HCMP 962/2017
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
MISCELLANEOUS PROCEEDINGS NO 962 OF 2017
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| | IN THE MATTER of Sections 45(2) and 45(5) of the Arbitration Ordinance (Cap 609) |
| | and |
| | IN THE MATTER of Section 21M of the High Court Ordinance (Cap 4) |
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| BETWEEN |
| | CHEN HONGQING（陳宏慶） | Plaintiff |
| and |
| | MI JINGTIAN（宓敬田） | 1st Defendant |
| | ZHAO LIPING（趙利平） | 2nd Defendant |
| | LI MAOHUAN（李茂桓） | 3rd Defendant |
| | YU YUCHUAN（于玉川） | 4th Defendant |
| | ASIA CEMENT CORPORATION | Intervener |
| | （亞洲水泥股份有限公司） | |
______________
| Before: Hon Mimmie Chan J in Chambers (Open to Public) |
| Date of Hearing: 13 June 2017 |
| Date of Decision: 27 June 2017 |
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D E C I S I O N
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Background
1. This is yet another chapter in the saga on the shares in China Shanshui Investment Company Limited (“CSI”), and the apparently unending battle for the control of the shares registered in the name of Mr Zhang and which are claimed by employees of Shandong Shanshui (“SS”) to be beneficially owned by them. Sprung from such battle is a fight for the control of China Shanshui Cement Group Ltd (“CSCG”), a company listed on the Exchange in Hong Kong, of which CSI is the holder of approximately 25% of its shares. Trading in the shares of CSCG has been suspended since April 2015.
2. There are various sets of proceedings involving Mr Zhang, employees and other minority shareholders of CSI, which shareholders include the 4 defendants named in the present proceedings. A number of injunctions and orders of receivership have been made by the Hong Kong Court in these sets of proceedings. In short, employees of SS claim that the CSI shares registered in the name of Mr Zhang in fact belong to them and were held on trust by Mr Zhang for them. SS is a wholly owned subsidiary of the listed company, CSCG. It is claimed that Mr Zhang sought to deprive the employees of their beneficial interests in the shares of CSI, as a result of which the employees, assisted by the defendants in these proceedings, commenced legal proceedings in Hong Kong for recovery of their beneficial interests in the shares. These proceedings are referred to as the Trust Action, under which receivers have been appointed by the Hong Kong Court (“EY Receivers”) in respect of the 45.63% shareholding of CSI, claimed by the employees as beneficial owners.
3. Apparently, Mr Zhang had attempted to persuade employees, who had participated in the proceedings against him in Hong Kong, to sell and release their shares to him, with the objective of procuring the abandonment of the claims made against him in the proceedings, and to secure control of CSI.
4. At the same time, the defendants in these proceedings (“Defendants”), who are minority shareholders of CSI, had enlisted help from other financers and/or the other minority shareholders of the listed company, to acquire the shares of CSI from the employees.
5. Currently (or prior to the latest dispute which is the subject matter of the present proceedings), 45.63 % of the shares of CSI are controlled by the EY Receivers. Of the balance, 36.11 % are registered in the name of Mr Zhang, 10.49% are registered in the name of the 4 Defendants, and 7.77% are registered in the name of 3 other minority shareholders, including one Mr Zhao Yongkui (“Zhao YK”).
6. CSI holds 25.09% of the shares in CSCG. Asia Cement Corporation (“ACC”) holds 25.18%, and a company referred to as Tianrui (“TR”) holds 28.16% of the shares in CSCG. The rest is held as to 16.67% by a company referred to as CNBM and as to 4.9% by the public.
7. These proceedings were instituted by the plaintiff, Mr Chen Hongqing (“Chen”), on 25 April 2017. The Defendants named are Mr Mi Jingtian (“MJ”), Mr Zhao Liping (“ZL”), Mr Li Maohuan (“Li”) and Mr Yu Yuchuan (“YY”), who are 4 of the minority shareholders of CSI and the registered owners of a total of 10.49% of the share capital of CSI. The claims made by Chen are for the appointment of receivers of the Defendants’ shares in CSI (“Shares”), as an interim measure pending the determination of a CIETAC arbitration between Chen and the Defendants in Beijing (“Arbitration”), pursuant to an arbitration agreement contained in an agreement between Chen and the Defendants whereby the Defendants purported to pledge the Shares to Chen as security. Chen further seeks an order from this court to restrain the Defendants from taking any steps to cause or procure the transfer, charge or assignment of the Shares or otherwise encumbering or dealing with the Shares, save for complying with the requests of the receivers to be appointed.
8. Alternatively, and pending the determination of the Arbitration, Chen seeks an injunction to restrain the Defendants from taking any steps to cause or procure the transfer, charge or assignment of the Shares or from otherwise encumbering or dealing with the Shares, and from voting or exercising any other rights attaching to the Shares. In the further alternative, Chen seeks an injunction to restrain the Defendants, pending the determination of the Arbitration, from taking steps to cause or procure or apply for the registration of the transfer of any of the Shares currently registered in the respective names of the Defendants.
9. Chen claims that under a Share Pledge and Guarantee Agreement dated 17 August 2015 (“Pledge Agreement”) signed by the Defendants, and by Zhao YK, the Defendants (together with Zhao YK) pledged their Shares to Chen as security for loans which Chen provided to 10 other borrowers (“Borrowers”), in the total sum of RMB 692.5 million (“Loan”). The Borrowers received the Loan which was used to purchase shares in CSI from employees of SS. Each of the Borrowers also signed a loan agreement and a share pledge agreement with Chen, whereby the Borrowers pledged their shares in CSI to Chen as security for the Loan.
10. According to Chen, since it was the 7 minority shareholders of CSI including Zhao YK and the Defendants who had approached Chen (and his friend Mr Li Liufa of TR) for financial assistance, the Defendants and Zhao YK agreed to offer their own shares in CSI as security for Chen’s Loan to the Borrowers, and the Pledge Agreement was signed by each of the Defendants and Zhao YK. On Chen’s case, the understanding was that when the employees succeeded in the Trust Action against Zhang for recovery of their beneficial interests in the shares in CSI, the Borrowers would transfer to Chen the CSI shares purchased with the Loan, instead of repaying the Loan.
11. The Pledge Agreement relied upon by Chen refers to the loan agreements executed by the Borrowers, and the Loan advanced, and recites that each of the Defendants agreed to pledge their Shares held in CSI for the purpose of guaranteeing the performance of the Borrowers’ obligations under their loan agreement.
12. According to Chen, under Article 5 of the Pledge Agreement, each of the Defendants agreed that before the Borrowers fully discharge their obligations under their loan agreements, the Defendants as pledgors and guarantors shall not transfer the Shares, nor exercise any voting rights, without the prior written consent of Chen. Chen’s claim is that in breach of Article 5, the Defendants had not only exercised voting rights in respect of the Shares without Chen’s knowledge or consent but had, in clear violation of contract, sold and transferred the pledged Shares to ACC, under 4 separate sale and purchase agreements made with ACC and dated 23 March 2017 (“S&P Agreements”). The Defendants have executed instruments of transfer and bought and sold notes in favor of ACC in respect of the Shares, and ACC have applied to CSI to register the transfer of the Shares.
13. Article 16 of the Pledge Agreement provides for the validity, interpretation, enforcement and dispute resolution of the Pledge Agreement to be governed by the laws of the PRC. Any disputes arising from the execution of and relating to the Pledge Agreement are to be arbitrated by CIETAC arbitration in Beijing. Consequently, Chen commenced the Arbitration against the Defendants on the Mainland pursuant to the arbitration clause, claiming that the Defendants were in breach of Article 5 of the Pledge Agreement.
14. The Defendants’ sale of the Shares to ACC in fact took place after Chen’s commencement of the Arbitration, and despite complaints having been made by Chen (since January 2017) in respect of the Defendants’ breach of Article 5, by their exercising voting rights without Chen’s knowledge or consent.
15. In May 2017, Chen applied to this court for interim injunctive relief, to restrain the Defendants from exercising their right to vote on the Shares at an EGM of CSI scheduled to be held on 10 May 2017, at which it was proposed to remove the 1st Defendant and the 4th Defendant as directors of CSI. This court refused the application on the basis that there was unexplained delay for the urgent injunction sought, lack of evidence of irreparable damage to Chen by virtue of the defendants’ exercise of their voting rights at the EGM, and by virtue of the ambit of the interim relief sought.
16. On 13 June 2017, the parties appeared on the return day of the Re-amended Originating Summons issued by Chen in these proceedings, for argument as to whether interim measures should be granted in aid or support of the Arbitration. In opposition to the application for the relief sought, the Defendants and ACC (which was granted leave to intervene) claim that receivership is a drastic and draconian relief which should not be lightly granted, that the arbitral tribunal or the PRC court is the proper forum for the grant of any relief, that the injunctive orders sought far exceed any rights Chen may have under the Pledge Agreement, and that Chen has no underlying cause of action to seek the relief now sought.
Applicable legal principles
17. The parties are not in disagreement over the principles applicable to the grant of relief under s 45 of the Arbitration Ordinance (“Ordinance”). The court may grant an interim measure in relation to any arbitral proceedings which have been or are to be commenced, in or outside Hong Kong. The powers of the court may be exercised irrespective of whether or not similar powers may be exercised by an arbitral tribunal under s 35 of the Ordinance in relation to the same dispute (s 45 (3)).
18. Under s 45 (5) of the Ordinance, in relation to arbitral proceedings which have been or are to be commenced outside Hong Kong, the court may grant an interim measure only if (a) the arbitral proceedings are capable of giving rise to an arbitral award (whether interim or final) that may be enforced in Hong Kong, and (b) the interim measure sought belongs to a type or description of interim measure that may be granted in Hong Kong in relation to arbitral proceedings by the court.
19. S 45 (4) of the Ordinance is not applicable, since there is no pending application to the arbitral tribunal on the Mainland for the interim measure sought by Chen in Hong Kong.
20. In exercising the power in relation to arbitral proceedings which are outside Hong Kong, the court in Hong Kong must, under s 45 (7), have regard to the fact that the power is ancillary to the arbitral proceedings outside Hong Kong, and is for the purposes of facilitating the process of a court or arbitral tribunal outside Hong Kong that has primary jurisdiction over the arbitral proceedings.
21. An interim measure is defined in Article 17 of the Model Law (given effect to by s 35 (1) of the Ordinance), to mean “any temporary measure”, whether in the form of an award or in another form, by which, at any time prior to the issuance of an award by which the dispute is finally decided, the court orders a party to:
(a) “maintain or restore the status quo pending determination of the dispute”;
(b) take action that would prevent, or refrain from taking action that is likely to cause, current or imminent harm or prejudice to the arbitral process itself;
(c) provide a means of preserving assets out of which a subsequent award may be satisfied; or
(d) preserve evidence that may be relevant and material to the resolution of the dispute.
An interim measure includes an injunction (s 45 (9)).
22. There is no question that the CIETAC proceedings on the Mainland are capable of giving rise to an award that may be enforced in Hong Kong. All that Chen has to show is that there is a good arguable case in this regard (Top Gains Macao Commercial Offshore Ltd v TL Resources Pte Ltd, HCMP 1622/2015, 18 November 2015).
23. In Prema Birkdale Horticulture (Macau) Ltd v Venetian Orient Ltd [2009] 5 HKLRD 89 and in Top Gains, supra, the court applied the same general principles governing the grant of interim injunctions and other interim relief, when decidingwhether to grant the interim measure sought in aid of an Arbitration. This means that in the context of a Mareva type of injunction, for example, the plaintiff has to show a good arguable case and that the balance of convenience is in favor of the grant of the injunction sought. In the context of a receivership order, the court should consider whether there is a serious issue to be tried, whether there is a proper basis for appointing receivers, the balance of convenience, whether there is a risk of dissipation of assets, whether some form of interim protection should be given to preserve the status quo, and whether the applicant is able to provide an undertaking as to damages suitably fortified (Re Zealot & Co Ltd [2008] 1 HKLRD 386, Re Chime Corporation Ltd HCMP 4146/2001, 25 June 2003).
Serious question to be tried
24. There is dispute between the parties as to whether the Pledge Agreement relied upon by Chen is authentic, and whether the Defendants had signed the version which contains the prohibition against the Defendants’ exercise of the voting rights in the Shares without Chen’s prior written consent. The Defendants also rely on expert evidence on PRC law, to argue that the Pledge Agreement is void and unenforceable under PRC law, for lack of registration with the appropriate Mainland authorities, or for being sham transactions entered into for unlawful or illegal purposes (for the avoidance of disclosure obligations under the Securities and Futures Ordinance of the laws of Hong Kong). On his part, Chen has filed evidence on PRC law, to argue that the Pledge Agreement is not registrable and is enforceable.
25. On the evidence filed, it is neither possible nor appropriate for this court to make findings as to which version of the facts should be accepted, and whose factual and expert evidence is to be preferred. It suffices to say that at this stage, the evidence is not clear either way, but I accept that there is a serious question to be tried, that the Defendants had signed the Pledge Agreement in its final form which contains the prohibition against transfer and exercise of voting rights in respect of the Shares, and that the Pledge Agreement is valid and enforceable.
Forum and jurisdiction
26. I do not agree with the Defendants’ claim, that Chen should apply to the arbitral tribunal or the Mainland court for any interim relief, and that the Hong Kong court would be usurping the jurisdiction of the Mainland court, to grant interim relief in the absence of “exceptional circumstances” (relying upon the decisions of the English court in U&M Mining Zambia Ltd v Konkola Copper Mines Plc [2013] EWHC 260 (Comm) and Econet Wireless Ltd v Vee Networks Ltd and Ors [2006] EWHC 1568 (Comm)).
27. It is noteworthy that Article 9 of the Model Law (applicable to Hong Kong by virtue of s 21 of the Ordinance) states expressly that “it is not incompatible with an arbitration agreement for a party to request, before or during arbitral proceedings, from a court an interim measure of protection and for a court to grant such measure”. The grant of interim measures by the court is not interference in the arbitral process or the parties’ agreement to arbitrate their dispute.
28. Section 45 of the Ordinance makes it clear that the court has jurisdiction and power to grant an interim measure in relation to any arbitral proceedings which have been, or are to be, commenced outside Hong Kong. It may decline such grant on the ground that the interim measure sought is currently the subject of arbitral proceedings, and the court considers it “more appropriate” for the interim measure sought to be dealt with by the arbitral tribunal. The interim measure may be granted by the Hong Kong court even if the subject matter of the arbitral proceedings would not, apart from s 45 (5), give rise to a cause of action over which the court would have jurisdiction (s 45(6)). So long as the court has regard to the factors outlined in s 45 (7), and bear in mind that its power to grant interim measures is ancillary to the arbitral proceedings outside Hong Kong, and is for the purposes of facilitating the process, either of the tribunal or a court outside Hong Kong that has primary jurisdiction over the arbitral proceedings, the court has the jurisdiction and may exercise the discretionary power to grant the interim measure. In short, s 45 envisages that there will be a court outside Hong Kong which has primary jurisdiction over the arbitral proceedings - as the supervisory court over the arbitration, but makes it clear that the court may yet order interim measures.
29. Whilst it is appreciated in this case that the Mainland court, as the supervisory court of the CIETAC Arbitration, would be in the best position to decide questions as to the validity or enforceability of the Pledge Agreement which is governed by the PRC law, it does not follow that the Hong Kong court should not exercise its power under s 45 to grant any form of interim measure which is appropriate and necessary, to facilitate the arbitral tribunal or the Mainland court which has the primary jurisdiction over the Arbitration. Whether interim measures should be ordered depends on the facts and circumstances of each case, the claims made in the arbitration, the nature of the relief sought in Hong Kong, the party against which the relief is sought in Hong Kong, and whether the interim relief will facilitate and aid the arbitral process.
The receivership order sought
30. Chen seeks, by way of primary relief in these proceedings, an order that receivers be appointed over the Shares in the interim and in aid of the Arbitration. In this regard, Mr Mok SC emphasized the fact that irrespective of the dispute raised by the Defendants as to whether the Pledge Agreement contains the prohibition against the Defendants’ exercise of their voting rights in the Shares (“Voting Prohibition”), the Defendants do not dispute that they signed the Pledge Agreement, and that when signed, the Pledge Agreement contained a prohibition against the transfer of the Shares without Chen’s prior written consent (“Transfer Prohibition”).
31. It is also not disputed that the Defendants had, on 23 March 2017, entered into the S&P Agreements with ACC to sell the Shares to ACC, and had signed instruments to transfer the Shares to ACC, all without the knowledge and consent of Chen. ACC applied to the share registrar for registration of the transfer, although the application was refused.
32. On behalf of ACC, it was emphasized that ACC is not a party to the Arbitration, not being a party to the Pledge Agreement. ACC claim that they have the right, under the S&P Agreements with the Defendants, to seek the registration of the Shares as a bona fide purchaser for value.
33. The Defendants and ACC further argued that Chen has no proprietary rights under and by virtue of the Pledge Agreement, and that at most, he only has a security interest in the Shares. He has no right to direct the Defendants how to vote, and the Pledge Agreement does not contain any provision for the transfer of the Shares to Chen. It was argued that the court should not, by the appointment of receivers, confer on Chen rights which exceed the underlying rights of the parties under the Pledge Agreement (Niemann v Niemann (1889) 43 Ch D 198, 202).
34. As I have found, there is a serious question to be tried that the Defendants executed the Pledge Agreement. The Pledge Agreement is governed by PRC law. The experts do not take issue with the fact that by its terms, the Pledge Agreement seeks to create a pledge of the Defendants’ Shares by way of security for the due performance of the Borrowers’ loan agreements. The experts are in disagreement as to whether the Pledge Agreement made between the Defendants and Chen, who are all PRC residents, is registrable as cross-border security in respect of the Shares of a Hong Kong company; whether the Pledge Agreement is otherwise enforceable; and whether the creation of a pledge of the Shares should be governed by the law of Hong Kong.
35. The experts further agree that under PRC law, there is no concept of a receiver taking over the Shares, other than in a bankruptcy. There is expert opinion that the Mainland courts (as opposed to the tribunal) are in a position to grant conservatory measures, to prohibit the Defendants from dealing in the Shares, including the sale and the exercise of voting rights in respect of the Shares. There is doubt as to whether any order for asset preservation that may be made by the Mainland courts can extend to assets which are in Hong Kong, since (amongst other reasons) the competent court to make any order for asset preservation is the court “where the assets in question are located”, or “where the evidence is situated” (as per paragraph 48 (a) (iii) of the report of Charles Qin). In this case, the Shares are of CSI, a company incorporated in Hong Kong, with its registered office and share register in Hong Kong, and it is yet unclear from the expert reports whether the Mainland courts are in a position to make a preservation order in respect of such Shares, and whether such preservation order made by a Mainland court is enforceable in Hong Kong.
36. Under s 45 (5) (b) of the Ordinance, the court has to consider whether the interim measure sought in aid of the arbitral proceedings outside Hong Kong “belongs to a type or description of interim measure” that may be granted by the court in Hong Kong in relation to arbitral proceedings. However, s 45 (3) makes it clear that the court may exercise its powers to grant interim measures irrespective of whether or not similar powers may be exercised by an arbitral tribunal under s 35.
37. An order of interim measure which the court can make under s 45 of the Ordinance includes an order to “maintain or restore the status quo pending determination of the dispute” in the arbitration, and for a party to take action or refrain from taking action that is “likely to cause current or imminent harm or prejudice to the arbitral process” (see s 35 (1) of the Ordinance and Article 17 (2) of the Model Law).
38. The questions to be considered by the court are whether the receivership order is a type of measure which the court has power to grant in relation to arbitral proceedings in Hong Kong, and whether on the facts of this case, such a receivership order should be made, bearing in mind the principles established in cases such as Re Zealot & Co Ltd [2008] 1 HKLRD 386, American Cyanamid Co v Ethicon Ltd [1975] AC 396, and Mandarin Resources Corp Ltd v David Cheng Heng Soon CACV 146/1987, 28 April 1988.
39. The court has the jurisdiction, and the power under ss 21L and 21M of Cap 4, to order the appointment of a receiver and to grant interim relief in relation to proceedings in Hong Kong, and proceedings which have been or are to be commenced outside Hong Kong.
40. On behalf of Chen, Mr Mok pointed out that the appointment of receivers over secured assets such as the Shares agreed to have been pledged to Chen, is a usual equitable remedy for the protection of the security (Gough, Company Charges (2nd edition) at p 34). Where the security is in jeopardy, equity enables the chargee to take steps to protect the charged property through the appointment of a receiver, or by way of an injunction.
41. Mr Mok highlighted the fact that if, according to Chen’s PRC law expert, Hong Kong law applies to the creation of the security interest over the Shares of a Hong Kong company, an equitable charge has been created over the Shares (para 7-073, Bridge, The Law of Personal Property). The Defendants had clearly intended to create a charge over their Shares in favor of Chen by way of security, and the Shares subject to the security were clearly identified for the discharge of a debt or obligation. Clause 10 of the Pledge Agreement clearly provides for the specifically enforceable rights of Chen in the event that the Borrowers do not or cannot fulfill their obligations by the due date, by way of transfer or sale of the Shares which were provided by the Defendants by way of guarantee and security. No further registration of the charge is required under Hong Kong law, and according to Mr Mok, there is a serious question to be tried, that there is a valid and enforceable equitable charge over the Shares, creating an equitable proprietary interest in Chen. As an equitable chargee, Chen has the right to appoint a receiver, so the order for appointment of receivers does not exceed or go beyond Chen’s rights under the Pledge Agreement, to be distinguished from Nieman v Nieman (supra).
42. There is clearly a dispute between Chen on the one part, and the Defendants and ACC on the other part, as to the beneficial title to the Shares. The Defendants were and remain the registered owner of the Shares, but claim to have sold the Shares to ACC, which seek the registration of the Shares in their name. Where title to shares is in dispute, the court in Mandarin Resources (supra) appointed receivers to protect and preserve the shares in question. At p 4 of the judgment, Cons VP referred to the jurisdiction of the court to make the receivership order as being founded in s 21L of Cap 4, and pointed out that the jurisdiction only exists for the protection or assertion of legal or equitable rights, and that the claim must be proprietary in nature, by way of legal or equitable ownership of the property over which it is sought to appoint the receiver. At p 8 of the judgment, Cons VP examined the “true position of a receiver”, by first referring to Kerr on Receivers:
“The learned Editor of Kerr on Receivers puts that this way-
‘The appointment of a receiver does not in any way affect the right to the property over which he is appointed. The court takes possession by its receiver, and his position is that of all parties to the action according to their titles: the receiver does not collect the rents and profits by virtue of any estate vested in him but by virtue of his position as an officer of the court appointed to collect property upon the title of the parties to the action.’
Who has the beneficial title to the shares in question is in dispute and will not be known until the conclusion of the trial. The legal title is undoubtedly in the 4th Defendants by virtue of the entry in the share register. However as the position stands at the moment the power to exercise the rights which attach to that legal title has been removed from the 4th Defendant and placed in the hands of the Receiver, Mr Hughes, in order that he may preserve the overall value of the shares until such time as the dispute has been resolved. If in his view it is necessary to exercise one or other of the particular rights in order to preserve that value, then it is his duty to do what he can; and we would have thought that all others who had notice of the Court order would be obliged to cooperate with him to accomplish that purpose.”
43. The observations made by Cons VP in Mandarin Resources, as to the role of a receiver, are in my view pertinent to the question as to whether receivers should be appointed in this case, and whether it would be just, convenient or appropriate to do so.
44. At first blush, the arguments made by the Defendants and ACC as to the “draconian” and “invasive” nature of a receivership order appeared persuasive. However, viewed in the context of the observations made by the Court of Appeal in Mandarin Resources, as well as the reminders made by G Lam, J in a related judgment in proceedings instituted by the SS employees against Mr Zhang, the appointment of a receiver may not be as drastic as it may appear. In a decision handed down on 20 May 2015 in HCA 1661/2014 (with other consolidated actions) (“Lam Decision”), G Lam J noted (at para 37) that in the case in question, receivers were proposed (as in this case) for a block of shares in CSI, and not for CSI itself or for any of its property such as its shareholding in CSCG. His Lordship pointed out that the registration and notification requirements in ss 299 and 300A of the Companies (Winding Up and Miscellaneous Provisions) Ordinance do not apply, and went on to observe:
“The risk of stigma is correspondingly reduced. In any event, CSI is an investment holding company whose sole function is to hold shares in Shanshui Cement [ie CSCG]. It has been recognized in the cases that appointing receivers over a company that is merely an asset holding company generally involves less adverse effects on the operation of the company than is the case for a company with an active business: Guo Jing Jing v Art Master Investment Ltd (HCA 1008/2009; 11 December 2009), para 74. A fortiori, the appointment of receivers over 40% of the shares in such a company as CSI is fundamentally different from, and less drastic than, appointing receivers and managers over a trading company. The present application is for appointment of receivers only, not receivers and managers.”
45. The remarks of G Lam J apply with equal force to the receivership proposed by Chen in this case in respect of the 10.49% shareholding in the Defendants’ name in CSI.
46. In the case of Chime Corporation Ltd HCMP 4146/2001, 25 June 2003, Kwan J (as she then was) pointed out (at paras 39 and 40 of her judgment) that the power to appoint receivers under s 21L is a discretionary power to be exercised flexibly on a similar basis to that of an interlocutory injunction, and that the principles in American Cyanamid apply. The court has to assess and balance the following matters:
(a) if there is a serious question to be tried;
(b) the alleged risks of dissipation of assets;
(c) the current protective regime and its efficacy; and
(d) the risk of damage to (in this case) the Defendants and ACC if the appointment of receivership is made, and whether they can be adequately compensated by a cross undertaking in damages.
47. In Re Zealot & Co Ltd [2008] 1 HKLRD 386, the court further took into consideration factors such as whether there is jeopardy to assets, whether some form of interim protection was required to preserve the status quo, whether some other less invasive form of protection would suffice as an alternative to the appointment of a receiver, and of course the balance of convenience.
48. The ultimate and fundamental principle, in deciding whether to grant any interlocutory injunctive or other interim relief, is that the court should take whichever course which appears to carry “the lower risk of injustice if it should turn out that it is wrong” (Music Advance Ltd v Incorporated owners of Argyle Centre Phase 1 [2010] 2 HKLRD 1041).
49. I have already concluded that there is a serious question to be tried, that Chen has equitable proprietary interests in the Shares under the Pledge Agreement, or as an equitable chargee of the Shares. Consideration will be given to the other matters referred to in Chime Corporation Ltd and in Re Zealot & Co Ltd as being relevant, in so far as they are in issue in this case.
Shares in jeopardy?
50. I agree with Mr Mok that the Defendants had blatantly acted in disregard of the Pledge Agreement which, even on their case, contains a prohibition against the transfer of the Shares offered by the Defendants as security, otherwise than with the prior written consent of Chen. They had, after the commencement of the Arbitration, and obviously without Chen’s knowledge or prior consent, entered into the S&P Agreements with ACC.
51. The fact that the Defendants were prepared to disregard their execution of the Pledge Agreement with Chen and such obligations as they admit the Pledge Agreement to contain, and to enter into the S&P Agreements with ACC to sell the same Shares, without even notifying Chen that they regard the Pledge Agreement to be unenforceable under PRC law (as they now contend) shows that the Shares would be in jeopardy of being further dealt with or encumbered by the Defendants, unless they are enjoined by the order of the court.
52. As Mr Mok emphasized, ACC had on their part entered into the S&P Agreements, with full notice of the Pledge Agreement made between the Defendants and Chen, and of the Transfer Prohibition. They had relied purely on the oral representations by the Defendants and the Defendants’ lawyers, that the Pledge Agreement was unenforceable. As Mr Mok submitted, ACC had clearly made a conscious and deliberate decision to take the calculated risks of the Pledge Agreement, and its being found to be valid and enforceable.
53. ACC have since indicated to the court that they will not take further steps to transfer or deal with or encumber the Shares, which have already been transferred to them, and are prepared to give an undertaking to such effect. Stop notices have been served by Chen on the registrar, and in May 2017, the board of CSI declined to register the transfer of the Shares in the name of ACC. Mr Mok submitted that the service of stop notices is not an adequate or full remedy, since it only means that Chen will be given notice to come to the court to seek appropriate injunctive or other relief, when required.
54. ACC maintain that they have the right to be registered as the legal owners of the Shares, and to exercise the voting and other rights in the Shares, under and by virtue of the S&P Agreements and their purchase of the Shares from the Defendants.
55. Obviously, the claims made by Chen under the Pledge Agreement and the rights of Chen and ACC to the Shares cannot be resolved, until the tribunal has determined the issues raised in the Arbitration. The tribunal cannot make orders which are binding on ACC, which is not a party to the arbitration agreement, but it can make orders against the Defendants as to the validity of the Pledge Agreement and Chen’s rights under the Pledge Agreement. The tribunal can also compel or restrain the Defendants to act or refrain from acting in a way which may prejudice Chen’s rights. If the Defendants cannot, as a result of any order made against them by the tribunal, discharge their obligations to ACC under the S&P Agreements, it is for ACC to seek appropriate remedies against the Defendants.
56. ACC have placed emphasis on their position as a purchaser of the Shares for value. On the basis that an equitable charge of the Shares has been created by the Defendants in favor of Chen, I accept the submissions made by Mr Mok, that until the Shares are registered in the name of ACC, their interests in the Shares are only equitable in nature, and not legal. As such, both Chen and ACC have equitable interests in the Shares, and irrespective of notice, the rule of priority is that the first in time (ie Chen’s interests) prevails.
57. Hence, Mr Mok argued that the status quo is that ACC are not in a position to raise any defence of their being a bona fide purchaser of the Shares for value without notice, but if ACC should be permitted to perfect their wrongfully acquired title by registering the Shares in their name, they might be able to defeat Chen’s security interests entirely.
58. In the interim of the determination of the Arbitration and pending any preservation or conservatory order which may be made by the Mainland courts in aid of the Arbitration, the Shares are in jeopardy of being registered in ACC’s name, and in jeopardy of having their voting rights being exercised, to prejudice or defeat the beneficial or equitable interests of Chen. As Mr Mok highlighted, the whole purpose of Chen entering into the Pledge Agreement with the Defendants was to obtain a form of security in the Shares pledged by the Defendants, to cater for the non-performance of the Borrowers’ obligations under their loan agreements. Such security will be lost if the Shares are transferred to and registered in ACC’s name, for ACC to exercise the voting and other rights in the Shares.
59. In my view, there is sufficient evidence of the Shares being in jeopardy.
Risk of damage and maintenance of the status quo
60. It is apparent from the evidence filed in these proceedings and from the Lam Decision that the scramble for control of CSCG has resulted in the contest for the shares of the minority shareholders of CSI, which include the Shares of the Defendant. ACC and TR are apparently competing in their bid for the control of the shares in CSI, in order to gain a larger say in CSCG. The voting rights in the Shares are a valuable asset in the fight for control.
61. The Lam Decision dealt with the receivership and voting rights of approximately 38.5% of the shares of CSI, with acts of Zhang as a trustee of the employees’ shares, and trust property which was regarded as being in serious jeopardy -circumstances which are different to those in the present case. Nevertheless, the observations made in relation to the receivers’ role and the necessity for the protection of the voting rights are still relevant to the position of the Shares in this case. At paragraph 33 of the Lam Decision, His Lordship remarked:
“The receivers, acting independently of the parties and under the supervision of the court, could see how best to exercise voting rights in relation to the block of shares in question (approximately 38.5% counting the plaintiffs in the first 3 actions, or approximately 43.3% counting the plaintiffs in all 5 actions commenced so far). They could properly perform the function of trustee of a substantial parcel of shares in a company, ie act in a manner that is necessary to safeguard that investment (Bartlett v Barclays Trust Co [1980] 1 Ch 515, 532-534), without being bedeviled by the conflicts of interests that beset the 1st defendant. The 1st defendant would remain the registered holder and in control of the balance of the 81.74% interest he has hitherto held in CSI. The 7 minority shareholders would continue to hold their shares which in aggregate represent an 18.26% stake. As things stand the receivers would not have a controlling stake in CSI, but as substantial shareholders they would be able to influence the voting power that CSI in turn has in Shanshui Cement. They would be able to take a disinterested stance in how the affairs of CSI should be conducted, particularly in relation to the complaints and litigation against Mr Zhang and in relation to its investment in Shanshui Cement, preventing the invidious conflicts affecting Mr Zhang. They could ensure that an independent mind is brought to bear, from the point of view of a shareholder of CSI, on the grant of the share options to the Zhangs. They would be able to help ensure that the relevant shares of CSI are not improperly encumbered or otherwise utilized for improper purposes and that any dividend income CSI receives and any dividend downstream are properly accounted for. It is true that CSI only has 25.09% in Shanshui Cement and that, as I shall refer to below, another shareholder has overtaken CSI as the largest shareholder of Shanshui Cement, but 25.09% is nevertheless a substantial interest in a limited company. If the affairs of Shanshui Cement are being prejudicially conducted, the receivers would be in a much better position than the plaintiffs to call CSI as a shareholder to take action. The directors of Shanshui Cement would be kept in check.” (Emphasis added)
62. The “substantial shareholder” referred to in the Lam Decision as having acquired shares from the market to become the largest shareholder of CSCG, holding 28.16% of the issued share capital of CSCG as at the date of the Lam Decision, is in fact TR.
63. I appreciate that the block of shares dealt with by Lam J (38.5%) is larger than the block of Shares held by the Defendants (approximately 10.49%). Nevertheless, that block is of value to TR and ACC, which are seeking to acquire it in their fight for control of CSCG. Appointing receivers to take control and to exercise the voting rights in respect of such Shares would be of significance in preserving the value of the Shares in the interim of the Arbitration and any award which may be made as to the ownership and rights vested in the Shares.
64. If, during the interim of the Arbitration, the Shares are to be transferred and registered in ACC’s name, for ACC to exercise the voting and other rights in the Shares, but Chen’s claims to the Shares should ultimately be accepted by the arbitral tribunal to be valid and enforceable, Chen’s loss of control over the Defendants’ exercise of their voting rights in CSI, and over the affairs of CSI affecting his interests as a shareholder, would constitute irreparable and irreversible harm.
65. As highlighted by the Court of Appeal in Mandarin Resources, the receiver’s possession of the property and the rights in the property over which the receiver is appointed is that of all parties to the action according to their titles. It is the receiver’s duty to do what he can and to take such action as may be necessary in the exercise of one or other of the rights in the property, in order to preserve the value of the property, pending the final determination of the beneficial title to the property which is in dispute. In the exercise of any voting rights in the Shares, the receiver to be appointed over the Shares will no doubt take into consideration the value of the block of the Shares in CSI, and any views as may be expressed by Chen and ACC, before deciding on the proper course to take, with directions from the court if necessary. In my view, this will be the best manner of preserving the value of the Shares and the interests of the beneficial owner of the Shares. It will also restore and maintain the status quo existing prior to the acts of the Defendants’ transfer and sale of the Shares to ACC of which Chen complains, ie the Defendants as the legal and registered owner of the Shares notifying and seeking the prior consent of Chen, before any transfer of the Shares and before their exercise of voting rights in respect of the Shares.
66. ACC and the Defendants emphasized the fact that the Defendants have already executed the documents for the transfer of the Shares to ACC under the S&P Agreements, and that there is no further conduct required on the part of the Defendants, and to be restrained, in relation to the transfer. Under s 45 and s 35 of the Ordinance, one of the interim measures which can be granted by the court is an order to “maintain or restore the status quo pending determination of the dispute”. The status quo is also relevant to the assessment of the balance of convenience.
67. The following statement of Sir John Pennycuick in Fellowes & Son v Fisher [1976] QB 122 is often quoted in the context and meaning of the expression “status quo”:
“By the expression “status quo” I understand to be meant the position prevailing when the defendant embarked upon the activity sought to be restrained. Different considerations might apply if the plaintiff delays unduly his application for relief.”
68. The meaning of “status quo” in Article 17 of the Model Law was also considered by the High Court of New Zealand in the case Safe Kids in Daily Supervision Limited v McNeil HC Auckland [2010] NZHC 605 (14 April 2010)[1]. There, the court observed (at para 23 of the judgment):
“The concept of the status quo is inherently flexible. It can be a point some time prior to the issue of proceedings, often the position prior to the conduct complained of. Sometimes it is fixed at the point of time of the issue of the proceedings. Sometimes, when the plaintiff is seeking to stop a wrong which is threatened in the future, it will be the position at the time of the hearing. This inherent flexibility was recognized by McGrechan J in E R Squibb & Sons (NZ) Ltd v ICI New Zealand Ltd. He said:
I turn therefore to the status quo. At one date? It is of course a somewhat flexible concept. A useful starting point is the state of affairs which prevailed before the defendant commenced the conduct the subject of claim in the proceedings: Metric Resources Corp v Leasemetrix Ltd [1979] FSR 571, 582 …”
69. The fluid nature of the status quo in the definition of “interim measures” in Article 17 was also highlighted in paragraph 26 of the judgment in Safe Kids:
“With these considerations in mind I turn to the specific words in the definition of “interim measure” in article 17 of the First Schedule. The fluid nature of the status quo is recognized in the definition at (a). The interim measure must “maintain or restore the status quo”. The two concepts of restoring something that has been taken away or maintaining something that presently exists are mutually exclusive, but both are embraced. This indicates that the phrase “status quo” must be approached in the same flexible way in which it is approached in interim injunction cases. I consider that the phrase is used in the sense of maintenance or restoration of a state of affairs either past or present. I do not accept Ms Peter’s submission that a past status quo must be exactly recoverable. As recognized in Cosco (NZ) Ltd v Port of Napier Limited, changes to the status quo have often taken place by the time of the court hearing. It is not a finite concept.”
70. In the circumstances of this case, I would consider the position existing immediately before the commencement of the Arbitration as the status quo. At that time, the Defendants had exercised voting rights in respect of various matters of which Chen had complained since January 2017. The Arbitration was commenced in February 2017, by which Chen complained of the Defendants’ wrongful acts and breach of the Pledge Agreement. The Defendants only entered into the S&P Agreements with ACC in March 2017. The status quo was prior to the S&P Agreements, and prior to the Defendants’ execution of the transfers of the Shares in favor of ACC, and the court is in a position to make an order for the restoration of the status quo.
71. In my decision of 9 May 2017, Chen’s unexplained delay since January 2017 was considered in the context of my dismissal of Chen’s application for urgent injunctive relief to restrain the Defendants from exercising their voting rights at an EGM of CSI convened to be held on 10 May 2017. I was of the view that since Chen had failed to take immediate action since January 2017 to seek the interim injunctive relief in respect of 10 May 2017 meeting, there was no urgency for the grant of interim relief pending the full determination of Chen’s application by Originating Summons for the grant of interim measures under s 45 of the Ordinance (the subject matter of this decision).
72. The grant of a receivership order as sought by Chen can serve the purpose of maintaining and restoring the status quo which existed prior to the commencement of the Arbitration.
Balance of convenience
73. On behalf of ACC, Mr Chan SC argued that the status quo is the current shareholding of CSI in CSCG, which should be preserved. According to Mr Chan, ACC should be permitted to exercise the voting rights in the Shares, to ensure that CSI would not vote in favor of any placement proposed by CSCG, which would have the effect of diluting CSI’s shareholding in CSCG, from 25.09% to below 20%, which would seriously and irreversibly prejudice the interests of CSI and its shareholders. According to ACC, TR is in favor of the placement proposal, and Chen is connected to TR and would vote in support of TR’s proposal, including the placement. The board of CSI is currently controlled by the representatives of TR and the EY Receivers who, on ACC’s case, have also sided with TR.
74. Mr Chan submits that the balance of convenience should be in favor of permitting ACC to vote on the Shares, as ACC are the minority shareholder at both the CSI level and CSCG level, and irreparable damage is more likely to be suffered by them if the placement proposals are passed.
75. In the consideration of the damage that might be suffered by Chen on the one hand, and the damage that might be suffered by the Defendants on the other hand, the principle is that the court should adopt the course which is likely to cause the lower risk of injustice, if it should turn out that the interim order (whether to grant or refuse the relief) is wrong.
76. In the present case, there are competing claims made by Chen and the Defendants as to ownership of the Shares, and each side claims irreversible and irreparable harm should he/they not be permitted to exercise rights in the Shares. In all the circumstances, the appointment of a receiver to “hold the ring”, in the interim of the making of an award in the Arbitration, should cause the lower risk of injustice to either side. This is so bearing in mind that the role of a receiver is to exercise the rights in the Shares and to preserve the subject matter of the dispute, for the benefit of the party ultimately held to be entitled to the Shares or such rights as may be vested in the Shares.
77. I would repeat the helpful reminders made by Lam J in the Reasons for his Decision handed down in the proceedings between the employees and Zhang on 20 February 2017. Firstly, the receivers are not agents of the parties. Further, as owners of shares, the parties for whose benefit the receivership is to be appointed do not owe any fiduciary duty to either CSI or CSCG. The parties, as shareholders, and the receivers in exercise of their rights as shareholders, are generally entitled to vote their shares in their own interests as they see appropriate (Eclairs Group Ltd v JKX Oil & Gas plc [2015] UKSC 71). At this stage, it suffices to say that the court making the receivership order in respect of the Shares would expect the receivers to seek and consider the instructions of both parties, before deciding how to exercise the rights of a shareholder of the block of 10.49% Shares in CSI, to best preserve the value of the Shares in the interim of the Arbitration.
Less intrusive remedy?
78. As highlighted by the Defendants and ACC, the instruments of transfer and contract notes have already been executed, and it would be futile to injunct the Defendants from selling and transferring the Shares to ACC.
79. As I have explained in the earlier part of this decision, CSI does not carry on any business, other than holding the Shares as an investment. The appointment of independent receivers, to exercise the voting and other rights of a shareholder in the interim of the determination of the dispute between Chen and the Defendants in the Arbitration, is not draconian and in fact serves to preserve the value of the Shares. It should also conserve the subject matter of the Arbitration, assisting to ensure that the arbitral process is not frustrated in its final stages, should Chen’s claims to the Shares succeed but the Shares have been transferred to and registered in someone else’s name, and the voting rights lost.
Conclusion and orders
80. Having considered the entire circumstances of this case, I am satisfied that the appointment of receivers to exercise the voting and other rights in the Shares is an interim order that may be granted by the court in Hong Kong in relation to arbitral proceedings. Bearing in mind that the Shares are of a company in Hong Kong, the interim appointment of receivers of such Shares will facilitate the process of the arbitral tribunal or the Mainland court that has primary jurisdiction over the Arbitration, and it is just for the court to grant such an interim order to maintain and preserve the status quo.
81. An order will be made in terms of paragraphs 1 to 3 and 4 of the Re-amended Originating Summons issued on 22 May 2017. An order nisi will also be made in terms of paragraph 5 of the said Originating Summons, with certificate for 2 counsel.
| | (Mimmie Chan)
Judge of the Court of First Instance
High Court |
Mr Johnny Mok, SC, Mr Johnny Ma and Ms Stephanie Wong, instructed by Stevenson Wong & Co, for the plaintiff
Mr Jose Maurellet SC and Ms Sharon Yuen, instructed by Stephenson Harwood, for the 1st to 4th defendants
Mr Abraham Chan SC, Mr Keith Lam and Mr Joshua Chan, instructed by Davis Polk & Wardwell, for the intervener
[1] It is noted that the High Court of New Zealand considered that under the amendments to their Arbitration Act, the powers of the New Zealand court to grant interim measures are restricted to those of an arbitral tribunal.