FO SHAN SHI SHUN DE QU CONSONANCY INVESTMENT CO LTD v. YAT KIT JONG AND LAM HOK CHUNG RAINIER, JOINT AND SEVERAL LIQUIDATORS OF WONGS INVESTMENT DEVELOPMENT HOLDINGS GROUP LTD (In Liquidation)

HCCW 332/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 332 OF 2012

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D E C I S I O N

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Background

1.  Wongs Investment Development Holdings Group Limited (“the Company”) was ordered to be wound up in 2013.  The applicant (“Consonancy”) lodged a proof of debt on the strength of an arbitral award for RMB87.18 million. The debt represented a loan of RMB80 million to Xiancheng Group Co Ltd (“the Borrower”), for which the Company was a guarantor.  There was a written Loan Agreement and a written Guarantee Agreement.

2.  The Liquidators rejected the proof of debt. They questioned the existence of the loan and guarantee and, if they genuinely existed, their validity and enforceability under PRC laws.  The Liquidators also asserted that the 2 years (counting from maturity of the loan) to call upon the guarantee had expired when the Liquidators were given notice of the commencement of the arbitration proceedings. 

3.  Consonancy appeals against the Liquidators’ rejection.

4.  Mr Justice Anthony Chan has given leave to the parties to adduce expert evidence on PRC law for the appeal.  This hearing is to determine the scope of the expert evidence.

5.  The Liquidators set out 5 pages of questions (“the Questions”) for the expert to give opinion on.  They are wide ranging issues, from asking whether specific legislative provisions apply to general questions like whether there are other provisions applicable. 

6.  Consonancy, on the other hand, wants only expert evidence on 4 questions but insisted them to be in an “open-ended format” instead of being “pre-set”.  Mr Yim, counsel for Consonancy, submits that to allow the Liquidators to ask “rhetorical and/or leading questions” of which answers have already been researched would not assist the court in adjudicating the live issues of the case. He submits that the Liquidators have resorted to complex PRC legal arguments in order to post-legitimize their wrongful rejection of the proof of debt.

Legal principles for adducing expert evidence

7.  Expert evidence must be confined to the live issues between the parties.  Typically the live issues are defined by pleadings.  In this case where there are no pleadings, the affidavits will define the issues.

8.  Where the proposed expert evidence is plainly inadmissible or irrelevant, the court will refuse to admit it.  But where the court cannot form a clear view on relevance of the proposed expert evidence or where it considers that the proposed evidence is clearly relevant, it should grant leave for the expert evidence to be adduced at the trial.  Wong Hoi Fung v American International Assurance Co (Bermuda) Ltd & anor [2002] 4 HKC 225, Chu J (as she then was), at §11.

9.  The expert should not be left to define for himself the questions he has to answer from reading lengthy pleadings (or affidavits in this case).  Questions for the expert should preferably be framed as “yes” or “no” or “multiple choice” questions. See Kam Hing Trading (HK) Ltd v The People’s Insurance Company of China (HK) Ltd & anor [2009] 4 HKC 531, Registrar Au-Yeung (as she then was).

Application of the legal principles

10.  Before I analyze the proposed questions for the expert, I wish to deal with the submission of Mr Yim in paragraph 6 above.

11.  An appeal against the rejection of proof is by way of rehearing.  The Liquidators are cast in the role of an adversary defending the assets available for distribution against a liability which, in their view, is not legally enforceable. He is a party litigant though he is required to act fairly in conducting the litigation.  In hearing the appeal, the court is bound to decide the rights of the claimant in the light of all the evidence before it, and not merely to express a view that the Liquidators were right or wrong in rejecting the proof of debt on the evidence then available before them.  The onus is on the claimant to show on a balance of probabilities that a real debt is due to him.  Re Moulin Global Eyecare Holdings Limited, HCCW 470/2005, 19 December 2013, §§30-31, Au-Yeung J.

12.  Having a duty to act fairly to protect the assets of the estate, it is entirely legitimate for the Liquidators to put Consonancy to strict proof of the existence and validity of the loan and guarantee as set out in paragraph 2 above.  The Liquidators are not confirmed to the reasons for rejection given in correspondence or their memorandum. Mr Yim cannot complain that the Liquidators seek to “post-legitimize” their rejection of the proof of debt.

13.  Mr Yim’s submission that the Liquidators asked “rhetorical and/or leading questions” of which answers have already been researched is, with respect, difficult to understand.  It is always the duty of both parties to identify the issues and draft the questions in the manner set out in paragraph 9 above. That said, I find that the Questions fall short of the legal requirements for seeking to adduce expert evidence in that they open up issues never referred to in either party’s affidavits.  There are also open-ended questions asked of the expert.  I will demonstrate why.

14.  Questions as to existence of the loan and guarantee are matters of fact and do not require expert evidence.  PRC law was raised in only 3 paragraphs of the affidavit of Mr Jong, one of the Liquidators:

“ 3.18 I also understand that, separately, there are legal issues regarding the validity of the Consonancy Loan Agreement. I will leave these to those qualified to opine on the relevant law. However, I note that Article 61 of the General Provisions on Lending issued by the People’s Bank of China … states that ‘no financing business involving lending or borrowing, or lending or borrowing in a disguised form, may be handled between enterprises in violation of the State provisions.’

3.44 I also understand there are legal issues regarding the validity and enforceability of the Consonancy Loan Guarantee Agreement. I will leave explanation of these matters to those qualified to opine on the relevant law, but I am aware that at the time of the Consonancy Loan Guarantee Agreement was signed, the PRC Government had imposed very strict regulations with regard to the provision of overseas’ security for onshore lending, including where security is provided by an offshore security provider (such as the Company in this case) for a debt owed by an onshore debtor (such as the Xiancheng Group in this case) to an onshore creditor (such as [Consonancy] in this case).

3.45 In this case, [Consonancy] has not shown that there was any special quota obtained from the State Administration of Foreign Exchange (‘SAFE’) nor that there was any registration or approval obtained from SAFE in relation to the creation of the cross border security.  In the circumstances, the Liquidators have concerns as to enforceability of the Consonancy Loan Guarantee Agreement.”

15.  Such averments make it hard for a reader to understand in what way the loan/guarantee fell foul of PRC law.  And yet a number of legislative provisions are referred to in the Questions.  Open-ended questions are asked, such as whether there are any other relevant PRC law and regulations that might impact the validity and enforceability of a loan/guarantee agreement between 2 PRC private companies.  The skeleton submission of Mr Powell did not correlate such questions to the relevant parts of the affidavits.

16.  To this, Mr Powell’s submission is that the Liquidators are in a difficult position, as they came on to the scene after the loan was made and could not find the Loan and Guarantee Agreements amongst the Company records.  Mr Jong is not qualified to put on affidavit the relevant PRC law.  There are also no pleadings to define the issues in the appeal. 

17.  This is not an answer.  Mr Jong did refer to some PRC legislative provisions eg §3.18 of his affidavit. Ironically, in the course of his submission, Mr Powell handed up a series of legislative provisions referred to in the Schedule.  Obviously, someone has done some research or given advice on possible applicable PRC law.

18.  There was simply no reason why Mr Jong could not have put on affidavit why he thought or that he has been advised that those provisions were relevant, and relevant to which issue.

19.  In answer to the court’s enquiries as to whether or not it is the Liquidators’ case that certain legislative provisions have been violated, Mr Powell frankly admits that he does not have a case yet. 

20.  It is not legitimate to seek to adduce expert evidence where there is no issue raised (be it by pleadings or affidavit).  The attempt of the Liquidators is akin to asking the expert for advice in the hope that something can come up to enable the Liquidator to set up a case against the claimant.  This is putting the cart before the horse.  A party cannot fish for evidence under the disguise of putting the other party to strict proof or seeking to adduce expert evidence on non-issues. 

21.  In the course of the arguments, Mr Powell has reduced the scope of the Questions.  There is no issue that PRC law applied.  Q1 & Q3, Q5 and Q7 (being 3 of the 4 sets of questions agreed to by Consonancy) are no longer pursued.  I shall analyze the remaining questions.

Analyses of individual questions

22.  Q2.1 asks whether the Loan Agreement complied with the formalities and/or other requirements of PRC law with which the parties must comply whether executing a loan agreement between 2 PRC private companies and if yes, how might the validity and enforceability of the Loan Agreement be affected if these formalities and other requirements were not satisfied.

23.  Neither Mr Jong's affidavit nor even Q2.1 alleged that the Loan Agreement failed to comply with any formalities or “other requirements” of PRC law. The term “other requirements” is simply open-ended.  Consonancy was deprived of an opportunity of rebuttal. 

24.  In my view, the burden is on the Liquidators to show that PRC law had been violated.  In proposing to ask Q2.1, the Liquidators have gone beyond merely putting Consonancy to strict proof.  They are asserting a positive defence that the Loan Agreement failed to meet formal or other requirements.  Not having raised that defence on affidavit, there is no issue for the expert to give an opinion on.  Q2.1 is refused.

25.  Q2.2 asks whether Articles 52 and/or 54 of the Contract Law of the People’s Republic of China apply to a loan agreement between 2 PRC private companies. 

26.  Article 52 provides that a contract is invalid if “(i) either party enters into the contract by means of fraud or coercion and impairs the State’s interests; (ii) there is malicious conspiracy causing damage to the interests of the State, of the collective [some words missing] or of a third party; (iii) there is an attempt to conceal illegal goals under the disguise of legitimate forms; (iv) harm is done to social and public interests; or (v) mandatory provisions of law and administrative regulations are violated.”

27.  Article 54 gives the rights to a party to alter or rescind any contract which is made under substantial misunderstanding or if the making of the contract lacks fairness, or if a party makes the other party enter into a contract against its true will by means of deceit, coercion or taking advantage of its difficulties.

28.  As confirmed by Mr Powell in the course of his submission, the Liquidators rely on §3.44 of Mr Jong’s affidavit.  The Liquidators have not even alleged that any of the vitiating factors in Articles 52 or 54 might invalidate the Loan Agreement.

29.  Mr Powell submits that if the Liquidators are precluded from putting the question to the expert, the Liquidators will not have a case to put before the court.  In my view, this is a clear statement that the Liquidators do not have a case for rescission due to any of the vitiating factors.  Q2.2 must be refused as being irrelevant, seeking legal advice and fishing expedition (paragraph 20 above).

30.  One part of Q2.3 asks questions about the need for a PRC private company to obtain a business license and whether the validity and enforceability of an agreement will be affected if a PRC private company engages in activities outside the scope of business in the business license. 

31.  This question is relevant. Consonancy’s business was investment in various fields of business and provision of consultancy service for investors and it lent money to the Company.  The Liquidators challenge Consonancy as having no business and is only a bogus company submitting a bogus claim against the Company.

32.  I allow expert evidence to be adduced on this part of Q2.3.

33.  Another part of Q2.3 asks whether the PRC private company’s scope of business has to be stated in the business license and what the consequences to the company are if its activities fell outside the scope of its licensed business.  It is not the business of the Hong Kong court to enquire into these questions and so expert evidence on this aspect is refused.

34.  Q2.4.1 asks whether the validity and enforceability of the Loan Agreement is affected by Articles 11 and 19 of the Provisions of the Supreme People’s Court on Several Issues concerning the Application of Law in the Trial of Private Lending Cases.

35.  Article 11 provides that “where a party claims the validity of a private lending contract signed as required for production or business operation among legal persons and other organizations, except under the circumstances as set forth in Article 52 of the Contract Law or Article 14 of these Provisions, the People’s Court shall support such a claim.”

36.  Article 19 provides that “where the People’s Court finds that any the following circumstances when trying a case concerning private lending disputes, it shall strictly examine the reason, time and place of loan, source of funds, payment methods, fund flow and the relationship among the economic status and other facts of the borrower and the lender, and comprehensively judge whether it is a false civil lawsuit.”

37.  It is not clear how this Article will assist the Liquidators in showing that the Loan Agreement was invalid or unenforceable. Nor is it clear how the PRC court differs from the way the Hong Kong court examines the evidence.  Q2.4.1 is refused.

38.  Q2.4.2 asks whether 3 sets of legislative provisions affect the validity and enforceability of the Loan Agreement, ie the Official Reply of the Supreme People’s Court on “How to Handle the Failure of the Borrower of a Loan Contract between Enterprises to Repay the Loan within the Specified Time Limit” as revised in 2008;Articles 3 and 11 of the Law of the People’s Republic of China on Commercial Banks as amended on 27 December 2003; and Article 61 of the General Rules for Loans (Order No.2, 1996 of the People’s Bank of China).

39.  It is not clear from Mr Jong’s affidavit how the first 2 sets of legislative provisions assist in the present case.  Article 61 of the General Rules for Loans presumably is the same as the Article 61 referred to in §3.18 of Mr Jong’s affidavit.  Mr Jong’s affidavit has not identified which State provision has been violated and Article 61 has not specified the sanction for its violation. The question concerning Article 61 is one of the four questions that Consonancy agrees to seek expert evidence on. Even so, I am unable to see the relevance of this question.  

40.  The 3 sets of legislative provisions being irrelevant, Q2.4.2 is refused.

41.  Q2.4.3 asks whether a loan granted by one PRC private company to another must be for a legitimate purpose and if yes, how the validity and enforceability might be affected if the loan was not granted for a legitimate purpose.

42.  The loan was allegedly advanced to the Borrower for satisfying the “working capital requirement”.  Mr Jong’s affidavit did not state that that was an illegitimate purpose.  Rather, it was the destination of the funds (to an unrelated third party) that was a “mystery” to Mr Jong.  The expert evidence sought is not relevant to any issue and is refused.

43.  Q2.5 asks whether there are rules governing the charging of interest for loans by one PRC private company to another, including but not limited to the permissible rate of interest gained, punitive interest rates and how the validity and enforceability of such loan agreements be affected by the amount of interest charged under the loan agreement.

44.  Mr Jong has not challenged the interest rate on the loan or quantum in the event liability against the Liquidator is established.  Q2.5 is not relevant.

45.  Q4.1 and Q4.2 (concerning guarantee agreements) are in the same veins as Q2.1 and Q2.2 (concerning loans).  For the reasons given in respect of Q2.1 and Q2.2, expert evidence is not admissible.

46.  Q4.3 asks if Article 30 of the Guarantee Law of the People’s Republic of China and/or Article 45 of the Judicial Interpretation of the Supreme People’s Court on Some Issues Regarding the Application of the Guarantee Law of the People’s Republic of China are applicable to guarantee agreements between a PRC private company as obligee and a non-PRC private company as guarantor. If yes, how might the validity and enforceability of such a guarantee agreement be affected by these provisions?

47.  Article 30 of the Guarantee Law provides that the surety shall not be civilly liable if the parties to the principal contract (ie the Loan Agreement) conspire to defraud the surety (ie the Company) and the creditor to the principal contract resorts to deception or coercion to induce or cause the surety to provide a suretyship against its will.

48.  There is nothing in Mr Jong’s affidavit alleging conspiracy, deception or coercion.   Q4.3 is not relevant to any issue and is rejected.

49.  Article 45 of the Judicial Interpretation provides that “where a creditor (in this case, Consonancy) knows or should know about the debtor’s bankruptcy (in this case, the Borrower) but fails to lodge a claim of obligation or notify the guarantor, and thus (render it impossible for the guarantor to exercise his right of recourse beforehand) causes the guarantor’s inability to exercise its right of recourse, the guarantor shall be exempted from its guarantee obligation by an amount equal to the amount that may be recovered during the bankruptcy procedure.”

50.  According to Mr Powell, the Borrower is in liquidation in PRC but the Liquidators have not been notified.  He queries whether or not Consonancy should have informed the Liquidators and whether Consonancy would have lost its right against the Liquidators. Mr Powell admits that the Liquidators only came to know of this recently and so it was not addressed in Mr Jong’s affidavit which was filed in 2016. 

51.  With the greatest respect, this part of Q4.3 is a complete violation of all rules of procedure.  It is wholly unfair to make such evidential statement during submission, leaving Consonancy with no opportunity to respond to it.  I reject Q4.3.

52.  Q4.4.1 and 4.4.3 (with proposed amendments) ask whether Article 26 of the Guarantee Law of the People’s Republic of China is applicable and how the validity and enforceability of the Guarantee Agreement is affected if Consonancy failed to comply with the requirements of Article 26. 

53.  Article 26 provides that:

“Where the surety of a suretyship of joint and several liability and the creditor have no agreement on the term of suretyship, the creditor shall, within six months from the date of maturity of the principal debts, have the right to demand that the surety undertake suretyship liability.

If the creditor does not demand that the surety undertake suretyship liability during the term of suretyship agreed in the contract or provided by the preceding paragraph, the surety shall be relieved of the suretyship liability.”

54.  The 1^st paragraph of Article 26 simply does not apply because there was only one guarantor and there was a purported term of suretyship.

55.  As to the 2^nd paragraph of Article 26, Mr Jong pointed out that the Guarantee Agreement had a validity period of 2 years from the date of maturity of the loan.  However, the 2-year period had expired when the Liquidators were first informed of the Company’s liability under the guarantee.

56.  Mr Yim submits that this is a matter of construction of the Guarantee Agreement.  I agree. No expert evidence under the 2^nd paragraph of Article 26 is required. 

57.  Q4.4.2 (with proposed amendments) asks if, beyond those stipulated by Article 26 of the Guarantee Lawof the People’s Republic of China, there was any action required, whether pursuant to an express clause in the Guarantee Agreement or otherwise, to be taken by Consonancy in order to trigger the Company’s obligations under the Guarantee Agreement within the guarantee period.

58.  With the greatest respect to Mr Powell, it is for the Liquidators to identify any relevant express clause in the Guarantee Agreement.  The rest of the question effectively asks the expert to create a case for the Liquidators, which is not permissible.  Q4.4.2 is rejected.

59.  Q4.5.1 asked whether the validity and enforceability of the Guarantee Agreement is affected by Articles 7 and/or 8 of the Judicial Interpretation of the Supreme People’s Court on Some Issues regarding the Application of the Guarantee Law of the People’s Republic of China.

60.  Article 7 provides that the guarantor and the debtor shall assume joint compensation liability for the creditor’s loss on condition that the principal contract is valid while the guarantee contract is invalid and the creditor is not at fault.  If the creditor and the guarantor are both at fault, the civil liability that the guarantor should assume shall not exceed half of that which the debtor cannot pay off.

61.  Article 8 provides that if the guarantee contract is invalid due to the invalidity of the principal contract and the guarantor is not at fault, he shall not assume any civil obligation. If the guarantor is at fault, he shall bear not more than one third of the obligation that cannot be fulfilled by the debtor.

62.  Once again, Mr Jong’s affidavit has never raised the issue of quantum if liability under the Guarantee Agreement is established. There is no issue on which expert evidence is required.  Q4.5.1 must be rejected.

63.  Q4.6 (with proposed amendments) asks whether the validity and enforceability of the Guarantee Agreement is affected by the lack of any special quota, registration or approval obtained from SAFE in relation to the creation of the cross-border security.

64.  Mr Jong’s affidavit did not even allege what the special quota, registration or approval requirements of SAFE were.  This is forcing Consonancy to prove an unparticularised allegation under the disguise of strict proof of Consonancy’s case.  Q4.6 must be rejected.

65.  Q5 asks about the professional experience of the expert with reference to comparable PRC transactions of similar value.  Mr Powell conceded that this is irrelevant and inadmissible.

66.  Q6 asks whether there are any applicable PRC laws that permit or prohibit a PRC company from lending out the entire amount of its registered share capital.  This question arises because Mr Jong pointed out that the registered capital of Consonancy was RMB50 million and yet the loan was for RMB80 million.  Q6 is one of the 4 questions that Consonancy agreed to ask.  I direct that expert evidence be obtained for Q6.

67.  Q7 asks about how a notice of arbitration and other relevant documents should be served on the Company and whether there had been valid service.  As conceded by Mr Yim, the Liquidators had been given notice of the arbitration but not of the arbitration proceeding itself.  As this is no longer an issue, no expert evidence is required.

How many experts?

68.  Consonancy does not oppose to appointment of a single joint expert.  The Liquidators would only agree to appointment of a single joint expert if their preferred questions for the expert are adopted. 

69.  I do not think the Liquidators can tie the court’s hands in this manner.  Given the limited issues on which expert evidence is required, I see no prejudice to any party if a single joint expert is appointed.

Conclusion

70.  I order that expert evidence in the form of an opinion from a single joint expert be adduced on the following questions:

“ Q2.3.1: Whether a PRC private company was required to obtain a business license.

…

Q2.3.4: How might the validity and enforceability of an agreement be affected if it does not fall within the scope of business as stated in the PRC private company’s business license?

…

Q6: Whether there are any applicable PRC laws that permit or prohibit a PRC company from lending out the entire amount of its registered share capital.”

Costs

71.  The parties have spent 6 months only to obtain an order (by consent) to adduce expert evidence as a matter of principle and the time frame for adducing the expert reports, but could not agree the scope of the expert evidence.  Much time and costs have been wasted.

72.  The manner in which the Liquidators present their case on expert evidence also violates the established practice.  The legislative provisions that are handed up during the hearing are not even included in the bundle of authorities of Mr Powell.  The process is not only informal but prejudicial to Consonancy, who have not been given a chance to respond to the new issues by affirmation evidence.

73.  I have only considered the legislative provisions in the interests of proper case management instead of adjourning the matter. What should have been a half hour hearing turned out to be 2 hours for Mr Powell to explain the relevance of the Questions.  It is a waste of the court’s time. 

74.  The Liquidators are ambitious in seeking to raise a host of questions for an expert to answer, which do not really concern the live issues.  Only 3 questions out of 5 pages have been allowed.  The parties have obtained an order granting 60 days for the expert to prepare his report. It turns out to be clearly excessive.

75.  Consonancy also fails to focus on matters of substance when it objects to the Questions for the expert.  Both parties are at fault.

76.  I make an order nisi that there should be no order as to costs on the summons, including this hearing and the pre-hearing correspondence over the issue of expert evidence.  I also order, nisi,that the Liquidators’ own costs out of the estate on the issue of expert evidence should be reduced by half.

HCCW 332/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 332 OF 2012

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D E C I S I O N

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1.  I have before me an urgent application made by Red Victory Group Limited (“Red Victory”) in the liquidation of Wongs Investment Development Holdings Group Limited (“Wongs”). The draft summons seeks an order (1) that the liquidators of Wongs do enter into an agreement to borrow money from the applicant to discharge a prior loan; (2) that the liquidators be removed from office; and (3) that the liquidators be restrained from voting in favour of the replacement of the existing directors of China Kingstone Mining Holdings Limited (“China Kingstone”). For the purposes of today, however, Red Victory seeks “interim relief” in the form of paragraphs 1 and 3 of the summons only. So far as paragraph 3 is concerned, the restraint is sought pending the substantive determination of Red Victory’s application for removal of the liquidators or further order.

2.  Mr Joffe, who has appeared for the liquidators, submitted that there was no urgency in paragraph 1 of the summons, to which the liquidators need further time to respond.  Mr Sussex SC, who appeared for Red Victory, did not argue to the contrary and accordingly the only application I need to deal with today is Red Victory’s application for an order that:

“The Liquidators be restrained from voting in favour of the removal of the existing members of the board of directors of China Kingstone and the appointment of new members in their place pending resolution of [the application to removal the liquidators from office] or until further order of the Court.”

3.  Wongs was put into compulsory liquidation on a petition presented by BOCOM International Holdings Company Limited (“BOCOM”) in September 2012 by a winding up order made on 23 April 2013.  The present liquidators were appointed by the court in mid 2013.

4.  A substantial asset, perhaps the only substantial asset, of Wongs is its shareholding in China Kingstone, which is a company incorporated in the Cayman Islands whose shares are listed for trading on the Hong Kong Stock Exchange with the stock code 1380.  China Kingstone is an investment holding company which heads a group of companies, the principal business and activities of which are the production and sale of marble and marble related products.

5.  The present application has arisen against the background of an open offer of shares made by China Kingstone just last month. When it first went into liquidation, Wongs’ holding in China Kingstone amounted to approximately 63%.  That percentage was later reduced by certain placements but until the open offer I have referred to, Wongs had been the holder of at least approximately 50.56% in the issued share capital of China Kingstone.  The open offer was announced on 14 May 2015 and made by prospectus despatched on 5 June, whereby China Kingstone offered to allot to its shareholders one new share for every two existing shares.

6.  On 16 June, Wongs, acting through the liquidators, who took the view that the open offer had been devised by China Kingstone’s directors for the purpose of diluting the shareholding and removing the absolute majority enjoyed by Wongs, presented a petition (in HCMP 1472/2015) and issued a summons for an injunction to restrain China Kingstone from proceeding further with the open offer of shares.  On 19 June, I heard and, at the end, dismissed the summons, for reasons which were handed down on 8 July 2015.

7.  Red Victory is a BVI company that had, in April 2013, taken an assignment from a major creditor of Wongs, namely, BOCOM, of its claims against Wongs.  As security, Red Victory made a reverse assignment to BOCOM, as a result of which Red Victory became an equitable assignee of the relevant debts. Red Victory is owned by one Mr Wang Min Liang, who has been keen to acquire a controlling interest in China Kingstone and who has various connections with China Kingstone including the following (according to the liquidators’ affidavit)[1]:

(1) Mr Wang is the 100% owner of Jiang Tong Investment Limited (“Jiang Tong”). Jiang Tong is a company incorporated in the BVI and holds approximately 6.11% of the issued capital of China Kingstone prior to the open offer.

(2) On 29 November 2013, China Kingstone entered into an agreement with Kinwin International Investment Limited, a company owned by Mr Wang, for the provision of a term loan of HK$25 million to China Kingstone at an interest rate of 15% per annum.

(3) On 23 April 2014, China Kingstone announced that it had entered into a subscription transaction with Jiang Tong.  The subscription agreement gave Jiang Tong or Mr Wang 16.21% of China Kingstone’s issued share capital and diluted Wongs’ shareholding from 62.99% to 52.49%.

(4) On 30 March 2015, Jiang Tong transferred 9.5% interest in China Kingstone to Endless Joy Management Limited, another BVI company owned by one Ms Ma Lan.  The transfer of interest allowed Mr Wang to cease to be a “connected person” for the purpose of the Listing Rules.  Then immediately on 31 March 2015, China Kingstone entered into a subscription agreement to issue 302,317,201 shares, representing over 11% of the enlarged share capital, to a company called Bold Tack.  Bold Tack is ultimately wholly owned by a discretionary trust created by Mr Wang for the benefit of his daughter and her issue.

(5) In around early 2015, the liquidators received a suggestion from BOCOM regarding a proposal for a scheme of arrangement that had been proposed by Red Victory.  The terms of the scheme provided that Red Victory, as the underwriter, would agree to purchase shares at market price from the scheme creditors to whom the scheme shares were to be distributed pursuant to the scheme and who elect to receive cash consideration instead of shares. The liquidators had pursued the scheme but it was abandoned when China Kingstone announced the open offer without any prior consultation with Wongs or the liquidators.

8.  On 18 June, the liquidators wrote to all creditors or claimants who had filed proofs of debt in Wongs’ liquidation, informing them of the possibility of Wongs borrowing funds from third parties in order to participate in the open offer should the court refuse to grant the injunction. In the morning of 19 June 2015, during or shortly before the court hearing, the liquidators were given a copy of Red Victory’s letter to BOCOM indicating a willingness to provide financing for Wongs to subscribe for shares pursuant to the open offer should it fail to obtain the injunction, although no detailed terms of any offer had emerged at that stage. 

9.  According to the liquidators’ affidavit[2], after Wongs failed to obtain an injunction to stop the open offer, the liquidators called Mr Wang at about 8 pm on 19 June 2015 to try to explore terms of financing by Red Victory, but was unable to discuss any details with Mr Wang.  Shortly afterwards, at 00:02 am on 20 June 2015, the liquidators sent an email to Red Victory enquiring whether Red Victory was willing to provide a secured loan in the amount of HK$62 million.  The liquidators also sent text messages to Wang’s Hong Kong and PRC mobile phones to follow up on the email but they did not receive any call from Mr Wang.  Apparently the liquidators also called Mr Wang several times over the weekend of 20-21 June but were unable to make contact with him.

10.  On 20 June 2015, Saturday, at 4 pm, the liquidators sent a letter to all known creditors and claimants of Wongs inviting firm offers to fund the subscription for shares, with a deadline set on 9 am, 22 June, Monday. 

11.  Red Victory sent a letter by email to BOCOM copied to the liquidators at 8:31 am on 22 June, in which Red Victory offered a loan with interest at 0.01% p.a. less than the rate of any loan obtainable by the liquidators from the market.  However, apparently because a wrong email reply address had been stated in the liquidators’ letter of 20 June inviting offers, Red Victory’s letter did not come to their attention until around 10:30 am after they had made an application to the court for sanction of their proposal to borrow from a third party syndicate represented by Asian Capital (Resources) Limited (“Asian Capital”).  Sanction of the court was a condition of the loan even though the liquidators had, under s 199(2)(e) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32), the power to raise money on the security of the assets of Wongs, without the sanction of the court.

12.  The liquidators did not immediately inform the court of the receipt of that offer from Red Victory.  They considered that the terms offered by Red Victory, in particular the requirement that Wongs must obtain Red Victory’s written consent before exercising its voting rights in respect of the shares, were unsatisfactory and unacceptable.  Further, the liquidators were concerned at the silence from Mr Wang over the weekend and considered that there was insufficient time remaining to settle the financing documents and ensure that funds were available in time to meet the deadline for acceptance of the open offer.

13.  Accordingly, on 22 June, pursuant to the sanction I granted on paper, Wongs obtained a loan from Asian Capital for the purpose of applying for shares under the open offer.  Acting through the liquidators, Wongs duly completed and sent to China Kingstone an application for shares together with a cashier’s order for HK$61,346,313.80 to subscribe for 613,463,138 shares at $0.10 each.

14.  Red Victory then began to complain by letters about the conduct of the liquidators and, on 25 June, sent a solicitors’ letter to China Kingstone demanding that no new shares were allotted to Wongs.  On the same day Red Victory took out a summons in these liquidation proceedings for, inter alia, an order that the liquidators’ act or decision be reversed or modified as the court deems fit, an order that China Kingstone be restrained from issuing shares pursuant to the open offer to Wongs, alternatively a declaration under s 276 of the Ordinance that the liquidators are liable to make good the loss caused to the company by their misfeasance.

15.  On 26 June, relying on Red Victory’s complaints, the board of directors of China Kingstone decided to reject Wongs’ application for shares and to allot the shares to the underwriter, Royal Moon International Limited (“Royal Moon”) instead.

16.  On 28 June, on the urgent application of Wongs in the petition proceedings (HCMP 1472/2015), I granted an injunction restraining the allotment to Royal Moon of the shares applied for by Wongs and requiring the shares to be allotted to Wongs.  On that ex parte on notice application, Red Victory appeared by counsel (Mr Roland Lau and Mr P K Fung) to oppose the grant of injunction.  Although it was not clear that Red Victory had any standing in that application, I heard its counsel de bene esse.

17.  The injunction was continued after further argument on 3 July, for reasons also handed down on 8 July.  The detailed background of the directors’ rejection of Wongs’ application for shares is dealt with in those reasons to which I refer.  Red Victory did not appear before the court on 3 July, having asked to be excused.

18.  It was against this background that Red Victory has made the application by the present summons before me.  Red Victory’s main complaints in its application are that:

(1) There had been non-disclosure of the practical effect of the loan which Red Victory said would be to strip Wongs of its only asset, ie its shares in China Kingstone.  The liquidators failed to discharge their continuing duty of disclosure in that they failed to inform the court of Red Victory’s offer which eventually came to their attention at around 10:30 am, 22 June 2015.

(2) The liquidators were unfit to remain in office because (a) there is a conflict of interests arising from what Mr Sussex characterised as their “pre-engagement touting activities” and their giving of personal advice to Mr Wang; and (b) they made various false representations to Mr Wang in procuring his support for them to be appointed to their current office.

(3) The liquidators’ intended wholesale reconstitution of the board of China Kingstone at the extraordinary general meeting to be held on 14 July 2015 is open to serious question given that the proposed appointees have no experience in the stone mining industry.

19.  Mr Sussex submitted that there is a serious issue to be tried on the application to remove the liquidators and that pending the determination of that application, there should be a restraint placed on the liquidators to prevent them from making significant decisions in relation to the assets of the company.  He submitted that the balance of convenience lies in favour of granting the order sought. 

20.  The liquidators have not yet filed evidence in opposition to the removal application as such, but even assuming there is a serious issue to be tried on that application, it seems to me the relevant status quo is that the liquidators are still the court-appointed liquidators of Wongs and that Wongs is a shareholder of China Kingstone.  The court ought generally not to be asked to “micro-manage” the assets in a liquidation.  How to vote on a motion about who should be directors of a listed company in which the liquidated company holds shares is generally a matter for the liquidators exercising their commercial judgment for the interests of the liquidation estate.

21.  It may be different where there is an allegation that the way the liquidators propose to vote is egregiously wrong.  As such that proposed act can be challenged under s 200(5) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance.  As Fok J (as he then was) stated in Re Wickson Holdings Ltd [2011] 2 HKLRD 373 at §19(d):

“In the administration of the company’s assets, where a liquidator has decided to embark on a particular course of action, the person aggrieved by the liquidator’s decision will need to demonstrate, before the court will interfere with the liquidator’s decision or act pursuant to s.200(5) of the Companies Ordinance, that the liquidator has either:

(i) not exercised his power in good faith or has acted in a way in which no reasonable liquidator could have acted; or

(ii) made a ruling or decision in the course of the administration which directly affected a party’s right and has not acted even-handedly as an impartial neutral: see Eagle Queen Co Ltd v First Bangkok City Finance Ltd [1989] 2 HKLR 71, 73H-74C (Hunger JA).”

22.  But Red Victory has not sought to challenge on this basis the way the liquidators propose to vote at the EGM.  In fact the liquidators’ proposal to replace the board was first announced in May with the notice of EGM being issued on 5 June.  Yet no application has been taken out by Red Victory until now, a few days before the EGM.  Nor does the proposal to remove directors in itself form a ground in Red Victory’s application for removal of the liquidators.  I am not aware of any general principle or practice that merely because there is a potential case for the removal of the liquidators, the liquidators ought to be stopped from making significant decisions.  In the present case, there is no suggestion that the liquidators are incompetent, of unsound mind, lack commercial experience, or are acting in bad faith in the way they propose to exercise the voting rights of Wongs in China Kingstone.

23.  To the contrary, the liquidators have elaborated in evidence urgently filed this morning what they propose to do and why they consider it appropriate and necessary.  In particular, the liquidators propose to vote to remove five out of seven of the existing directors, re-appointing or retaining two existing directors in order to ensure continuity and retain relevant expertise in the mining industry and knowledge of the listed company’s operations.  The liquidators have stated that they consider that the proposed new directors are very experienced in the management of Hong Kong listed companies with a number of them being renowned professionals who are currently sitting on the board of listing companies and hold other established positions in their respective industries.  The liquidators consider that those directors will have sufficient experience to acquire the requisite talent and expertise to assist the board in running the day to day operations of China Kingstone.  In addition, one of the proposed directors also has experience in mining activities in the PRC.

24.  Further, the liquidators have also explained their lack of confidence in the existing directors, arising from the board’s actions in:

(1) refusing to appoint directors nominated by Wongs;

(2) entering into transactions that the liquidators believe to be against the best interests of China Kingstone;

(3) taking various steps for what the liquidators believe to be the improper purpose of diluting Wongs’ majority shareholding in China Kingstone;

(4) attempting to invalidate Wongs’ subscription to the open offer despite that the liquidators had duly prepared and returned the application form pursuant to the open offer together with the requisite remittance;

(5) extending the long-stop date for the completion of the China Fortune Acquisition immediately after the court granted the injunction requiring the offer shares to be issued to Wongs; and

(6) refusing to provide information to Wongs or the liquidators on the actions the board is taking on behalf of China Kingstone.  Thus, for example, despite the enquiries made by the liquidators on 30 June and 2 July 2015 to the board in relation to the proceeds of the open offer, the board has failed to provide any details as to the use of those proceeds.  Nor has the board responded substantively to the written enquiries made by the liquidators to the board on 24 May 2015 regarding the Qilu Loan Note Acquisition.

25.  The liquidators also believe that the existing directors, who are admittedly Mr Wang’s “business friends” well known to him, are acting in cohort with him with a view to diluting the shareholding of Wongs in China Kingstone.

26.  It is not necessary for me on this application to say whether these beliefs and opinions of the liquidators are correct and valid.  It is sufficient to note that it has not been suggested by Mr Sussex that they are not honestly held or that they lie so far outside the range of tenable opinion that no reasonable liquidator could have formed them. 

27.  Accordingly, on the basis of the evidence, I am not satisfied that pending the determination of paragraph 2 of Red Victory’s summons, I should intervene in the way in which Wongs’ voting power is to be exercised at a general meeting of China Kingstone.  Paragraph 3 of Red Victory’s summons must therefore be dismissed.