PACAS WORLDWIDE LTD v. CHINA HEALTH GROUP LTD

HCA 2961/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2961 OF 2015

____________

____________

_______________

J U D G M E N T

_______________

Background

1.  This is the application made by Pacas Worldwide Limited (“PW”) for judgment to be summarily entered against China Health Group Limited (“Company”) under Order 86 RHC.

2.  On 14 December 2015, PW issued these proceedings against the Company, to seek specific performance of a Convertible Note issued by the Company to PW (“Note”), that the Company should allot and issue shares to PW which represent the principal amount of the Note, of HK$30 million.  Alternatively, PW seeks damages in lieu of or in addition to specific performance. 

3.  The facts of the case do not appear to be disputed.  The Company is listed on the Hong Kong Stock Exchange (“Exchange”), with its head office and principal place of business in Hong Kong.  On 8 April 2014, PW entered into an agreement with the Company (“Agreement”), whereby the Company agreed to issue and PW agreed to subscribe for the Note in an aggregate principal amount of HK$30 million in accordance with the terms of the Agreement.  The Company further agreed to grant an option to PW, pursuant to which PW can request the Company to issue new trenches of convertible notes on the same terms and conditions of the Note, within a period of 12 months.

4.  The Agreement recites PW’s acknowledgement that “on or around the date of” the Agreement, the Company will enter into another subscription agreement with a third party, pursuant to which the Company agreed to issue convertible notes to such third party in the aggregate principal amount of approximately HK$195 million, subject to the same terms and conditions of the Agreement.

5.  Under the Agreement, the closing or completion of the transaction contemplated under the Agreement (“Closing”) is expressed to be conditional upon various conditions (“Conditions Precedent”).  Such Conditions Precedent include: the Exchange granting listing of and permission to deal in the shares of the Company (“Shares”) to be issued upon the exercise of the rights attaching to the Note (“Conversion Shares”) (“CP 1”); the passing of an ordinary resolution at a general meeting of the Company to approve the Agreement, the transactions contemplated under the Agreement, and the Note (“CP 2”); the passing of a directors’ resolution of the Company to approve the Agreement, the transactions contemplated and the Note (“CP 3”); and “the completion of the possible acquisition by the Company or its subsidiaries of certain interests in companies which are principally engaged in provision of healthcare services in the PRC” (“CP 4”).

6.  A series of supplemental agreements were entered into between the parties for the purpose of extending the long stop date for Completion under the Agreement, the last supplemental agreement having been made on 18 September 2015, extending the long stop date to 31 December 2015.  Completion under the Agreement eventually took place on 11 November 2015, when PW transferred HK$30 million to the Company for subscription of the Note, which sum was accepted by the Company, and the Company issued a certificate dated 11 November 2015, certifying that PW is the registered owner of the Note in the principal aggregate amount of HK$30 million.

7.  According to PW, its case is simple.  Pursuant to the express provisions of the Agreement, PW exercised its right to convert the entire principal amount of the Note into 200 million Shares, at the Conversion Price of HK$0.15 per share specified under the Agreement, by serving a conversion notice on the Company on 4 December 2015.  The Company refused to allot or issue the Conversion Shares to PW, and PW claims that the Company has no defence to PW’s claim that the Company is in breach of its obligations under the Note and the Agreement. 

8.  According to PW, damages are not an adequate remedy for the Company’s breach, and specific performance should be granted instead.  PW claims that 200 million Shares in the capital of the Company is not readily available in the market, due to its substantial quantity (which constitutes over 9.4% of the issued share capital of the Company).  The costs and expenses of purchasing 200 million Shares of the Company on the market are very substantial and will exceed HK$30 million, and are in any event uncertain due to the volatility of the stock market.  PW claims that it will suffer prejudice, inconvenience and difficulties if it should be required to purchase the 200 million Conversion Shares on the market.  Further, PW claims that it will be difficult to enforce any award of damages against the Company, in view of its dire financial position.

9.  The Defence of the Company is more uncertain.

10.  The affirmation filed on behalf of the Company, in opposition to PW’s application for summary judgment, and the draft Defence relied upon by the Company, focus on:  firstly, what the Company now claims to be suspicious features of the Agreement and the transactions under the Agreement (“Transactions”); secondly, the breach of fiduciary duties of the Company’s director who was solely responsible for the negotiation of the Agreement and the Transactions (“Chung”), and Chung’s exercise of his powers for an improper purpose; and further, PW having acted in concert with a third party to acquire more than 30% of the Shares of the Company, to circumvent the requirement to make a general offer for the Company as provided for under the Takeover Code.

11.  The Company claims that there are so many suspicions concerning PW’s claims, which (when properly ventilated and investigated) will raise an arguable defence, such that PW must have known or ought to have known of Chung’s breach of duties owed to the Company.  According to the Company, the action should proceed to trial, for discovery and cross-examination if nothing else.

Applicable legal principles

12.  The principles for summary judgment are not in dispute.  In summary, the essential test at the summary stage is whether the defendant’s assertions are believable, in the context of so much of the background as is either undisputed or beyond reasonable dispute, and if yes, whether such assertions can raise an arguable defence (Re Safe Rich Industries Ltd [1994] HKLY 183).

13.  In resisting summary judgment, a defendant must show that there are triable issues.  It has to satisfy the court that it has a real or bona fide defence, or a fair probability or reasonable grounds that a bona fide defence exists (Toy Major Trading Co Ltd v Plastic Toys Ltd [2007] 3 HKLRD 345).

14.  The sound reminder of Megarry VC in Lady Anne Tennant v Associated Newspapers Group Ltd [1979] FSR 298 is also relevant to this case:

“A desire to investigate alleged obscurities and a hope that something will turn up on the investigation cannot, separately or together, amount to a sufficient reason for refusing to enter judgment for the plaintiff.”

15.  Hence, a defendant must condescend upon particulars, and should state clearly and concisely what the defences, and what facts are relied upon to support it (para 14/4/4 Hong Kong Civil Procedure).

Are there triable issues/an arguable defence?

16.  On behalf of all the Company, Mr Chan SC emphasized that considered as a whole, the evidence clearly suggests that Chung was in breach of his duties as a director of the Company, in procuring PW and the Company to enter into the Agreement for an improper purpose of enabling PW and a third party, Zheng Hua Investment Ltd (“ZHI”), to act in concert to seize control of the Company, through their acquisition of Shares at undervalue for a substantial discount.

17.  The Company claims that Chung had failed to inform the Company that PW and ZHI were related companies, and that Chung had failed to advise the Company that the conversion price for the Conversion Shares under the Agreement was well below the prevailing market price, when convertible notes are usually issued at a premium over the market price.

18.  Mr Chan further points to what the Company now describes as the suspicious and unusual features regarding the Agreement and the Transactions. In gist, these are:

(1)  PW had on 5 November 2015 transferred the HK$30 million payable on Completion under the Agreement, before CP 1 had been complied with and before application for listing approval was even made on 6 November 2015.

(2)  PW entered into the Agreement for the Company’s issue of the Note, when it was PW’s stated intention to become a shareholder and to acquire Shares in the Company.  The Company claims that PW could have entered into a subscription agreement for Shares in the Company instead.

(3)  Notwithstanding that the Agreement involved the substantial amount of HK$30 million, PW did not engage any lawyers to negotiate the terms of the Agreement and to protect PW’s interests, but had simply accepted the Agreement prepared by the Company’s lawyers.

(4)  The Agreement conferred on PW an option to subscribe for another tranche of convertible notes (“Option”), when the future financial position of the Company was still unknown.  The Option was then cancelled by mutual agreement pursuant to the 7^th Supplemental Agreement made between PW and the Company on 13 October 2015.

(5)  CP 4 provided for acquisitions to be made by the Company or its subsidiaries on the Mainland (“Acquisitions”), and the subscription under the Agreement was to raise funds for the Acquisitions.  However, CP 4 did not specify in detail the nature of the Acquisitions to be made, the identities of the companies involved in the Acquisitions, nor the interests to be acquired. 

(6)  CP 4 was waived by PW on 14 August 2015, without any correspondence exchanged between Chung, the Company and PW, and without any details as to the negotiations leading to the waiver.

(7)  ZHI had entered into an agreement with the Company on 8 April 2014 (“ZHI Agreement”) on terms identical to those under the Agreement, to provide for ZHI’s subscription of Shares and for the issue by the Company of convertible notes in an aggregate principal amount of HK$195 million.  The same circumstances apply to ZHI with regard to extensions of time for compliance with and eventual waiver of CP 4, and ZHI’s payment of HK$195 million prior to compliance with CP 1, under the ZHI agreement.

19.  Mr Chan argued on behalf of the Company that the above features raise suspicions in PW’s case, and triable issues that PW and ZHI were parties acting in concert, and that Chung was acting for the ulterior and improper purpose of enabling PW and ZHI to acquire control of the Company. 

20.  I am unable to agree that the features referred to by the Company can raise any arguable defence to PW’s claims.

The facts asserted

21.  Dealing first with the allegedly suspicious features, most of them were matters to which parties in a commercial transaction may agree, for different reasons.  PW has offered its reasons, as to why it did not engage lawyers, its payment made on assurances given by Chung after the shareholders’ meeting, and why it decided commercially to agree to the cancellation of the Option, and to waive the CPs.  The court would be slow to question, investigate or speculate on the myriad financial and commercial factors in the capital and/or stock markets, which may cause parties to decide on a course of action or to choose a particular option in a commercial deal, or to speculate as to why PW should have agreed to subscribe for Notes, instead of subscribing outright for Shares in the Company. 

22.  In this case, the reasons for the parties to enter into the various agreements should also be considered in the undisputed context and factual matrix, that the Company was at the material time of the transactions “facing a solvency problem” and was in financial distress, as it admitted.  In the Announcement issued by the Company on 8 April 2014 (“8 April Announcement”), it stated its reasons for the issue of the Notes under the Agreements with PW and ZHI, as follows:

“As disclosed in the Company’s interim report for the 6 months ended 30 September 2013, the Group was facing a solvency problem and the financial distress of the Group had adversely impacted its operating activities. The Group has been making every effort to work out a satisfactory solution for improving its financial position and has taken active steps to seek for viable assets and business that can improve the profitability of the Group. The Company is currently in discussions with an independent third party with respect to a possible acquisition of certain interests in companies which are principally engaged in the provision of healthcare services in the PRC. The Directors consider that the Subscription will provide strong capital support for the development of the Group’s business and alleviate the solvency problem of the Group. The Subscription and the Grant of Options will also provide additional funding for financing potential acquisition activities of the Group.

The Directors consider that the terms of the Subscription Agreements, which were arrived at after arm’s length negotiations between the Company and the Subscribers, are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

The estimated net proceeds from the Subscription (after deducting all related expenses) of approximately HK$224.4 million is intended to be used for potential acquisition activities and general working capital of the Group. After deducting the expenses relating to the Subscription, the net conversion price for each Conversion Share is about HK$0.150. The maximum net proceeds from the issue of the Option CN would be approximately HK$224.4 million, which are intended to be used for general working capital and for future business development of the Group.” (Emphasis added)

23.  Significantly, and as highlighted by PW, the fact that the Company would be entering into another subscription agreement with a third party, on identical terms, had been disclosed and was recited in the Agreement itself. The Company’s execution of the Agreement with PW and of the separate agreement with ZHI was a fact openly and publicly disclosed, as evidenced by the 8 April Announcement. The 8 April Announcement, the Circular and the letter from the board of directors of the Company (“Board”), both dated 19 October 2015 and relating to the special general meeting to be held on 3 November 2015 to consider the Agreement, referred to PW and ZHI as subscribers for the Notes and contained all the details of their subscription, including the amount of Shares which would be issued and allotted to PW and ZHI pursuant to their Notes, and the shareholding structure of the Company before and after conversion of the Notes.

24.  Further, and as also stressed by Counsel for PW, the Board all along had knowledge of all the allegedly suspicious features of the Agreement and the Transactions, and had affirmed and approved the Agreement and the Note.  The Board publicly stated in the 8 April Announcement and in the Circular and letter from the Board to the shareholders of 19 October 2015 not only that the terms of the Agreement were fair, reasonable, and in the best interests of the Company, but also, that PW and ZHI were independent parties.  The Board stated that “having made all reasonable inquiries”, and to the best of their knowledge, information and belief, PW and ZHI were independent of the Company and the connected persons of the Company, and further, were independent of each other in terms of beneficial ownership, finances and control, and that there was no relationship between PW and ZHI.

25.  It has been asserted by Jia, the current chairman and executive director of the Company, that Chung was in fact the only executive director who was stationed in Hong Kong and who was “exclusively responsible” for the Company’s capital markets and corporate finance matters.  The draft Defence of the Company pleads that Chung was the only director handling the negotiations and documentation for the Agreement and the Transactions.  Nevertheless, as directors of the listed Company, who have duties which they themselves owe to the Company, it is astonishing for Jia and the other members of the Board to suggest that they would, could, and did simply delegate and entrust Chung, not only with the negotiations of the Agreement and the Note, but also the consideration of the terms of the Agreement and the Note, whether such terms and conditions are reasonable, and whether the Agreement is indeed in the best interests of the Company.  As directors, they have the duty, collectively and individually, to exercise independent judgment, and to acquire and maintain sufficient knowledge and understanding of the Company’s business and the Transactions proposed to be entered into by the Company.

26.  Nor is it credible that none of the other directors on the Board at the relevant time of the Agreement had any knowledge of the Agreement and the Transactions.  Even on the evidence adduced by the Company, Chung had been in correspondence with Jia and Li (another executive director) in September 2015 in connection with the Agreement, Chung’s communications with the Exchange regarding the Acquisitions, the funds to be raised under the Notes, and the Announcements to be made by the Company.  The Company’s Announcements concerning the Agreement, the Note and the Transactions were all issued in the name of Zhao Bao Yi, another executive director of the Company.  The Certificate of the Note itself was signed by Jia and Chung.  Neither Zhao, Li nor Jia can purport to disavow the documents which they signed, or to profess ignorance of the contents of such documents which they signed.

27.  In any event, all of the features now referred to by the Company as being so obviously unusual, and hence suspicious, were in existence at the time of the execution or the completion of the Agreement.  There is no evidence of any of the directors on the Board having raised any of such features for questioning, investigation, or even consideration.  Jia merely states in his affirmation that it is only with the assistance of the Company’s “current legal advisers” that the directors now believe that the features were “highly unusual and suspicious”.  As Leading Counsel for PW pointed out, there were solicitors acting for and advising the Company at the time when the Agreement was prepared and signed.  If the features now highlighted were indeed so “highly unusual and suspicious”, it would be surprising if they were not raised by the solicitors acting for the Company, and drawn to the attention of the Board at the relevant time.  This suggests that the unusual features had been raised for the directors’ consideration, and that the Board had agreed to these features after due consideration.  It will be highly unfair if the Board should now be allowed, after the event, to retract all the statements which they had made in the Announcements and the Circular, and to resile from their considered decision when they are now persuaded that the Agreement may, commercially, be a bad deal.

28.  Importantly, although Mr Chan has argued that the allegedly suspicious features show that there is a triable issue as to whether PW and ZHI were acting in concert at the relevant time, the Company has failed to establish how this can constitute a defence to the claims made by PW under the Agreement. Even if Chung had been acting in breach of his duties to the Company, as it is claimed, the Company has not been able to refer to any fact at all which can be said to support its bare assertion that PW had knowledge of Chung’s improper motive, breach of duties, or lack of authority.

29.  All that Jia has claimed is that the Board of directors now believe that the Transactions had the unusual and suspicious features outlined above, and were not “normal” transactions.  Jia then goes on to state that “the evidence suggests” that Chung had exercised his powers for improper purposes (para 5.3 of Jia’s 1^st affirmation).  He refers to the same suspicious features outlined above, and then states in paragraph 5.7:

“Fourth, it was suggested that ZHI and (PW) are independent and are not acting in concert. At the time of the transactions, Chung represented to the Board that ZHI and (PW) were independent parties. However, as advised by (the Company)’s current legal advisers, I verily believe that this should not be so. It is inherently most improbable for (PW) to invest in the shares of (the Company) - when it knew that ZHI was to become the single largest majority shareholder of (the Company). In the light of the amount of the investment, (PW) and ZHI should be parties acting in concert.”

30.  Jia also states in paragraph 5.10 of his affirmation:

“Sixth, whilst Chung told us that ZHI and (PW) are independent parties, I am advised and verily believe that this cannot be so. ZHI also knew and/or ought to have known that (the Company) was to enter into the (Agreement) on the basis of terms and conditions identical with those in the ZHI Agreement for the issue of convertible notes in the aggregate sum of HK $30 million which could be converted into 200 million shares of (the Company) at the conversion price of HK$0.15 per share.” (Emphasis added)

31.  Throughout Jia’s affirmation, there is only his speculation that PW and ZHI “should not be” and “cannot be” independent parties.  There is no claim of PW’s knowledge of any improper act, nor reference to any fact to show that PW had the relevant knowledge, apart from paragraph 11.2 of Jia’s affirmation, where he states:

“ZHI and (PW) must have known of Chung acting for improper purposes. Given the circumstances, ZHI and PW cannot be truly ‘independent’ with each other and they must be regarded as ‘concerted parties’ for the purpose of the Takeovers Code.”(Emphasis added)

32.  In short, even if it was true that there were suspicious features in the Agreement or the Transactions, and/or that PW and ZHI were acting in concert, there are no facts which can support any claim, or from which it can be inferred, that PW knew or ought to have known that Chung was acting for an improper purpose, or that PW was acting in concert with ZHI.  The Board had announced the fact of the Company entering into the Agreement, the terms of the Agreement and the Notes which were stated by the Board to be reasonable, and the Board had declared to the world that the Agreement and the Notes were in the interests of the Company.  There would have been no basis whatsoever for PW to have questioned whether Chung (with whom PW had negotiated the Agreement) had the authority to enter into the Agreement, and the Note. 

33.  To put all matters beyond doubt, the shareholders of the Company had passed a resolution at the special general meeting on 3 November 2015, to approve, ratify and confirm the Agreement with PW, the agreement with ZHI and the Transactions contemplated thereunder, including the Note.  The shareholders’ resolutions and the poll results of the special general meeting were the subject matter of the Company’s Announcement issued on 3 November 2015.

34.  As PW emphasized, the Company has never convened any separate general meeting after November 2015, for the shareholders of the Company to withdraw their approval of the Agreement or the Note.

35.  As for the alleged obscurity or suspicious features of the execution of the agreement between the Company and 2 parties on the Mainland (“Tianjian Parties”) for the establishment and operation of hospitals in Tianjin (“2015 Agreement”), I fail to see how this can afford an arguable defence for the Company.  The Company alleges that Chung had provided false and misleading information to the Board and to the Exchange in relation to the execution of the 2015 Agreement, causing the Company to issue an Announcement on 21 September 2015 that the 2015 Agreement had been signed or concluded, when in fact, it was not the case.  The facts relied upon by the Company, to assert that the 2015 Agreement had not been signed or concluded by the Tianjin Parties, have not even been shown to be credible.  The Tianjian Parties have jointly issued a letter to the Company on 16 January 2016, confirming that the 2015 Agreement had been signed by them on 20 September 2015.  Even if any false or misleading information had been given by or on behalf of the Company to the Exchange in relation to the 2015 Agreement or the Acquisitions, it has not been shown that this was due to any misleading information provided by Chung, or that the Board did not have the relevant knowledge of the true circumstances at the material time.  Nor has it been shown (or alleged) that PW knew of the falsity of the information furnished to the Exchange, or the Company.

Whether there is an arguable defence

36.  As a matter of law, I agree with Mr Smith that whether the Agreement and the Note can be enforced by PW in this case depends simply on whether Chung had the actual authority to sign the Agreement on behalf of the Company, and if he did not, whether he had the apparent authority to do so, and if PW can rely on such apparent authority.  Mr Smith relies on para 3.349 of Palmer’s Company Law, where the learned author cited Criterion Properties Plc v Stratford UK Properties [2004] 1 WLR 1846, and concluded that the validity of a transaction entered into by a director in breach of his fiduciary duty to the company turns on the question of whether the director was actually or apparently authorized by the company to conclude an agreement of that nature. It was pointed out that it was irrelevant whether the third party’s conduct, in seeking to hold the company to the transaction, was “unconscionable”.  It is only where the third party dealing with the agent or director had actual knowledge that the agent or director did not have actual authority, or if its belief in the director’s authority was dishonest or irrational, that the transaction can be set aside (Akai Holdings Ltd v Thanakharn Kasikorn Thai Chamchat (2010) 13 HKCFAR 479).  In Criterion Properties, the House of Lords considered that the question of the director’s authority in the case could not be resolved on the appeal, and it was for that reason that the matter was allowed to go to trial.

37.  On the facts of this case, there is no question concerning Chung’s authority.  The Board, and then the shareholders of the Company, authorized and approved the Agreement and the Note.  There are no facts put forward by the Company which can adequately and credibly show either that PW had knowledge of Chung’s lack of authority or Chung’s improper motives, or that PW’s directors were dishonest or irrational in believing that the Board and the shareholders of the Company had authorized and approved the Agreement, the terms and conditions of which had been stated by the Board to be reasonable and in the best interests of the Company.  On the facts and evidence available in this case, to permit the Company and its current Board to avoid specific performance of the Agreement and the Note, because of what they now proclaim to be their belief and their unsubstantiated suspicions, would be doing precisely that which was cautioned against by Megarry VC in Lady Anne Tennant v Associated Newspapers Group Ltd [1979] FSR 298, ie  investigating alleged obscurities in the wishful hope only that something will turn up on some investigation at trial.  Without more concrete facts and credible particulars, that cannot be the reason for refusing to enter judgment.

Conclusion and orders

38.  In conclusion, I agree with Mr Smith that if there were unusual features in the Transactions under the Agreement, they only show that Chung, the directors on the Board and the Company’s legal advisers at the material time had failed to act diligently in discharge of their duties owed to the Company, to protect the best interests of the Company.  It is for the Company to pursue any of its remedies against the directors, but in the absence of any credible evidence that PW had knowledge of the directors’ breach of duties, or had acted irrationally and dishonestly in accepting the approval of the Agreement by the Board and the shareholders of the Company, there can be no arguable defence to PW’s claims.

39.  No arguments have been raised on behalf of the Company as to why the Court should not exercise its discretion to award specific performance of the Agreement.  I accept PW’s case that damages are inadequate in respect of the Company’s breach of its obligations under the Agreement and the Note, and accordingly will order specific performance, as sought.

40.  I grant summary judgment in terms of paragraph (1) of the draft minutes attached to the summons issued on 8 January 2016, with costs of the application and of the action to PW, with certificate for 2 Counsel.

HCA 2961/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2961 OF 2015

____________

____________

______________________________

REASONS FOR DECISION

______________________________

Background

1. This was the plaintiff’s application for a Mareva injunction, interlocutory injunction and/or preservation order, and disclosure order.

2. The plaintiff paid the defendant (a listed company) $30,000,000 pursuant to an agreement (“the Agreement”).  In return, the defendant issued Convertible Notes to the plaintiff for 200,000,000 shares in the aggregate principal amount of $30,000,000.  The defendant claimed that the Agreement was void/voidable and refused to allot and issue shares to the plaintiff.  The defendant rescinded the Agreement, offered to pay back $30,000,000 to the plaintiff, and asked for payment instructions, which were never given.  Instead, the plaintiff issued the present action for specific performance of the Convertible Notes, alternatively for damages. 

3. I dismissed the application after the hearing, with costs to the defendant.  Here are my reasons.  Broadly, there was not an existing cause of action to be protected by the injunction and there was no urgency in the application.

Legal principles for grant of Mareva injunction

4. On an application for an interlocutory injunction the court must be satisfied that there is a serious issue to be tried, that damages are not an adequate remedy and that the balance of convenience lies in favour of granting the interlocutory injunction.

5. For the grant of a Mareva injunction, it must be shown that there was a good arguable case on the merits, that there were assets within the jurisdiction and that there was a real risk of dissipation of assets: Hong Kong Civil Procedure 2016, Vol 1, at §29/1/65.

6. Under RHC Order 29 r.2, the court has discretionary power to grant an order for the detention, custody or preservation of any property which is the subject-matter of the cause or matter, or as to which any question may arise therein, on such terms as the Court thinks just.

7. The relevant principles for seeking a preservation order and/or proprietary injunction were summarized in the recent case of Liao Chen Toh v Loyal International Enterprises Co Ltd and ors HCA 2302/2014 (30 March 2016, unreported), Lok J, at §§26-27 as follows:

(1)  There is property which is bona fide the subject matter of the cause or matter.

(2)  Something ought to be done for the security of the property. Part of this inquiry will involve showing that damages may not be an adequate remedy.

(3)  Unlike an application for a Mareva injunction, no risk of dissipation needs to be demonstrated. Further, even if there has been delay in making an application which may lead to refusal of a freezing injunction, a proprietary injunction may nonetheless be granted.

(4)  An enquiry into the relative merits of rival claims is not necessary.

(5)  In respect of the merits of the claim, the party seeking the preservation order only needs to show that there is a serious issue to be tried on the merits on the normal American Cyanamid principles.

8. In order to support a claim for the interlocutory injunction (whether Mareva type or proprietary under O.29 r.2), there must be a substantive cause of action actionable at the time of the application.  A potential future right or possible future cause of action is not sufficient.  See The Siskina [1979] AC 210 at 256C-F, Lord Diplock:

“A right to obtain an interlocutory injunction is not a cause of action. It cannot stand on its own. It is dependent upon there being a pre-existing cause of action against the defendant arising out of an invasion, actual or threatened by him, of alegal or equitable right of the plaintifffor the enforcement of which the defendant is amenable to the jurisdiction of the court. The right to obtain an interlocutory injunction is merely ancillary and incidental to the pre-existing cause of action. …

… the High Court has no power to grant an interlocutory injunction except in protection or assertion of some legal or equitable right which it has jurisdiction to enforce by final judgment …” (emphasis added)

9. In Steamship Mutual Underwriting Association (Bermuda) Ltd v Thakur Shipping Co Ltd [1986] 2 Lloyd’s LR 439, Sir John Donaldson MR said this:

“… it is important to remember that s.37(1), which is the section of the Supreme Court Act, 1981, which gives jurisdiction to this Court, speaks of granting an injunction or appointing a receiver in all cases in which it appears to the Court that it would be just and convenient to do so. Justice and convenience in this context is not an abstract conception. It predicates that there is a cause of action in respect of which the Court may make an order and the Court will be unable to enforce its order unless there is security provided by a Mareva injunction. Therefore we asked Mr Kealey what the cause of action was that we were being asked to support. The answer is that the only cause of action that they can conceivably have at the moment is a cause of action for a declaration … It seems to me that no such declaratory relief needs a Mareva injunction to support it.

What the club really wants is security for a future cause of action – a cause of action which will give rise to entitlement to monetary relief. I think that that would be contrary to a long line of authority which says that s.37 is to be used in support of an existing legal or equitable right. I furthermore think that if we extended it to this case, even assuming we have jurisdiction to do so, it would be difficult to see what possible limits there could be to the Mareva jurisdiction, since whenever it was apprehended that someone was likely in the future to commit a breach of contract, and it was further apprehended that if they did and if judgment were given against them they might be unable to meet the judgment debt, it would follow that the fearful plaintiff was entitled to a Mareva injunction. That plainly is not the case.” (emphasis added)

10. If there is no cause of action, the want of jurisdiction cannot be supplied by suspending the operation of the injunction until one exists: The Veracruz I [1992] 1 Lloyd’s LR 353 at 358, 360, Nourse LJ, col 2. 

11. No interlocutory injunction would be granted in an action for specific performance of a put option to acquire shares: Zucker & ors v Tyndall Holdings Plc [1992] 1 WLR 1127. 

“… a Mareva injunction cannot be granted unless there is an existing cause of action which can be immediately enforced. An order for specific performance which is granted before the time of performance has arrived is, as pointed out by Lord Tucker, really in two parts: first of all the declaratory part and secondly the part where consequential directions might be given.” (at 1134H, Neill LJ)

Any existing cause of action to support an interlocutory injunction?

12. There may be serious issues to be tried on breach of the Agreement.

13. The defendant has elected to rescind the Agreement which it considered to be void/voidable and offered to pay back the money. Mr Smith SC submits that this would give rise to a constructive trust in favour of the plaintiff over the money, arguably from the time of the defendant’s election.  Tracing would have been available to see whether there remained an asset upon which the trust could operate where money has been paid under a mistake.  See Falcon Private Bank Ltdv Borry Bernard Edouard Charles Ltd & anor, HCA1934/2011 (14 March 2014, unreported), per Recorder Houghton SC, at §43; Zimmer Sweden AB v KPN Hong Kong Ltd And Another HCA 2264/2013 (2 May 2014, unreported) at §92.

14. I am unable to agree with Mr Smith SC as a matter of law. 

“… before he can pursue a restitutionary claim, the innocent party must first bring the contract to an end. If he does not do so, the contract continues to govern the situation and the plaintiff must seek his remedy on the contract and not in restitution.” Goff and Jones, The Law of Restitution (7^th ed), §20-012.

“Where there is a contract between the parties relating to the benefit transferred, no claim in unjust enrichment will generally lie whilst the contract is subsisting.” Goff and Jones, The Law of Unjust Enrichment (8^th ed) at §3-13.

15. Applying the principles in Goff and Jones, the plaintiff had always treated the Agreement as valid and subsisting, as reflected in:

(a)   Its failure to give payment instructions to the defendant to get back the $30,000,000.  (The defendant’s offer was made as late as in December 2015.)  That acceptance would have dispensed with the need for the present application.

(b)   Its claim for specific performance with damages sought as an alternative remedy, and no claim for restitution of the $30,000,000. 

(c)   The pursuit of specific performance by an Order 86 summons.

(d)   Its failure to accept, even on the day of this hearing, the defendant’s offer to pay back the $30,000,000 (supported by documentary proof that the defendant held $200,000,000 in its bank account). 

16. In the context of showing that damages were unlikely to be an adequate remedy, the plaintiff made adverse criticisms of the defendant’s financial situation and internal management –:

(a)  The defendant’s Interim Report for the 6 months ended 30 September 2015 (“the Interim Report”) indicated that it only had total current assets of about $25 million, with cash or cash equivalents of about HK$30.3 million; that in those 6 months, there has been a decrease of over $70 million in cash and cash equivalents.  Mr Smith SC submitted that there was no guarantee that the defendant would have sufficient financial resources to fulfil any monetary award.

(b)  Comparing 2 announcements dated 14 January 2016 and 11 December 2015 respectively, there was a real concern that the defendant had used part of the $30 million for its own purpose, despite having declared that it ought to be returned to the plaintiff.  Recently, there was evidence of payments made by the defendant as a result of its director acting in breach of his fiduciary duties, which would have led to further depletion of the defendant’s assets.

(c)  There was also concern that the internal turmoil and disputes amongst the management and shareholders of the defendant might cause the defendant’s resources to be used for purposes other than operating the normal and proper business of the defendant.

17. In the context of showing risk of dissipation of assets, the defendant also relied on the following matters:

(a)  Payments in breach of fiduciary duties and lack of proper supervision, being transactions entered into between the defendant (and its associates) and a company controlled and owned by a spouse of one of the directors (Mr Wang).  Such misappropriation was not announced until 9 months after the transactions were entered into by the defendant.

(b)  Numerous statements contrary to earlier announcements to the public were made in order to resist the plaintiff’s claim and to evade the defendant’s obligations.  These comprised announcements in relation to a 2015 Tianjin Agreement, statements in circulars and board letters to shareholders, and statements in application to the Hong Kong Stock Exchange.

18. The plaintiff’s keen pursuit of specific performance was not reduced a bit despite such dim view of the defendant’s situation set out in the 2 preceding paragraphs.  It wanted the shares, not money of the defendant.

19. A recurrent theme in the plaintiff’s submission was to “assume that the Court found that the Agreement and the Convertible Note were voidable”; or “when the party elects to rescind the transaction”.  However, the Court’s jurisdiction for interim injunction should not be exercised for the purpose of any “possible” cause of action which may accrue in future.

20. Applying the principles in paragraphs 8-11 above, no interlocutory injunction (ordinary or Mareva type) should be granted to the plaintiff. 

21. No preservation order would be granted either, as the subject property was unissued shares and Mr Smith SC admitted that there was no proprietary claim pleaded as yet.

Risk of dissipation of assets

22. The plaintiff relied on matters set out in paragraphs 16(b), (c), 17(a) and (b), in support of its averment that there was risk of dissipation of assets.  However, the defendant’s acts in trying to uncover and investigate the misconduct of its directors were not acts in dissipation of assets or in reflection of low commercial morality.  To the contrary its report to the Hong Kong Stock Exchange and the police were acts to reduce the impact of the misconduct on the company.

23. For present purposes, even if I assume that there was risk of dissipation of assets, there was no existing cause of action that warranted the grant of an injunction.  Moreover, there was little to show that the risk of dissipation would be so great as to reduce $200 million to less than $30 million within 12 days before the Order 86 was heard.

Lack of urgency

24. At this call-over hearing, where the defendant has had no full opportunity to put in proper affirmation evidence, the plaintiff hurried the court to hear its injunction application.  Any relief granted would have the consequence of putting the defendant at a very real disadvantageous position from which it may never adequately recover: Re Chau Cham Wong Patrick, HCB 549/2012, 20 June 2014, §30, per Ng J.

25. However, there was no urgency for the injunction application to be heard as the Order 86 summons would be heard in 12 days from this hearing. 

26. The plaintiff’s determination to use litigation to achieve its ends when there was no real need to engage the court could be seen from its failure, twice, to accept the defendant’s offer to repay the $30,000,000. 

27. Further, it was on 15 April 2016 that the plaintiff’s solicitors first raised the issue of security at around 11 am and insisted on having a reply from the defendant’s solicitors on the same day.  When the defendant’s solicitors replied that answers would be provided by 19 April 2016, the plaintiff chose not to wait for the reply and proceeded to take out the application on 19 April 2016.  In the morning on 20 April 2016, the plaintiffs’ counsel team produced a substantial skeleton with 25 authorities.  It was apparent that the plaintiffs were determined to launch this application irrespective of how the defendant replied. Documents were only served upon the defendant’s solicitors at 4.42 pm on 19 April 2016, leaving the defendant with only 2 days for the preparation of this hearing. 

28. The plaintiff seemed to suggest that the present injunction application was triggered as a result of the discovery of the Interim Report: ONC’s letter dated 15 April 2016.  However, it was plain that this could not be the real reason, as the plaintiff was clearly aware of the Interim Report when it took out the Order 86 summons. 

29. Viewing the plaintiff’s conduct before and in this injunction application, I agree with Mr Warren Chan SC that this was an ill-conceived attempt on the part of the plaintiff to seek security before judgment, which was not permissible under the law:  AJ Bekhor & Co Ltd v Bilton [1981] QB 923 at 941-942, per Ackner LJ:-

“The plaintiff, like other creditors of the defendant, must obtain his judgment and then enforce it. He cannot prevent the defendant from disposing of his assets pendente lite merely because he fears that by the time he obtains judgment in his favour the defendant will have no assets against which the judgment can be enforced. Were the law otherwise, the way would lie open to any claimant to paralyse the activities of any person or firm against whom he makes his claim, by obtaining an injunction freezing their assets … The Mareva jurisdiction was not intended to rewrite the English law of insolvency in this way. The purpose of the Mareva jurisdiction was not to improve the position of claimants in an insolvency, but simply to prevent the injustice of a defendant removing his assets from the jurisdiction which might otherwise have been available to satisfy a judgment. It is not a form of pre-trial attachment, but a relief in personam which prohibits certain acts in relation to the assets in question.”

Disclosure order

30. In order to make a freezing injunction effective, the court has a discretion to order the defendant to make a statement of his assets and to give discovery of documents for the purpose of ascertaining the existence, nature and location of assets.  Hong Kong Civil Procedure 2016, Vol 1, at §29/1/74.

31. Further, in an action in which the plaintiff seeks to trace property which in equity belongs to him, the court may at the interlocutory stages of the action make orders designed to ascertain the whereabouts of that property.  See: A& anorv C& ors [1981] QB 956; Zimmer Sweden AB v KPN Hong Kong Ltd & anor, HCA 2264/2013 (2 May 2014, unreported), at §§72-75, per DHCJ Kent Yee.

32. It was admitted by Mr Smith SC that there was no proprietary claim over the $30 million as the money was probably mixed with other funds of the defendant.

33. I have declined to grant the injunctions/preservation order sought.  I do not see any legal basis for a disclosure order requiring the defendant to identify the whereabouts of the $30 million and/or its traceable proceeds, or to disclose all of its assets of an individual value of HK$10,000 or more, whether in its own name or not and whether solely or jointly owned.

34. Again, in view of the hearing of the Order 86 summons, and lack of urgency, even as a matter of discretion, there was no reason to grant such a draconian pre-trial disclosure order.

Conclusion

35. For all the reasons given, I dismissed the application. 

36. Costs should follow the event, which were not opposed.  I therefore ordered costs in favour of the defendant with certificates for 2 counsel. 

37. The urgency justified the engagement of 2 fee earners.  I summarily assess the defendant’s costs at $900,000. 

38. I thank counsel for their great assistance and succinct submissions.

Mr Clifford Smith, SC and Mr Kerby Lau, instructed by ONC Lawyers, for the plaintiff

Mr Warren Chan, SC and Mr Law Man-Chung, instructed by Chiu & Partners, for the defendant