YIFUNG DEVELOPMENTS LTD v. LIU CHI KEUNG RICKY AND OTHERS

HCA 1341/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1341 OF 2014

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D E C I S I O N

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1.  By a decision dated 20 December 2016 (“the Decision”), I made various costs order nisi. This is a decision dealing with variation of the nisi orders and summary assessment of YDL’s costs.

Costs granted under paragraphs 33 and 34 of the Decision

2.  These relate to costs granted to YDL for making representation on the material non-disclosure issue (“the representation”).

3.  Ricky Liu seeks to vary that order by asking for no order as to costs.  It was legitimate for YDL to respond by their letter dated 6 January 2017 and I have taken that letter into account.

4.  It was true that what directly triggered the court’s directions for YDL to make the representation was §42 of the reply submission of Ms Linda Chan SC (“the reply submission”).  YDL did not disclose the resolution to cancel YDL’s seals and chops.  No blame could be laid on Ricky Liu’s counsel in placing emphasis on a specific aspect (recovery of the chop and seal) of YDL’s application. If YDL took the view that the emphasis was misplaced, its legal team could have made submissions in response at the injunction hearing.  Submission from an opponent often requires immediate response at a hearing. YDL could not be heard to say that they did not have the opportunity to properly read or review the content of the reply submission or address the court on the same. 

5.  It was also true that it was the court, not Ricky Liu, who required YDL to make the representation.  However, a more fundamental fact was that Ricky Liu was in possession of the old chop and seal and had not surrendered them to YDL until 3 months after the injunction was granted. He had probably kept it from even his own counsel and that was why the reply submission was made at the hearing of the authority summons.

6.  Despite YDL’s request in preparation for the representation, Ricky Liu has hardly come up with any convincing evidence to support the alleged non-disclosure except in relation to a resolution. However, there was evidence to show that he should have known of the creation of the new chop. 

7.  Ricky Liu’s submission in response to the representation went beyond merely highlighting facts to assist the court.  He persisted in justifying the reply submission, obviously trying to achieve the draconian consequence of discharging the injunction and setting aside the present action, a result which he had always wanted. 

8.  I see no reason for varying the costs order.  I make the order nisi absolute and dismiss Ricky Liu’s application to vary.

9.  On quantum, as the representation was on a very focused issue, there was no justification for more than one fee earner.  I allow a notional rate of $4,000 per hour.  I also reduce the fees of counsel as the issues involved were not complicated.  The rest is a matter of quantum.  I summarily assess the costs of YDL at $64,000, inclusive of the costs for opposing Ricky Liu’s application to vary.

HCA 1341/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1341 OF 2014

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____________

____________________

D E C I S I O N

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Introduction

1.  YDL first issued a summons (“the 1^st Summons”) to vary costs order nisi, 6 weeks out of time.  It then issued another summons (“the 2^nd Summons”) to vary the 1^st Summons, asking for costs on indemnity basis.  This court dismissed both summonses by a decision dated 24 November 2016 (“the Decision”).  YDL seeks leave to appeal against the Decision.

Legal principles

2.  Leave to appeal may be granted if the court is satisfied that a question of law is involved in the proposed appeal; and the proposed appeal has a reasonable prospect of success or there is some other reason in the interests of justice why the proposed appeal should be heard: section 14AA of the High Court Ordinance, Cap 4.

3.  Reasonable prospect of success means that the appeal has merits and ought to be heard and the prospects of success are more than fanciful but without having to be probable: Wynn Resorts (Macau) S.A. v Mong Henry [2009] 5 HKC 515 at 519H; and SMSE v KL [2009] 4 HKLRD 125 at §17.

4.  Case management decisions are only subject to appeal in rare circumstances.  An applicant faces a very high hurdle and must show that the court has gone clearly wrong and made orders which will clearly involve an injustice or an inability for the trial court to carry out its task, or if the judge erred in principle or the order was irrational having regard to the issues that had to be resolved: Wong Kar Gee Mimi v Severn Villa Ltd [2012] 1 HKLRD 887, at §31, Kwan JA.

5.  The appellate court will not interfere with a judge’s exercise of discretion unless the judge has misunderstood the law or the evidence or the exercise of his discretion was plainly wrong such that it was outside the generous ambit within which a reasonable disagreement is possible: Wong Kar Gee Mimi, at §31; Hong Kong Civil Procedure 2017, Vol 1, §59/0/54.

Intended grounds for appeal

6.  Leave is sought under both limbs of section 14AA of the High Court Ordinance.  The grounds can be summarized as follows:

(i)     That this court adopted a rigid and mechanistic approach focused on the delay but failed to have regard to the primary object of exercising fairness and avoidance of injustice to the parties, and failed to take into account the merits of YDL’s application to vary.

(ii)    That this court erred in treating the situation as a pure failure to apply within time when there was timely application, albeit informal, by letter setting out the full reasons; and this court failed to appreciate that, at most, this was simply an irregularity capable of cure: Ling Yuk Sing v Secretary for Civil Service [2010] 3 HKLRD 722.

(iii)   That this court took into account an irrelevant matter or was plainly wrong in finding a deliberate decision by YDL’s solicitors to flout the Rules of the High Court by not taking out a summons to vary in the light of various pieces of evidence.

(iv)   That this court erred in finding prejudice to the defendants by reason of YDL’s method of applying or delay in issuing a summons. 

(v)    That this court took into account an irrelevant matter, namely that the dismissal of the summons would not prejudice YDL in that it might choose to explore recourse against its own solicitors for related losses.

(vi)   That there was no ground identified when the 2^nd Summons was dismissed for abuse of process. The court incorrectly stated that there had been failure by YDL to seek costs on an indemnity basis when there had been an oral application in the strike out application but the costs were reserved.  The indemnity costs issue was not mentioned in the Decision when the court made a costs order nisi.  The only reason such an order had not been made earlier was the significant delay and distraction introduced by D1’s ultimately unsuccessful authority summons. That same feature occasioned the firm’s inadvertence on this issue.

(vii)  There were merits in YDL’s underlying application for variation of costs order.

7.  There is no attack on the legal principles that this court took into account in the Decision. 

8.  For present purposes, I disregard Order 32, rule 1 and Hong Kong Civil Procedure 2017, Vol 1, §32/6/9A which neither party relied on at the hearing on 24 November 2016.  Even so, as can be seen in the case of Ling Yuk Sing now cited by Mr Barlett SC, the Court of Appeal had decided that an application to vary a costs order nisi has to be made by summons and not informally by letter, based on to a PCCW case back in 2003.  The passage in Hong Kong Civil Procedure 2017, Vol 1, §42/5B/1 relied on by the applicant to show that an application to vary can be made without a summons is not supported by authority.  That commentary refers, at best, to a practice, which cannot override established case law.

9.  Further, Ling Yuk Sing is distinguishable in that the applicant had not shown prejudice by the informal mode of application for variation of a costs order and had chosen not to avail himself of the opportunity to raise objections to it (§6).  This was in stark contrast to Ricky Liu who had, right from the start, pointed out the irregularity in procedure to YDL.

10.  The Decision refusing to extend time is a case management decision. Apart from saying that the Decision has the effect of barring an underlying substantive application from being made, Mr Bartlett has not shown how the intended appeal could meet the test in Wong Kar Gee Mimi set out in paragraph 4 above.

11.  Grounds (i) to (iii) are attacks on the way this court exercised the discretion in refusing to give time extension and are not appealable: Wong Kar Gee Mimi set out in paragraph 5 above.

12.  Ground (iv) is a view on the facts held by this court and has not been shown to be perverse, irrational or unsupported by evidence: Wong Kar Gee Mimi set out in paragraph 5 above.

13.  Ground (v) has no merits.  Lack of prejudice to the other party is not in itself a ground for granting extension of time which is otherwise unjustified: Pine Enterprises Ltd v Cyber Strategy Ltd, CACV 116/2008, 12 December 2008, at §18, per Yuen JA.

14.  Ground (vi) has no merits.  If the 1^st summons was already issued way out of time, an application to amend it to add a further item of relief could not be anything other than an abuse.  The fact that an oral application for costs have been made was irrelevant.  The procedure for variation is to precisely deal with any matters overlooked by counsel or the court when making the costs order nisi.  Moreover, lawyers are used to dealing with multi-issues and there is no room for them to say that they have been distracted by the opponent’s unwarranted interlocutory applications and failed to make a proper application.

15.  Ground (vii) has no merits.  It was another exercise of discretion based on the lengthy delay.

16.  None of the intended grounds for appeal have reasonable prospect of success.  I dismiss the application for leave to appeal with costs, nisi, to the 1^st defendant.  Such costs are summarily assessed and allowed at $45,000.

HCA 1341/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1341 OF 2014

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D E C I S I O N

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1.  There are 3 matters before the court:

(1)   Ricky Liu’s application to vary a costs order nisi;

(2)   Solicitors for YDL (“Linklaters”) showing cause as to why they should not bear costs of Ricky Liu; and

(3)   YDL to make representation as to whether the mandatory injunction made on 17 November 2014 (“the injunction”) should be set aside for non-disclosure and whether the present action was necessary.

(1)  Ricky Liu’s application to vary a costs order nisi

2.  On 25 April 2016, upon dismissing the authority summons taken out by Ricky Liu, I ordered, nisi, that

(a)   Ricky Liu should have costs of the authority summons up to and including 31 July 2015.  Linklaters were to show cause as to why they should not bear such costs within 14 days from the date of the judgment.

(b)   Half of the costs of the authority summons from 1 August 2015 onwards shall be paid by Ricky Liu to YDL. 

3.  Ricky Liu sought variation asking for costs of the 2-day hearing of the authority summons.  Alternative to Linklaters’ potential costs liability, Ricky Liu asked for YDL’s directors (ie Mr Fok, Mr Gronow and Mr Batchelor) to pay his costs. I will deal with the directors’ liability after analyzing Linklaters’ liability to bear costs.

4.  It is well established that a successful party may be ordered to pay costs to the unsuccessful party or be deprived of his costs where he raises issues or makes allegations improperly or unnecessarily: Hung Fung Enterprises Holdings Ltd v Agricultural Bank of China [2012] 3 HKLRD 679, §§100-102, Kwan JA, following Re Elgindata Ltd (No.2) [1992] 1 WLR 1207, 1214A-D, Nourse LJ.

5.  At the hearings, the core issue was whether there was authority to sue or ratification.  It was a question of fact and law and not discretion.  The court’s role was not to determine how stubborn a party was or to investigate the route by which that party came to the right decision. 

6.  The underlying objectives of the Rules of the High Court are, amongst others, to ensure that a case is dealt with as expeditiously as is reasonably practicable and to promote procedural economy.  The parties have a duty to assist the court to further these underlying objectives and decide which issues need full investigation. 

7.  As affidavits are filed, it is incumbent on the parties and their legal representatives to review the merits of their application or grounds of opposition. If they can come to terms on the merits but not on costs, a short hearing or paper application for costs is the right course.

8.  Unfortunately, neither party took this approach which would have disposed of the core issue in a more economical way and both must bear the blame.  The success of Ricky Liu in showing that the action was commenced without authority has been reflected in the order nisi for YDL to bear the pre-ratification costs.  The fact of YDL lacking even a board resolution to commence the action, succeeding on only one out of 4 lines of arguments and making unjustified complaints that Ricky Liu lacked locus or abused the process have been reflected in the order nisi that YDL could only recover half of the post-ratification costs.  I see no reason why Ricky Liu can further ask for costs of the hearing.

9.  I see no reason to vary the costs order and I make it absolute.

(2)  Linklaters showing cause as to why they should not bear costs of Ricky Liu

10.  When a solicitor purported to act for a client in an action, he impliedly warranted that he had the authority to represent the client.  When it later transpired that in fact he did not have such authority, he had acted in breach of the implied warranty.  The court would normally order him to personally pay the costs needlessly incurred by the opposing party.  Grand Field Group Holdings Ltd v Tsang Wai Lun Wayland & ors [2010] 5 HKC 441, §12; Airways Ltd v Bowen [1985] 82 LSG 1863, p 7.  Note that in those cases, there was no ratification.

11.  This was because the supposed client was not a party to the proceedings in the ordinary sense and the promisee of the warranty has lost the ability to recover from that “client” the costs of the proceedings in the event of a costs order in the promisee’s favour.  This was usually quantified as the amount of costs thrown away by the promisee in relation to the proceedings from the first participation in them of the solicitor until the promisee was apprised of the solicitor’s lack of authority: Skylight Maritime SA v Ascot Underwriting & ors [2005] EWHC 15, §16.

12.  The situation is different where there was ratification as stated in Bowstead & Reynolds on Agency, 20^th ed, §9-072:

“Ratification. It may be assumed that the agent is not liable where the principal ratifies. Here again there is no loss to the third party, but it may be more plausibly argued that there was no breach of warranty at all (unless perhaps the principal initially refused to ratify, thereby causing expense to the third party), on the basis that the agent warrants that he has authority or that the principal will ratify.

13.  In Chan Chi Ming v Brilliant Rise Container Depot Ltd & anor [2009] 4 HKC 458, the solicitors who acted for a deregistered company was ordered to personally bear the wasted costs of the plaintiff.  The solicitors successfully applied for reinstatement of the company, and belatedly validated all prior acts done and all instructions given by the company in and for the conduct of the action during its deregistration period.  The Court of Appeal held that the orders of reinstatement and validation retrospectively removed the basis upon which the wasted costs order had been made and thus set aside the wasted costs order (§§47-49).

14.  In the present case, any lack of authority was cured by ratification.  The ratification related back and was deemed equivalent to antecedent authority: Danish Mercantile Co Ltd & ors v Beaumont & anor [1951] 1 Ch 680, 687-688.

15.  The ratification also meant that Ricky Liu was not left without a remedy.  He could recover costs against the principal YDL: Bowstead & Reynolds andSkylight above.

16.  In the premises, Linklaters should not be asked to bear costs.

17.  I have additionally considered whether or not Linklaters should personally bear the costs of their client YDL.  At the outset, I have directed Linklaters and Mr Bartlett SC to consider the potential conflict of interest between YDL and Linklaters.  However, Mr Bartlett SC insisted that there was no conflict of interest and he informed the court that YDL would not seek to recover costs from Linklaters. 

18.  This case was commenced without even a board resolution.  Clearly the solicitors had acted without authority initially.  That said, the present case in fact showed unity of purpose of all the stakeholders (ie mortgagee, receivers, shareholders, Lender Director and directors), as recognized in paragraphs 95 and 106 of the judgment.  Linklaters all along took instructions from Mr Fok and Mr Gronow, as persons constituting the entire board of directors of YDL. 

19.  Linklaters drew to my attention that there was no letter before summons to question the authority of Linklaters.  I place little weight on this.  Even with the issue of the authority summons, YDL had taken a convoluted route until 31 July 2015 to ratify the action.

20.  Having considered all circumstances, I am satisfied that Linklaters need not personally bear the pre-ratification costs.

Personal liability of YDL’s directors for costs

21.  Directors can be made personally liable if they were the real parties to the litigation or would benefit from it: Dymocks Franchise Systems (NSW) Pty Ltd v Todd & ors [2004] 1 WLR 2807, §§25(3) and 29; cited by the Court of Final Appeal in The Liberty Container (2007) 10 HKCFAR 256, at §§28 & 30, per Bokhary PJ.

22.  In the present case, the action was taken out to recover YDL’s own assets.  The directors could not have been the true beneficiaries to the action or the summons.  There was no basis to make them personally liable.

(3)  YDL to make representation as to whether the injunction should be set aside for non-disclosure and whether the present action was necessary

23.  In the reply submission of Ms Chan SC (“the reply submission”) in the authority summons, it was stated that:

“42.1 Fok and Gronow repeatedly alleged that they urgently required to obtain the YDL’s seals and chops so as to perform their duties, which led to this Court acceding to their application and criticized Ricky for having misrepresented the position about the seals and chops …

42.2   As recently revealed by the evidence submitted by Fok and Gronow to the PRC Court on 23.6.2015, in fact, even before the commencement of the action, on 9.6.2014, [Mr Fok and Mr Gronow] had already passed resolution to cancel YDL’s then seals and chops.  Such crucial fact, which undermined the utility of the action and the application for injunction, had been concealed by Fok and Gronow from the Court.”

24.  This triggered the court’s concern as to whether or not the injunction in this action was obtained by material non-disclosure and whether this action was necessary.

25.  YDL’s representation dated 17 May 2016 disclosed that the reply submission was an exaggeration.  YDL had not invalidated its corporate seal.  It created a new business chop and invalidated the old one by the resolution.  Ricky Liu has not identified the specific evidence in support of the reply submission. Rather, for the reasons given in paragraph 10 of Linklaters’ letter dated 17 May 2016, Ricky Liu should have known of the creation of the new chop.

26.  The action and the mandatory injunction sought were justified because YDL was seeking to recover its own assets (including an invalidated old chop) from the ex-directors including Ricky Liu.  The chops and seals formed only a small part of the subject matter of the action and the injunction application.  It would have been better if existence of the new chop had been brought to the court’s attention before the injunction was granted, but that would be more relevant to the issue of urgency of granting the injunction.  At the inter partes hearing, the court would have ordered delivery up of the old seals and chops even if new ones had been created.

27.  There were various reasons that led the court to grant the injunction. In fact, Ricky Liu misled the court to believe that all the ex-directors had handed over the chops and seals.  The old chop and seal were in the possession of Ricky Liu and he had not surrendered them to YDL until 3 months after the injunction was granted.

28.  I see no reason to question the taking out of the present action and the injunction.  Having considered YDL’s representation, there is no need for the court to investigate further.

29.  As it was Ricky Liu who triggered the court’s concern, costs of YDL making representation should be borne by him.

Conclusion

30.  I dismiss Ricky Liu’s application to vary the costs order nisi and for the directors of YDL to bear costs. I make the costs order nisi absolute.  Costs of Ricky Liu’s summons to vary should follow the event and be to YDL.  I apportion, nisi, 20% of the hearing time and Mr Bartlett SC’s fees for these applications.

31.  I have dismissed YDL’s summons to vary the costs order nisi and the application to amend that summons with costs to Ricky Liu.  YDL’s costs should be set off against the costs in the preceding paragraph, so that overall there should be no order as to costs on each party’s summons.

32.  I am satisfied that Linklaters should not bear costs of the authority summons.

33.  I am satisfied on the representation of YDL that the action and the injunction shall stand.  As it was Ricky Liu’s conduct which led to the relevant enquiries, I order, nisi, that costs are to be borne by him.  I apportion, nisi, 20% of the hearing time and Mr Bartlett SC’s fees for this matter.

34.  The net effect is that fresh costs statements shall be filed and served by YDL pursuant to the preceding paragraph within 14 days of the handing down of this decision and grounds of objection are to be filed by Ricky Liu within 7 days thereafter.  If any party or Linklaters wants to dispute the apportionment or any costs order in relation to this hearing, they should do so by written submission of not more than 1 page within 7 days, without the need to file a summons.

35.  I thank counsel for their assistance.

HCA 1341/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1341 OF 2014

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R U L I N G

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1.  This is a purported application by YDL to vary the cost order nisi made on 25 April 2016. The application by YDL was full of errors. First, it was purportedly done by letter. Secondly, the summons to vary the costs order nisi (YDL’s variation summons) was filed seven weeks out of time. Thirdly, there is another application for leave to amend YDL’s variation summons which was filed yet another three months afterwards, to vary the costs order nisi further.

Application for extension of time for YDL to vary the costs order nisi

2.  The reason stated on affidavit was that Linklaters, their solicitors, relied on a commentary to the Hong Kong Civil Procedure, at paragraph 42(5)(b)(i), that an application to vary a costs order nisi could be made by summons.  I am not satisfied that ignorance of such an established principle was a good reason for extension of time.

3.  The second reason given in Mr Bartlett’s submission is that there was a letter dated 9 May 2016 wherein Linklaters purported to seek to vary the costs order nisi.  It was said that the basis for variation had been stated in that letter.  YDL’s variation summons was no different in substance and no prejudice can be caused to Ricky Liu’s side.  When this court pointed out to Linklaters that variation had to be done by summons, YDL’s variation summons was taken out three days later on 23 June 2016. 

4.  With respect, the letter dated 9 May 2016 was Linklaters showing cause as to why they, as solicitors, should not personally bear costs of the authority’s summons.  It was in the penultimate paragraph that they slipped in a purported application to vary the costs order nisi between the parties.

5.  Ricky Liu’s side had issued a summons to vary the costs order nisi. YDL and, of course, Linklaters were aware of it and Linklaters even invited Ricky Liu to withdraw it on 10 May.  Ricky Liu’s solicitors very quickly brought to Linklaters’ attention, on 11 May, what they perceived to be procedural errors on the part of Linklaters.  It was specifically pointed out to Linklaters that the purported invitation to the court to vary the costs order nisi by letter of 9 May was misconceived because Linklaters was making submissions in their personal capacity and not in their capacity as YDL’s agents.  They had no locus, not being a party to the authority’s summons, to invite the court to vary that costs order nisi. 

6.  Linklaters did nothing to issue a summons.  By their letter dated 7 June, Linklaters further made comments on the question of varying the costs order nisi.

7.  From all these correspondence, one can see that the failure to take out a summons within time or shortly after expiry of time was not simply a wrong reference to the Hong Kong Civil Procedure.  It was a deliberate decision not to take out a summons.  Even when this court notified the parties on 20 June that variation could not be done by way of letter, Linklaters still only took out a summons three days later.  The contents of the summons were not complicated.  It purported to reflect what was in the letter dated 9 May.  There was simply no reason for spending these extra three days.  I am not satisfied that there was good explanation for the delay in taking out YDL’s variation summons.

8.  It cannot be heard that Ricky Liu was not prejudiced.  Delay in itself, caused by failure to follow the time laid down by the rules, in itself, would cause prejudice to the opposing party.  As could be seen, Ricky Liu, had to prepare submissions to contest YDL’s purported variation summons and to explain to the court why it should not be entertained.  I also add that, even if this court were to refuse the opportunity to YDL to vary the costs order, YDL can still have an opportunity, if they deem fit, to go against their solicitors. 

9.  Taking all circumstances into account, I am not satisfied that there was a good explanation for the delay and I dismiss the application for extension of time to file YDL’s variation summons.

Application to amend

10.  It goes without saying that the application to amend YDL’s variation summons ought to be dismissed as well.  But just to add a few words, to take out this further summons to amend, in itself is an abuse.  The only explanation for the delay in seeking to amend YDL’s variation summons was an inadvertent omission to ask for costs on indemnity basis.  That could not in any case be a good explanation for delay, especially if the delay was 4.5 months since expiry of time.

HCA 1341/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1341 OF 2014

____________

____________

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J U D G M E N T
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A. THE APPLICATION

1.  The plaintiff (“YDL”) claims against the defendants, its ex‑directors, for injunctions restraining them from holding themselves out as directors and to deliver up corporate records and assets to YDL.

2.  D1 (“Ricky Liu”) applies to strike out the writ of summons on the ground of want of authority (“the authority summons”).  He asserts that the issue of the writ was in contravention of the Articles of Association of YDL (“the Articles”); and so were the purported ratifications by shareholders, the board of directors and Receivers.

B.  UNDISPUTED FACTS

3.  I adopt the abbreviations in my decisions dated 17 November 2014 (“the injunction decision”) and 19 October 2015 (“the strike-out decision”).

4.  YPL and Wonder Earn are the shareholders of YDL.  They pledged their shares in YDL to secure a loan from MSC to YDL.  YDL owns a valuable WFOE in the Mainland.

5.  YDL defaulted in repayment of the loan.  MSC declared an event of default and appointed Mr Fok and Mr Gronow as Receivers of the YDL shares.  MSC exercised its rights by completing pre-signed resignation letters, causing the defendants to “resign” and appointing Mr Fok and Mr Gronow as directors of YDL.  Despite the appointments, the YDL shares have remained registered in the names of YPL and Wonder Earn to date.

6.  On 18 June 2014, Mr Fok and Mr Gronow purported to commence proceedings in the name of YDL in the Mainland against WFOE and its incumbent officers (including Ricky Liu) (“the Mainland proceedings”) for delivery up of WFOE’s assets.  The Mainland court has not yet granted any relief as of the date of hearing of the authority summons.

7.  The present action (“the Action”) was commenced on 16 July 2014 in the name of YDL.  An interim injunction has been granted against the defendants. See the injunction decision and the Court of Appeal’s judgment dated 3 June 2015 refusing leave to appeal.

8.  A substantive part of the defence relating to what were known as the No Event of Default Point, the Implied Terms Point, the MLO Point, the Estoppel Point and the Invalid Appointment of Receivers Point has been struck out.  See the strike-out decision. 

9.  Meanwhile on 21 July 2015, Ricky Liu issued the authority summons. 

10.  YDL has 4 broad grounds in opposition:

(a) That Ricky Liu has no locus to raise the issue of authority;

(b) That on a proper construction, Reg 13.1(t) of the Articles does not apply where there is no Lender Director and if necessary a term should be implied.  Moreover, Reg 13.1 does not operate beyond an event of default;

(c) That there had been ratification; and

(d) That issue of the authority summons was an abuse of process.

11.  The Receivers and MSC are not parties to this authority summons.  Nor have they filed affirmations.

C.  LEGAL PRINCIPLES ON AUTHORITY TO SUE

12.  The Court has inherent jurisdiction to strike out a plaintiff’s name for want of authority. The burden lies with those suing in the name of the plaintiff to prove authorization. Subject to any subsequent ratification (where necessary) of the action by the company, the action will stand or fall depending on the court’s determination of the question of authority.  If the standard of proof is not achieved, then there is no consent and the name of the company must be struck out and the action dismissed. Put another way, either there was authorization or there was not.  See Kammy Town Ltd v Super Glory Corporation Ltd (unreported, HCA 3524/2003, 14 January 2005), §§11-14, 21.

D.  LEGAL PRINCIPLES ON ARTICLES OF ASSOCIATION

13.  Articles of association (being part of the company’s constitution) constitute a statutory contract between the company and all its members inter se and is enforceable amongst them: Gower & Davies, Principles of Modern Company Law, 9^th ed., §§3-18; BVI Business Companies Act 2004 s11, Companies Ordinance (Cap 622) s86(1)(a) & (2). 

14.  Where the articles of association have become a public document (in this case by registration), they represent the company’s regulations and cannot be rectified or supplemented by implied terms. This has been explained in Gower,at §§3-19 and 3-20.

“Although the articles of association have a contractual status, they are clearly more than a private bargain among the company and its members. The company’s articles become a public document at the moment of formation … Thus, those who deal with the company have a legitimate expectation that the registered articles represent an accurate statement of the company’s internal regulations.

From this situation the courts have concluded that standard contract law should apply to the articles only with certain qualifications. In particular, the courts are reluctant to apply to the statutory contract those doctrines of contract law which might result in the articles subsequently being held to have a content substantially different from that which someone reading the registered documents would have understood them to have. Thus, the Court of Appeal has held that articles cannot later be rectified to give effect to what the incorporators actually intended but failed to embody in the registered document, since the reader of the registered documents could have no way of guessing that any error had been made in transposing the incorporators’ agreement into the document [citing Scott v Frank F. Scott (London) Ltd [1940] Ch 794, 801 (CA)].  Equally, that Court has refused to imply terms into the statutory contract from extrinsic evidence of surrounding circumstances where that evidence would probably not be known to third parties who would thus have no basis for anticipating that any such implication was appropriate [citing Bratton Seymour Service Co Ltd v Oxborough [1992] BCLC 693, 696f-697f, 698f-i (CA); Towcester Racecourse Co Ltd v Racecourse Association Ltd [2003] 1 BCLC 260]…”

15.  As part of his duty to act in good faith in the interests of the company, a director is under a duty to act in accordance with the company’s constitution. This is because the corporate constitution can define and set the limits of the company’s interests. The constitution may do so either by purporting to prohibit the company from undertaking certain activities, or by limiting the powers of the board (perhaps by requiring shareholder approval for certain matters).  See Ford’s Principles of Corporations Law, 15^th ed, at §8.160.

16.  A director also has a duty to follow the procedures in the company’s constitution, in particular to disclose his personal interest: Clark v Cutland & ors[2003] 2 BCLC 393, at §21, Arden LJ:

“… It is the duty of directors to follow the appropriate procedures in the company’s constitution as much as it is their duty to apply corporate property only for proper purposes. Failure to obtain appropriate approval and insufficient disclosure is a serious matter. Disclosure plays an important role in company law and the quality of disclosure is important. Disclosure is required for many purposes and it performs at least two valuable functions. It ensures that information is passed from the directors to the shareholders or from one director to another. It also acts as a deterrent against self-dealing...”

17.  Where the directors carry out a transaction without obtaining proper authorisation in accordance with the articles of association, the consequence is that the transaction is without legal effect and not merely voidable. This was explained by Arden LJ in Clark v Cutland, at §§26-27:

“[26]…Under this article, directors were not entitled to any remuneration unless it was authorised by the company in general meeting. The judge held that there was no such authorisation in the present case. It follows that the payments of pension contributions to the pension fund trustees were without legal effect and not merely voidable….

[27]…However, where an agent carries out a transaction without authority, the consequence is (as I have stated) that the transaction is without legal effect. This consequence is more serious in law than that which attaches to a transaction which is voidable since the right to rescind a voidable transaction can be lost. Because the sanction attaching to an unauthorised transaction is more serious, it must supersede the sanction of voidability that would otherwise attach in the present case.”

18.  I now turn to each ground of opposition.

E.  GROUND 1 – LOCUS OF RICKY LIU

19.  Mr Bartlett SC submits that Ricky Liu was a former director but not a member of YDL.  He was not a party to the Articles and should not be permitted to invoke them to challenge the present action.  See Beattie v E&F Beattie Ltd [1938] Ch 708, 721-722; Newmark Capital Corp Ltd v Coffee Partners Ltd [2007] 1 HKLRD 718, §§80-82, Recorder Paul Shieh SC.  In Beattie in particular, a company director (who was not a member) who wanted to refer his dispute with the company to arbitration pursuant to the articles was not permitted to do so.

20.  Want of authority may mean that the act in question (issue of the writ) was void: Clark v Cutland, at §§26-27; or a nullity so that the action can be stayed: Danish MercantileCo Ltd & ors v Beaumont & anor [1951] 1 Ch 680, at pp 683, 687-688.  It is thus open to a third party to challenge the lack of authority of the company to issue the writ.  By way of example, in Airways Ltd v Bowen & anor [1985] BCLC 355, the company sued the directors for misuse of company property.  The directors (not being members of the company and hence a “third party”) raised the issue of want of authority.

21.  I reject Mr Bartlett SC’s submission that Ricky Liu has no locus to raise the issue of authority.

F.  GROUND 2 – PROPER CONSTRUCTION OF YDL’S ARTICLES AND THE IMPLIED TERM

F1.  The relevant Articles

22.  The following regulations (referred to individually as “Reg”) in YDL’s Articles are relevant:

“8.4 [MSC] and any person to whom it assigns and/or transfers its rights and/or obligations in accordance with and under the Investor Rights Deed (the “Lender”) shall have the right from time to time by notice in writing to require the appointment of its nominee as a director (any such director being a “Lender Director”) and by like notice to require the removal of such Lender Director and the appointment of another nominee to act in place of such Lender Director. No Lender Director may be removed otherwise than in accordance with this Regulation 8.4.

…

9.1 The business and affairs of the Company shall be managed by, or under the direction or supervision of, the directors of the Company. Subject to the requirements and restrictions contained in Regulation 13, the directors of the Company have all the powers necessary for managing, and for directing and supervising, the business and affairs of the Company. The directors … may exercise all such powers of the Company as are not by the Act or by the Memorandum or the Articles required to be exercised by the Shareholders.

9.2 Each director shall exercise his powers for a proper purpose and shall not act or agree to the Company acting in a manner that contravenes the Memorandum, the Articles or the Act. Each director, in exercising his powers or performing his duties, shall act honestly and in good faith in what the director believes to be the best interest of the Company.

…

9.8 Save and except that the specific prior written consent of the Lender Director is required for the purposes set out in Regulation 13 below, the Lender Director shall not be entitled to vote with respect to the executive management of the operation of the business of the Company…

…

10.4 … if any resolution in respect of any of the matters described in Regulation 13 is to be considered at a meeting of the directors (each such meeting being a ‘Restricted Meeting’), the agenda of each Restricted Meeting shall be available to all directors at least ten (10) Business Days before such Restricted Meeting is held.

10.6 The quorum for any meeting of the directors shall be two (2), provided always that the quorum at any Restricted Meeting [as defined in regulation 10.4] shall include at least one Lender Director or his alternate…

…

13.1 Notwithstanding any other provisions in the Memorandum or the Articles, the Shareholders and the directors of the Company shall procure that the Company shall not (and the directors (and any committee of the directors) and the Shareholders may not) resolve, pass any resolution with respect to, approve, undertake, action or do any of the matters described below in respect of the Company without the prior specific written consent of the Lender Director:

…

(t) Commencement or settlement of any material litigation or arbitration or other proceedings.

14.1 A director of the Company shall, forthwith after becoming aware of the fact that he is interested in a transaction entered into or to be entered into by the Company, disclose the interest to all other directors of the Company in writing.

…

14.3 A director of the Company who is interested in a transaction entered into or to be entered into by the Company may with the prior approval of a Restricted Meeting:

(a) vote on a matter relating to the transaction;

(b) attend a meeting of directors at which a matter relating to the transaction arises and be included among the directors present at the meeting for the purposes of a quorum; …”

(all emphases added)

F2. The parties’ respective construction

23.  Ms Linda Chan SC submits that the writ was issued in breach of Reg 13.1(t).  On the other hand, Mr Bartlett SC submits that Reg 13.1(t) only applied where there was a Lender Director.  If necessary, a term should be implied into Reg 13.1(t) such that after the words “the Lender Director”, there should be added “provided that this Regulation shall only operate if a Lender Director is appointed” (“the Implied Term”).  If no Lender Director is appointed, then the Company would simply operate “normally”.  He also submits that Reg 13.1(t) did not operate beyond an event of default.

F3. The proper approach

24.  To start with, the Articles cannot be supplemented by implied terms: Gower, §§3-19 to 3-20.

25.  To imply a term, one has to satisfy 5 requirements, namely, that (i) the proposed term is reasonable and equitable; (ii) it is necessary to give business efficacy to the Articles, so that no term will be implied if the Articles are effective without it; (iii) it must be so obvious that it goes without saying; (iv) it must be capable of clear expression; and (v) it must not contradict any express term of the Articles: Kensland Realty Ltd v Whale View Investment Ltd &  anor (2001) 4 HKCFAR 381,at §59, following BP Refinery (Westernpoint) Pty Ltd v Shire of Hastings (1978) 52 AJLR 20, at p26.  This is a binding Court of Final Appeal authority.

26.  In Attorney General of Belize & ors v Belize Telecom Ltd & anor [2009] 1 WLR 1988, at §§21-27, in particular §27, Lord Hoffmann says that this list is best regarded, not as a series of independent tests which must each be surmounted, but rather as a collection of different ways in which judges have tried to express the central idea that the proposed implied term must spell out what the contract actually means, or in which they have explained why they did not think that it did so.

27.  AG of Belize was followed by the Hong Kong Court of Appeal in Guo Jianjun & anor v Dragon Fame Investment Ltd [2015] HKCU 2196, §§20-25, which used context as the starting point instead of looking at what may be the natural and ordinary meaning of words. Provisions must be construed by having regard to the agreement as a whole.  The overriding question for the court is to find out what the instrument would convey to a reasonable person against all the background knowledge.  The relevant provisions would be considered together with the implied term question.  The court should only imply a term if it can be satisfied that this must be what the contract means to such a reasonable person. 

28.  The House of Lords has since held that AG v Belize should not be interpreted as diluting the traditional test of necessity for implying a term: Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd & anor [2015] 3 WLR 1843, §§18-31, 57-74, 76-77, in particular §§23-24. Lord Neuberger added 6 comments (at §21) to the 5 requirements in BP Refinery:

(i) The implication of a term was “not critically dependent on proof of an actual intention of the parties” when negotiating the contract but was concerned with what notional reasonable people, in the position of the parties at the time at which they were  contracting, would have agreed.

(ii) A term should not be implied into a detailed commercial contract merely because it appears fair or merely because one considers that the parties would have agreed it if it had been suggested to them.  Those are necessary but not sufficient grounds for including a term.

(iii) It is questionable whether the first requirement of reasonableness and equitableness, will usually, if ever, add anything.  If a terms satisifes the other requirements, it is hard to think that it would not be reasonable and equitable.

(iv) Although the 5 requirements are otherwise cumulative, business necessity and obviousness can be alternatives in the sense that only one of them needs to be satisifed.

(v) If one approaches the issue by reference to the officious bystander, it is vital to formulate the question to be posed by him with the utmost care.

(vi) Necessity for business efficacy involves value judgment.  The test is not one of “absolute necessarily”.  It may well be that a more helpful way of putting the 2^nd requirement is that a term can only be implied if, without the term, the contract would lack commercial or practical coherence.

29.  Lord Hoffmann in AG v Belize suggested that the process of implying terms into a contract was part of the exercise of the construction, or interpretation, of the contract.  There is only one question: is that what the instrument, read as a whole against the relevant background, would reasonably be understand to mean?  Lord Neuberger in Marks and Spencer reiterates that construing the words used and implying additional words are different processes governed by different rules.  It is only after the process of construing the express words is complete that the issue of an implied term falls to be considered (at §§26 & 28).

30.  Further, Lord Neuberger explains that whether a term is implied is to be judged at the date the contract was made and the reasonable reader of the contract would consider the term to be so obvious as to go without saying or to be necessarily for business efficacy. (at §§22 & 23)

31.  In the light of all these authorities, the proper approach is to construe Reg 13(t) in the context of the Articles to ascertain what they would convey to a reasonable person with all the background knowledge.  Considering whether or not a term should be implied follows.  The 5 requirements adopted in Kensland Realty remain valid considerations.

F4. Application of the legal principles on construction

32.  I agree with Ms Linda Chan SC that on a proper interpretation of the cited Regulations:

(1) The commencement of an action is a “restricted matter” under Reg 13 (“Restricted Matter”);

(2) The shareholders and the directors of YDL shall procure that YDL shall not pass any resolution with respect to such Restricted Matter without the prior specific written consent of the Lender Director;

(3) The quorum for a board meeting at which the board resolves to commence an action is 2 directors, one of whom must be a Lender Director appointed by MSC;

(4) The directors of YDL shall not act in contravention of the Articles and can only exercise their powers for a proper purpose and in the interest of YDL; and

(5) Where the directors have conflict of interests, they shall disclose their interests in writing to all other directors, and the directors can only vote on a matter relating to the transaction in which he is interested with the prior approval of a Restricted Meeting.

33.  Mr Gronow suggests that the Action is not litigation touching upon MSC’s security but, rather, “domestic litigation” directed to something as basic as the recovery of company property from the ex‑directors. 

34.  Without disrespect, this is a wholly unmeritorious argument.  The Action is an attempt to recover assets which, in turn, will enable YDL to take control of WFOE and reduce the debt due to MSC.  I cannot think of more “material litigation” under Reg13.1(t) than the Action.  Mr Bartlett SC does not press hard to the contrary.

35.  Issue of the Writ was not preceded by a board resolution authorizing it. The only Lender Director, Mr Kawaii, had resigned the day before the Writ was issued.  YDL has now conceded that Mr Fok and Mr Gronow were ordinary directors and not Lender Directors.  Issue of the Writ was in contravention of Reg 13.1(t). 

F5. Does Reg 13.1 only operate when a Lender Director has been appointed by MSC?

36.  Reg 13 is framed in mandatory terms by the use of the word “shall”.  It is to apply “notwithstanding any other provisions in the Memorandum or the Articles” and that would mean “notwithstanding Reg 8.4” as well.  On a proper interpretation, consent of the Lender Director cannot be dispensed with in the context of the Articles. Operation of Reg 13(t) is not limited to where there is a Lender Director.

37.  Mr Bartlett SC submits that (i) appointment of a Lender Director is a right and not an obligation given to MSC under Reg 8.4; and (ii) the lack of a Lender Director for the relevant period was because MSC has controlled YDL’s board of directors and MSC had assumed rights over all the shares in YDL. Accordingly Reg 13(t) only operates when a Lender Director has been appointed.

38.  I agree with point (i).  Reg 13.1(t) was added by way of amendments to the Articles on 14 September 2010 at the instigation of MSC in view of the loan made to YDL.  There is no dispute that Reg 13.1 was intended to protect MSC so that material litigation would not be commenced without its consent. Otherwise, costs may be incurred which would impinge on the security held by MSC. I do not think YDL could unilaterally waive the requirements in Reg 13(t).

39.  However, I disagree with point (ii).  Mr Bartlett SC submits that it was MSC who had taken control of the shares and appointed Mr Fok and Mr Gronow.  MSC would have been comforted by the fact that they were new and independent appointees, unconnected with former management and the shareholders, He also submits that the directors’ normal duties undergo a fundamental change when a company is insolvent.  The duties of directors are owed to MSC, as stakeholders in insolvency, ie balance sheet or cash flow insolvency: Company Law in Hong Kong – Insolvency 2015, §§1.016 to 1.017; Butterworths Hong Kong Company (Winding-up and Miscellaneous Provisions) Law Handbook, §177.06.

40.  With respect, Mr Bartlett SC’s submission as to MSC’s state of mind is not supported by evidence from MSC. The directors (including the Lender Director) owe their duties to YDL and not MSC: Palmer’s Company Law, §8.2402. It was all the more important to preserve MSC’s veto power under Reg 13.1(t). Anyhow, it has now been conceded that Mr Fok and Mr Gronow were ordinary directors and not Lender Directors.

41.  YDL may be cash flow insolvent but it was not balance sheet insolvent because WFOE has net asset value of RMB1.7 billion.  Even if YDL were involvent, I do not agree that the duties of the directors were owed to MSC, as opposed to the general body of creditors.

42.  The definition of “Resolution of Directors”, Reg 9.1, 9.5, 10.4, 10.6, which circumscribe the powers of directors, are all directed at “Restricted Matters” and “Restricted Meetings” rather than the Lender Director. I agree with Ms Linda Chan SC that Mr Bartlett SC’s argument would require those Regulations to be re-written.

43.  I reject the construction that Reg 13.1 only applies where there is a Lender Director.

F6. Should the Implied Term be implied?

44.  Applying the 5 requirements in Kensland Realty, the Implied Term only meets the 4^th one in being capable of clear expression. 

45.  In respect of the 1^st requirement, instead of being reasonable and equitable, the Implied Term will take away the business efficacy of Reg 13.1 and defeat the whole purpose of including Reg 13.1 in the Articles.  It will mean that if there is no Lender Director, MSC need not even be informed of the intended litigation. 

46.  In respect of the 2^nd requirement, Reg 13.1 is effective without the implied term.  It appears that a Lender Director can be appointed with ease at any time, as could be seen from the ratifications.

47.  In respect of the 3^rd requirement, an officious bystander would hardly say that the Implied Term goes without saying in view of the purpose of the inclusion of Reg 13.1.

48.  In respect of the 5^th requirement, the Implied Term contradicts the express mandatory terms of Reg 13, which requires every shareholder and director to procure YDL not to approve any action without the written consent of the Lender Director.  It also defeats Reg 9.1, 9.5, 10.4 and 10.6.

49.  Even applying the contextual approach in Guo Jianjing, knowing the scheme of the loan, the documentation involved, the request of MSC to include Reg 13.1(t) in the Articles, I do not think a notional reasonable person in the position of MSC and YDL at the time the Articles were amended would come to a different conclusion from mine.

50.  The Implied Term fails to satisfy 4 out of 5 requirements in Kensland Realty and lacks necessity or business efficacy when applying the contextual approach in Guo Jianjun.  I decline to imply it.

F7.  Does Reg 13(t) operate past an event of default?

51.  Mr Bartlett SC submits that the draftsman did not apply his mind to how things would operate on the occurrence of an event of default.  The event of default would introduce other forms of protection and control of MSC so that MSC would no longer need a Lender Director.

52.  With respect, there is no reference to an event of default in either Reg 8.4 or 13.1(t).  The 2 Regulations are widely drafted to cover a situation where eg YDL is solvent but wants to sue a contractor for defective services. MSC should have a say in that kind of litigation. 

53.  Further, the Articles form a public document.  An ordinary reader of the Articles would not know if an event of default has occurred or has been declared. There needs to be extrinsic evidence, which is not permissible: Bratton v Seynour, 696d-697g; AG v Belize (which did not question the principle but found it inapplicable), §§35-37.    

54.  I find that Reg 13.1(t) operates whether there is an event of default or not.

G. GROUND 3 - RATIFICATION

G1. Legal principles on ratification

55.  Danish Mercantile v Beaumont explains the wide powers of ratification of an action commenced (in that case by a director) without authority of the company:

“… it is open at any time to the purported plaintiff to ratify the act of the solicitor who started the action to adopt the proceedings, to approve all that has been done in the past, and to instruct the solicitor to continue the action. When that has been done, then, in accordance with the ordinary law of principal and agent and in accordance with the ordinary doctrine of ratification, in my view, the defect in the proceedings as originally constituted is cured; and it is no longer open to the defendant to object on the ground that the proceedings thus ratified and adopted were, in the first instance, brought without proper authority.” (per Jenkins LJ, at 687-688)

56.  Ms Linda Chan SC does not dispute that there could be ratification.  The only question is how it should have been done.

57.  Where there is an effective board of directors, the company in general meeting cannot, short of altering the articles, usurp the board’s power: John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113 at 134 per Greer LJ and at 143 per Slesser LJ; followed in Broadview Commodities Pte Ltd v Broadview Finance Ltd [1983] 2 HKC 578 at 581D per Commissioner Denis Chang QC.

58.  Where the board is ineffective, the power which in effect has been delegated by the articles to the directors reverts to the person or persons who delegated, namely the company in general meeting: Miracle Chance Ltd v Ho Yuk Wah David [1999] 3 HKC 811, at 815 C‑E.

59.  Where the exercise of a power vested exclusively in a board of directors is invalid, it is for the board to ratify the invalidity. The company in general meeting has no right to intervene.  A fortiori when the shareholders had agreed specifically that certain matters required their joint consent and had confided the giving of that consent particularly to the directors.  See Breckland Group Holdings Ltd v London & Suffolk Properties Ltd & Ors (1988) 4 BCC 542, at 545, 546, 547. 

60.  In Breckland Group, the shareholders’ agreement agreed for P to appoint 1 director and D2 to appoint 2.  There had to be written consent of P’s appointee and one of D2’s appointees to commence material legal proceedings. No such consent was given.  Harman J held that since the relevant article confided the management of the business to the directors, it was not for the general meeting to interfere. 

61.  The shareholders’ unanimous consent will bind the company, even on matters that the articles reserve to the directors.  In re Duomatic Ltd [1969] 2 Ch 365, 373C-D, Buckley J held that

“where it can be shown that all shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be.”

Gower & Davies, §14.15-14.17, 15.15-15.21.

62.  Re Torvale Group Ltd [1999] 2 BCLC 605, 617e-g explains the Duomatic principle:

“The essence of the Duomatic principle is that, where a statue or a company’s articles provide that a course can be taken only with the sanction of a certain group, which sanction is to be given in accordance with a prescribed procedure, then, provided that all the members of that group agree to that course, the presecribed procedure is not normally treated as being of the essence. This is particularly likely to be the case if (i) the court is satisfied that the sole purpose of the prescribed procedure is for the protection of the members of the relevant group, and (ii) the prescribed procedure enables a majority of that group to bind the minority in relation to the course in question. The articles constitute a contract, and if the parties to that contract, or if the parties for whom the benefit of a particular term has been included in that contract, are happy unanimously to waive or vary the prescribed procedure for a particular purpose, then, unless there is a ground of the sort considered in Peak and in Wright for the Duomatic principle not to be applied, it seems to me that there is no good reason why it should not be capable of applying.”

63.  The Duomatic principle applies to directors meetings: Base Metal Trading Ltd v Shamurin [2005] 1 WLR 1157, at §§83-84. In Company Law in Hong Kong, Practice and Procedure 2015.

64.  However, unanimous consent can operate to waive formalities required for the protection of shareholders, but not those required for the protection of other parties, notably creditors: Gower & Davies, §15-20.

G2.  The purported resolutions in ratification

65.  Mr Bartlett SC relies on 4 sets of resolutions in ratification:

(a) YDL’s shareholders’ resolution dated 26 November 2014;

(b) YDL’s board resolution dated 31 July 2015;

(c) YDL’s shareholders’ resolution dated 31 July 2015; and

(d) YDL’s shareholders’resolution dated 7 September 2015.

G3.  Ratification by YDL’s shareholders resolution dated 26.11. 2014

66.  This resolution predated the authority summons by 8 months.  It was signed by MSC as attorney and proxy for YPL and Wonder Earn respectively.  It states that “all acts and actions of [Mr Fok and Mr Gronow] … for and on behalf of [YDL] … on or after 4 June 2014 be and are hereby confirmed, ratified and approved” (§§9 and 11).  It did not refer to the present action. 

67.  Ms Linda Chan SC challenges the validity of this resolution because:

(a) the validity of the powers of attorney given by YPL and Wonder Earn to MSC (“the PoAs”) has lapsed;

(b) it had not complied with Reg 13.1(t); and

(c) the power to ratify rested with the board of directors but not the shareholders.

68.  With regard to point (a), on Mr Fok and Mr Gronow’s own case, YPL and Wonder Earn have, since 18 March 2014 (date of declaration of event of default), ceased to have power to exercise any rights over the shares. Ms Linda Chan SC submits that any power given to MSC under the pre-signed irrevocable PoAs must have lapsed together.

69.  I disagree. Unlike a person who has eg become mentally incapacitated, YPL and Wonder Earn as principals have not lost their capacity. The PoAs granted remained valid.  As the PoAs were security for money, and stated to be irrevocable, they were not revocable: Walsh v Whitcomb (1797) 2 Esp 565.

70.  YDL produced 2 legal opinions containing inconsistent statements. Harneys’ 1^st opinion dated 12 June 2015 stated that only the Receivers might vote (at §7).  Harneys’ 2^nd opinion dated 7 September 2015 stated that both the shareholders and Receivers might vote.  The bases were contractual and statutory.

71.  By contract, under clause 7.1(a) of the Share Mortgage, once an event of default has occurred, YPL and Wonder Earn were precluded by contract from exercising their voting powers.  Instead:

“the Mortgagee [MSC] without further notice to the Mortgagor may, whether acting on its own behalf or through a receiver or agent:

(a) solely and exclusively exercise all voting and/or consensual powers pertaining to the Mortgaged Property or any part thereof and may exercise such powers in such manner as the Mortgagee may think fit.” (emphases added)

72.  By statute, s.66 of the BVI Business Companies Act 2004 gave the Receivers the right to vote the YDL shares.

73.  I hold that the persons who could exercise the voting powers should be MSC (as mortgagee or under the PoAs) or the Receivers. 

74.  With regard to point (b), even if MSC still retained the powers under the irrevocable PoAs, Reg 13.1(t) was a formality for protection of a creditor which cannot be unanimously waived by shareholders: Gower & Davies, §§15-20.  The resolution failed to comply with Reg 13.1(t) for lack of written consent of a Lender Director.  It failed to identify this Action so as to enable the Lender Director to give “specific” written consent. Reg 13.1(t) simply does not permit the grant of blanket authorization to commence actions. 

75.  With regard to point (c), Article 9.1 and s.109 of the BVI Business Companies Act 2004 (as amended) provide that the business and affairs of YDL shall be managed by the board of directors.   The board was effective, subject to the appointment of a Lender Director.  No difficulty in such appointment was ever suggested. Applying John Shaw, Broadview Commodities, Miracle Chance and Breckland Group, the shareholders could not usurp the powers of the directors. 

76.  I find the board resolution dated 26 November 2014 to be invalid ratification.

G4.  Ratification by YDL’s board resolution dated 31.7. 2015

77.  This board resolution referred to, amongst others, the appointment of Mr Batchelor as Lender Director on 31 July 2015, the Action and this strike-out application.  The board unanimously adopted, ratified, confirmed and approved the commencement and carrying on of the Action.  It also stated, for the avoidance of doubt, that the signing of these written resolutions by Mr Batchelor also constituted his irrevocable consent to the resolutions as Lender Director.  The minutes were signed by all 3 directors (Mr Batchelow, Mr Fok and Mr Gronow).

78.  This was valid ratification of the Action by the board of directors with specific written consent of the Lender Director.  Even on Ms Chan SC’s own case, ratification should have been done by the board.

79.  Ms Linda Chan SC nonetheless challenges the validity of this ratification on the following grounds:

(a) Lack of prior specific written consent of the Lender Director.  Failure to comply with Reg 13(t) was not something which could be ratified.

(b) The 3 directors were in positions of conflict and could not pass any resolution for the purpose of exonerating the default of Mr Fok and Mr Gronow at the expense of YDL. 

80.  I am unable to agree with point (a).  Ratification necessarily relates back.  The persons who needed to consent to the issue of the writ in the first place all ratified the Action. Neither MSC nor YDL were prejudiced.  Applying the Duomatic principle, Base Metal and Breckland Group, the board resolution was clearly valid ratification.

81.  With regard to point (b), the conflict was said to have arisen in this manner. Ms Linda Chan SC submits that if lack of authority is established, Mr Fok and Mr Gronow as directors who commenced this action on behalf of YDL would be personally liable for costs.  They and their firm (FTI Consulting), with Mr Batchelor as a senior Managing Director would be liable in damages for negligence to YDL.   There was thus a potential conflict with their duties to the principal, YDL.

82.  On a similar vein, YDL’s solicitors may be personally liable for the costs needlessly incurred by the defendants for breach of the implied warranty that they had authority to represent YDL: Grand Field Group Holdings Ltd v Tsang Wai Lun Wayland & Ors [2010] 5 HKC 441 at §§12 and 34, per Poon J (as he then was); Airways Ltd v Bowen 358f to 361g; Danish Mercantile v Beaumont, at p.682, Jenkins LJ.  She submits that YDL may need to indemnity their solicitors pursuant to an indemnity clause in the retainer agreement.

83.  Ms Linda Chan SC points out that the purported board resolution did not contain a declaration of conflict of interest of a director, as required by Reg 14.1.  Nor was there evidence of prior approvalof a Restricted Meeting under Reg 14.3 authorising Fok, Gronow or Batchelor to vote on a matter in which they were interested.

84.  Even if Fok and Gronow are able to demonstrate that they have obtained the prior approval of a Restricted Meeting before passing the board resolution, the grant of authority would not include an authority to act for the director’s own benefit. In Hopkins v TL Dallas Group Ltd & anor [2005] 1 BCLC 543 at §88, Lightman J held that:

“The grant of actual authority to an agent will not normally include authority to act for the agent’s benefit rather than for that of his principal and therefore, without agreement, the scope of actual authority will not include this. The grant of actual authority should be implied as being subject to a condition that it is to be exercised honestly and on behalf of the principal: Lysaght Bros & Co Ltd v Falk (1905) 2 CLR 421. It follows that, if an act is carried out by an agent which is not in the interests of his principal, for example signing onerous unconditional undertakings, then the act will not be within the scope of the express or implied grant of actual authority. As a result there cannot be actual authority.” (emphasis added)

85.  Accordingly, Ms Linda Chan SC submits that the board resolution was invalid.

86.  For present purposes, I assume without deciding, that Mr Fok and Mr Gronow may face personal liability in costs.  Even so, with respect to Ms Linda Chan SC, her contentions go beyond challenge to procedural error in authorizing commencement of the Action.  It is speculative to talk about the existence of an indemnity clause in the retainer, the motive of Mr Batchelor and to say that YDL would sue the 3 directors for any cause.  As an ex-director and not even a shareholder of YDL, Ricky Liu has no locus to assert any conflict of interest and hence invalidate the board resolution on this ground. 

87.  The board resolution was not passed to ratify breach of fiduciary duty of any director (eg in converting corporate assets).  The directors had no personal interest in the Action.  In fact, there was a united front amongst YDL, the Lender Director and ordinary directors in commencing and continuing the Action. The assertion of potential conflict of interest is more theoretical than real.

88.  I find that the board resolution dated 31 July 2015 was valid ratification.

G5.  Ratification by YDL’s shareholders resolution dated 31.7.2015

89.  This resolution was purportedly passed by the shareholders (with MSC as attorney and proxy for YPL and Wonder Earn).  It specifically referred to the Action and the board resolution of the same date.  It, amongst others, ratified, confirmed, approved and adopted the Action from the date of its commencement.

90.  The Lender Director has given his consent. MSC could vote with the valid PoAs. However, shareholders could not usurp the powers of an effective board.  The ratification was invalid.  It was unnecessary too,  as a valid board resolution has been passed on the same date.

G6. Ratification by YDL’s shareholders’ resolution dated 7.9. 2015

91.  YPL and Wonder Earn (through the Receivers) passed this resolution adopting, approving, ratifying and confirming the commencement of this action and the PRC Proceedings”.  It referred specifically to this action, the board resolutions dated 31 July 2015 appointing Mr Batchelor and ratifying the action.  It also referred to BVI law under s.66 of the BVI Business Companies Act 2004 and the 2 PoAs. It resolved to ratify, confirm approve and adopt (i) the Action, (ii) all acts of Mr Fok and Mr Gronow and Mr Batchelor in purported exercise of their powers as directors in connection with the action; and (iii) the board resolutions dated 31 July 2015.

92.  As held above, the Receivers had power to vote.  However, as Ms Linda Chan SC points out, Mr Fok and Mr Gronow cannot approbate and reprobate.  The Court of Appeal and this court have accepted their contentions that all their acts (including prosecution of the Action) were carried out by them as directors and on that basis, this court struck out the Agency Point: CA decision, at §§27-28 & 38; the strike-out decision at §§90 & 100.  One questions whether Mr Fok and Mr Gronow can turn round to assert their role as Receivers.

93.  If I am wrong, their rights as Receivers could not exceed those of the shareholders.  For the same reasons given in paragraphs 89-90, the ratification was invalid.

94.  In summary, only the board resolution was valid ratification. 

95.  However, one should not lose sight of the bigger picture.  The Court can have regard to the outcome of the shareholders’ resolutions in July and September 2015 to ascertain the wishes of YDL.  Those 2 shareholders’ resolutions involved all stakeholders, ie all the shareholders (votes exercised by MSC), MSC (as Mortgagees invoking the PoAs), the Receivers, the Lender Director and all the directors. There was unity of purpose amongst them in ratifying the Action.  No stakeholder could have been prejudiced by the purported ratifications.  According to Ms Chan SC, the only entity who might have been prejudiced was YDL, who would otherwise be spared from having to pay costs of the various interlocutory orders. 

H. GROUND 4 – ABUSE OF PROCESS

96.  Mr Bartlett SC submits that the authority summons is an abuse of process, as it is simply a further gambit by Ricky Liu to obstruct the new directors’ attempt to gain legitimate control over WFOE and to frustrate enforcement action in the Mainland.  He says that Ricky Liu (and D2) was avoiding the Mainland proceedings.  The presiding judge commented that Ricky Liu (and D2) had “without justified reasons, refused to appear in court and participate in the proceedings despite [the Court’s] service of summons”. Subsequently YPL commenced New Mainland Proceedings and sought to stay the delivery of a judgment in the Mainland Proceedings on the same basis.

97.  This case has gone through hearings for injunctions and striking out of the defence.  It would of course have been better if Ricky Liu had issued the authority summonses before those hearings.  However, I do not agree what he has done was an abuse.  I have found the issue of the writ to be in contravention of Reg 13.1(t).  The arguments were not straightforward.

98.  Moreover, the issue of authority has not been decided before in this case.  In any event, principles of res judicata and issue estoppel do not apply to interlocutory application: Chu Hung Ching v Chan Kam Ming & Ors [2001] 1 HKC 396 at 401 E-F (CA), per Mayo VP.

99.  Further, as explained in Ricky-7^th, Ricky Liu was not aware that Fok and Gronow had represented to the Mainland Court that they were Lender Directors until their Mainland lawyers filed the Summary of Evidence on 20 April 2015, ie 5 months after the injunction decision.

100.  If Ricky Liu had abused the process, YDL has not done much better.  Apart from issuing the writ without authority, it has constantly shifted the goal posts: from representing to the Mainland court that Mr Fok and Mr Gronow were acting “not merely as Lender Directors”, to “not as Lender Directors”, to now conceding that they were ordinary directors.  Harney’s opinions shifted on whether the Receivers and/or MSC were entitled to vote.  Their case that Mr Fok and Mr Gronow were Lender Directors were only withdrawn on 21 September 2015 at the hearing before the Mainland court.

101.  Ms Linda Chan SC points out that even before commencement of this action, on 9 June 2014, YDL had passed a resolution to cancel YDL’s then seals and chops.  It was material non-disclosure in the application for injunction and undermined the utility of the Action. 

102.  Ms Linda Chan SC may be correct but it is more appropriate for the court to deal with that argument on a separate occasion, after hearing the representations of YDL and its solicitors, than to take this into account on the question of costs in the authority summons.

J. SUMMARY OF FINDINGS

103.  Ricky Liu has locus to raise the issue of authority.  Reg 13 is framed in mandatory terms by the use of the word “shall”.  It is to apply “notwithstanding any other provisions in the Memorandum or the Articles.  Consent of the Lender Director cannot be dispensed with in the context of the Articles and the whole scheme of the loan. Operation of Reg 13(t) is not limited to where there is a Lender Director at the material time.  It operates whether or not there is an event of default.

104.  The Implied Term fails to satisfy 4 out of 5 requirements in Kensland Realty and lacks necessity and business efficacy when applying the contextual approach.  I decline to imply it.

105.  The PoAs granted by YPL and Wonder Earn to MSC remained valid and irrevocable.  Despite YPL and Wonder Earn being the registered shareholders, it was MSC or the Receivers who could exercise the voting powers on the YDL shares.

106.  Only the board resolution dated 31 July 2015 was valid ratification as having complied with Reg 13(t).  Ricky Liu has no locus to assert conflict of interest in the directors which might have invalidated the board resolution. The board resolution and 2 purported shareholders’ resolution passed after the authority summons was issued involved all stakeholders, ie all the shareholders, MSC (as mortgagees invoking the PoAs), the Receivers, the Lender Director and all directors.  There was unity of purpose among them and no stakeholder could have been prejudiced by the purported ratifications.

107.  There was no abuse of process by Ricky Liu.

K. COSTS

108.  The 4 affirmations filed contained lots of legal arguments and costs should be reduced.  On my findings, by 31 July 2015, there would have been valid ratification by the board and yet YDL did not make the concession that Mr Fok and Mr Gronow were ordinary directors until a very late stage before the hearing.  On a nisi basis, I order that:

(a) Ricky Liu should have costs of the authority summons up to and including 31 July 2015.  Solicitors for YDL are to show cause as to why they should not bear such costs within 14 days from the date of this judgment.

(b) Half of the costs of the authority summons from 1 August 2015 onwards shall be paid by Ricky Liu to YDL. 

(c) Costs reserved under the strike out decision dated 19 October 2015 shall be paid by the defendants to YDL.

109.  I have at the hearing given leave to file Mr Gronow’s 7^th affidavit to update the court on the Mainland proceedings.  Costs of and occasioned by that affidavit should be to Ricky Liu.  I have also given costs to Ricky Liu upon dismissal of the summons dated 18 January 2016.

110.  All costs are to be summarily assessed on 16 May 2016 on the papers without the need for an attendance.  If the receiving party does not adopt the costs statements already lodged, it/he shall revise its/his costs statement 7 calendar days before and the paying party revises its/his 3 calendar days before the summary assessment.

111.  I order that the authority summons be dismissed and make the costs order nisi in Section K above.

112.  I am most grateful to counsel for their thorough preparation and assistance to the court.

HCA 1341/2014 &
HCA1359/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1359 OF 2014

____________

____________

AND

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1341 OF 2014

____________

____________

__________________

D E C I S I O N

__________________

1.  These are applications for striking out before me:

A. In HCA 1359/2014, 2 summonses by D1 and D4 (“MSC” and “Elliott” respectively) on one part and D2 and D3 (“the Receivers”) on the other part to strike out the amended writ of summons and the statement of claim; and

B. In HCA 1341/2014, by the plaintiff (“YDL”) to strike out part of the   defences of D1, D2 and D3 (“the ex-directors”).

BACKGROUND

2.  These 2 Actions have gone through prior injunction proceedings which led to 3 Decisions.  The first decision was given by me dated 17 November 2014 (“the Decision”) refusing to grant an injunction to the plaintiff Mortgagors in the 1359 Action to restrain the Receivers’ exercise of powers; but granting an interim mandatory injunction in the 1341 Action to YDL for the ex-directors to hand over company records and assets to YDL.  Applications for leave to appeal have been refused by me and the Court of Appeal (“the Leave Decision” and “the CA Decision” respectively). 

3.  The facts have been summarized in §§2-13 the CA Decision and I rely on the same.  I also adopt the abbreviations therein. 

4.  Briefly, YDL did not repay the 2^nd and 3^rd instalments of a loan to MSC, which remained outstanding since 17 March 2014.  MSC declared an event of default and exercised its rights under the security arrangements to appoint the Receivers over the YDL shares and obtained possession of a property subject to a legal charge.  MSC also exercised its rights under the equitable mortgages to change the directors of YDL and the WFOE owned by YDL.  The new directors are the same persons who had been appointed the Receivers.

5.  In 1341 Action, YDL (acting under the new directors) seeks (a) a declaration that as from 4 June 2014 the ex-directors had no authority to hold themselves out as directors of YDL; and (b) a mandatory injunction for the handing over of corporate records, assets and business premises to YDL, and to restrain the ex-directors from giving instructions to YDL’s auditors and banks. 

6.  In 1359 Action, the Mortgagors claim that there was no event of default and that MSC was estopped from declaring an event of default by virtue of an oral assurance given by James Smith on behalf of MSC to Ricky Liu for YDL (“the Assurance”).

7.  The core issues in the injunction proceedings were whether an event of default had occurred to justify the appointment of receivers and whether ex-directors have been rightly removed by the Receivers. The parties argued extensively over what were known as theEstoppel Point, the MLO Point and the Agency Point (“the 3 Points”).

8.  The 3 Points were held to be demurrable on their faces and did not raise serious issues to be tried.  Apart from refusing to grant the injunction sought, I also dismissed the plaintiff’s application to amend the writ in 1359 Action to raise the MLO Point and the Agency Point.

9.  Following on the CA Decision, the present summonses for striking out were restored or taken out.

LEGAL PRINCIPLES FOR STRIKING OUT

10.  Striking out is a draconian remedy.  A party should not lightly be denied his day in court.  Accordingly, pleadings should be struck out only in clear and obvious cases.  Disputed facts are to be taken in favour of the party sought to be struck out.  The court should not decide difficult points of law in striking out proceedings.  The claim must be obviously unsustainable, the pleadings unarguably bad and it must be impossible, not just improbable, for the claim to succeed before the court will strike it out.  The mere fact that the case is weak and not likely to succeed is no ground for striking it out. Hong Kong Civil Procedure 2015, §18/19/4. 

11.  Where the limb of lack of reasonable cause of action or defence is relied on, no evidence is admissible.  The court should only look at the pleadings and decide whether on the assumption that the facts as pleaded are true the cause has some chance of success: O. 18, r 19(2).

12.  A proceeding is “frivolous” when it is not capable of reasoned argument, without foundation or where it cannot possibly succeed: Hong Kong Civil Procedure2015, §18/19/8.  Where a litigant brings a claim knowing that there is no substance in it or that it is bound to fail, or if the claim is on its face so manifestly misconceived that it can have no prospect of success, it may be deemed frivolous and an abuse of process: see ET Marler Ltd v Robertson [1974] ICR 72 at 76D-E.  The court should see what the party in question knew or ought to have known if he had gone about the matter seriously: Cartiers Superfoods Ltd v Laws [1978] IRLR 315 at 317, §18.

13.  A proceeding is “vexatious” when it is oppressive and/or lacks bona fides: Hong Kong Civil Procedure 2015, §18/19/8. Vexatiousness implies the doing of something over and above that which is necessary for the conduct of the litigation, and suggests the existence of some spite, or desire to harass the other side to the litigation, or some other improper motive: Cartiers Superfoods, §16.

14.  To decide that the litigant has been frivolous or vexatious and thus abused the process of the court is a serious finding to make, for it will generally involve bad faith on his part and one would expect the discretion to be sparingly exercised: ET Marler Ltd v Robertson [1974] ICR 72 at 76G-H.

15.  Each limb under Order 18, rule 19(1) forms a separate ground for striking out as is evidenced by the disjunctive “or”. Accordingly, although a cause of action might appear to be reasonable on the face of a set of pleading, the court is at liberty to consider evidence and decide if the pleading should be struck out under another limb.

16.  The test for showing serious issues to be tried in order to grant an injunction under the American Cyanamid principles are different to those for striking out.  In respect of the former, the court undertakes “what is in effect a preliminary trial of the action upon evidential material different from that upon which the actual trial will be conducted”: American Cyanamid Co. v Ethicon Ltd [1975] AC 396, at 406H, per Lord Diplock.  Showing a “serious issues to be tried” is not a high threshold.  An applicant (then Ricky Liu’s camp) needs only to show that the matter is not demurrable on its face, regardless of whether its chances of success in establishing liability at the trial are 90% or 20%: §§21-22 of the Decision.  In respect of striking out, the applicants (here being the defendants in the 1359 Action and the plaintiff in the 1341 Action) must show that the pleadings are unarguably bad.

APPLICATION OF THE LEGAL PRINCIPLES – THE 1359 ACTION

17.  The applicants rely on Order 18, rule 19(1)(a), (b) and (d), ie that the statement of claim discloses no reasonable causes of action, is frivolous or vexatious, and an abuse of the process of the court.

Lack of reasonable cause of action

18.  The only cause of action in the amended writ and statement of claim is based on the Estoppel Point.  Ms Chan SC argues that the viability of this cause of action, namely the clarity of the meaning in substance of the Assurance, is fact-sensitive and can only be resolved at trial. As such, the court must give the Mortgagors the opportunity to prove their case at trial.

19.  On the assumption that the facts in the statement of claim are true, there may be a reasonable cause of action in the Estoppel Point.

Frivolous or vexatious and abuse of court process

20.  The court is at liberty to consider evidence under limbs (b) and (d) of Order 18, rule 19(1).

21.  The findings in the Decision that the 3 Points did not give rise to serious issues to be tried and refusal of leave to amend the writ to include the MLO Point and Agency Point satisfied the high threshold for striking out a statement of claim: Ren Yun Liang v China Merchants Bank Co Ltd, HCA 1456 of 2005, 29 January 2007, Recorder B Yu, SC, §32; followed in GDH Ltd v Creditor Co Ltd [2008] 5 HKLRD 895, DHCJ To (as he then was), §19; Dong Shing F & T Co Ltd v Hanmec Co Ltd [2010] 5 HKLRD 261, §42, Fok J (as he then was). 

22.  There has been no material change to the factual circumstances since the Decision save that the writ in 1359 Action has been amended to plead some uncontroversial facts.

23.  I take note of the fact that things moved quickly since the Event of Default was declared in March 2014.  Pleadings and affirmations had to be filed in haste.  Discovery is incomplete.  Allegedly there was insufficient time for Ricky Liu to recount to its former solicitors the history of the Mortgagors’ dealing with MSC.  In addition, the Ricky Liu’s camp was not a sophisticated financial body (like MSC) acting with the assistance of legal counsel. 

24.  However, as noted in §19 of the CA Decision, the Ricky Liu’s camp was not deprived of any opportunity to present its factual case.  It has had 4 hearings to present its case, ie a call-over hearing and substantive hearings which led to the 3 Decisions.

25.  Specifically, on the Estoppel Point, Ricky Liu’s camp argued that this court has “erred in determining significant disputes of fact based on hotly disputed affidavit evidence and the [plaintiffs] were deprived of the opportunity to properly explain and adduce evidence in the possession, custody and control of the defendants yet to be discovered and to cross-examine the defendants’ witnesses”.  It also argued that in deciding whether the assurance was given and relied on, this court has failed to take into account certain matters.  Those arguments were held to be a re-run of the arguments at the substantive hearing: §§7 and 8 of the Leave Decision; §§16 and 17 CA Decision.

26.  Assuming that Ricky Liu’s camp had genuinely thought that it had a viable claim when the writ was first filed, having gone through 2 levels of court in the injunction proceedings, it should have known that there was no substance in the 3 Points. Ricky Liu’s camp might have been keen to avoid the consequences of default in repayment rather than harassing the other side.  However, had it seriously considered the 3 Decisions, it would have known that its causes of action were so manifestly misconceived that they could have no prospect of success: ET Marler Ltd v Robertson.  This is particularly so since I have held that the proposed causes on the MLO Point and Agency Point would have been struck out for being frivolous and vexatious (§123 of the Decision) when I refused leave to amend the writ.  The resistance to the striking out is thus another “try on” with the same arguments. It is frivolous and an abuse of process.

27.  Separately, I have considered whether or not I should preserve the action since there is an arguable issue on whether MSC has charged the right amount of interest (§54 of the Decision).  Mr Mok SC convinces me that I should not.  This is because there is no pleaded cause of action for the court to rule on the amount due under the facility arrangement.  It is not a claim by MSC against YDL for repayment.  If MSC does make such a claim after I strike out the 1359 Action, there is no bar to YDL or the Mortgagors contesting the quantum of interest.

28.  In the premises, the amended writ and the statement of claim were not just weak but ought to be struck out for being frivolous and an abuse of process of the court; and the action ought to be dismissed.

APPLICATION OF THE LEGAL PRINCIPLES – THE 1341 ACTION

29.  Ricky Liu and the other 2 ex-directors have filed separate defences of similar substance.  The relevant parts of those defences that YDL seeks to strike out can be classified as follows:

(a) That there was no event of default which would have entitled MSC to enforce any of the securities given by the Mortgagors (“the No Event of Default Point”);

(b) That the FA, the Equitable Share Mortgage Agreements, the Escrow Agreement, the Property Mortgage and the IRD (collectively “the Agreements”) were subject to implied terms (“the Implied Terms Point”);

(c) The Estoppel Point;

(d) The MLO Point; and

(e) The Invalid Appointment of Receivers Point.

30.  YDL relies on all limbs of Order 18, rule 19(1) and the inherent jurisdiction of the court.  Ms Linda Chan SC made her submission without prejudice to her position under another summons filed on 21 July 2015 whereby Ricky Liu’s camp challenged the authority of the Receivers (“the authority summons”).

The No Event of Default Point

31.  This point is plainly unarguable.  It was not pursued at the injunction proceedings.  An event of default occurred upon non-payment on the due day of any amount payable, in this case, the 2^nd and 3^rd instalments: §54 of the Decision. 

The Implied Terms Point

32.  Ms Linda Chan SC submits that the court will readily imply a term that each party to a contract will cooperate with the other to secure performance of the contract and that neither party will, by his own act or default, prevent performance of the contract: Chitty on Contracts, (31^st ed) §24-033.  She contends that the implied terms were necessary to give business efficacy to the Agreements.

33.  She contends that the combined effect of the FA and the IRD was that YDL was unable to repay the Loan or the 2^nd Settlement Sum without MSC’s consent.  Knowing that to be the case, and that the only way for YDL to raise funds was to obtain re-financing from a new lender, MSC never gave consent to YDL to do so.  MSC thus acted in breach of the Implied Terms, which prevented an event of default from occurring.

34.  With respect, the contentions are unsustainable.  In the 1341 Action, MSC is not a party.  In the 1359 Action, the Implied Terms and MSC’s breach of them were not pleaded.  Clause 6.1 of the FA required YDL to repay instalments by specific dates (subject to extensions) which were not conditional upon YDL’s financial ability.

35.  In any case, the Implied Terms Point is to undermine the occurrence of an event of default.  For the reasons given in paragraph 31 an event of default would have occurred anyway.  This Point is plainly unarguable.

The Estoppel Point and MLO Point

36.  For the same reasons given as for the 1359 Action, these 2 Points are plainly unarguable.

TheInvalid Appointmentof Receivers Point

37.  This court has already found no serious issue to be tried on this Point: §§89-90, 100 of the Decision; §28 CA Decision.  Ms Linda Chan SC, however, relies on section 66(7) of the BVI Business Companies Act 2004 “as modified by clause 7.9(c) of the Equitable Share Mortgages”. Those provisions require a period of one hour to elapse from the occurrence of an event of default and the Event of Default had not been rectified within one hour of service of a notice specifying the default and requiring rectification thereof.

38.  This point was originally taken in the injunction proceedings but abandoned when the Receivers issued a 2^nd notice of default on 28 March 2014 that met the requirements of the 2004 Act (§8 of the Decision).  This is a desperate attempt of the defendants to revive an admittedly unarguable point.

39.  In summary, I find that the subject paragraphs of the defence are incurably bad and ought to be struck out.

COSTS

40.  Insofar as HCA 1341/2014 is concerned, costs shall be reserved until after disposal of the authority summons as I have indicated to the parties at the beginning of this hearing. 

41.  Insofar as HCA 1359/2014 is concerned, costs should follow the event and be borne by the plaintiffs.  In principle, there should be indemnity costs to the defendants, given that Ricky Liu’s camp has made a desperate re-run of the arguments advanced for the injunction proceedings and revived abandoned points.

42.  I remind myself that there is overlap in evidence and arguments of Mr Bartlett SC in both Actions and so the costs to be awarded under the 1359 Action has taken into account the need for apportionment.

43.  Mr David Chen (counsel for the plaintiffs) objects to the huge costs claimed by the defendants.  I share his sentiments.  This is the 5^th occasion when the same teams of counsel appeared to argue on the merits of the 2 Actions.  Almost all the costs for preparing the evidence were incurred in the injunction proceedings.

44.  The law on striking out is well-settled.  The present applications are not difficult since the various Points have been fully canvassed in the injunction proceedings and there was heavy reliance on the 3 Decisions.  It was unnecessary for the defendants to recite the facts in detail in their affirmations or for Mr Bartlett SC to do so in his skeleton submission.  Without disrespect, there was no need to engage junior counsel notwithstanding the importance of this case to D1 and D4.

45.  Further, there was no coordination in photocopying amongst parties so, eg, I have over one set of the 3 Decisions and related orders.

46.  I had substantially cut down the costs for the 1359 Action in the injunction proceedings and so had the Court of Appeal.  The costs statements in the present applications are for the following sums:

(a) For the plaintiffs: $320,292.00 in respect of the 1359 Action (and for comparison purpose, plaintiffs’ costs of $358,052.00 in respect of the 1341 Action, totalling $678,344.00);

(b) For D1 and D4: $991,230.00 in respect of HCA 1359/2014;

(c) For D2 and D3: $250,735.00 in respect of HCA 1359/2014 (and for comparison purpose, YDL’s costs of $394,993.00 in respect of the 1341 Action).

47.  Ricky Liu’s camp had filed lengthy skeleton submissions though not lengthy affirmations.  Being in debt, it was desperately finding a way out but that should not prevent the defendants from exercising good sense and focusing on the real issues.  The level of costs claimed by the defendants is not just grossly excessive but oppressive – to the client, the paying party and probably the entities liable under the Agreements.  I disallow all costs beyond one fee earner.

48.  I summarily assess costs on indemnity basis (disallowing unreasonable costs), at $202,343 for D1 and D4, and $82,868 for D2 and D3, to be borne by the plaintiffs.

CONCLUSION

49.  I order as follows:

(A) In respect of HCA 1359 of 2014,

(1) The statement of claim should be struck out and the action dismissed;

(2) On a nisi basis, costs of D1 and D4 are summarily assessed at $202,343 to be paid by the plaintiffs; and

(3) On a nisi basis, costs of D2 and D3 are summarily assessed at $82,868 to be paid by the plaintiffs.

(B) In respect of HCA 1341 of 2014,

(4) Those paragraphs of the defence of D1 and that of D2 and D3 as set out in paragraph 2 of the summons be struck out; and

(5) Costs are reserved to be dealt with after the hearing of the authority summons.

50.  I thank counsel for their assistance.

HCA 1341/2014 &
HCA1359/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO NO 1359 OF 2014

____________

AND

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1341 OF 2014

____________

____________

_____________

D E C I S I O N

_____________

1. I shall adopt the same abbreviations as in the decision of 17 November 2014 (“the decision”). By the decision, this court (in the 1359 Action) dismissed the Mortgagors’ application (a) to restrain MSC and Elliott from enforcing the Share Mortgage and the Property Mortgage and to restrain the Receivers from exercising their powers over the mortgaged assets; and (b) to amend the writ to claim under the MLO and Agency Points. This court also granted (in the 1341 Action) YDL’s application for injunctions against the defendants for, amongst others, delivery up of YDL’s assets, including company chops and seals.

2. There are now 3 applications before me: leave to appeal against the order in the 1359 Action and 1341 Action, respectively, and stay of execution of the order in the 1341 Action.

Principles for grant of leave to appeal

3. Section 14AA(4) of the High Court Ordinance applies.  Before granting leave to appeal, the court has to be satisfied that the appeal has a reasonable prospect of success, or there is some other reason in the interests of justice why the appeal should be heard.  Reasonable prospect of success involves the notion that the prospect of succeeding must be reasonable and therefore more than fanciful, without having to be probable: SMSE v KL [2009] 4 HKLRD 125, at §19, per Le Pichon JA.  The applicant does not have to demonstrate that the appeal will probably succeed: Wynn Resorts (Macau) SA v Mong Henry [2009] 5 HKC 515, at §19.

4. In Ho Yuen Ki Winnie & anor v Ho Hung Sun Stanley & anor, HCMP 1009/2009, 24 August 2009, at §16, Le Pichon JA further explained that “merely showing that the appeal is ‘arguable’ and ‘not fanciful’ would not be sufficient” and that reasonable prospects require something more and, in that regard, some assistance may be derived from the test applied when setting aside a default judgment [ie the test of ‘real prospect of success’].”

5. Where an intended appeal is against an exercise of discretion, this would not be entertained unless the appellant can establish that the exercise of discretion was under a mistake of law, or in disregard of principle, or under a misapprehension as to facts, or by taking into account irrelevant matters or that there was a failure to exercise the discretion, or that the conclusion the judge reached was outside the generous ambit within which reasonable disagreement was possible: Hong Kong Civil Procedure 2015, Vol 1, §59/0/54.

The grounds of appeal in the 1359 action

6. The grounds of appeal can be summarized as follows:

(1)  That this court erred in law and was plainly wrong in holding that there was no serious issue to be tried in relation to the plaintiff’s argument on promissory estoppel (§§59-87 of the decision);

(2)  That this court erred in proceeding on the basis that the plaintiffs no longer sought an order restraining the receivers from holding themselves out as directors of YDL and WFOE (§107 of the decision);

(3)  That this court erred in law and was plainly wrong in holding that there was nothing unique in the property and any loss YDL suffered by reason of the sale of the property could clearly be compensated for by way of damages (§111 of the decision);

(4)  That this court erred in refusing leave to the plaintiffs to amend the writ.

Ground (1)

7. It is said that this court erred in determining significant disputes of fact based on hotly disputed affidavit evidence and the plaintiff was deprived of the opportunity to properly explain and adduce evidence in the possession, custody and control of the defendants which they were obliged to discover and to cross-examine the defendants’ witnesses.  It is also said that in deciding whether the assurance was given and relied on this court has failed to take into account certain matters.

8. With respect to Ms Chan SC, the grounds put forth are but a re-run of the arguments before this court at the main hearing which led to the decision (“the main hearing”).  The present complaints that the Mortgagors and his camp have towards the decision are directed at the exercise of discretion of this court in deciding which factors to place more weight on an interlocutory matter.  I am not satisfied that this ground has any prospect of success in view of the principle in paragraph 5 above.

Ground (2)

9. Ms Chan SC submits that I have erred in saying that it was not necessary to seek an order restraining the receivers from holding themselves out as directors (“the holding out order”) of YDL and WFOE.  She clarified that her submission at the main hearing was limited to WFOE but not YDL.

10. My recollection differs.  In fact, in §21.1 of Ms Chan SC’s amended reply submission at the main hearing, she did refer to YDL in the context of the holding out order.

11. In my view, even if I had misunderstood her then submission, the holding out order could not be granted independently without showing a serious issue to be tried.  Since no such serious issue was shown, my misunderstanding alone would not have justified leave to appeal.

Ground (3)

12. Again I see no merit in this ground.  The court was not dealing with a situation of conveyancing.  The principle that land is unique and damages are not an adequate substitute or remedy for the loss of an interest in land (Spry, The Principles of Equitable Remedies (9^th ed)  63) has no application in the present context.  In any case, on the question of adequacy of damages generally, I have held in favour of the Mortgagors (§118 of the decision).

Ground (4)

13. There is dispute as to whether or not leave to appeal is required when a court dismisses an application to amend a writ.  Mr Bartlett relies on Order 59, rule 21(2)(i) which provides that an order “refusing to allow an amendment of a pleading to introduce a new claim or defence or any other new issue” is a type of order for which no leave to appeal is required; but a writ is not a pleading.

14. Without disrespect, once the court disallows an amendment to the writ, the plaintiff will be barred from even pleading the new claim: Order 18, rule 15(2).  In my view, if leave to amend a writ is refused, it is an “order determining in a summary way the substantive rights of a party to an action”  (Order 59, rule 21(1)(a)) and hence no leave is required.

15. In summary, I do not find there to be reasonable prospect of success on any of the draft grounds of appeal put forth in the 1359 action.

Leave to appeal in the 1341 action

16. The grounds relied on are that this court erred in holding that there was no question as to validity of the appointment of receivers and the new directors of the plaintiff, and the validity of the receivers’ act in causing YDL to commence the action against the defendants.

17. The analyses under Ground (1) of the 1359 action apply equally to the 1341 action but there are additional matters.

18. Two affirmations have been filed by Ricky Liu which raised 3 new arguments that:

(i)     There being at least a serious issue to be tried in relation to the MLO Point and Estoppel Point, this court ought to have adjourned YDL’s application for injunction against the defendants pending determination of the plaintiff’s authority to sue.

(ii)    One of the receivers, Mr Fok, has been sued in HCA 92 of 2014 for fraudulent or reckless misrepresentation and breach of duty of care but the action was not drawn to this court’s attention.  In HCA 6 of 2014, Mr Fok was sued for conspiracy to sell mortgaged assets at undervalue although that claim had been dismissed on the ground that the plaintiff’s loss was reflective loss and there was no finding that the claims against Mr Fok disclosed no reasonable cause of action.  In the 1359 action, Mr Fok’s credentials had been “confirmed by his appointment as an independent non executive director of Kaisa Group” but Kaisa has recently announced Mr Fok’s resignation from various committees (raised in the reply affirmation).

(iii)    That the interest charged under the FA was 79% and exceeded the MLO limit (raised in the reply affirmation).

19. Under item (i), this argument has never been raised at the main hearing.

20. Under item (ii), Ms Chan SC submits that the new facts are to illustrate that the receivers do not have the experience to manage the Project in the present case.  She further submits that although the receivers were not appointed by the court, they had the duty to inform this court of the actions against Mr Fok.

21. Mr Bartlett, however, submits that it is part of the life of receivers to be sued.  He also purports to explain at the bar table the reason for Mr Fok’s resignation but I decline to take that into account.

22. In my view, the facts under item (ii) are irrelevant to the issue of leave to appeal.  Those facts should, at best, have formed the bases for variation of my order of 17 November 2014, or for seeking leave to adduce fresh evidence on appeal (if leave to appeal is granted).

23. With regard to item (iii), there was no reason why the interest rate of 79% was not put forth at the main hearing.

24. In summary, I do not find there to be reasonable prospect of success on any of the draft grounds of appeal put forth in the 1341 action.

Principles for stay of execution on appeal

25. The relevant principles are not in dispute.  In short, the court must be satisfied that there is an arguable appeal and that the appeal would be rendered nugatory if stay of execution were refused: Star Play Development Ltd v Bess Fashion Management Co Ltd [2007] 5 HKC 84.

26. Ricky Liu’s affirmation stated that without a stay, the intended appeal will be rendered nugatory if the appeal is successful.  The purported new directors would be able to take control over the management of YDL, including the appointment and/or removal of the directors of WFOE.  The steps taken by the purported new directors appointed to the board of WFOE will be irreversible.

27. It may be true that the appeal might be rendered nugatory.  However, for failure to show an arguable appeal, the application for stay simply does not get off the ground and ought to be dismissed.

28. In any case, as rightly pointed out by Mr Bartlett, Ricky Liu was an undeserving party.  At the main hearing, it was confirmed by Ms Chan SC, entirely without impropriety on her part, that Ricky Liu was not in possession of YDL’s seals and chops.  (See §64 of her skeleton submission and §26 of her reply submission at the main hearing.)  Paragraph 132 of the decision relied on this piece of evidence.  Following the handing down of the decision, the defendants have substantially complied with the order by delivering up its books and records but Ricky Liu remains in custody of YDL’s chop and seal.  This was quite clearly selective compliance with my order and Ricky Liu has misled the court previously.

29. If I have to exercise my discretion, I would have equally dismissed the summons for stay.

Conclusion

30. Both applications for leave to appeal and application for stay of execution are dismissed.  There shall be costs to the defendants in the 1359 action and YDL in the 1341 action.

Costs

31. The 3 applications have been set down for 30 minutes.  They mainly involve submission by counsel and re-run of arguments at the main hearing.  There is no justification for 2 fee earners.  For $458,646, $181,507 and just under $370,000 to be incurred by D1 and D4, the receivers and YDL respectively were grossly excessive.

32. At least 60% of the 4^th affirmation of Mr Gronow was, without disrespect, unnecessary as it set out the order this court made, the grounds for the applications and some submissions.  It also set out the correspondence in unnecessary detail.  The costs incurred for this affirmation was entirely disproportionate to the issues at stake.

33. In relation to the transcript, only a couple of pages were referred to at this hearing.  That could well have been saved by making reference to previous affirmations and skeleton submissions instead.  I disallow all costs in relation to the transcript.  I summarily assess the costs as follows:

(a)  in the 1359 Action, $200,000 for D1 and D4;

(b)  in the 1359 Action, $80,000 for D2 and D3; and

(c)  in the 1341 Action, for both summonses: $100,000.

34. I thank counsel for their assistance.

HCA 1341/2014 &
HCA 1359/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1359 OF 2014

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D E C I S I O N

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A. INTRODUCTION

1.  There are 2 pairs of applications before the court:

A. In respect of HCA 1359/2014 (“the 1359 Action”), an application by the plaintiff mortgagors for an injunction to restrain the defendant receivers from exercising their powers as receivers.  Related to it is an application for leave to amend the writ of summons to plead new causes of action.

B. In respect of HCA 1341/2014 (“the 1341 Action”), an application by the plaintiff (YDL) for a mandatory injunction for handing over corporate records and assets and business premises to the new directors, and to give instructions to the plaintiff’s auditors and banks.  Related to it is an application to amend the summons.

2.  The core issues in these applications are whether an event of default has occurred to justify the appointment of receivers and whether directors have been rightly removed by the receivers.

B.  THE PARTIES

3.  In the 1359 Action:

(a) The plaintiffs are “YPL”, “Wonder Earn” and “Capital Metro”, respectively (collectively “the Mortgagors”) are BVI companies.

(b) YPL and Wonder Earn hold respectively 60% and 40% of the entire issued share capital of and in Yifung Developments Limited (“YDL”), another BVI company. 

(c) Capital Metro is the sole registered and beneficial owner of the property at 20^th Floor, Shun Feng International Centre, No 182 Queen’s Road East, Hong Kong (“the Property”).

(d) YDL wholly owns a wholly owned foreign enterprise in the Mainland, Yiangjiang Fungyi Properties Ltd (“WFOE”).  WFOE, in turn, owns a property development project in Yangjiang City, Guangdong (“the Project”). 

(e) Ricky Liu is the ultimate sponsor and beneficial owner of the Project. 

(f) The 1^st defendant (“MSC”) is the lender under the facility agreement referred to in paragraph 5 below.

(g) The 2^nd and 3^rd defendants (“Mr Gronow” and “Mr Fok” respectively) are the Receivers appointed in the circumstances referred to below.

(h) The 4^th defendant (“Elliott”) is an investment advisor and agent of MSC.  One Mr James Smith was and is its employee.

4.  In the 1341 Action, YDL is the plaintiff.  The 3 defendants (“Ricky Liu”, “Robert Ho” and “Rebecca Choy”, respectively) used to be directors of YDL (“the ex-directors”) before they were removed pursuant to MSC’s enforcement of rights as described below.

C.  BACKGROUND

5.  Pursuant to a facility agreement dated 10 September 2010 (“the FA”), MSC lent US$39m (“the Loan”) to YDL, repayable by 3 instalments.  Interest was at an internal rate of return (“IRR") of 20%.  The Loan was secured by the following key security arrangements:

(1) Two equitable Share Mortgages whereby YPL and Wonder Earn respectively mortgaged all their shares in YDL (“the YDL Shares”) in favour of MSC;

(2) A legal charge over the Property granted by Capital Metro;

(3) A Rental Assignment whereby Capital Metro assigned to MSC rights in leases relating to the Property; and

(4) An Investor Rights Deed (“the IRD”) whereby MSC is, entitled to receive a “profit-linked bonus” (“the Bonus”) out of YDL’s available profits, after YDL pays (a) all amounts payable to MSC under the FA; and (b) HK$100m to YPL and Wonder Earn in accordance with clause 2.1(b) of the IRD.  MSC was entitled to receive 70% of the available profits until it shall achieve an IRR of 30% on the Loan and, thereafter, 20% of all available profits of YDL.

6.  In the event of default under the FA, MSC could appoint receivers over the YDL Shares and the Property.

7.  The 1^st installment (US$10m + US$9.2m interest) was paid. The 2^nd and 3^rd installments (each for US$14.5m + interest) has remained outstanding since 17 March 2014.

8.  By a letter dated 18 March 2014, MSC declared an Event of Default under the FA on the basis that YDL had failed to pay US$50.1m (about US$29m as to capital and US$21m as to interest) to MSC on 17 March 2014 and gave notices of the appointment of Receivers over the YDL Shares and the Property.  There was a technical issue as to whether the Notice of Event of Default was premature but, to avoid argument, the Receivers were re-appointed on 28 March 2014.

9.  On 29 April 2014, MSC sought recovery of possession of the Property under HCMP 1058/2014 (“the Order 88 Proceedings”).

10.  On 4 and 5 June 2014, MSC exercised its rights under clause 7 of the Share Mortgages to change the board of directors of YDL and WFOE.  The new directors of YDL are Mr Gronow and Mr Fok (“the new directors”). 

D.  PROCEDURAL HISTORY

11.  YDL proceeded to seek control over its books and assets of but was met with the uncooperative attitude of the ex-directors.  YDL took out proceedings in the PRC against those ex-directors and WFOE (“the PRC Proceedings”). 

12.  On 16 July 2014, YDL (acting under the new directors) commenced the 1341 Action.  Application C is YDL’s application to seek interim orders of the reliefs sought in the writ.  Application D was made in the course of the hearing before me to amend Application C.

13.  In the meantime, on 18 July 2014, the Mortgagors commenced the 1359 Action against MSC, the Receivers and Elliott to challenge the occurrence of the Event of Default, validity of the Receivers’ appointment (“the Appointment”) as well as the propriety of their acts in seeking to seize control over YDL and WFOE.  The Mortgagors issued Application A.   Application B is to amend the writ to plead new causes of action raised by the Mortgagors on affidavit in support of Application A.

E.  THE CASE OF THE MORTGAGORS AND EX-DIRECTORS

14.  It is alleged that in August 2012, Mr Smith (on behalf of MSC) invited YDL to consider obtaining refinancing to prepay the outstanding balance under the FA and MSC’s entitlement under the IRD, which MSC assessed to be US$25m.

15.  In about November 2013, MSC increased the total amount payable by YDL to approximately US$97m (being US$50m under the FA + US$47m under the IRD) (collectively “the Settlement Sums”).

16.  Whilst Ricky Liu (for YDL) was finding the necessary funding for the Settlement Sums, Mr Smith allegedly gave certain assurances to him.  Allegedly relying on the same, YDL did not make any payment under the FA in March 2014, or seek extension of time for payment of the 3^rd installment.

17.  The Morgators assert that:

(1) The transactions under the FA and the IRD are unenforceable for contravening section 24 and/or section 25 of the Money Lenders Ordinance, Cap. 163 (“MLO”) (“the MLO Point”);

(2) Even if the FA and the IRD were enforceable, MSC was estopped from declaring an Event of Default on 18 March 2014 as a result of the assurances given by MSC (“the Estoppel Point”); and

(3) The Receivers, being agents of the Mortgagors, acted in breach of their duties to the Mortgagors who are parties interested in the equity of redemption in the mortgaged assets (“the Agency Point”).

18.  The ex-directors assert that the Receivers have no basis to seek the injunctions in the 1341 Action.

19.  It is the case of the Mortgagors and the ex-directors that these points form serious issues to be tried. 

20.  I shall first deal with the common issues of the MLO Point, the Estoppel Point and the Agency Point to see if there is a serious issue to be tried before I consider each application. 

F.  SERIOUS ISSUES TO BE TRIED

21.  “Serious issue to be tried” is not a high threshold.

“…the threshold for the establishment of a 'serious issue' is not high, and it seems to me that unless the matter really can be seen, at this stage, to be demurrable on its face, there is no justification for knocking the application out on this basis absent the opportunity of seeing and hearing the witnesses who presently are recounting contradictory stories on affidavit/affirmation.”

Holyrood Ltd v. Bank of China (Hong Kong) Ltd, HCCL 35/2003, 19 September 2003, at §29 per Stone J.

22.  The case of Chinaplus Wines Ltd v Berry Bros & Rudd Ltd, HCA 1818/2012, 13 December 2012, is an illustration of how the principle is applied.  Anthony Chan J said:

“29. Last but not least, Mr Burns has rightly taken this court to the further and better particulars in HCA 905/11 where CWL was asked in no unclear terms about particulars of the Oral Agreement and none has been given. This is highly detrimental to the credibility of the Oral Agreement.

30. Although the merits of CWL’s case are hardly impressive, the threshold which it has to satisfy to demonstrate a serious issue to be tried is not very high. The low threshold is consonant with the principle that the court does not decide factual disputes on affidavits. I have been taken by Mr Huggins to the judgment of Deputy Judge To (as he then was) in AXA China Region Insurance Co Ltd v Pacific Century Insurance Co Ltd [2003] 3 HKC 1 at 13B where, referring to Alfred Dunhill Ltd v Sunoptic SA [1979] FSR 337 at 373, it was said that in the context of deciding whether there is a serious issue to be tried it is irrelevant whether the court thinks that the plaintiff’s chances of success in establishing liability are 90% or 20%.

31. In the premises, and not without considerable reluctance, I hold that CWL has a serious issue to be tried in respect of its claim over the Storage Data.”

23.  I agree with Ms Chan SC that the principles applicable to Order 14 relied on by Mr Mok SC are not in themselves applicable to an injunction application.  However, that does not mean the court should shut its eyes to the obvious in deciding if the applicant’s case is demurrable on its face.  Clearly, the court can apply common sense and test a party’s assertions against objective, contemporaneous documents, although there should be no trial on affidavits.

G.  THE MLO POINT

G1.  The legal principles

24.  Under section 2 of MLO, a “loan” includes:

“…every agreement (whatever its terms or form may be) which is in substance or effect a loan of money, and also an agreement to secure the repayment of any such loan.” (emphasis added)

“Interest” “does not include”:

“any sum lawfully agreed to be paid in accordance with this Ordinance on account of stamp duty or other similar duty, but save as aforesaid includes any amount (by whatever name called) in excess of the principal, which amount has been or is to be paid or payable in consideration of or otherwise in respect of a loan;” (emphasis added)

25.  In considering whether a transaction amounts to a “loan” within the statutory definition:

“… what was required was to consider in overall terms what it was that the parties to the transaction were attempting to achieve and then decide whether the transaction was a ‘loan’ according to the definition” (emphasis added)

See: Pang Kam Yiu t/a Tai Kung Weaving Factory v Edward Wong Finance Co Ltd[1985] 2 HKC 62, at 65A-B, per Mayo J (as he then was).

26.  Under section 24(2) of MLO, no agreement for the repayment of any loan or for the payment of interest on any loan and no security given in respect of any such agreement or loan shall be enforceable in any case in which the effective rate of interest exceeds 60% per annum.

27.  A loan that contravenes section 24 is irrecoverable and cannot be re-opened under section 25: Wong Ming Wai v Tsui Kam Ming trading as Tung Tai Construction Co, CACV 179/1999, 14 October 1999, at pp3-4, Rogers JA (as he then was).

28.  Under section 25(3), an agreement is presumed to be extortionate where the effective rate of interest exceeds 48% per annum. but the court may re-open the transaction to do justice between the parties.  Subject to section 25(3), the court may reopen an extortionate transaction under section 25(1).  In determining whether the transaction is extortionate, the court will have regard to the factors stipulated under section 25(4) to (6).

29.  Sections 24 and 25 apply to all loan transactions, whether or not the loan was made by a money lender: see s 24(1), s 25(1)(a) of MLO.

30.  In Pearldelta Group Limited v Huge Winners International Limited and Others,HCA 595/2008, 22 April 2010, §§239-240, Saunders J said that the purpose of MLO is to curb loansharking, and its provisions are not intended to catch genuine commercial transactions. Accordingly, a convertible bond containing an element of a loan and capital investment that would lead to return of a capital nature was found not to have contravened MLO and was divisible from the loan.  (The determination on the MLO issue was not overruled on appeal: see CACV 105 & 106/2010, 3 September 2010.) 

G2.  The issues under the MLO point

31.  The issues are whether the Bonus forms part of the interest, whether there was a “transaction” that should be reopened and whether the effective rate exceeded 48%.

G3.  Whether the Bonus forms part of the interest

32.  The definition of “interest” in MLO includes “any amount (by whatever name called) in excess of the principal”, which amount has been or is to be paid or payable in consideration of or otherwise in respect of a loan.  The Bonus is not principal.  Arguably, it may be “interest”.

33.  In fact, Mr Smith acknowledged in his affirmation that the Bonus was part and parcel of the return for the Loan:

“12. The Profit-share Entitlement is a profit-linked bonus arrangement…This provides [MSC] with an all-in rate of return for the entire funding arrangements over the life of the Project. The Profit-share Entitlement was an important part of the compensation [MSC] agreed to when making the Loan, in light of the risks associated in making an investment in the Project (a real estate development in a third tier Chinese city)…”

34.  Relying on the Pearldelta case, Mr Mok SC argues to the contrary.  He submits that the arrangements between MSC and YDL/WFOE was of a dual nature, being a loan with interest return (subject to MLO) and an investment-type return akin to equity interest (not subject to MLO).  It was a genuine commercial arrangement after lengthy and detailed negotiations amongst commercial entities, each of which having acted under independent legal and financial advice.  Amongst the heavy commercial documentation was an enforceability opinion provided by YDL’s lawyers, which assumed that the effective rate of interest under the FA did not exceed 48% per annum.

35.  Mr Mok SC also contends that even on Ricky Liu’s own estimate, the profit forecast for the Project was contingent on several factors.  The period for the earning of such return is unascertained and unascertainable.  This may take place long after the principal has been repaid or no Bonus may be payable at all if there is no profit.  The formula for the Bonus would fail to reflect “the true annualpercentage of interest” in Schedule 2 of the MLO, which is co-extensive with the several periods during which the principal remains outstanding. 

36.  Mr Mok SC also points out that the IRD contained provisions preventing YDL/WFOE from becoming involved in certain “restricted matters” (Schedule 4 to the IRD), and allowed MSC to appoint a director to the boards of each of YDL and WFOE (clause 3.2 of the IRD).  The Bonus represented a participation right to reflect the risk that MSC assumed in providing all of Ricky Liu’s acquisition costs for the Project, which was in a third tier city in the Mainland.

37.  With respect to Mr Mok SC, his argument that the Bonus was an investment is contrary to Mr Smith’s acknowledgement in paragraph 33 above.  The opinion of YDL’s lawyers that he refers to had not taken into account the Bonus.

38.  Further, the Pearldelta case is distinguishable:

(i) It was a decision made after trial.  Here, the court has not yet had the full opportunity of investigating the circumstances leading to the FA and IRD. 

(ii) Pearldelta involved a convertible loan.  Here, there was no option to convert the Loan into YDL’s equity.  There was no capital risk on the part of MSC who would only reap the available profits but need not shoulder loss.

(iii) The loan in Pearldelta was an exempted loan under the MLO because the defendant had paid up share capital of over HK$1m, whereas YDL’s paid up capital was only US$10.

39.  In any case, issues on the nature of the Bonus as submitted by Mr Mok SC are matters that cannot be dealt with summarily.  There is clearly a serious issue to be tried as to whether the Bonus is “payable” as interest although the amount is not ascertainable at present.

G4.  Whether there was a “transaction” that should be re-opened

40.  There is a dispute as to who initiated the idea of prepayment of the Bonus – Ricky Liu who wanted to buy out MSC’s rights so as to obtain refinancing from another source, or MSC who wanted to withdraw from the Asian market.  For present purpose, I shall assume in favour of the Mortgagors and the ex-directors that it was MSC who initiated the idea.

41.  There is no dispute that agreement had not been reached over the amount needed for the Bonus but there was a dispute on the nature of the request for payment. 

42.  On MSC’s case, US$25m was proposed by MSC as an “opening offer price” and different valuations were just put forth to Ricky Liu to illustrate the reasonableness of that offer. MSC has never stated that US$25m was insufficient. 

43.  On the case of the Mortgagors and the ex-directors, however, MSC had required YDL to pay the Bonus, initially at US$25m, later US$47m. 

44.  Ms Chan SC, however, argues that MLO has chosen to use the term “transaction” in section 25(2)(a) and (b).  So something short of “agreement” would suffice if it “requires the debtor … to make payment (whether unconditionally or on certain contingencies) which are grossly exorbitant” or “otherwise contravenes ordinary principles of fair dealing”.

45.  She points out that payment of the Settlement Sums was the only option dictated by MSC.  This is because YDL was a US$10 company which required borrowing to finance repayment, and yet provisions like clause 7.4(f) of the FA expressly prohibited YDL and WFOE from incurring any “financial indebtedness” without the consent of MSC.

46.  Ms Chan SC contends that by demanding for payment of the Settlement Sums, MSC has in effect prevented YDL from performing its contractual obligations under the FA.  It is well-established that where the performance of a term of contract depends on the cooperation of the other party, that other party must refrain from doing anything that would obstruct the party’s performance (Chitty on Contracts (31^st ed) §§13-012 and 13-013). 

47.  With respect to Ms Chan SC, the suggestion that MSC had required YDL to pay US$47m was starkly contradicted by contemporaneous documents:

(a) A “Statement of Amounts Due” emailed on 12 March 2014 by Elliott to Ricky Liu, cc Mr Smith, confirmed the precise sums of principal and interest due to be paid by YDL on 17 March 2014.  It did not include any Bonus.

(b) Three days before the due date for repayment, in a letter dated 14 March 2014, MSC, having referred to YDL’s intention not to repay the US$50.1m on time, referred to the Bonus issue as“ongoing (albeit sporadic) discussion”. 

48.  It can hardly be said that MSC dictated the payment of the Bonus when the parties were clearly in negotiation only.  Ricky Liu himself regarded the US$25m as “excessive and unreasonable”, the Project being under-performing at that time.

49.  Mr Kawaii (representative of MSC appointed under the IRD to the board of YDL) then came up with a valuation summary showing 3 figures of US29m, US$47m and US$25m.  Ricky Liu did not find recent discussions on the Bonus constructive.  Despite Mr Smith’s request for a number in hand to move things forward, Ricky Liu never gave a reply.

50.  Hence, neither US$25m nor US$47m were “to be paid or payable” within the definition of “interest” in section 2 of the MLO.  It can hardly be arguable that MLO would regard negotiation as a “transaction”.  By its nature, negotiation, being something still open, does not need to be re-opened.

51.  The reference to provisions like clause 7.4(f) does not assist YDL because those were pre-existing contractual terms and did not give MSC additional powers which it did not have if it had not asked for pre-payment of the Bonus.

G5. Whether the effective rate exceeded 48%

52.  For completeness sake, I have considered the effective rate if I am wrong in saying that there was no transaction to be re-opened.  There are 2 components to the Settlement Sums: the amount due under the FA and the Bonus.

53.  For the 1^st component, several sets of figures have emerged:

(a) MSC’s request for confirmation, subsequently completed by YDL, showed that as at 30 June 2013, the amount due and owing was US$33.8m.  Even accepting Mr Smith’s explanation that the request was “in connection with an internal audit of [Elliott’s] positions”, Mr Smith has not said that that amount was in any way incorrect.

(b) Mr Kawaii’s version on 23 August 2013 was that, based on an assumption of prepayment of the 2^nd and 3^rd tranches on 15 September 2013, the total to be paid for principal and interest was about US$46.47m, a huge leap by US$12.67m from the sum due under (a) in 2 ½ months’ time.

(c) By 17 March 2014, the amount due was stated to be US$50.1m, an additional US$3.63m from the sum due under (b) in 6 months’ time.

54.  The additional sums accrued in the time frames under (b) and (c) were simply disproportionate compared to each other.  There was never any satisfactory explanation from MSC.  There is a serious issue to be tried as to what sum under the FA was due to MSC on 17 March 2014.  However, by virtue of the definition of “Event of Default” being “non-payment on the due day of any amount payable pursuant to the FA” (clause 17.1 FA), this serious issue to be tried cannot prevent an Event of Default from occurring.

55.  Even adopting US$50.1m as the amount due under the FA, Ms Chan SC accepts that MLO was not breached until there was a requirement to pay the Bonus of US$47m.

56.  There is no dispute that the effective rate based on US$50.1 plus a Bonus of US$25m was about 43%, if repayment was made on 17 March 2014.

57.  There is dispute as to whether or not the effective rate was 59.71% (Mortgagors and ex-directors’ case) or less than 48% (Receivers’ case) if the Bonus had been US$47m and repayment was made on 17 March 2014.  The methodology for computing the effective rate is a serious issue to be tried.  However, that is irrelevant since there was nothing close to a requirement being made by MSC for YDL to pay that sum. 

G6.  Summary

58.  In summary, even if there is a dispute as to who initiated the prepayment discussions, whether the nature of the Bonus was “interest” or investment return, whether the sum due under the FA was US$50.1m, MSC had not required YDL to prepay any fixed sum for the Bonus.  Even taking the opening offer of US$25m as the Bonus required to be prepaid, the effective rate of interest was less than 48%.  The MLO Point has no merits.

H. THE ESTOPPEL POINT

H1. The legal principles

59.  It is not disputed that promissory estoppel arises where:

(1) The parties are in a relationship involving enforceable or exercisable rights, duties or powers (“requirement (1));

(2) One party (the promisor) by words or conduct conveys a clear and unequivocal promise to the other (the promisee) that the promisor will not enforce or exercise some of those rights, duties or powers (“requirement (2));  and

(3) The promisee reasonably relies upon that promise and is induced to alter his or her position on the faith of it, so that it would be inequitable or unconscionable for the promisor to act inconsistently with the promise (“requirement (3)).

See Luo Xing Juan v Estate of Hui Shui See (2009) 12 HKCFAR 1,at §55, per Ribeiro PJ.

60.  To be “clear and unequivocal” under requirement (2),

(i) The promise need not be express but its meaning conveyed by the promisor’s words or conduct must be clear and unequivocal.  He must make it clear that he is promising not to enforce the relevant rights or powers.  The message must be conveyed with a clarity similar to that needed to vary a contract.  Whether there is sufficient clarity is to be assessed objectively by the court.  See Luo Xing Juan, at §59;

(ii) The court will seek to ascertain the meaning in substance of the promise. It is the substance of its meaning that must be clear and unequivocal. A promisor may make his intentions perfectly plain but, not being a lawyer, may express himself in terms which are legally imprecise or inaccurate.  A promisee may likewise clearly understand the substance of what is being promised without any knowledge of the legal rights or powers within which the promise is framed. See Luo Xing Juan, at §60.

61.  If a representation is not made in such a form as to comply with requirement (2), it normally matters not that the representee should have misconstrued it and relied upon it.” Woodhouse AC Israel Cocoa Ltd SA v Nigerian Produce Marketing Co Ltd [1972] AC 741, at 755 F‑G, per Lord Hailsham LC.

62.  The effect of promissory estoppel is suspensory only.  The promisor can resile from his promise on giving reasonable notice, which need not be a formal notice, giving the promisee a reasonable opportunity of resuming his position.  The promise only becomes final and irrevocable if the promisee cannot resume his position: Ajayi v RT Briscoe (Nigeria) Ltd [1964] 1 WLR 1326, 1330.

H2.  The terms of the Assurance

63.  According to Ricky Liu, MSC (through Mr Smith) told him (of YDL) that YDL should continue to seek investors to finance a prepayment of the Settlement Sums.  MSC would not insist on YDL’s payment of the Outstanding Balance (probably covering both instalments) on its due date and would not declare an Event of Default should YDL delay in repayment under the FA.  Mr Smith assured Ricky Liu that “So long as YDL was sincere about repaying the Settlement Sums, and was actively seeking additional finance for such purposes, it was unnecessary for YDL to write to MSC again to extend the relevant due/repayment dates under clause 6.2 of the FA.” (“the Assurance”)

64.  Ms Chan SC submits that she is not using promissory estoppel as a sword, but defensively to prevent MSC from enforcing their strict legal rights to declare an Event of Default and to appoint the Receivers: Spencer & Bower, Estoppel by Representation (4^th ed) at XIV.4.7. 

H3.  Requirement (1)

65.  There is no dispute that Requirement (1) is met.

H4.  Requirement (2)

66.  There is no dispute that there had been discussions between the parties as to prepayment under the FA and the Bonus since August 2012 and the amount of the Bonus. 

67.  There is dispute as to who initiated the discussion which need not be resolved for present purpose.

68.  There is dispute as to whether Mr Smith had the authority to bind MSC.  Given that Mr Smith featured prominently in dealing with Ricky Liu.  He at least had apparent authority to bind MSC and I shall so assume.

69.  The core dispute is whether the Assurance was given.  The court cannot and should not resolve issues of fact in the present application but I have taken into account the following factors, all revealed in the documents before action:

70.  Firstly, in the few months leading up to 17 March 2014, MSC had repeatedly reminded Ricky Liu to repay as scheduled:

(a) Mr Kawaii constantly referred to amounts “which will shortly be payable”.  He was keen to know YDL’s plans for repayment.  See email to Ms Rebecca Choy dated 18 February 2014 and 5 March 2014; and Mr Kawaii’s handwritten note of the Board Meeting on 4 March 2014;

(b) There were also express references to the payment date of 17 March 2014.  See Mr Kawaii’s email to Ms Rebecca Choy dated 7 March 2014; and documents referred to in paragraph 47 above;

(c) In the email dated 7 March 2014, Mr Kawaii complained that “from November 2013 until the topic was re-raised by Elliott by way of a request made on 13 February 2014 for an update (followed by Mr Kawaii’s email to Rebecca Choy dated 18 February on that and other matters), there was silence on the issue from Mr. Liu.  Even at this late stage, with payment due on 17 March, I have no clarity as to how YDL is going to be able to make the single largest payment which it has had to make in its recent history ...”; and

(d) In the above letter dated 14 March 2014 MSC referred, amongst others, to the “ongoing (albeit sporadic) discussions regarding the possibility of terminating MSC’s [Bonus] rights under the IRD for an appropriate consideration payable by YDL.” MSC reserved all of its rights against YDL, including those available MSC under the FA, without further or any notice to YDL.

71.  Secondly, such reminders were uncontradicted and in fact confirmed in YDL’s letter dated 14 March 2014:

“Since you expressed the Lender’s preference to receive full repayment, and if possible earlier repayment, of the Facility at our lunch meeting on 22 August 2013 …As explained to you at subsequent meetings and phone conversations during the fourth quarter of 2013 and the first quarter of 2014, my goal has always been to put the Company into a position to meet all the obligations under the Facility Agreement.” (emphasis added)

72.  The letter then informed Mr Smith of steps taken by Ricky Liu to find refinanciers.  Ricky Liu also offered a facilitation fee of US$500,000 (“the facilitation fee”) for the lender not to declare an Event of Default for 4 weeks until 17 April 2014 to enable the potential financer to complete the deal.

73.  YDL even acknowledged in its letter to Mr Smith dated 26 March 2014 (well after the alleged Assurance had arisen) that,

“After Mr Smith informed YDL that [MSC] had no intention to roll-over or extend the loan on maturity, YDL then focused on refinancing for the purpose of repayment on maturity.”

74.  In its draft form dated 24 March 2014, that letter stated that,

“During the same period [ie from August 2013 to March 2014], Mr Smith has repeatedly informed Mr Liu that [MSC] had no intention to roll-over or extend the loan on maturity, and the purpose of the Refinancing Request was therefore changed from prepayment to repayment on maturity.”

The draft and final letter put beyond doubt that YDL knew that MSC was not extending the repayment date and that YDL knew that it was facing repayment and not prepayment.

75.  Thirdly, in all the contemporaneous correspondence, YDL/Ricky Liu had never mentioned, still less relied on, the Assurance.

76.  Fourthly, in its letter dated 20 March 2014, YDL rejected MSC’s offer of a conditional suspension of enforcement and asserted that there was no need for MSC to take the step it had taken to receive payment.  It just did not deny the existence of an Event of Default. Ricky Liu even expressed an interest in purchasing the secured assets. 

77.  Fifthly, in resisting enforcement proceedings prior to the present 2 Actions, Ricky Liu never challenged the existence of an Event of Default.  This could be seen from YDL’s issue of a notice to lessees on MSC’s request pursuant to the Rental Assignment.  Further, in the Order 88 proceedings, Ricky Liu had not challenged the amount of principal and interest due under the FA.

78.  The case on the Assurance was so contradicted by contemporaneous documents (which all pointed one way) and so inherently improbable that it was demurrable on its face.

79.  Assuming that the Assurance was made, its terms were vague.  There was no objective standard to measure whether YDL was “sincere” about repayment or was “actively seeking” additional finance and no certainty as to the time by which the repayment had to be made.  The Assurance fell short of the clarity required to vary a contract.

80.  Moreover, the meaning of the words or conduct constituting the promise or assurance has to be understood in the light of the parties’ particular relationship, and in the light of the legal rights or powers exercisable, and known to be exercisable, by the promisor.  One should put in focus not simply the actions of the promisor but the proper interpretation to be placed on those actions given the shared background and knowledge of the parties: Luo Xing Juan at §§56-57.

81.  Under clauses 25 and 26 of the FA, waiver would not be lightly given.  Any amendment to a term had to be in writing:

“25. Remedies and Waivers

No failure to exercise or to reserve, nor any delay in exercising or reserving, on the part of any Lender, any right or remedy under the Finance Documents shall operate as a waiver, nor shall any single or partial exercise of any right or remedy prevent any further or other exercise or the exercise of any other right or remedy. The rights and remedies provided in this Agreement are cumulative and not exclusive of any rights or remedies provided by law.

26. Amendments and Waivers

Any term of the Finance Documents (other than any Security Agreement) may be amended or waived only with the prior written consent of the Lender, the Borrower and the Sponsor and any parties thereto and any such amendment or waiver will be binding on all parties to such Finance Documents” (emphasis added)

82.  There had never been a waiver of the requirement of written consent by MSC in making the Assurance. 

H5.  Requirement (3)

83.  Ms Chan SC submits that reliance might take the form of inaction.   The Mortgagors have altered their positions in allowing YDL and Ricky Liu to focus on seeking financiers instead of repaying the outstanding balance before 17 March 2014 and seeking extension of the 3^rd installment.   They claim to have funds to pay from WFOE, Metro Capital and/or Ricky Liu’s personal deposit to raise the finance with, which was not disputed by MSC at all.  Ms Chan SC submits that it was thus inequitable for MSC to be permitted to go back on the Assurance and declare an Event of Default.

84.  As demonstrated above, the correspondence showed no reliance by Ricky Liu on the Assurance at all.  The offer of the facilitation fee refuted all possibility of reliance. 

85.  Despite recognizing that the declaration of an Event of Default under the FA “could potentially spell disaster for the [Project]”, Ricky Liu’s excuse was that he did not appreciate the legal significance of MSC going back on the Assurance and had acted without the benefit of legal advice when replying to MSC on 20 and 26 March 2014. There was no time for him to recount the history to his solicitors and Messrs Cheung, Mr Tong SC & Rosa only acted on behalf of Capital Metro in the Order 88 Proceedings.

86.  Although solicitors may be instructed under pressing circumstances, in my view, a person did not need to understand the legal effect of an estoppel to be able to assert a promise which he said he had relied on and was breached. 

87.  In summary, the Assurance was demurrable on its face and lacked the certainty required to establish an estoppel.  It did not matter that Ricky Liu might have misconstrued it.  There was no reliance on it before action.  The Estoppel Point cannot raise a serious issue to be tried.

J.  THE AGENCY POINT

J1.  Parties’ case

88.  Clause 8.6 of the Share Mortgages provides as follows:

“The receiver shall be the agent of the Mortgagor (which shall be solely liable for his acts, defaults and remuneration) unless and until the Mortgagor is placed into liquidation, after which time he shall act as principal. The receiver shall not at any time become the agent of the Mortgagee.” (emphasis added)

89.  Ms Chan SC submits that the Receivers were the Mortgagors’ agent.  There were 3 acts taken by the Receivers which showed that they did not act in the interests of the Mortgagors (which had an interest in the equity of redemption in the mortgaged assets) and acted to their detriment:

(i) Application for an injunction on ex parte basis;

(ii) Replacement of WFOE’s board of directors; and

(iii) Taking out PRC proceedings.

90.  Mr Mok SC submits that there was no dishonesty or bad faith on the part of the Receivers to make them liable to the Mortgagors.  Moreover, the alleged acts constituting breach of duties by the Receivers were in fact performed by Mr Gronow and Mr Fok qua directors of YDL, not as Receivers.

J2.  The legal principles

91.  The mortgagor has no say in the appointment of a receiver. There is no contractual relationship but only a duty owed in tort by the receiver to the mortgagor as a person interested in the equity of redemption.  The receiver’s primary duty is to the mortgagee and to bring about a situation where the secured debt is repaid.  The Receiver may exercise those powers even if they may be disadvantageous to the Mortgagors.  See Fisher & Lightwood, Law of Mortgage (13^th ed) at §§28.8 – 28.9:

“28.8 … Although nominally the agent of the mortgagor, his primary duty is to realise the assets of the mortgagor in the interests of the mortgagee. In practical terms the receiver has a close association with the mortgagee and the mortgagor cannot instruct the receiver how to act in the conduct of the receivership …

The peculiar incidents of the agency are significant. In particular:

(1) the agency is one where the principal, the mortgagor, has no say in the appointment or identity of the receiver and is not entitled to give any instructions to the receiver or to dismiss the receiver: ‘For valuable consideration he has committed the management of his property to an attorney whose appointment he cannot interfere with’;

(2) there is no contractual relationship or duty owed in tort by the receiver to the mortgagor: the relationship and duties owed by the receiver are equitable only;

(3) the equitable duty is owed to the mortgagee as well as the mortgagor. The relationship created by the mortgage is tripartite involving the mortgagor, the mortgagee and the receiver;

(4) the duty owed by the receiver (like the duty owed by a mortgagee) to the mortgagor is not owed to him individually but to him as one of the persons interested in the equity of redemption. The class character of the right is reflected in the class character of the relief to be granted in case of a breach of this duty. That relief is an order that the receiver account to the persons interested in the equity of redemption for what he would have held as receiver but for his default;

(5) not merely does the receiver owe a duty of care to the mortgagee as well as the mortgagor, but his primary duty in exercising his powers of management is to try and bring about a situation in which the secured debt is repaid; and

(6) the receiver is not managing the mortgagor’s property for the benefit of the mortgagor, but the security, the property of the mortgagee, for the benefit of the mortgagee. His powers of management are really ancillary to that duty.

(7) in the context of such a relationship, which is no ordinary agency and is primarily a device to protect the mortgagee, general agency principles are of limited assistance in identifying the duties owed by the receiver to the mortgagor.

...

28.9 The power to appoint a receiver is given to the mortgagee as a means of securing the repayment of his debt.  Thus, the primary duty of the receiver is to the mortgagee who appointed him, not to the mortgagor, and he can exercise his powers even though they may be disadvantageous to the latter.  However, the mortgage is simply security for the repayment of that debt and the performance of the mortgagor’s other obligations.  Thus, a receiver appointed by the mortgagee must exercise his powers in good faith and for the purposes of obtaining repayment of the debt owed to the mortgagee.”

92.  The receiver owes a duty of good faith to the mortgagor: Medforth v Blake [2000] Ch 86 at 102F, per Scott VC. However, there is no fiduciary duty in the sense that the receiver must act in the best interests of the mortgagor (as in a normal principal and agent relationship) as Ms Chan SC contends. 

93.  If the mortgagor requires protection, he must insist upon them when the bargain was made and upon the inclusion of protective provisions in the mortgage.  In the absence of such protective provisions, the mortgagee is entitled to rest on the terms of the mortgage and the court must give effect to them: Silven Properties Ltd and anor v Royal Bank of Scotland plc and ors [2004] 4 All ER 484, at §18.

94.  A receiver cannot be in breach of his duty of good faith to the mortgagor in the absence of some dishonesty, improper motive or element of bad faith.  Medforth v Blake [2000] Ch 86 at 103D, per Scott VC.

J3.  Application of the legal principles

95.  The Agency Point cannot be relied on to dispute the validity of the Event of Default or the Appointment.  This is because under clause 7 of the FA, once there is an Event of Default, the Mortgagee can take possession of or sell the mortgaged assets and exercise all rights as if it were the beneficial owner.  Granting an injunction to YDL will be tantamount to rewriting the contract for the parties, which the court should not do.

J4.  1^st complaint: ex parte application for an injunction

96.  The Mortgagors complain that the Receivers caused YDL to expend funds improperly for an ex parte injunction in the 1341 Action, which was subsequently discharged for want of secrecy or urgency.  It prejudiced the Mortgagors’ equity of redemption in the mortgaged assets.

97.  However, there was no evidence to show that the Receivers acted with dishonesty, improper motive or bad faith.  They cannot be said to be in breach of their duty to the Mortgagors to justify a restraint on their powers: paragraph 94 above.  At best, the Receivers can be asked to give an account: principle (4) in Fisher & Lightwood cited in paragraph 91 above. 

98.  In addition, even if the complaint is justified, it would fall foul of the principle of reflective loss for YPL and Wonder Earn to pursue the Receivers for compensation.  Capital Metro does not even have cause to complain about the wrongful steps taken in the 1341 Action.

J5.  2^nd complaint: replacement of WFOE’s board of directors

99.  Ms Chan SC complains that the Receivers have not justified its removal of Ricky Liu, Robert Ho, Lu Xiao Hua of WFOE (“the ex-WFOE directors”). The Receivers do not have the experience and expertise of the ex-WFOE directors. Their removal had caused disruption to the business of WFOE and confusion to its employees, customers, banks and government authorities dealing with WFOE; and a contractor has threatened to sue WFOE for damages.  There is real risk that such disruptive actions, if not restrained, will destroy the value of the Project.

100.  With respect, this complaint on replacement is misconceived.  All the acts complained of were not done by the Receivers as YDL is not on receivership.  The Receivers happened to have appointed themselves as the new directors of YDL.  The new directors have caused YDL, as sole shareholder of WFOE, to change the composition of the board of directors of WFOE as well.  These were achieved by dating the resignation letters signed in escrow by ex-WFOE’s directors and the written resolutions of the board of directors of YDL, which were provided to MSC as part of the security arrangement.  The exercise of such rights was not dependent on the misconduct of ex-WFOE directors or their lack of experience.

101.  Causing disruption is not a reason for MSC to cease the enforcement process either, as it was the expected result of receivership and not the dishonesty, improper motive or bad faith of the Receivers.

J6.  3^rd complaint: taking out PRC proceedings

102.  On 18 June 2014, YDL commenced the PRC Proceedings, the same day they made the request for delivery up of books and records of WFOE.  Service has not yet been effected on the ex-WFOE directors.

103.  Ms Chan SC submits that the PRC Proceedings were misconceived and unnecessary because the books and records requested for are the property of WFOE. In any event, unless and until the Receivers have been properly appointed and registered as directors of WFOE, they have no right to possession.

104.  With respect to Ms Chan SC, it should be left to the PRC court to decide the issue over the change in directorship and the right to demand for books and records.  Even if wrongly constituted, the PRC Proceedings cannot be used to invalidate the Appointment or appointment of new directors.

105.  In summary, I do not find there to be a serious issue to be tried on the Agency Point or any of the complaints. 

106.  I now consider the individual applications.

K.1359 ACTION: MORTGAGORS’ APPLICATION FOR AN INJUNCTION TO RESTRAIN THE RECEIVERS FROM EXERCISING THEIR POWERS AS RECEIVERS

K1. Serious issues to be tried

107.  The Mortgagors no longer seek an order restraining the Receivers from holding themselves out as directors of YDL and WFOE (ie paragraphs 1(1), 2(1) and 2(2) of the Summons in the 1359 Action). Bearing in mind the principles in section F above, there is no serious issue to be tried on any of the MLO, Estoppel or Agency Points.  That is sufficient to dispose of the injunction summons.

K2.  Balance of convenience

108.  For completeness sake, I have considered the question of balance of convenience.

109.  The principles guiding the exercise of the court’s discretion whether to grant an interlocutory injunction have been explained by Lord Hoffmann in National Commercial Bank Jamaica v Olint Corporation Ltd [2009] 1 WLR 1405 at §§16-18. The court may take into account the prejudice which the plaintiff may suffer if no injunction is granted or the defendant may suffer if it is granted; the extent to which the parties may be compensated by an award of damages or enforcement of the cross-undertaking; the likelihood of either party being able to satisfy such an award; and the likelihood that the injunction will turn out to have been wrongly granted or withheld.

110.  The question of balance of convenience is highly fact specific.  Where the factors are evenly balanced or difficult to assess, the prudent course is to take measures to preserve the status quo: Hong Kong Civil Procedure 2014, Vol 1 pp 638-656; 2^nd Supplement pp 17-19.

K3.  Are damages an adequate remedy?

111.  Insofar as the Property is concerned, there is nothing unique in it.  Capital Metro could have used another property as office. Any loss it suffered by reason of the sale of the Property can clearly be compensated for by way of damages.

112.  Insofar as the Shares are concerned, I agree with Mr Mok SC that as shareholders of YDL, the damage that Wonder Earn and YPL may suffer will be a diminution in the value of the YDL Shares.  They do not own the assets of YDL, let alone the assets of its subsidiary WFOE: Macaura v Northern Assurance Co [1925] AC 619, 626.

113.  However, one cannot ignore the reality that the value of the YDL Shares depends on how well the Project performs.  There will be costs attendant upon the Receivers taking over the Project.  Once it is found that the appointment of Receivers was invalid after trial, it will be difficult to assess the damage or restore YDL/WFOE to its original form.  Once the YDL Shares are sold, it will also be difficult to repurchase them.  Damages are not an adequate remedy for the right to acquire shares in a private company: Spry, Equitable Remedies (9^th ed), at 61-69. 

114.  There is dispute as to who is more effective in managing the Project.  Ricky Liu’s side relies on the experience of the ex-WFOE directors.   He points out the negative effects on seeking alternative financing, triggering of cross-default provisions in other (unidentified) loans of WFOE and the knock-on effect when WFOE is perceived to be in financial difficulties. 

115.  On the other hand, the Receivers points to the costs increment and poor financial performance of the Project when run by Ricky Liu’s side.  They assert experience in managing construction projects in the Mainland and their common interests as the Mortgagors and YDL in securing the success of the Project. 

116.  In my view, the effectiveness in running the Project is an evenly balanced factor.  The Receivers have been carrying on their duties for well over 4 months by the date of the hearing, although no complaint of “delay” can be made against Ricky Liu’s side given the documentation and arguments that unfolded.

117.  MSC refers to evidence showing the size of the assets (US$24 billion) that it and Elliott manage.  I agree with Ms Chan SC that those assets do not belong to them and are irrelevant when it comes to assessing the ability of MSC or Elliott to bear an award of damages.

118.  I am of the view that damages will not be an adequate remedy to the Mortgagors.  On the other hand, MSC’s interest all along lies in having the Loan repaid with interest and the Bonus.  If the outcome of the trial is in its favour, damages will certainly be an adequate remedy for the defendants.  Such damages together with costs will be paid out of the proceeds of realizing the YDL Shares and the Property.

K4. Undertaking as to damages

119.  The Mortgagors have given an undertaking as to damages.  Subject to having the ex-WFOE directors in the board and the Receivers not interfering with the management of WFOE and the Project, Ricky Liu has offered to provide management accounts and monthly receipts and payments of WFOE to MSC.

120.  However, the Mortgagors are BVI companies. Without the benefit of seeing their accounts, their only assets appear to be the YDL Shares and the Property.  Ricky Liu suggested that YPL and Wonder Earn will be worth at least RMB1.8 billion (revenue of RMB2.9 billion minus costs of RMB1.1 billion) and far exceeds YDL’s indebtedness under the FA. That was based on projection of gross revenue of the Project up to 2017 without taking into account the liabilities.  There is no reference to more readily available capital to meet any award of damages pursuant to that undertaking.  If this court were to grant an injunction in their favour, the Mortgagors should fortify their undertaking.

121.  In summary, even though damages are not an adequate remedy to the Mortgagors, the Mortgagors’ application for an injunction against the Receivers is dismissed for lack of a serious issue to be tried.

L. RELATED APPLICATION FOR AMENDMENT TO THE WRIT OF THE 1359 ACTION

122.  The amendments seek to introduce the MLO Point and Agency Point.  Counsel are agreed that even if the injunction application is dismissed, the court still has the power to allow the amendments unless it takes the view that the amendments could have been struck out.

123.  Given my analyses on the MLO Point and the Agency Point, it is plain and obvious that the proposed causes would have been struck out for being frivolous and vexatious.  I therefore decline to give leave to amend the writ in the 1359 Action, save to the extent of adding paragraphs 5 and 6 to the indorsement of claim to plead the IRD and Equity Pledge, which are factual and non-controversial.

M. APPLICATION BY YDL FOR VARIOUS INJUNCTIONS AGAINST THE EX-DIRECTORS UNDER THE 1341 ACTION

124.  YDL’s summons applies for all the reliefs in the amended writ on an interim basis, being mandatory and prohibitory injunctions against the ex-directors.

M1.  The legal principles

125.  As mandatory injunctions may have a dispositive effect on the action, an applicant is generally required to meet a higher standard, ie to show a strong prima facie case.  The court must normally feel a high degree of assurance that at trial it will appear that the injunction was rightly granted. See Hong Kong Civil Procedure 29/1/29; Music Advance Ltd v Incorporated Owners of Argyle Centre Phase 1 [2010] 2 HKLRD 1041.  The court will examine the merits more closely and take account of the parties’ respective prospects of success: Cayne v Global Natural Resources plc [1984] 1 All ER 225, at 236b-f; Kwok Shun On v Wong Sai Wing [2001] 3 HKLRD 811 at §43.

M2. Application of the legal principles

126.  My findings that there are no serious issues to be tried on the MLO, Assurance and Agency Points apply.  There is thus no question as to validity of the appointment of Receivers and the new directors.

127.  Detinue is a wrongful detention of the owner’s goods/chattels despite demand for delivery up. Conversion is an interference with the claimant’s possessory title which causes harm to the claimant’s right or title to the goods/chattels.  Trespass to goods is an interference with the claimant’s possession or immediate right to possession of goods.  See Tort Law and Practice in Hong Kong (2^nd ed) §§6.009, 6.011, 6.016, 6.027; §§9.013, 9.040, 9.042.

128.  There is a strong prime facie case that the ex-directors would have committed the torts of detinue and conversion and trespass to goods if they still hold on to assets and corporate records of YDL after termination of their directorship.  The demand for delivery up of assets and corporate records has been given on 5 June 2014.  The only director who had complied with the demand was Mr Kawaii, but the compliance was limited.

129.  The ex-directors refused to grant YDL access to its own rented premises in Wanchai on 10 and 11 August 2014.   That would be trespass, which is intentional interference with the rights of a tenant in possession.  See Tort Law and Practice in Hong Kong (2^nd ed) §§9.002, 9.013, 9.038, 9.040.

130.  Under paragraph 1(a) of YDL’s Summons, the ex-directors were asked to deliver up YDL’s assets, including its “books and records, company seals and chops, and the share certificates in, and any other documents or materials concerning, [WFOE] in the Plaintiff’s possession or in the Defendants’ possession held on behalf of the Plaintiff”.

131.  Records of a subsidiary are not ipso facto the records of its parent company (Wong Kar Gee Mimi v Hung Kin Sang Raymond [2011] 5 HKLRD 241 at §§44-49, per Harris J).  As the Receivers are not of WFOE, there is no basis for them (and YDL) to seek the documents or materials of WFOE under paragraph 1(a).

132.  As to the rest of the items sought under paragraph 1(a) of YDL’s Summons, all the ex-directors have confirmed that they do not have possession of them.  The chops and seals have been handed over. Minutes of all board meetings of YDL have in any case been exhibited to 2^nd affirmation of Ricky Liu.

133.  The new directors seem to have been in possession of enough documents to produce teasers and projections for advertising the sale of the Project.

134.  However, the new directors have shown that some other documents like tax returns, bank statements, employee records have not yet been handed over.  They have received some outdated documents from Mr Kawaii but still need the latest financial reports of YDL.  Those should be provided by the ex-directors.

135.  Paragraph 1(b) of YDL’s Summons seeks to restrain removal of YDL’s assets outside Hong Kong.  This is otiose because the only asset of YDL is its equity in WFOE, located in the Mainland.  The equity is subject to the equity pledge and cannot be disposed of either.  MSC confirmed through leading counsel that the Receivers have got the original share certificates. There is no asset that YDL could remove from the jurisdiction. 

136.  The ex-directors might not have been cooperative.  However, there was simply no evidence on which it can be shown that there was risk of their disposal of the assets of YDL, encumber it or otherwise act in a way detrimental to the interests of YDL.  Removal of YDL from the Property in anticipation of surrendering possession to the Receivers, having the air-conditioning and the lights to the Property turned off over lunch time and replacing the directory to avoid people asking for “the landlord”, cannot be regarded as acts to spirit away YDL’s assets and records. YDL simply fails to meet the requirement of showing risk of dissipation to justify an injunction under paragraph 1(b), which should be dismissed.

137.  Paragraph 1(c) of YDL’s Summons requiring the ex-directors to grant access to the Property, collect its assets or take copies, is ancillary to paragraph 1(a) and should be granted.

138.  Paragraph 1(d) of YDL’s Summons requires the ex-directors to give written instructions to the auditors and banks to release information, to accept and act in accordance with the instructions from YDL’s new directors.  YDL was relying on previous communications between the ex-directors and the auditors/the banks stating that the former dispute the validity of appointment of the Receivers.  Accordingly, some bank accounts could not be operated because of conflicting instructions received from one or more of the directors.  The auditors also refused to release information to the new directors. 

139.  I agree with Ms Chan SC that there is no power under the security documents for the ex-directors to comply with paragraph 1(d). It is for the new directors to give the necessary instructions to the auditors and the banks.

140.  It was only on the 3^rd day of hearing that Mr Barnett submitted a draft amendment to the terms of paragraph 1(d), quite different from the ex parte order obtained but discharged. The new order sought is for the ex-directors to write to the auditors and banks (including Bank of China which was lately discovered) to withdraw previous communications given since 4 June 2014.

141.  The amendment came very late although the evidentiary basis of YDL has not changed.  In my view, it was a clear concession of YDL that the court should not make an order under the existing paragraph 1(d).

142.  The amendment is objected to by Ms Chan SC who, and her clients, understandably did not have time to consider.  Despite that, there is little prejudice to her clients as it is not uncommon for courts, in the course of a hearing, to adjust the proposed terms of an injunction to reflect the justice of the case.  The amendment should be allowed.  Any prejudice can be covered by an appropriate order of costs.

143.  The relief sought under the new paragraph 1(d) is closely tied to others.  The ex-directors might have honestly told the banks and the auditors the truth that they were challenging the Appointment but their acts did have the effect of interfering with the operation of bank accounts and the proper management of YDL (paragraph 1(e) of the summons).  They have also held themselves out as being still in office as directors of YDL (paragraph 1(f) of the summons).  The court has now found against the ex-directors and they should be restrained from similar conduct.

144.  I find there to be a strong prima facie case and there is a high degree that at the trial it will appear the mandatory injunctions (paragraphs 1(a), (c) and (d)) are rightly granted.  For the prohibitory injunctions (paragraphs 1(e) and (f)), there are serious issues to be tried.

M3. Balance of convenience

145.  The risk of injustice in not granting the injunction to enable the new directors to properly manage YDL is greater than any conceivable prejudice to the ex-directors who have been validly removed. The injustice to YDL cannot be properly compensated for by damages, whilst any damage to the ex-directors can be compensated for by money.

M4. Undertaking as to damages

146.  Although YDL is a BVI company, its worth, based on the net asset value of WFOE as at December 2013, is approximately RMB 117m. That is more than sufficient to cover any damages or costs that may be suffered by the ex-directors in the event it is found that the injunction (except para 1(b) of the Summons) should not have been made.

N. CONCLUSION

147.  YDL did not repay the 2^nd and 3^rd installments of the Loan to MSC.  An Event of Default occurred on 17 March 2014.  MSC as lender was justified in enforcing its rights by appointing the Receivers. 

148.  Viewed against the contemporaneous documents, the grounds in opposition to MSC’s enforcement actions were but desperate attempts by a debtor to resist an impossible situation.  The MLO point, the Estoppel Point and the Agency Point are demurrable on their face.  There are no serious issues to be tried to justify an injunction or leave to amend the writ in the 1359 Action. However, there is justification to issue the injunctions (except para 1(b) of the Summons) in the 1341 Action.

149.  On costs, the arguments concerning the 3 Points are relevant to both Actions.  Therefore the costs of the 2 summonses in the 1359 Action and 50% of the costs of the hearing should be to the defendants. 

150.  As for the 1341 Action, the late amendments effectively conceded 2 main objections of Ms Chan SC under paragraphs 1(a) and (d) and YDL should be responsible for costs thrown away.  In addition, paragraph 1(b) is not granted.  On a broad brush approach, there should thus be no costs on the application to amend; costs of the amended summons together with 30% of the costs of the hearing should be in the cause. 

151.  Costs of the ex parte injunction and hearings before Deputy Judge Wilson Chan and Recorder Pow SC should be borne by YDL as the dismissal arose solely out of lack of urgency/secrecy.

152.  I order as follows:

(A) In the 1359 Action,

(1) The summons for an injunction is dismissed;

(2) Save for the addition of paragraphs 5 and 6 to the indorsement of claim, the summons for leave to amend the writ is dismissed.

(3) The amended writ together with the amended statement of claim is to be served within 21 days;

(4) On a nisi basis, costs of both summonses together with 50% of the costs of the hearing be to the defendants to be summarily assessed on 2 December 2014 on the papers.

(B) In the 1341 Action,

(5) There be leave to amend the summons to enclose the draft order on pages 69A to 69E of Bundle 1.

(6) The defendants, whether by themselves, their employees, servants or agents or any of them or otherwise:

a. shall deliver up to the plaintiff at its address c/o FTI Consulting, Level 22, The Centre, 99 Queen’s Road Central, Hong Kong, all of the plaintiff’s assets, including, without limitation, the plaintiff’s books and records, company seals and chops in the defendants’ possession held on behalf of the plaintiff;

b. shall on or before 24 November 2014:

(i) grant access to the plaintiff (acting through Nicholas James Gronow and Fok Hei Yu (“plaintiff’s directors”) or their duly appointed agent(s) in respect of the plaintiff’s business premises at 20/F Sun Feng International Centre, 182 Queen’s Road East, Wanchai, Hong Kong, in order that the plaintiff may inspect the premises, collect its assets or take copies or make arrangements for copying (either at those premises or elsewhere) of documents or computer files relating to the plaintiff.  Such access to be between the hours of 9 am and 9 pm from Monday to Friday;

(ii) give disclosure to the plaintiff of any additional or alternative business premises of the plaintiff; and

(iii) grant access to the plaintiff’s directors or their duly appointed agent(s) in respect of any such additional or alternative business premises of the plaintiff, for the same purposes and in the same manner as prescribed above.

c. shall on or before noon on 24 November 2014:

(i) write to the plaintiff’s auditors, PricewaterhouseCoopers, (copied to the plaintiff) confirming that PricewaterhouseCoopers should

1. should ignore any contrary instructions or communications which the defendants have purported to give, whether directly or indirectly, which conflict with the instructions or communications given by the plaintiff or the plaintiff’s directors since 4 June 2014;

2. should comply with any instructions from the plaintiff or the plaintiff’s directors given since 4 June 2014, including the instructions for release of the accounting documentation; and

3. should henceforth accept the instructions from the plaintiff or the plaintiff’s directors.

(ii) write to the banks at which the plaintiff maintains (or maintained at any time between September 2010 and the present) accounts, including but not limited to HSBC, Bank of China and Standard Chartered Bank (Hong Kong) Ltd, (copied to the plaintiff) confirming that the banks

1. should ignore any contrary instructions or communications which the defendants have purported to give, whether directly or indirectly, which conflict with the instructions or communications given by the plaintiff or the plaintiff’s directors since 4 June 2014;

2. should comply with any instructions from the plaintiff or the plaintiff’s directors given since 4 June 2014; and

3. should henceforth accept the instruction from the plaintiff or the plaintiff’s directors to release information to the plaintiff or to the plaintiff’s directors and to accept instructions from the plaintiff’s directors.

d. shall not interfere with the plaintiff’s relationships with its auditors and its banks.

e. shall not hold themselves out as directors, officers or representative of the plaintiff.

(7) The defendants (or any of them) be at liberty to apply to vary or discharge this order upon giving no less than 48 hours’ written notice to the plaintiff.

(8) On a nisi basis, there be no order as to costs on the application to amend, and the costs of the amended summons together with 30% of the costs of the hearing should be in the cause.

(9) On a nisi basis, costs of the ex parte injunction and hearings before Deputy Judge Wilson Chan and Recorder Pow SC should be borne by YDL to be summarily assessed on 2 December 2014 on the papers.

153.  I thank counsel for their assistance.

Mr Jeremy Bartlett, instructed by Linklaters, for the plaintiff in HCA 1341/2014 and the 2^nd and 3^rd defendants in HCA1359/2014

Ms Linda Chan, SC and Mr David Chen, instructed by Li, Wong, Lam & W I Cheung, for the 1^st to 3^rd defendants in HCA1341/2014 and the 1^st to 3^rd plaintiffs in HCA1359/2014

Mr Johnny Mok, SC and Ms Ann Lui, instructed by Roome Puhar, for the 1^st and 4^th defendants in HCA1359/2014

HCA 1341/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1341 OF 2014

_______________

__________________________________

__________________________________

BACKGROUND

1. The plaintiff (“YDL”) is a BVI incorporated company.  This action is instituted by the plaintiff which has recently appointed directors and two receivers, Mr Gronow and Mr Fok (“the Receivers”).  The Receivers were purportedly appointed pursuant to the terms of two similar Equitable Share Mortgages.

2. These two Equitable Share Mortgages formed part of a series of financial documents executed on 10 September 2010 whereby a loan facility was granted by Manchester Securities Corp (“MSC”) as lender to YDL as borrower.  The series of financial documents included the followings:

(1)  A Facility Agreement.

(2)  An Investor Rights Deed.

(3)  Two Equitable Share Mortgages over shares of YDL owned by the two shareholders, namely Wonder Earn Group Ltd (“Wonder Earn”) and Yifung Properties Ltd (“YPL”).  These mortgages are securities under the Facility Agreement.  In the event of default under the Facility Agreement, MSC as mortgagee could appoint receivers over the shares of YDL.

(4)  A Triparte Legal Charge over a real property in Hong Kong (“the HK Property”).  The mortgagor is Capital Metro Group Ltd (“Capital Metro”) and the mortgagee is MSC.  This is also a security under the Facility Agreement.  In the event of default under the Facility Agreement, MSC can appoint a receiver for the HK Property.

(5)  There also certain related agreements which do not feature much in the current dispute between the parties.

3. Pursuant to the Facility Agreement, very substantial loan had been advanced by MSC to YDL in September 2010.  It is the plaintiff’s case that the loan and interest became repayable on 17 March 2014.  On that day, YDL defaulted in repayment.  On 18 March 2014, MSC issued a letter to YDL declaring an event of default under the Facility Agreement and notified YDL of its intention to enforce the securities by appointing receivers to effect a sale of the HK Property.  On the same day, MSC also appointed Mr Gronow and Mr Fok as receivers under the two Equitable Mortgages.

4. On 20 March 2014, the 1^st defendant (who was at that time a director of YDL) in his letter to MSC and copies to the Receivers said:

“Given the Lenders [MSC] has declared the Borrower [YDL] to be in default, and that receivers have been appointed in relation to the securities under the Securities, the receivers may exercise their power of sale and/or transfer the title of assets over which security has been given under the Securities Agreement.

Please take notice that in such event, I will be interested in purchasing the aforesaid assets.  Please keep me informed in good time of the manner and necessary details of the sale and/or transfer.”

Based on this letter, the Receivers believed that the 1^st defendant seemed to have accepted their appointment.

5. Yet, by a letter dated 26 March 2014, it appeared that the 1^st defendant raised challenge to the appointment of the Receivers on the ground that no time had lapsed between the delivery of the demand for payment (on 18 March 2014) and the Receivers’ appointment.  The challenge was purportedly based on clause 7.9(c)(i) of the Equitable Share Mortgages providing that a period of one hour must have elapsed before MSC can take enforcement action following a demand for repayment.  To avoid technical arguments, MSC re‑appointed the Receivers on 28 March 2014.

6. Then on 28 March 2014, the receivers received a solicitor’s letter from Messrs DLA acting on behalf of YPL, Wonder Earn, the 1^st defendant.  They reiterated the same challenge based on “appointment time”.  Then it was followed by a “without prejudice” letter whereby they suggested some uncertainty in the amount of repayment demanded without elaboration.  This was promptly replied to by the Receivers on 2 April 2014 stating that the Receivers were not aware of any dispute on the sum demanded by MSC.

7. It is the plaintiff’s case that the Receivers encountered the following obstructions in the exercise of their rights and duties:

(1) after the appointment, the Receivers successfully replaced the directors of YDL.  They also attempted to change the legal representative and supervisor of a WFOE in PRC owned by YDL.  This WFOE held and operated a property development project in the PRC named “Riviera Project”.  They were unable to register a change in directors, legal representatives and supervisor of the WFOE.  The chops of WFOE remained in the hands of the defendants;

(2) when they asked the defendants for delivery up of all property, books, records etc of YDL and/or WFOE, the defendant simply ignored the repeated demands;

(3) they were denied access to the premises of the WFOE;

(4) when they attempted to gain control over the bank accounts of YDL (maintained with HSBC and SCB), they were informed by the banks that the banks were unable to continue operating the accounts because of conflicting instructions received from the defendants;

(5) they were also prevented from obtaining records of YDL from its auditors because the latter had been informed by Li, Wong, Lam & W.I. Cheung (“LWL”) that they acted for YDL and Wonder Earn.  LWL informed the auditors that legal proceedings in the High Court had been instituted to challenge the validity of the Receivers’ appointment;

(6) then by a writ search, the Receivers discovered that on 20 June 2014, YPL and Wonder Earn issued HCA 1143/2014. This writ was never served on MSC.  The writ purported to claim for “termination or rescission of the Facility Agreement and other relevant contracts due to [MSC’s] misrepresentation (fraudulent, negligent and/or innocent misrepresentation) and/or breach of terms of the Facility Agreement and/or oral agreements and/or collateral warranties”; and

(7) it was also discovered that YDL no longer occupied the HK Property as its office which remained locked with lights off.

8. Consequently, on 16 July 2014, YDL issued a writ in HCA 1341/2014.  By an ex parte application before DHCJ Wilson Chan on the same day, YDL obtained an ex parte injunction against the defendants consisting of the following orders:

(1)  a mandatory order of delivering up assets (including books and records) of YDL;

(2)  a prohibitory order of not to remove YDL’s assets outside jurisdiction;

(3)  a mandatory order of providing access to the HK Property and other business premises of YDL;

(4)  a mandatory order of giving instructions to YDL’s auditors for the release of YDL’s financial documents and to YDL’s bankers to accept current directors’ instructions;

(5)  a prohibitory order not to interfere with YDL’s relationships with bankers and auditors; and

(6)  a prohibitory order of not holding out as directors/officers of YDL.

THE APPLICATION TO DISCHARGE THE EX PARTE INJUNCTION

9. Counsel for the 1^st defendant Mr Chen attacked the propriety of the ex parte injunction on two basis:

(1)  there was no urgency or need for secrecy; and

(2)  there was material non‑disclosures.

Urgency/secrecy

10. In relation to the first ground, Mr Chen made the following points:

(1)  He relied on the dictum of Lam J (as he then was) in Slik Hong Kong Co Ltd v Gerald Rhoslyn[1]to the effect that ex parte applications should be regarded as exceptional and the court should not entertain the same unless there are cogent justifications usually in term of either extreme urgency or secrecy.  He also relied on the dictum of Ma J (as he then was) in Brand, Farrar Buxbaum v Samuel-Rozenbaum Diamond[2]in which his Lordship said:

“…. At the risk of repeating the obvious, ex parte orders are only made where the situation is of such extreme urgency that there is literally no time to warn the defendant of what is proposed or where the purpose of the injunction will or may be frustrated if the defendant is informed…” (my emphasis)

(2)  He submitted that there was neither urgency nor need for secrecy.  He submitted that putting the plaintiff’s case to the highest, its case of urgency/secrecy was built upon (a) non‑cooperation of the 1^st defendant in handing over management control of YDL to the Receivers; and (b) the discovery on the 10 July 2014 visit to the HK Property that the premises were closed down with YDL’s name removed from the building directory.

(3)  On “secrecy”, he first pointed out that in letter dated 5 June 2014 from the Receivers to the defendants, the former demanded the latter to hand over assets of YDL.  The defendants did not respond.  By another letter dated 18 June 2014, the receivers reiterated the demand and threatened that legal proceedings would be commenced without further notice in the event of the defendants failing to deliver up the assets.  He submitted that this letter completely dispelled any suggestion of need for secrecy.  If there were any nefarious intent on the part of the 1^st defendant to dissipate YDL’s assets, he would have done so given that the ex parte application was made nearly one month later.  He referred to a similar observation made by Lam J in Cheung Yuk Chun v Yeung Wo Fai[3].  In similar vein, Mr Chen referred me to the fact that on 16 June 2014, the plaintiff also commenced proceedings in the PRC against the 1^st defendant.

(4)  On “urgency”, he submitted firstly that the plaintiff had no urgency to get the various orders sought in its ex parte application, especially those that are mandatory in nature.  For instance, the plaintiff had no real urgency to seize the books and records of YDL which is in nature a holding company of a WFOE in the PRC.  As to access to the HK Property, the plaintiff had already instituted a mortgagee action.  The attempt to gain access to the office premises was no more urgent than the intention to seize the books and records of YDL.  Similarly, there was no urgency to obtain the financial records from YDL’s auditors.  As for the bankers, they already indicated that the bank accounts of YDL had been frozen due to conflicting instructions.  There was no risk of YDL’s money being dissipated.

(5)  In any event, Mr Chen submitted that the plaintiff had nearly a month after 18 June 2014 to make an inter partes application if it really felt necessary to obtain such interlocutory reliefs as early as possible.  There was no justification not to do so.  An inter partes application can easily be made and heard on any Summons Day.  Not only did the plaintiff choose to proceed ex parte, it chose not to give notice to the defendants of the application.  This is particular unfair in the light of the plaintiff’s stance before DHCJ Wilson Chan.  Before the learned judge, the plaintiff submitted that it had an “overwhelming” case justifying the imposition of mandatory reliefs.  Mr Chen submitted that the plaintiff’s conduct was wholly unjustified in view of the following dictum of Lam J in the Slik case[4]:

“Whether the Plaintiff has a strong case or not, the usual rule is that the Defendants are entitled to be heard. As mentioned above, an inter partes hearing can be arranged within a relatively short time and even if the Defendant might ask for more time to respond, the court will then be in a position to assess whether any interim relief should be granted after hearing the Defendant on a preliminary basis.”

(6)  Mr Chen submitted that based on this ground alone, the ex parte injunction should be set aside, quoting Luck Continent Ltd v Leonora Yung[5].

11. Counsel for the plaintiff Mr Bartlett submitted that he has no arguments with the applicable legal principles.  He submitted that in the context of this case, “urgency” was based on the fact that YDL’s directors have positive duties to protect assets of the company.  YDL owned a WOFE in the PRC which ran the Riviera Project.  It was necessary for the directors to have access to books and records of YDL and its subsidiary to see whether the PRC project is still viable.  He submitted that the invoking incident was the Receivers’ attempted visit to the HK Property on 10 July 2014.  Having notified the 1^st defendant beforehand, it was alarming to the Receivers to find the premises locked up on a week day, 2:50 pm.  It was also alarming to find that YDL’s name had been removed from the building’s directory.  This caused panic and that was the basis of the “secrecy and urgency” element.

DISCUSSION

12. I am unable to accept Mr Bartlett’s submissions.  I find the following chain of emails exchanged between the Receivers and the 1^st defendant rather revealing:

(1) By an email from Mr Gronow to the defendants on 9 July 2014, Mr Gronow expressed his disappointment on the defendants’ failure to hand over records of YDL.  He then mentioned that his staff would attend the HK Property to take possession of YDL’s records.

(2) Then the visit to the HK Property took place on 10 July 2014.

(3) The 1^st defendant’s reply email was on 11 July 2014 where he mentioned that he had been discussing settlement matters with MSC directly.  He also reiterated that he would like to settle with MSC and focus back on his business as soon as possible.  He also complained about disruptive activities from MSC/Receivers. The 1^st defendant expressly stated that:

“In view of the above and in order to avoid any further inaccuracies and misunderstandings, please send all your further correspondence to my solicitors, Mr. Dennis Lam of Messrs. Li, Wong, Lam & W.I. Cheung or contact him at telephone number 3181-xxxx. ”

(4) Mr Gronow replied to the 1^st defendant’s email on 12 July 2014.  He accused the 1^st defendant of declining his various requests and reneged on his earlier intimation of willingness to cooperate with the new directors.  He also stated that “further correspondence will be sent to your solicitors”.

13. It did not seem that the Receivers were alarmed by the 10 July 2014 incident.  Neither did Mr Gronow question the 1^st defendant why YDL’s premises was locked and why YDL’s name was removed from the building’s directory.  Mr Gronow was given the clear identify and contact of the 1^st defendant’s solicitors.  Mr Gronow did not make any complaint or express any alarm to the 1^st defendant or his solicitors over the 10 July 2014 incident.  This is rather odd if Mr Gronow was truly alarmed by the incident and feared that YDL’s books, records and assets would likely be dissipated.  In fact, Mr Gronow in his affidavit deposed to the fact that there were settlement negotiations between the 1^st defendant and MSC during which the 1^st defendant indicated his intention to seek refinancing with a view to buying out MSC’s interest.  In my view, it must have been clear to Mr Gronow that the 1^st defendant was trying to hold onto YDL rather than seeking to harm YDL.  Mr Gronow must have treated the 10 July 2014 incident as part of the 1^st defendant’s uncooperative attitude and refusal to hand over management control of YDL to the new directors.  Hence, the contents and tone of the 12 July 2014 email.

14. More importantly, the plaintiff (through the Receivers) was given the identity and contact of the 1^st defendant’s solicitors.  10 July 2014 was a Thursday.  If the plaintiff was truly alarmed by the incident and wished to take immediate action, there was ample time to make preparation and file an inter partes summons on or before 15 July 2014 such that the application could be heard on 18 July 2014, a Summons Day.  I can see absolutely no justification for planning to go on an ex parte basis.  Even assuming that the use of ex parte application can somehow be justified, I can see no reason whatsoever not to proceed on “ex parte on notice” basis.  I agree with Mr Chen’s submission that no element of secrecy could have been involved.

15. Mr Bartlett was unable to provide any explanation as to why no notice of the intended application before DHCJ Wilson Chan was given to the 1^st defendant’s solicitors.  In my view, the attitude of the plaintiff was akin to what Rogers VP observed in Luck Continent case[6]:

“The whole matter seems to me, in reality, to be a push by the plaintiff to get some kind of victory under its belt as quickly as possible against the other parties or the other shareholders in CY Foundation, with whom it appears to be at loggerheads.”

16. In the circumstances, I agree with the submissions of Mr Chen that the ex parte injunction should be set aside on this ground alone, following the approach of the Court of Appeal in the Luck Continent case.

17. Given my decision, it is strictly unnecessary for me to deal with the “material non‑disclosure” ground.  I will just briefly set out my views as follows:

(1)  Mr Chen submitted that there were three material non‑disclosures:

(i) failure to disclose the existence of settlement negotiations between the defendants and MSC;

(ii) non‑disclosure of the PRC proceedings commenced by the plaintiff and its exact nature; and

(iii) failure to alert the judge of the “final dispositive effect” of his orders.

(2)  Mr Bartlett submitted that there was clear and sufficient disclosure of (i) and (ii) matters in paragraphs 76 and 77 of the affidavit of Mr Gronow.  As for complaint (iii), Mr Bartlett took me to the skeleton arguments he relied on before DHCJ Wilson Chan. I can see that in explaining the injunctive orders sought, he made clear cross‑references to each of the corresponding prayers in the writ. Furthermore, Mr Bartlett drew the learned Judge’s attention to the fact that some of the orders sought were mandatory in nature which required a “strong degree of assurance” in the strength of the plaintiff’s case.  Mr Bartlett then submitted to the learned judge that the plaintiff had an overwhelming case justifying the grant of mandatory orders.  Mr Bartlett submitted that the very reason why the grant of mandatory orders requires a “strong degree of assurance” is because such orders normally carry “final dispositive effect”. He therefore submitted that the learned judge was sufficiently alerted in the circumstances of this case.

(3)  I accept Mr Bartlett’s submissions.  I do not find that there was material non‑disclosure which would cause me to exercise my discretion to set aside the ex parte order.

CONCLUSION

18. For the above reasons, I had on 25 July 2014 set aside and discharged the ex parte orders granted by DHCJ Wilson Chan.