland.  There are two joint venture partners:  the Plaintiff (which is the Hong Kong partner holding 90% of the equity interest in Liuzhou Century) and Liuzhou Anching Development Ltd. (柳州市安青房地產開發有限公司) (“Anching”) (the PRC partner holding the remaining 10% equity interest).

3.  The shareholding in the Plaintiff (which will be referred to as “the Company” herein) is in turn as follows:  Winsway Inc. (which until October 2005 was owned by Chen Shenan (陳慎安)) holds 43%, Peng Yi Cheng (彭義成) holds 17.5%, and Jiang Hainan (姜海南) 1%.  They together hold 61.5% of the interest in the Company.

4.  On the other hand, Sun Capital Group Ltd. (owned by Liu Qing (劉清)) holds 16%, Serene International Ltd. (owned by the Defendant, Hui Nei Na (許妮娜)) holds 10%, and Wealth Best Developments Ltd. (owned by the Defendant’s husband, Cheung Sek Ki (張錫基)) holds 5%.  The three of them together hold a total of 31% in the Company.

5.  The remaining shareholders in the Company is Plupart International Limited (owned by Chan Tim Sing) holding 7.5%.

6.  It appears that in October 2005, Chen Shenan’s shares in Winsway were transferred to one Seaco Properties Limited (a company apparently owned by Hui Sung Sat (許崇實)).

7.  I will refer to the various individuals, Chen Shenan (陳慎安)), Peng Yi Cheng (彭義成), Liu Qing (劉清), Hui Nei Na (許妮娜), Cheung Sek Ki (張錫基), Jiang Hainan (姜海南) and Hui Sung Sat (許崇實) as “Chen”, “Peng”, “Liu”, “Madam Hui”, “Cheung”, “Jiang”, and “Hui” respectively.

8.  The Company does not have any other business or assets except its interest in Liuzhou Century. 

9.  On the one side of this dispute is Chen (and now Hui), Peng and Jiang, and on the other side is Madam Hui, Cheung and Liu.  The dispute is essentially a struggle for the control of Liuzhou Century, with each camp accusing the other of wrongdoings.

10.  Their dispute dated back to 2004, if not earlier.  Including the present Action, there are now at least 4 sets of proceedings pending in the courts in Hong Kong.  The course of the dispute has already seen two applications for interlocutory injunctions (respectively in HCMP 3216/2004 and HCA 1314/2006), which have been disposed of by Kwan J with reasoned decisions. 

11.  Not only are the parties litigating in Hong Kong, as will be seen presently, they have also been heavily embroiled in legal battles in the Mainland courts.  

Factual Background 

12.  The chronology of the material events have been set out in detail in the two decisions of Kwan J.  The following narration of the events is largely adopted from the learned judge’s decisions. 

13.  I shall begin with the Articles of Association of Liuzhou Century (dated 8 January 2002).  Article 19 provides that there should be 3 directors on the board of directors of Liuzhou Century, one of whom was to be nominated by Anching and the remaining two by the Company.  Their term of office was 3 years.  The Company was also to nominate the Chairman.  Article 21 provides that the Chairman would act also as Liuzhou Century’s Legal Representative (法定代表人).

14.  Pursuant to the Articles, the Company nominated Madam Hui and Cheung as directors of Liuzhou Century.  Madam Hui was nominated as the Chairman, and hence also became its Legal Representative. 

15.  According to Madam Hui, in December 2003, the directors and shareholders of the Company had resolved that the responsibility of managing the operation, finance, sales and marketing of Liuzhou Century would be entrusted to Chen.  Since then, Chen took control over the financial affairs of Liuzhou Century, with the assistance of its financial controller, one Luo Kui Zhong (羅葵中).

16.  The propriety of some transactions undertaken by Liuzhou Century during the period after Chen had assumed control was seriously questioned by Madam Hui’s camp. 

17.  On 7 July 2004, before the expiry of Madam Hui and Cheung’s terms of office in Liuzhou Century, there was a resolution of the Company’s board of directors (i) to remove Madam Hui and Cheung as directors of Liuzhou Century and they were to be replaced by Peng and Jiang; (ii) to remove Madam Hui as Chairman and to be replaced by Peng; (iii) to require Madam Hui and Cheung to surrender to Peng and Jiang forthwith the company seal of Liuzhou Century together with its books and accounts.  These have been referred to as “the Removal Resolution” in the previous proceedings.

18.  The validity of the Removal Resolution was hotly disputed by Madam Hui’s camp.  They alleged first, that among the several persons who attended and voted at the meeting, only Chen had the proper capacity to act.  The other two, who purported to act as alternate directors, were not in fact duly appointed as such.  The meeting was accordingly not properly quorate and no resolution could validly have been passed.  Secondly, it was alleged that the Removal Resolution contravened a resolution previously passed at the first shareholders’ meeting on 22 May 2003 to the effect that any change in the senior management of Liuzhou Century would require the approval of all the shareholders.  Thirdly, it was contended that the Removal Resolution was an improper attempt by the Chen’s camp to exclude Madam Hui and Cheung from participating in the management of Liuzhou Century with a view to preventing the latter from uncovering the tax evasions and other misdeeds perpetrated by Chen.

19.  On 2 August 2004, an extraordinary general meeting of the Company was held for the purpose of confirming the Removal Resolution.  Notwithstanding the confirmation by a majority, Madam Hui’s camp contended that no valid resolution was passed as this contravened the requirement of a unanimous approval of all shareholders.   

20.  Also, a board resolution of Liuzhou Century passed on the same day which purportedly appointed Peng as its Chairman and Legal Representative was similarly subject to challenge.

21.  Sometime in August 2004, an application was made by Chen to the Industrial and Commercial Administration Bureau (“ICAB”) for the change of Liuzhou Century’s Legal Representative to be registered.  The application was blocked by Madam Hui following her complaint to the Public Security Bureau (“the Public Security”) that Chen’s conduct was an attempt to seize control with a view to appropriating her interest and assets in Liuzhou Century.

22.  Associated with the battle over the control of Liuzhou Century was the cross allegations by both sides concerning the use and custody of the company seal.  Eventually, the original seal was cancelled and a replacement seal issued for Liuzhou Century, which has since been kept by Madam Hui. 

23.  In December 2004, the Hui-Cheung-Liu camp filed a petition (HCMP 3216/2004) alleging that the affairs of the Company had been conducted in a manner which was unfairly prejudicial to them.  They applied for an interlocutory injunction to restrain Chen and his associates from giving effect to the Removal Resolution, and to compel the latter to procure the withdrawal of the application to ICAB for a change of the Legal Representative.  The application was refused by Kwan J.

24.  In June 2005, Madam Hui made another complaint to the Public Security accusing Chen and others of tax evasion and appropriation of corporate assets of Liuzhou Century.  An investigation was consequently commenced by the Tax Bureau of Liuzhou City.  According to Madam Hui, several of the companies in which Chen had interest were also investigated.

25.  Since about March 2005, Chen had not returned to Liuzhou for fear of being apprehended and detained.  Peng was also investigated and he too left Liuzhou in June 2005 and had not returned.  The Public Security had issued warrants of arrest for Chen, Peng, Chen’s wife and others.

26.  According to Madam Hui, the business of Liuzhou Century left behind by Chen and Peng was in chaos.  This had come to the attention of senior officials of the Liuzhou City Government who requested her, still being Liuzhou Century’s Legal Representative, to attend to its affairs.  She and her husband therefore returned in July 2005 and resumed control of Liuzhou Century.

27.  In or about October 2005, Chen transferred his shareholding in the Company held through Winsway to Seaco Properties, which is owned by Hui.  Nothing is known about the circumstances of this transfer or the actual consideration paid by Hui to Chen for Chen’s considerable stake in the Company.  Madam Hui’s camp alleged that Hui was probably just Chen’s nominee or puppet, and that Hui was put up as a front by Chen for the purpose of circumventing enforcement action against Chen and his companies by the Mainland authorities. 

28.  On 13 March 2006, a notice was received from the relevant Mainland authority that Liuzhou Century owed land use fees in the sum of over RMB9.4 million.

29.  On 15 March 2006, the Tax Bureau completed its investigation of Liuzhou Century and found that Liuzhou Century’s outstanding tax liability to be RMB30,095,388.43 (“the Defaulted Tax”).  A demand was made requiring payment on or before 30 April 2006 with the threat of a penalty on default.    

30.  Madam Hui and Cheung decided to sell some of the units in the Development to pay the tax liability and the land use fees.  On 19 April 2006,  Liuzhou Century entered into an agency agreement with Greatlink Property Consultant Company Limited to sell some of the units. 

31.  By a decision on 19 June 2006, the Tax Authority decided that RMB29.6 million was to be imposed as penalty; and that Liuzhou Century was liable to pay RMB30 million (the Defaulted Tax) plus a surcharge thereon, amounting to RMB5.78 million and still accruing at 0.05% per day at a daily rate of RMB50,000.  There was also a surcharge on the fine at 3% per day which was accumulating at the daily rate of over RMB900,000. 

32.  On 20 June 2006, Hui through Winsway, commenced the Action (HCA 1314/2006) against Madam Hui, Cheung, Liu and their companies, making primarily the same allegations which Chen and his camp had made in HCMP 3216/2004. 

33.  On 2 August 2006, a notice of payment was issued by the Tax Bureau to Liuzhou Century in accordance with the Tax Collection Law of the PRC.  By this notice, Liuzhou Century was required to pay the Defaulted Tax of RMB30 million by 16 August 2006.  If payment was not made by that day, a further penalty would be imposed.  The relevant legislation empowered the Tax Bureau to impose additional penalty if payment of tax was not made within time and to sell the tax payer’s assets by compulsory public auction and apply the proceeds of sale to pay the tax due.

34.  On 8 August 2006, Liuzhou Century made a request in writing to the Public Security and offered to sell its assets by public auction to discharge its tax liability, the land use fees and various fines and surcharges.

35.  On 9 August 2006, the Public Security issued a notice stating that the public auction of the assets of Liuzhou Century at its request would be conducted under the supervision of the Public Security, that the proceeds of sale would first be used to discharge the tax liability and other amounts owed to the government, and that the use of any surplus would be monitored by the Public Security.

36.  Meanwhile on 12 August 2006, Winsway issued a notice to convene an extraordinary general meeting of the Company on 31 August 2006 to consider various resolutions to remove Madam Hui, Cheung and others as directors of the Company with immediate effect; to appoint Hui and another as directors of the Company with immediate effect; to confirm the removal of Madam Hui as Chairman of the board of directors and the Legal Representative of Liuzhou Century; and to appoint Hui as the Chairman of the board of directors and the Legal Representative of Liuzhou Century with immediate effect.

37.  On 17 August 2006, Hui read a notice of the public auction of the Development to be held on 26 and 27 August 2006.

38.  Hui through Winsway applied for and obtained an ex parte injunction on 24 August 2006 before Chu J.  It is worth noting that one of the terms of the injunction was to restrain Madam Hui (together with Cheung and Liu) from acting or purporting to act as the Legal Representative and/or the director and/or the officer of Liuzhou Century; and from making representations to such effect to any third party for the purpose of dealing with the Development whether by public auction or otherwise, including the giving of instructions to the auctioneer for this purpose.

39.  This application for an ex parte injunction was made on the allegation of Hui that he was informed by the auctioneer that the entire Development was to be sold at a substantial undervalue, on the pretext that the proceeds of sale would be used to pay tax, when the authorities in Liuzhou had not completed the investigation into the allegations of tax evasion and that no decision had been made.  Hui asked the court to infer that the only reason for the sale of the entire assets of Liuzhou Century and thus of the Company was that Madam Hui and Cheung had intended to abscond with the proceeds to Canada as they are Canadian residents. 

40.  Armed with a sealed copy of the injunction, Hui went to Liuzhou on 24 August 2006, and called on the auctioneer on 26 August 2006 to serve on him the injunction. 

41.  On 28 August 2006, the Public Security issued a notice stating that Liuzhou Century had only paid RMB 2 million towards its tax liability and the balance was outstanding.  The Public Security noted the injunction granted by the Hong Kong court on 24 August 2006 and stated that in order to avoid unnecessary conflict, it had decided to postpone the public auction to 2 September 2006.

42.  Madam Hui and Cheung flew to Liuzhou immediately in the hope of stopping the auction on 2 September 2006 but failed to do so.  The auction took place on 2 September 2006, but apparently only two units were sold. 

43.  Through the arrangement of the Public Security for another auctioneer, further auctions of the Development were scheduled to be held on several occasions in October 2006. 

44.  On 28 September 2006, there was a criminal trial against Liuzhou Century before the Liuzhou City District People’s Court (“the District People’s Court”), its accountant and another related company.  Madam Hui and the lawyers she instructed for Liuzhou Century took part in the trial.  The defence they raised was rejected by the court.

45.  On 23 October 2006, Liuzhou Century was convicted of tax evasion and fined over RMB54 million, to be paid within 1 month or else there would be enforcement action according to law.  This fine was over and above what the Tax Bureau had ordered Liuzhou Century to pay. 

46.  On 16 November 2006, Hui lodged an appeal on behalf of Liuzhou Century against its criminal conviction for tax evasion.

47.  On 13 December 2006, a statement was issued by the auctioneer, setting out in a schedule the 86 units of the Development that have been sold and the total amount of sales price at over RMB133 million.  According to the statement, the auctioneer had to that date received sale proceeds of over RMB41 million from the purchasers.  The balance of the sale proceeds would be raised by the purchasers with mortgage loans from the banks.  Of the proceeds received, the auctioneer had transferred RMB25.8 million odd to two designated accounts in the name of Liuzhou Century.  These accounts, according to Cheung, were under the control of the Public Security.

48.  According to Hui, there was another public auction by a different auctioneer on or about 3 September 2006, bringing a further sum of RMB6 million.  The total sale proceeds should have been in the order of RMB140 million. 

49.  Meanwhile on 9 October 2006, another resolution of the board of the Company was passed to remove Madam Hui, Cheung and others as directors of the Company with immediate effect; to appoint Hui and another as directors of the Company with immediate effect; to confirm the removal of Madam Hui as Chairman and Legal Representative of Liuzhou Century; and to appoint Hui as Chairman and Legal Representative of Liuzhou Century with immediate effect; to require Madam Hui, Cheung and Liu to deliver up the company seal of Liuzhou Century and produce the financial records of both Liuzhou Century and the Company. 

50.  On 7 November 2006, Hui made an application to the ICAB in the name of Liuzhou Century to be registered as its Legal Representative and for the issuance of a replacement company seal.  On 8 November, the ICAB notified Liuzhou Century that the application would not be entertained. 

51.  Hui renewed the application again on 24 November 2006.

52.  On 28 November 2006, Hui acting on behalf of the Company and in his personal capacity filed an action with the District People’s Court against the ICAB alleging neglect of public duty to process his application.

53.  On 19 December 2006, Kwan J. refused the Company’s application to continue the ex parte injunction.  The learned judge gave the following reasons for her decision:

“43. No purpose would be served by continuing the injunction, as the sales of such part of the Development as sufficient to discharge the liabilities of Liuzhou Century to various government authorities had already taken place.  This court does not act in vain.  I am certainly not prepared to infer that the sales by auction were not conducted under the supervision of the public security, as alleged by Hui.  I am not prepared to treat the various notices apparently issued by the public security and the tax bureau as issued without authority and that these documents are a sham.

44.    If there is complaint that the sales by auction were irregular, or should be impugned, or that the decision of the tax bureau was erroneous, invalid or unlawful, the proper avenue for redress is not in this court, but in the courts in the PRC.  I note that Hui has in fact brought proceedings in PRC in November 2006 on behalf of Liuzhou Century, notwithstanding that his dispute with Madam Hui as to who is to be the legal representative of that company has not been resolved.

45.  There is no cogent evidence to indicate that the proceeds to be realised from the public auctions would not come under the control of the authorities and would not be applied to settle the tax and other penalties payable by Liuzhou Century.  The injunction would only serve to obstruct the authorities in the PRC from recovering tax.  As I have mentioned, there is provision under the Tax Collection Law that the tax bureau has power to sell the assets of a tax payer to settle unpaid tax by compulsory auction.  This reason alone is sufficient for the discharge of the injunction.

46.  There is no or no sufficient evidence to back up the allegation that it was the intention of Madam Hui and Cheung to sell the Development, not for the purpose of paying tax but to abscond to Canada with the proceeds.  There is nothing to support the allegation that the sales by public auction were of the entire Development, not just part of the Development as sufficient to discharge the liabilities of Liuzhou Century to the government authorities.”

54.  Hui’s camp were not discouraged by their failure to secure the injunction in the Hong Kong proceedings.  As already mentioned, Hui had instituted proceedings in the District People’s Court in November 2006 to challenge ICAB’s refusal to entertain his application for a change of the Legal Representative and director. 

55.  Hui’s challenge was dismissed by the District People’s Court on 15 June 2007.

56.  Hui appealed the decision to the Intermediate People’s Court of Liuzhou City (“the Intermediate People’s Court”) which, on 28 November 2007, allowed Hui’s appeal and set aside ICAB’s refusal to process his application. 

57.  With the decision of the Intermediate People’s Court in his favour, Hui made a fresh application to ICAB on 4 December 2007.  The application was approved by ICAB on 5 December 2007.

58.  Madam Hui immediately commenced a fresh action in the District People’s Court on 6 December 2007 against ICAB’s approval of the change of the Legal Representative, also naming Liuzhou Century, Hui and the Company as interested parties.  Madam Hui alleged that ICAB was wrong to have approved Hui’s registration in view of the tax evasion perpetrated by Chen and the substantial tax liability still owing by Liuzhou Century.  Hui, being the transferee of Chen’s assets for nominal consideration, was in effect aiding Chen’s criminal act.  By ignoring the ongoing investigation by the Public Security, ICAB’s decision in approving Hui’s registration had seriously undermined the legal system and the interest of other shareholders of Liuzhou Century. 

59.  Madam Hui was directed by the court to deliver the company seal into court’s custody.

60.  On 23 May 2008, the District People’s Court gave judgment in favour of Madam Hui, holding that ICAB was wrong to have overlooked the dispute of the parties as to the appointment of Legal Representative and the investigation by the Public Security of Chen’s affairs.  Given the serious ramifications of a change in Legal Representative, ICAB was wrong not to have given an opportunity to Madam Hui and Anching to make representations before giving its approval.  The substitution of Hui as the Legal Representative in place of Madam Hui was accordingly set aside. 

61.  The ICAB, as well as Hui, Liuzhou Century and the Company appealed the decision to the Intermediate People’s Court, which on 25 September 2008, gave judgment affirming the decision of the District People’s Court.  

62.  In the meantime, Hui had also commenced proceedings in the District People’s Court in Nam Ning City against the manufacturer of the new company seal who, after becoming aware of the administration proceedings, refused to deliver the new seal to Hui without his surrender of the original seal.  On appeal, on 25 May 2008, the Intermediate People’s Court in Nam Ning upheld Hui’s claim against the manufacturer.  However, the court in Nam Ning did not have jurisdiction to disturb the Liuzhou court’s direction that the new seal was not to be released to Liuzhou Century in order to preserve the evidence.

63.  In the event, in light of the September 2008 decision of the Intermediate People’s Court (of Liuzhou City), the Public Security notified the manufacturer to cancel the new company seal.  The original company seal was restored to Madam Hui in November 2008. 

64.  It appears from the evidence that Hui has since made a re-submission of the application to ICAB for change of Legal Representative.  Apparently the application is still pending and there is no information as to its current status.

65.  Further still, on 2 July 2008, the Company had commenced yet another action against Madam Hui and the auctioneers in the High People’s Court of Guangxi, seeking to set aside the sale and purchase of part of the Development in the auction held on 7 October 2006, on the ground that the sale was at a gross undervalue and was concluded at a time when Madam Hui had no authority to represent Liuzhou Century.

66.  While the parties were engrossed in legal battles, the tax liability of Liuzhou Century remained outstanding.  During the period between June 2006 and August 2008, a total sum of RMB24 million was recovered by the tax authorities and applied towards reducing the tax liability.  As at 5 August 2008, however, profits tax of over RMB6 million, penalty of RMB29 million and surcharge of RMB13 million remained unpaid, making the total outstanding sum over RMB48 million.

67.  On 18 October 2008, an auction was held under the order of the Tax Bureau.  Only one property was sold for just over RMB3 million.  Another auction was held on 1 December 2008 and on that occasion 16 properties were sold for over RMB24 million.   

68.  According to Madam Hui, the proceeds of the sale would go directly into the bank account of the Tax Bureau.  In addition, the liability for land use fees of over RMB7 million remained unpaid.   

69.  I have recounted this rather lengthy narrative of the events so that a few matters would be immediately obvious.  First, insofar as the present application is based on the Removal Resolution and also subsequent similar resolutions of the board and shareholders of the Company, such matters have already been ventilated in the previous applications.  Secondly, the dispute, in substance, really concerns the affairs of and control over Liuzhou Century and the ability or otherwise of the parties to secure the formal recognition by the Mainland authorities of their positions in Liuzhou Century.  The manoeuvres in the Company in Hong Kong (in this case, the Chen/Hui’s camp in particular) are obviously used as a springboard to strengthen their hands in order to achieve their objectives in the Mainland.  Thirdly, the allegations of misapplication of assets concerned predominantly, if not entirely, the assets of Liuzhou Century.  So far as the Company is concerned, any loss which may be said to result from the wrongdoings is, strictly speaking, not a direct loss but the diminution in the value of its Mainland investment in Liuzhou Century, in other words, a “reflective loss”.

70.  Against such background, I am now asked to consider the Company’s application for fresh injunctive relief. 

Injunctive Relief

71.  It is, of course, no part of the court’s function to resolve disputes of fact in this application.  At this stage, I am only required to be satisfied that the applicant has raised at least a serious issue to be tried.  In this regard, I am prepared to accept that the Company has set up an arguable case that Madam Hui’s appointment to the official positions in Liuzhou Century has been withdrawn by the Company.  The validity of Madam Hui’s removal, however, is the subject of challenge in other litigations before this court.  At this stage, other than noting that the merits of the arguments are not all one-sided, it is neither appropriate nor necessary for me to attempt to resolve that substantive question. 

72.  The Company does not base its present application solely on the revocation of Madam Hui’s mandate.  It says that the present application is prompted by the discovery that after the two auctions in 2006 which should have produced RMB140 million for Liuzhou Century, only RMB 24.2 million had been applied towards reducing its tax liability.  In addition, only a meagre balance of RMB0.3 million now remains in its Bank of China accounts.  The Commercial Bank account has been cancelled without any explanation as to the whereabouts of the RMB50 million deposit.  Further, certain properties had been rented out but the rentals remained unaccounted for.  The Tax Bureau had again threatened further auctions of the properties of the Development, and it is likely that further proceeds would be received.   

73.  In light of these recent discoveries, it is said that Madam Hui’s continued exercise of her (already revoked) authority as the Legal Representative or director of Liuzhou Century would jeopardize the Company’s investment.  “There is a real risk that [Madam Hui] will exercise her power as the legal representative of [Liuzhou Century] again to sell the remaining properties of the Development, whether they are seized by the Tax Bureau or not, and then dissipated (sic) the sale proceeds from [Liuzhou Century]” (Hui’s 1^st Affirmation).

74.  In response to the present application, in addition to the evidence already adduced in the previous hearings, Madam Hui explained that the total sales price under the 2006 auctions was, instead of RMB133 million, reduced to RMB126.35 million because a few buyers had subsequently backed out from their transactions for fear of the charge on the properties.  According to Madam Hui, the incumbrance was lifted in August 2007 and the sale of the properties eventually completed. 

75.  Madam Hui pointed out that the court’s fine of some RMB53 million was settled out of the proceeds.  In addition, partial payment of the Defaulted Tax, part of the land use fees, and other expenses including 2 sums representing the corporate profits tax and property gains tax arising from the auctioned sale of the properties were paid out of the proceeds.  She gave a breakdown of the expenses in her affirmation.   

76.  The Company disputed most of Madam Hui’s explanations.  To begin with, the Company did not accept the assertion as to reduction of the total sales price.  On the side of the expenditure, on the other hand, it was pointed out that most items were not supported by proper documentation; and contrary to the tenor of Madam Hui’s argument in the previous application, some items were not even payments towards discharging Liuzhou Century’s tax liability.  Furthermore, the amount of some items, such as the payment for electricity, appeared excessive; and the timing of the commission payable to the auctioneers questionable.  Also, the payments allegedly for the corporate profits tax and property gains tax were merely part of the sums recovered by tax authority towards reducing the outstanding Defaulted Tax and therefore ought not to have been treated as separate payments. 

77.  Further, contrary to what Madam Hui had led the court to believe, according to Hui, his subsequent inquiry with the officials revealed that the Tax Bureau had not in fact been involved in the public auctions in 2006 at all.  On the other hand, as regards the involvement of the Public Security, Hui maintained his belief that the Public Security had been acting in collaboration with Madam Hui and Cheung to give the impression that the auctions were held under the authority’s supervision. 

78.  I do not need to rehearse every detail of the challenge raised against Madam Hui’s explanations concerning her dealings with the proceeds from the auction sales.  It is not necessary for me to come to a concluded view on these issues, but I am satisfied that the Company has indeed raised a serious question worthy of a trial as to whether the proceeds might have been misappropriated for improper purposes, given that Madam Hui’s attempt at giving a limited account of the expenditure was by no means complete or satisfactory.

79.  However, as already noted, the essence of the case of misappropriation against Madam Hui concerned predominantly, if not entirely, properties and assets belonging to Liuzhou Century in the Mainland.  Naturally, Liuzhou Century should have been the proper complainant and the proper forum for redress is the Mainland courts.  This is amply demonstrated by the very involved legal battle between the parties in the Mainland courts over the control of Liuzhou Century.

80.  Mr. Chong, representing the Company, said that the Hong Kong court undoubtedly has jurisdiction to intervene in the dispute between the Company and its appointee.  I do not disagree with that.  But equally, the court in Hong Kong has a discretion whether its jurisdiction should be exercised in light of all the circumstances, bearing particularly in mind that the present application is interlocutory in nature.

81.  In the present case, the dispute between the two camps over the control of Liuzhou Century should primarily be resolved within that company, and failing which, through the legal process in the Mainland.  Any allegations of wrongdoing affecting the parties’ interest in the Mainland company should, likewise, primarily be resolved in that jurisdiction.  I am firmly of the view that this court should not allow its process to be used to pre-empt or further complicate the litigations which are already taking their course through the Mainland courts.  I am mindful that the present application, particularly only as an interlocutory measure, should not be used as a springboard to gain an advantage in resolving the disputes in the Mainland.  Any redress, including interlocutory reliefs if desired, should be sought from those courts.

82.  It is argued that the Company has a right to take steps in Hong Kong to protect its investment, lest the substantial investment would be jeopardized and there is no assurance that Madam Hui will be in a position to make good the loss suffered by the Company.  While I am prepared to assume the soundness of such an argument notwithstanding the principle preventing a shareholder from recovering what is characterized as “reflective loss”, I think such an argument really begs the question why it is appropriate for the court here to exercise its jurisdiction to intervene (on an interlocutory basis), when related disputes are currently hotly contested in the Mainland which is where the investment is situated and where the substance of the disputes has the closest connection. 

83.  In this connection, I have not overlooked the allegation that Madam Hui was obstructing Hui’s renewed application for registration as Legal Representative by evading service by the ICAB of the notice of such application, and the history of similar evasion of other legal process.  However, I note also the evidence that the legal avenue in the Mainland is not closed simply because of such evasion of the process. 

84.  Mr. Chong referred me to the decision of the District People’s Court (dated 23 May 2008) and submitted that that court was constrained by the fact that the question over the validity of the board resolutions in the Company had not yet been resolved in the courts in Hong Kong.  I do not agree with Mr. Chong’s reading of that decision.  While it is correct that the District People’s Court had remarked on the fact that the question of validity was still pending before the courts in Hong Kong, I do not understand the decision to be saying that the Mainland court would be unable to deal with the question of the appointment of the Legal Representative until and unless the validity question was first determined in Hong Kong. 

85.  In any event, the substantive issue on the validity of the various resolutions will be determined by the Hong Kong courts in due course after trial of the several actions.  Until then, however, given the history of the dispute, I am not convinced that this court should intervene at this stage by ordering Madam Hui to cease acting as the Legal Representative of Liuzhou Century or its director. 

86.  This is one of those cases where I think it would be wrong to upset the status quo by requiring Madam Hui to cease acting.  On the question of what constitutes the status quo, Mr. Chong submitted that neither Madam Hui nor Hui should be regarded as holding the position of the Legal Representative of Liuzhou Century.  However, Mr. Chong’s submission is clearly contrary to the judgment of the District People’s Court (dated 23 May 2008, upheld on appeal) which ordered ICAB’s act of substituting the name of Hui in place of Madam Hui to be set aside.  Having reversed the alteration, it is clear that Madam Hui remains the registered Legal Representative. 

87.  For the foregoing reasons, I would refuse the Company’s application for the interlocutory injunction against Madam Hui.  It follows that the application to compel Madam Hui to surrender the company seal of Liuzhou Century into the custody of the Hong Kong court should also be refused.

Accounts

88.  The application for an account is taken out under Order 43, rule 1 of the Rules of the High Court.  An order for an account should be made under this summary procedure only if the Court is satisfied that there is no question as to the entitlement by the Company to an account from Madam Hui.

89.  Mr. Chong argued that as Madam Hui acted as the Company’s representative or agent in conducting the business of Liuzhou Century, she stands in the position of an accounting party vis-à-vis the Company. 

90.  In my view, although Madam Hui was nominated to assume the official positions in Liuzhou Century, and broadly speaking, her conduct of the affairs of Liuzhou Century would affect the Company’s interest as Liuzhou Century’s majority shareholder, it does not necessarily follow that Madam Hui should be characterized as the Company’s agent or representative to make her an accounting party. 

91.  When dealing with the properties of Liuzhou Century, it is Liuzhou Century to whom Madam Hui stood as an accounting party.  Likewise, when Liuzhou Century’s seal was being applied (as its Legal Representative), it is to Liuzhou Century that she owed her duty to account.  For the same reason, it is only with Liuzhou Century that Madam Hui could settle the account.  It is Liuzhou Century (rather than the Company) who could give a good receipt for any account rendered by the Madam Hui. 

92.  I do not preclude the possibility of Madam Hui’s acting in a dual capacity.  It is not necessary to express a concluded view on the question.  But there is at least an issue as to whether the Company is entitled to claim an account from Madam Hui.  I will not order the accounts under the summary procedure.

Conclusion

93.  The Plaintiff’s summons is dismissed, with an order nisi that the Defendant is to have the costs of this application.