PRAISE FORTUNE LTD v. ALEGANA ENTERPRISES LTD

HCA 858/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 858 OF 2017

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REASONS FOR DECISION

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1.  On 21 April 2017, I continued until further order the ex parte injunction granted by Madam Justice Au-Yeung on 10 April 2017, prohibiting and restraining the defendant from in any way disposing of or dealing with any of the 230,000,000 and 75,000,000 ordinary shares (“Shares”) in Pan Asia Environmental Protection Group Limited (“Company”) registered in the name of the plaintiff and deposited in account No.600658 operated by China Times Securities Limited (“China Times”) and in account No.90200051 operated by Resources Securities Limited (“Resources Securities”) respectively on 28 February 2017, except in accordance with the instructions or consent of the plaintiff (“Injunction”).

2.  I so ordered for the following reasons.

Principles governing grant of interlocutory injunctions

3.  In deciding whether it is just or convenient to grant an interlocutory injunction, the court asks the following questions:

(1) whether there is a serious question to be tried;

(2) if so, whether, if the plaintiff were to succeed in obtaining a permanent injunction at trial, it could adequately be compensated by an award of damages in respect of any loss which it might suffer by reason of the defendant continuing to act unrestrained pending the trial;

(3) if not, whether the defendant would be adequately protected by the plaintiff’s cross-undertaking in damages should it be later found that the plaintiff should not have been granted an interlocutory injunction; and

(4) if there is doubt as to the adequacy of the respective remedies of damages, where the balance of convenience lies.

See American Cyanamid Co v Eithicon Ltd [1975] AC 396, per Lord Diplock at 407F-409D as explained by the Hong Kong Court of Appeal in Wah Nam Holdings Co Ltd v Excel Noble Development Ltd [2000] 3 HKC 118, per Ribeiro JA (as he then was) at [28]-[32].

Serious question to be tried

4.  The requirement of “serious question to be tried” means that the claim must not be frivolous or vexatious: American Cyanamid Co at 407G-H.

5.  On the evidence, the plaintiff has plainly passed this threshold.  Indeed, it has demonstrated a very serious claim to the return of the Shares arising from the following circumstances:

(1) The plaintiff agreed to pledge to the defendant, and transferred to the said China Times and Resources Securities accounts, the Shares as collateral in return for a loan to a value of 43% against the fair market value of the Shares (“Loan”) under (a) a Loan Agreement and a Pledge Agreement signed on 1 November 2016 between the plaintiff and the defendant (“Loan Agreement” and “Pledge Agreement” respectively); (b) a Collateral Agency Agreement dated 3 February 2017 between the plaintiff, the defendant and China Times; and (c) a Tri Party Control Agreement dated 26 September 2016 between the plaintiff, the defendant and Resources Securities.

(2) The first tranche of the Loan in the amount of HK$53,000,000 was advanced by the defendant to the plaintiff and the Shares[1] were transferred into the said China Times and Resources Securities accounts on 28 February 2017.

(3) Notwithstanding the prohibition against prepayment of the Loan within the first 12 months in clause 2.8 of the Loan Agreement, for reasons to be set out in paragraph 9 below, by an email dated 6 March 2017 from the plaintiff’s Raymond Lai (“Lai”) to the defendant’s John Zorbas (“Zorbas”), the plaintiff informed the defendant that it had decided to “terminate this loan arrangement” and asked the defendant to advise the relevant procedure and costs.

(4) In response, by an email dated 7 March 2017 from Zorbas to Lai, the defendant expressed disappointment with the plaintiff’s decision but (a) advised the plaintiff that the defendant had stopping funding for the second tranche of the Loan; (b) asked the plaintiff if it would buy from the defendant shares in the Company which the defendant had acquired from the open market after the advance of the Loan in order to support the share price of the Company; and (c) promised to provide the plaintiff with the closing loan statement.

(5) By an email of the same date from Lai to Zorbas, the plaintiff indicated its willingness to consider buying back the Company shares that the defendant had bought and asked for the number of shares in question and the closing loan statement.

(6) Zorbas responded by an email dated 8 March 2017 to Lai, which opened with the following statement: “As per your request below we have terminated your Loan with us.”

(7) After much chasing by the plaintiff, by an email dated 27 March 2017 from Zorbas to Lai, the defendant eventually provided the plaintiff with its termination statement that asked for US$8,559,354.84.

(8) By an email of the same date from Lai to Zorbas, the plaintiff confirmed acceptance of the defendant’s termination statement and the redemption figure of US$8,559,354.84 which the plaintiff proposed to satisfy by payment of an equivalent amount in Hong Kong dollars (i.e. HK$66,335,000) (“Redemption Sum”) through the Central Clearing and Settlement System on DVP terms.  

(9) Thereafter, from 28 to 31 March 2017, the plaintiff kept chasing the defendant, but to no avail, for the arrangements for transfer of the Shares by the defendant’s custodians to the plaintiff’s account with one Caitong International Securities Co Ltd against the payment of the Redemption Sum by the plaintiff.

(10) Against this background, the plaintiff issued the Writ of Summons herein against the defendant on 10 April 2017 praying for, inter alia, a declaration that the Loan Agreement and the Pledge Agreement were terminated on 8 March 2017; a declaration that the plaintiff is entitled to forthwith discharge the Loan by repayment of any outstanding sums (including interest) due to the defendant under the Loan Agreement; and an order that the defendant do forthwith transfer the Shares to the plaintiff upon the discharge and repayment of the Loan.

(11) On the same date, the plaintiff applied for and obtained the Injunction against its undertaking to, inter alia, pay into court in an interest-bearing account a sum of HK$66,335,000 (i.e. the Redemption Sum) by noon on 11 April 2017 (“Payment Undertaking”), in addition to the usual cross-undertaking as to damages.

(12) The Payment Undertaking was duly complied with.

6.  In summary, the material before the court disclosed a meritorious case of termination of the Loan Agreement and Pledge Agreement by consent at the latest by 8 March 2017 whereupon the plaintiff should be entitled to the return of the Shares upon payment of the Redemption Sum, the performance of which is assured by the plaintiff’s compliance with the Payment Undertaking.

Inadequacy of damages to the plaintiff    

7.  The plaintiff’s evidence also persuaded me that, without interlocutory injunctive relief, the plaintiff would be exposed to a risk of loss of the Shares.

8.  Although increased volume of trading in the shares of the Company (which is listed on the Main Board of the Hong Kong Stock Exchange) was recorded from 28 February to 15 March 2017 before trading was suspended on 16 March 2017, the plaintiff was understandably unable to identify from the data available any particular sale involving any of the Shares by the defendant.

9.  Nevertheless, I was prepared to infer a risk of disposal of the Shares by the defendant if unrestrained from the evidence of the unexplained transfer of 230,000,000 of the Shares out of the said China Times account on 1 March 2017 and the subsequent breaking up of such shares into smaller tranches and repeated movements of the same amongst different brokers, even after the defendant had agreed to the termination of the Loan Agreement and the Pledge Agreement and after the suspension of trading on 16 March 2017.  The plaintiff was in fact prompted to initiate the termination of the Loan Agreement and the Pledge Agreement by the share movements prior to 6 March 2017.

10.  As the defendant had exclusive control over the Shares while they were under pledge to it, it would not be unreasonable to attribute these share movements to the defendant.  In fact, Lai’s email dated 6 March 2017 to Zorbas (paragraph 5(3) above) opened as follows: “We noticed that since we transferred the shares to China Times, the shares have been transferred to Standard Chartered Bank and subsequently to Citibank.  We are greatly troubled by such move and this has put a grave concern to us.”  Zorbas’ reply email sent on the next day (paragraph 5(4) above) did not deny that the Shares lodged with China Times had been moved or give any reasons for such move to allay the plaintiff’s concern.

11.  Even allowing for the fact that the defendant did enjoy certain rights to deal with the Shares during the currency of the Loan Agreement,[2] any further dealings with the Shares behind the plaintiff’s back after the termination agreement, especially after the plaintiff had agreed to pay the Redemption Sum, would naturally arouse suspicion.  The fact that the plaintiff had to chase the defendant by repeated emails and WhatsApp messages for the amount of the Redemption Sum for many days and the defendant’s refusal / failure thereafter to confirm the arrangements for the transfer back of the Shares to the plaintiff did not inspire confidence either.  For the sake of completeness, the defendant did mention a number of times in the correspondence that trading in the shares of the Company had to be resumed to allow the transfer back to China Times.  However, this did not sit well with the fact that the defendant was able to move the Shares around off market without going through the trading floor of the Stock Exchange even after 16 March 2017.  In light of these events, plaintiff’s worry that the defendant might sell or otherwise dispose of the Shares was not groundless.

12.  According to paragraphs 2.1(3) and 4.6(2) of the 1^st Affirmation dated 5 April 2017 of Qian Yuanying, the plaintiff’s shareholder and director, as at 5 April 2017, the Company has issued 840,000,000 ordinary shares so that the Shares represent a 37% shareholding in the Company and trading in the shares of the Company closed at HK$1.24 per share on 28 February 2017 so that the Shares had a market value of about HK$378 million when they were pledged to the defendant and transferred to the said accounts with China Times and Resources Securities.

13.  Should the Shares be disposed of by the defendant in the interim, it is firstly very doubtful whether the plaintiff would be able to re-acquire such a sizable holding of shares in the Company in the market. Secondly, such acquisition may trigger the requirement of making a mandatory general offer under rule 26 of the Takeovers Code. 

14.  In these circumstances, there is an appreciable risk that the plaintiff would not be adequately compensated by an award of damages if the Shares could not be returned to it.  See Wongs Investment Development Holdings Group Limited (in liquidation) v China Kingstone Mining Holdings Limited, HCMP 1472/2015, unreported, 8 July 2015, per G Lam J at [24].

15.  While on the adequacy of damages to the plaintiff, I was also mindful that very little was known about the defendant save that it was incorporated in Cyprus and used an address in Toronto, Canada.  According to the plaintiff, the defendant was not known to have any physical presence, place of business, telephone or fax lines or employees in Hong Kong.  Damages may be an illusory remedy if there is any doubt about the defendant’s ability to pay damages (Union (V-Tex) Shirt Factory Ltd (in liquidation) v Union V-Tex Realty Ltd [1985] 2 HKC 617 and Yeko Trading Ltd v Chow Sai Cheong Tony [2000] 2 HKC 612).

Adequate protection of defendant by plaintiff’s undertaking in damages

16.  In contrast, upon the termination of the Loan Agreement and Pledge Agreement, the defendant’s only interest should be in receiving the Redemption Sum, which has been sitting in court and therefore secured.

17.  The adequacy of damages to the defendant should not be an issue at all.

[1] The number of shares transferred by the plaintiff to the said Resources Securities account were 126,568,000 but only 75,000,000 of those shares were subject to the pledge.  

[2] Clause 3.1 of the Loan Agreement.

HCA 858/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 858 OF 2017

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________________________

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REASONS FOR DECISION

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Introduction

1.  The plaintiff (“Pledgor”) pledged shares in Pan Asia Environmental Protection Group Limited (“Pan Asia”) with the defendant (“Pledgee”). The Pledged Shares were deposited into the Pledgor’s account with collateral agents, China Times Securities Ltd　(“China Times”) and Resources Securities Ltd, as the depository broker.  The Pledgee was given “exclusive control over the account”.

2.  Within a few days, the Pledgor discovered that the Pledged Shares had apparently moved out of the collateral agents’ accounts. The Pledgor was very concerned.  It decided to repay the loan and get back the Pledged Shares. 

3.  The Pledgor has paid the full sum of capital, interest and fees allegedly due to the Pledgee into court.  The Pledgor made this application under Order 29, rule 6 of the Rules of the High Court.

4.  Having heard the submission, I made an order in favour of the Pledgor.  These are my reasons.

The facts

5.  The Pledgor was the largest shareholder (42.45%) of Pan Asia, a company listed in Hong Kong.  The Pledgee was a Cyprus company with a Canadian address.  It had no presence in Hong Kong.

6.  On 1 November 2016, the Pledgor and Pledgee entered into (a) the Loan Agreement; and (b) the Springing Pledge Agreement whereby the shares would be pledged in favour of the Pledgee as collateral to secure the loan; the loan would be paid over 5 tranches. 

7.  The Loan Agreement provided for:

(a)  Delivery of the Pledged Shares to custodial brokerage firms designated by the lender Pledgee (clause 2.4).

(b)  No prepayment during the first 12 months from the date of the Non-recourse Promissory Note (clause 2.8).

(c)  The lender’s right to the Pledged Shares included a right to pledge, encumber, hypothecate or sell all or a portion of the collateral (clause 3.1).

(d)  Upon an event of default, the lender has rights including rights, benefits and remedies under the Loan Documents with respect to the collateral and may take, use or otherwise encumber or dispose of the collateral as if it were the lender’s own property (clause 8.2).

(e)  The Pledged Shares were to be returned to the Pledgor, where there was no event of default, within 3 business days after the lender’s receipt of payment in full of the loan and all other obligations (clause 9.1).

8.  On 28 February 2017, the first tranche of the loan for HK$53 million was advanced to the Pledgor, maturing in 3 years. 

9.  As at 28 February 2017, China Times held 230,000,000 Pan Asia shares and Resources Securities held 75,000,000 shares as Pledged Shares, representing a holding of about 36.31% of Pan Asia.  As at close of the market on 24 April 2017, the shares were worth more than HK$305 million. 

10.  Subsequent to the pledge, the Pledgor noticed large and abnormal movements of the Pledged Shares.

11.  By an email dated 6 March 2017, the Pledgor expressed grave concern over the transfers of the Pledged Shares and informed the Pledgee of its decision to terminate the Loan Agreement.  The Pledgor asked to be advised of the procedure and all relevant costs.

12.  By an email dated 7 March 2017, the Pledgee replied, stating that it had stopped the funding for the 2^nd tranche of the loan and would advise and provide the Pledgor “the closing loan statement”.

13.  By an email dated 8 March 2017, Mr Zorbas of the Pledgee stated, “As per your request below we have terminated your loan with us.”  He asked the Pledgor to arrange for repayment of the principal amount and have it transferred to the China Times account; the Pledgee would initiate the process of the transferring of the collateral.

14.  On 16 March 2017, trading of shares of Pan Asia was suspended.  Despite that, there were still abnormal movements of the shares with various securities accounts.

15.  After the Pledgor’s repeated demands for figures, by an email dated 27 March 2017, the Pledgee gave the Pledgor a “closing statement” setting out the amount of capital, interest and fees, being HK$66,335,000 in total (“the Sum”) allegedly due under the Loan Agreement.  The Pledgor agreed to this figure on the same day.

16.  Accordingly, despite clause 2.8 of the Loan Agreement, the parties have reached an agreement for the Pledgor to repay the loan.

17.  Notwithstanding the agreement to terminate, the Pledgee has refused to return the Pledged Shares to the Pledgor.

18.  Meanwhile, during March, the shares have continued to change hands, giving rise to the Pledgor’s concerns that steps were taken to facilitate dumping of the shares on and off the market.  The share price was falling.

19.  On 7 April 2017, the Pledgor obtained (i) an ex parte injunction restraining the Pledgee from disposing of the Pledged Shares; and (ii) an order for the Pledgee to disclose all the dealings of the Shares.  The injunction was continued until trial or further order on 21 April, in the absence of the Pledgee.  The Pledgee has failed to make disclosure as ordered.

20.  On 10 April 2017, the Pledgee was served with the writ and all documents in relation to the ex parte and inter parte applications for injunction.  On the same day, the Pledgor paid the Sum into court.

21.  On 25 April 2017, the Pledgor took out the present summons asking that, upon the Sum remaining in court pending final determination of this action or further order, the Pledgee do forthwith transfer and deliver the Pledged Shares to the Pledgor and execute the necessary documents for the purpose of effecting the transfer and delivery.

Legal principles

22.  Order 29, rule 6 provides as follows:

“ Where the plaintiff, or the defendant by way of counterclaim, claims the recovery of specific property (other than land) and the party from whom recovery is sought does not dispute the title of the party making the claim but claims to be entitled to retain the property by virtue of a lien or otherwise as security for any sum of money, the Court, at any time after the claim to be so entitled appears from the pleadings (if any) or by affidavit or otherwise to its satisfaction, may order that the party seeking to recover the property be at liberty to pay into court, to abide the event of the action, the amount of money in respect of which the security is claimed and such further sum (if any) for interest and costs as the Court may direct and that, upon such payment being made, the property claimed be given to the party claiming it.”

23.  An example of the application of Order 29, rule 6 was in Hin Fai Lt trading as Sun Food Seafood v Longrace Development Ltd and anor, HCA 1788/2003, 18 July 2003, at §§50, 51, 61 and 77(1), per Deputy Judge Wong Yan Lung SC.  In that case, the court granted an interlocutory mandatory injunction, ordering the defendant to deliver goods back to the plaintiff on the ground that the defendant did not assert any ownership over the goods and that there was a payment into court.

Application of the legal principles

24.  The Pledged Shares represented more than 36% of the shareholding of Pan Asia.  It would be difficult for the Pledgor to get back such volume of shares and, if it did, it might trigger the requirement of making a mandatory general offer.

25.  Without getting back the shares, the Pledgor’s voting rights might be diluted, and this loss was irreparable: Wongs Investment Development Holdings Group Ltd (in liquidation) v China Kingstone Mining Holdings Ltd and anor, HCMP 1472/2015, 8 July 2015, §24, G Lam J.

26.  The Pledgor had legitimate concerns that the movements of the Pledged Shares might mean that the Pledgee was positioning to sell them and might be driving the price down.  It would spark off a run on the shares so that the Pledgee could get back the shares at the bottom of the market.  If there was to be massive sell-off, there might be damage to the confidence of investors in Pan Asia.  There might be systematic transfers to create an untraceable web of persons acting in concert, each holding less than 5%.  The attempt would be to gain control of the Shares and yet prevent triggering the disclosure requirements of the Securities and Futures Commission.

27.  The Pledgor has paid the Sum into court, which was based on the figures put forth by the Pledgee. 

28.  The writ, injunction order and skeleton submission of the Pledgor had been served on the Pledgee.  Continuation of the injunction was not opposed.  Nothing had been filed in relation to the summons under Order 29, rule 6 before this hearing. 

29.  The Pledgee gave a short submission at this hearing.  I accept that in view of clause 3 of the Loan Agreement, any movement of shares was not in breach of the Pledgee’s obligations.  However, the Pledgee denied the existence of an agreement to terminate.  Its defence was broadly as follows:

(a)  the Pledgor gave notice to the Pledgee of an anticipatory breach of the Loan Agreement;

(b)  there was no agreement for the immediate return of the shares; and

(c)  until such time the Pledgor shall pay all its financial obligations under the loan documents, the Pledgee was entitled to retain the Pledged Shares.

30.  With regard to defence (a), Mr Man acting for the Pledgee was not even able to tell the court whether the Pledgee had accepted the anticipatory breach.  He referred to various whatsapp messages in which Mr Zorbas of the Pledgee stated that the process of returning the Pledged Shares was in “black and white”; and that the Pledgor acknowledged that the Pledgee was granting the Pledgor an indulgence in trying to reach an agreement for immediate prepayment of the loan amount, something precluded by clause 2.8 of the Loan Agreement.

31.  However, those Whatsapp messages could not override the Pledgee’s clear acceptance of any anticipatory breach and agreement to terminate set out in the emails referred to in paragraphs 11 – 13 above.  The closing statement stated the amount which the Pledgor had to repay without any other conditions imposed, specifically in relation to the right to retain the Pledged Shares.  The Pledgor even sent over a draft Prepayment Agreement to the Pledgor for its consideration of the terms.

32.  With regard to defence (b), I could discern no basis for the Pledgee to impose a clog on the Pledgor’s equity of redemption, contractual or otherwise. 

33.  With regard to defence (c), I repeat paragraph 31 above.  The entire redemption sum has been paid into court giving the Pledgee full security.  It represented a profit of about HK$13.4 million for making a loan for 3 weeks, effectively at an interest rate of over 300%. 

34.  Mr Man relied on Clause 10.2 of the Springing Pledge Agreement, which provided that in the event of default, the Pledgee shall be entitled to retain as its sole property and/or to dispose of the collateral to the extent the Pledgee had not already exercised its rights under clause 3 of the Loan Agreement.

35.  Clause 19 of the Springing Pledge Agreement provided that that Agreement shall terminate when all obligations were paid in full, upon which the lender shall redeliver the shares.  Until that time, the lender was entitled to hold the Pledged Shares.

36.  In my view, clause 10.2 was not applicable as there was no event of default.  The Pledgee did not rely on this clause in the emails set out in paragraphs 11 – 13 above.  Clause 19 showed that the Pledgee was not denying the title of the Pledgor over the Pledged Shares but only claimed to be entitled to retain the Pledged Shares as security for the loan.  In any case, the Sum represented security for payment of all obligations in full.  Defence (c) was unsustainable.

37.  The conditions in Order 29, rule 6 having been complied with, the Pledgor was plainly entitled to the return of the Pledged Shares.  There was nothing from the Pledgee’s side which would have persuaded the court to exercise the discretion in another way.  I therefore made the order as sought.

38.  Costs should follow the event.  I therefore granted costs to the plaintiff with certificates for 2 counsel.