HCA 2880/2015
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
ACTION NO 2880 OF 2015
____________
BETWEEN  
 CHINA SHANSHUI CEMENT GROUP LIMITED (中國山水水泥集團有限公司) 1st Plaintiff
 CHINA SHANSHUI CEMENT GROUP (HONG KONG) COMPANY LIMITED
(中國山水水泥集團(香港)有限公司) 2nd Plaintiff
 CHINA PIONEER CEMENT (HONG KONG) COMPANY LIMITED 3rd Plaintiff
 and 
 ZHANG CAIKUI (張才奎) 1st Defendant
 ZHANG BIN (張斌) 2nd Defendant
 LI CHEUNG HUNG (李長虹) 3rd Defendant
 CHANG ZHANGLI (常張利) 4th Defendant
 WU LING-LING (also known as DORIS WU) (吳玲綾) 5th Defendant
 LEE KUAN-CHUN (also known as CHAMPION LEE) (李冠軍) 6th Defendant
 ZENG XUEMIN (曾學敏) 7th Defendant
 SHEN BING (沈平) 8th Defendant
____________
Before: Hon Au-Yeung J in Chambers
Dates of Hearing: 8 and 13 January 2016
Dates of Decision: 8 and 13 January 2016
Date of Reasons for Decision: 15 January 2016
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REASONS FOR DECISION
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INTRODUCTION
1. By their summons dated 28 December 2015, the plaintiffs seek against, amongst others, D1 (“Zhang senior”) and D2 (“Zhang junior”) (collectively “the Zhangs”) :
Under §1
(1) Continuation of the injunction granted by Lok J on 24 December 2015 (“the Injunction Order”), restraining them from disposing of property belonging to the plaintiff; or to conceal, destroy or temper with or remove from Hong Kong the books and records of the plaintiffs; and to deliver the records in the Zhangs’ possession over to the plaintiffs’ solicitors.
(2) Disclosure of information on assets received from the plaintiffs, the current whereabouts of the assets and how they are held;
(3) Disclosure of information concerning the plaintiffs’ records;
Under §§2&3
(4) An prohibitory injunction to restrain the Zhangs from acting upon the unlawfully altered Articles of Association of Shandong Cement (“the unlawfully altered articles”); and/or misapplying any assets of Shandong Cement or any of its subsidiaries;
(5) A mandatory injunction to compel the Zhangs to execute corrective amendments to the Articles of Association of Shandong Cement (“the corrective amendments”), failing which the Registrar of the court shall do so on their behalf.
2. The plaintiffs based their applications on 4 activities of the Zhangs (“the 4 activities”):
A. Misappropriation of P1’s funds (§17 soc);
B. Bringing of ultra vires proceedings in Cayman Islands to wind up GroupCo (§§33, 47-62 soc);
C. Unlawfully altering the articles of Shandong Cement in an attempt to misappropriate the most valuable subsidiary of the Group (§§4, 40-44, 65-68 soc);
D. Theft of the Plaintiffs’ records (§§1, 63-64 soc);
3. The Zhangs have not been served at their primary addresses in the Mainland. However, pursuant to the order of Lok J, Messrs Deacons who have been acting for Zhang senior in other proceedings in Hong Kong have been served with the concurrent writ and notice of hearing on 13 January 2016. Although Messrs Deacons have returned the papers to the plaintiffs’ solicitors (“W&G”), that did not undermine the effective service.
4. At the 2nd hearing on 13 January, 2016, Mr Barlow SC informed me that Zhang senior had a hearing before Chow J on the day before in the Trust Actions (defined below) for substantive arguments of a striking out application against him. Zhang senior was represented by Messrs Deacons. Clearly Zhang senior was involved in litigation in Hong Kong but chose to ignore the present proceedings.
5. There was no substituted service order on D2, so the hearings on both dates have proceeded on ex parte basis against D2.
6. At the hearing on 8 January 2016, I made the orders sought against, amongst others, the Zhangs as per paragraph 1 above. At the hearing on 13 January 2016, I approved the terms of the corrective amendments. Here are my reasons.
BACKGROUND
7. P1 (“GroupCo”) was incorporated in the Cayman Islands with its shares listed on the Stock Exchange of Hong Kong (“SEHK”). It is the holding company for the Shanshui Cement group of companies (“the Group”) through 3 immediate subsidiaries:
(a) HK Cement (P2): wholly-owned by GroupCo and incorporated in Hong Kong;
(b) Pioneer (P3): wholly-owned by HK Cement (P2) and incorporated in Hong Kong;
(c) Shandong Shanshui Cement Group Co Ltd (“Shandong Cement”) is a wholly-owned subsidiary of Pioneeer (P3), incorporated in Mainland China and operating out of the Group’s industrial plant at Jinan, Shandong.
8. Shandong Cement holds the Group’s subsidiaries that owns the vast majority of the Group’s fixed assets, employs most of the Group’s staff and are responsible for about 99% of the Group’s revenue. As of 30 June 2015, Shandong Cement’s consolidated balance sheet showed total assets of RMB 34.8 billion, with net assets of RMB 15.13 billion.
9. Since 21 July 2015, the shareholders of the GroupCo have been:
Tianrui (International) Holdings Co Ltd (“Tianrui”) 28.16%
China Shanshui Investment Co Ltd (“CSI”) 25.09%
Asia Cement Corporation and associates (“ACC”) 25.18%
China National Building Materials Co Ltd (“CNBM”) 16.67%
Public shareholders 4.9%
10. In respect of GroupCo’s board of directors (“the GroupCo Board”),
(a) At all times up to 13 October 2015, the executive directors were the Zhangs and D3. D3 routinely voted in accordance with the directions of the Zhangs.
(b) Until mid-October 2015, the Zhangs had been able to control the composition of the GroupCo Board and hence management of the Group;
(c) From mid-October to 1 December 2015, Zhang senior was able to control the composition through the Zhangs’ collaboration with CNBM and ACC. The GroupCo Board included the defendants, except D3 (company secretary and employee accountant).
11. In respect of HK Cement (P2) and Pioneer (P3), until 2 December 2015, the Zhangs had been the only directors.
12. In respect of Shandong Cement, until 28 October 2015, its directors were the Zhangs and 4 Group employees loyal to them, ie Chen Xueshi, Huang Kehua, Tian Guang and Zhu Wei.
13. Zhang senior had been able to control CSI, until July 2015.
14. Since March 2015, the Zhangs have been heavily involved in litigation in Hong Kong with multiple interlocutory proceedings. There were 2 main sets of proceedings:
(a) Unfair prejudice proceedings by the minority shareholders in CSI on behalf of all shareholders in CSI and/or GroupCo against GroupCo, the Zhangs and CNBM. The subject matter was an agreement whereby GroupCo agreed to allot shares to CNBM. It had the effect of making CNBM a substantial shareholder, but diluting CSI’s shareholding in GroupCo. Another subject matter was GroupCo’s grant of share options to the Zhangs and D3 which would further dilute the shareholding of CSI and cause CSI to lose its ability to block any shareholders’ special resolutions. See HCMP 360/2015 and HCMP 593/2015.
(b) Breach of trust claims in HCA1661, 1766, 2191 of 2014, 623, 939 and 1564 of 2015 (“the Trust Actions”). These are claims made by the contributing employees who claim to be equitable owners of shares in CSI (which in turn owns about 25.09% shares in GroupCo) registered in the name of Zhang senior. Zhang senior denied the claim and asserted that the contributing employees were merely beneficiaries to 2 BVI discretionary trusts on which the shares were settled.
See the decisions of G Lam J’s dated 13 May, 20 May and 17 June 2015 in HCA 1661/2014 (consolidated) and Harris J’s decision dated 17 March 2015 in HCMP 360/2015.
15. In the Trust Actions, G Lam J appointed interim receivers (“the Receivers”) to take possession of the CSI shares claimed upon a finding of clear risk of jeopardy to the trust property.
16. In July 2015, the Receivers, with approval of the court, caused the CSI Board to be reconstituted and so Zhang senior lost control over it.
17. On 1 December 2015 with the assistance of the court in the Trust Actions, the board of directors of GroupCo was completely replaced by individuals (“the new directors”) who are not under the control or influence of the Zhangs.
18. The new directors discovered that, amongst others, the Zhangs had breached their fiduciary duties to the plaintiffs. The plaintiffs therefore brought this action. For the purpose of the present applications, they relied only on the 4 activities.
Legal principles for grant of injunction
19. The legal principles for the grant of interlocutory injunction are settled. It is for the plaintiff to show serious issues to be tried, that damages would not be adequate remedy; that the balance of convenience lies in favour of the grant of an injunction and that it is just and convenient to grant the injunction: American Cyanamid Co v Ethicon Ltd [1975] 2 WLR 316.
20. Questions of balance of convenience and preservation of status quo ante are not of much relevance in the context of a claim for an interlocutory proprietary injunction: CY Foundation Group v Cheng Chee Tock & ors [2012] 1 HKLRD 532, 545, Barma J (as he then was).
21. In the case of a mandatory injunction, the plaintiff has to demonstrate a high degree of assurance that at the trial it will be shown that the injunction was rightly granted. At the injunction stage, the court will take whichever course appears to carry the lower risk of injustice if it should turn out that it is wrong. Two common guidelines are the consideration of the merits of the plaintiff’s claim and the balance of convenience. At no stage should the court lose sight of the practical realities of the situation to which the injunction will apply. See Music Advance Ltd v The Incorporated Owners of Argyle Centre Phase I [2010] 2 HKLRD1041 at §12 per Ma J (as he then was); National Commercial Bank Jamaica Ltd v Olint Corporation Ltd [2009] 1WLR 1405, §§17-20, Lord Hoffmann.
22. Where the grant or refusal of an interlocutory injunction sought by the plaintiff would dispose finally of the claim for an injunction in the writ, the court should approach the matter on the broad principle that it should endeavour to do what will avoid injustice. The plaintiffs have to show at least that they are likely to succeed at the trial, and that requires a stronger evidential case than is required in ordinary matters to which the American Cyanamid principles apply: Sunlink International Holdings Ltd v Wong Shu Wing [2010] 5 HKLRD 653, §10, Harris J.
LEGAL PRINCIPLES ON BREACH OF FIDUCIARY DUTY
23. In Re Tysan Holdings Ltd [2013] 4 HKC 425, §38, Mimmie Chan J stated that:
“… As directors, they also have fiduciary duties of utmost good faith, and cannot exercise their power for improper purposes, for their own benefit or otherwise than for the benefit and in the best interests of the company for which they act. Directors of public companies are under the same if not more onerous duties, bearing in mind that they are governed by the Listing Rules, and considering the fact that public investors look to them for the proper governance of the company…”
24. In Extrasure Travel Insurances Ltd & anor v Scattergood & anor [2003] 1 BCLC 598, Deputy Judge Jonathan Crow said, at §90 that:
“… a director’s duty is to do what he honestly believes to be in the company’s best interests. The fact that his alleged belief was unreasonable may provide evidence that it was not in fact honestly held at the time: but if, having considered all the evidence, it appears that the director did honestly believe that he was acting in the best interests of the company, then he is not in breach of his fiduciary duty merely because that belief appears to the trial judge to be unreasonable, or because his actions happen, in the event, to cause injury to the company.”
25. In the same judgment, the learned Deputy Judge also set out the test for ascertaining whether or not a director has acted in breach of fiduciary duty (§92). It is unnecessary for the plaintiff to prove that a director was dishonest or that he knew he was pursuing a collateral purpose. The test is an objective one. The court must:
(a) Identify the power whose exercise is in question;
(b) Identify the proper purpose for which that power was delegated to the directors;
(c) Identify the substantial purpose for which the power was in fact exercised; and
(d) Decide whether that purpose was proper.
PARAGRAPH 1 OF THE SUMMONS - CONTINUATION OF THE INJUNCTION AND DISCLOSURE ORDERS
Bases for the applications
26. The 4 activities are analyzed below.
27. Firstly, Zhang’s misappropriation of company funds (§17 soc). It is the plaintiffs’ case that until 13 October 2015, the Board was dominated by the Zhangs. Zhang senior treated CSI as his own property and GroupCo as his to manipulate. There had been payment of directors’ remuneration to him of about RMB149 million. There had been misfeasant loans to companies controlled by the Zhangs. There was evidence of the Zhangs acting in collaboration with ACC and CNBM to enable those 2 companies to try and obtain control of GroupCo without a general offer. Such conduct resulted in the unfair prejudice proceedings.
28. Further, despite having net profit of over RMB150 million in the preceding year, GroupCo’s public announcement showed unaudited mid-2015 net trading losses of over RMB 1 billion, with unexplained increases in administrative expenses from RMB 572 million to RMB 851 million.
29. The Board has failed to take action in respect of the prima facie breaches of fiduciary duties by Zhang senior, committed with the knowing assistance of Zhang junior and D3.
30. Secondly, the defendants caused ultra vires proceedings to be brought in the Grand Court of the Cayman Islands, attempting to wind up GroupCo pursuant to a purported board resolution on 10 November 2015.
31. The purported resolution was passed by all the defendants except D3 (company secretary). It also authorized GroupCo to apply for joint provisional liquidators (“JPLs”) to be appointed. The draft order would have ordered the JPLs to develop a compromise with the Company’s creditors and authorized JPLs to, without sanction of the court, deal with all questions affecting the assets or the restructuring of the Company. If JPLs had been appointed, it would have the effect of displacing the management control of the GroupCo Board.
32. The purported board meeting was to pre-empt another GroupCo EGM which Harris J directed to be held in Hong Kong on 1 December 2015, when it was anticipated that all the members of the GroupCo Board (including the Zhangs) would be replaced.
33. The winding-up petition in the Grand Court was presented on the ground of alleged inability of GroupCo to repay its debts. Zhang junior, as authorized by the purported resolution, filed an affirmation in support of the petition. If what he had deposed to were true, the Group had a wholly unexplained cash deficiency of about RMB 171 million for which D1 to D5 would have to account.
34. In addition, D5 swore an affidavit inviting the Grand Court to appoint JPLs (“the JPL application”).
35. The Grand Court struck out the winding-up petition and dismissed the JPL application on the ground that the GroupCo Board had no authority to present the winding-up petition without authorization from GroupCo’s shareholders, which the GroupCo Board never sought.
36. Thirdly, the Zhangs (together with D3) purported to misappropriate the Group’s most valuable subsidiary Shandong Cement (with gross assets of RMB 34.8 billion) through unlawfully altered Articles of Association. They did so at a time when they were the only directors of Pioneer (P3). The unlawfully altered articles were 5.2.2.1, 5.2.2.2, 5.2.4, 5.2.7, 5.3.2 and 15.3. The effects of the alterations were:
(a) To reduce the number of permitted directors from 5 to 3;
(b) To remove the shareholders’ (Pioneer’s) right to replace any director removed and replace it with a provision preventing the shareholder from dismissing any director from office before expiry of a 3-year term;
(c) To permit directors to receive remuneration (when they were previously not permitted to);
(d) To permit the board to decide all matters relating to merger, split up, dissolution or change of corporate form of the company;
(e) To remove the shareholders’ power to appoint the chairman of the board and confer it on the board of directors;
(f) To reduce the quorum for a board meeting from 3/4 of the total number of directors to 2/3;
(g) To remove the shareholders’ right to require commencement of legal proceedings against the company’s directors and confer it on the board of directors.
(h) To remove the shareholders’ right to amend the articles and confer it on the board of directors.
37. Fourthly, there had been theft of company records.
38. GroupCo has maintained its principal place of business at Lippo Centre in Hong Kong (“the GroupCo Premises”). HK Cement (P2) and Pioneer (P3) also maintained their registered office there. Since the outgoing directors have not delivered up to the new directors the Group’s properties and records, the new directors went to the GroupCo premises on 2 December 2015. It was discovered that all the main records had been removed from GroupCo’s premises. Those included accounting records, bank statements, most of the employment records, all of GroupCo’s records of dealings with SEHK and the SFC, all records of litigation of which GroupCo was a party and all the computer data on the only 4 Group lap-top computers left in the GroupCo office. Since GroupCo has taken possession of the GroupCo premises, none of the previous staff of GroupCo have returned to the GroupCo premises to work.
39. Under s.377 of the Companies Ordinance, Cap 622 and s.51C of the Inland Revenue Ordinance (“IRO), Cap 112, each of the plaintiffs was required to keep its books and records. Anybody who without reasonable excuse failed to comply with s.51C of the IRO commits an offence (s.80).
40. Clearly the directors had to keep the books, accounts and records of a company. There was no reason for the removal of those documents from GroupCo’s premises. The Zhangs, as outgoing directors, had no reason to keep or refuse to hand over the company records of the plaintiffs to the new directors. The computer data was clearly deliberately removed and the outgoing directors would have a duty to explain the whereabouts of those data.
SERIOUS ISSUES TO BE TRIED
41. Individually, the 4 activities formed serious issues to be tried on breach of fiduciary duties.
42. Misappropriation of GroupCo’s funds , if established, was for the benefit of the Zhangs and not in the interests of GroupCo or the Group.
43. Bringing the winding-up proceedings in Cayman Islands was clearly unlawful and against the interests of GroupCo. The purpose apparently was to engineer a change in composition of the GroupCo’s body of shareholders for the benefit of the Zhangs. There might be issues of dishonesty on the part of Zhang junior in trying to mislead the Cayman Islands as to financial inability of GroupCo. This activity showed the grievous extent to which the the Zhangs would go to strip GroupCo even of its existence.
44. There was no discernible commercial purpose for unlawfully altering the articles of Shandong Cement. The overall effect of the amendments was an attempt to thwart the Zhangs’ impending removal from the GroupCo Board and to entrench the Zhangs’ control over the Group’s assets through Shandong Cement for at least another 3 years. This would give the Zhangs free reign over Shandong Cement and hence its assets. There was apparent lack of honesty and good faith on the part of the Zhangs.
45. It was a clear inference that in anticipation of the outcome of the 1 December 2015 EGM and in order to block or impede any investigations and the criminal and civil proceedings that would ensue, the essential books and records of the plaintiffs and the Group were removed. At this stage, it might not be possible to pinpoint the Zhangs as the thieves. However, as directors, they did have the duty to keep or cause to be kept those books and records, which they apparently had failed to discharge. They also had a duty to hand them over to the new directors.
46. As Deputy Judge Seagroatt said in the Trust Actions, HCA 1661/2014 (consolidated), 26 October 2015, §23:
“The applications by [Zhang senior and Li Yanmin] and the arguments developed and persisted in, have, to my mind, only one discernible objective – to resist all investigations and hide the financial activities. As I referred to earlier there is a number of dispositions of money which need to be explained and as but one aspect of that, is the extent to which the defendant has used corporate moneys of [CSI] and/or [GroupCo] to pay for his personal legal fees.”
47. In another decision in the same case, 18 November 2015, §5, the learned Deputy Judge similarly criticized:
“… the overwhelming impression is that [Zhang senior] has been deliberately obstructive, the sole motivation appearing to be to prevent any erosion of his control and any examination of his financial machinations in relation to one or more of the companies concerned.”
48. Collectively, the 4 activities, if established, continued to reflect the truth of such criticisms and the oppressive conduct of the Zhangs that aggravated the damage. Applying the principles in paragraphs 23-25 above, there were clearly serious issues to be tried as to whether the conduct of the Zhangs was in breach of their duties as directors.
ADEQUACY OF DAMAGES AS A REMEDY
49. Very valuable assets have been or might be removed pending trial. Theft of the plaintiffs’ records was criminal conduct in itself. As directors, the Zhangs were not fulfilling their duties to keep proper records pursuant to the Companies Ordinance and Inland Revenue Ordinance. They also put the plaintiffs at risk of violation of SEHK Listing Rules for lack of records of dealings with SEHK. Without company records, the plaintiffs would be unable to conduct their business properly. Without the litigation records, the plaintiffs would be unable to assert or defend their interests properly. All of these could not be adequately compensated for by damages.
BALANCE OF CONVENIENCE
50. There was no conceivable defence to the plaintiffs’ claim to recover their own assets and stop the Zhangs’ unlawful and oppressive conduct. The plaintiffs have given an undertaking in damages. The balance of convenience was clearly in favour of the continuation of the injunction.
THE DISCLOSURE ORDERS
51. The court has power to make an order for disclosure of information in order to ascertain the whereabouts of missing trust funds and to enable tracing of them. The court may require directors of a company to make full disclosure of certain specified facts on affidavit. It may make orders for interrogatories to be answered by the defendants or their employees or director. A v C [1981] QB 956, 958E-959E, Robert Goff J; Zimmer Sweden AB v KPN Hong Kong Ltd & anor, HCA 2264/2013, 2 May 2014, §§73-75, per DHCJ Kent Yee.
52. The 2 disclosure orders sought against the Zhangs fell within the principles of A v C. The plaintiffs were clearly entitled to the information sought, which would enable them to take steps to collect in, preserve or trace the assets, or handle its business and litigation properly. I granted the orders sought.
PARAGRAPHS 2-3 OF THE SUMMONS FOR PROHIBITORY INJUNCTION AND MANDATORY INJUNCTION
Prohibitory injunction
53. I have alluded to the effects of the unlawfully altered articles (paragraphs 36 and 44 above). They removed all safeguards against entrenchment of directors. Exercise of powers thereunder might lead to misappropriation of huge assets beneficially belonging to the plaintiffs. There appeared to be no resolution of Pioneer (P3) or other plaintiffs or public announcements relating to the unlawfully altered articles. Damages would not be an adequate remedy.
54. There has been a history of the Zhangs using unlawful and oppressive means to gain control as shown in the Trust Actions, the unfair prejudice proceedings and the rest of the 4 activities. The Zhangs treated companies as their own to manipulate for their own benefit to the detriment of the relevant company or the minority shareholders. It was hard to imagine to what extent they might use or abuse their powers under the unlawfully altered articles which might leave the plaintiffs with an empty judgment should the plaintiffs win.
55. The plaintiffs are likely to succeed at the trial in showing that amendments to the articles were unlawful or in breach of fiduciary duties owed by the Zhangs. Any prejudice that might be caused to the Zhangs as a result of an injunction would likely be caused by their own conduct. There were compelling reasons and it was just to restrain the Zhangs from acting upon the unlawfully altered articles pending trial.
MANDATORY INJUNCTION
56. The grant of the mandatory injunction would have a dispositive effect of this part of the claim. I only had the evidence from the plaintiffs’ side. However, I could see no legitimate justification for the alteration to the articles. The reasoning in the 3 preceding paragraphs applied. The unlawfully altered articles appeared to have been registered according to a public statement on GroupCo’s websites (probably placed at the instigation of the Zhangs) and members of the public might be misled. The draft corrective amendments sought to restore the articles to the version immediately before the alternation.
57. In my view, granting the prohibitory injunction was plainly more likely to do justice than refusing it. If the Zhangs shall fail to execute the corrective amendments on the due date, the Registrar of the High Court would do so on their behalf pursuant to section 25A of the High Court Ordinance, Cap 4.
URGENCY
58. Given the above analyses, one could see that there was urgency in the hearing of these applications even in the absence of Zhang junior. He had, at least in the attempt to winding-up GroupCo, demonstrated that he might engage dishonest means to further his (and his father’s purpose). Unless the orders sought were put in place, it was possible that Zhang junior (alone or with his father) would take steps to put valuable assets and records beyond the reach of the plaintiffs.
CONCLUSION
59. I had therefore made the orders against the Zhangs as sought in paragraph 1 above.
60. I also made an order nisi for costs to be in the cause with certificates for 2 counsel for the plaintiffs. I will ask the taxing master to note that the 2nd hearing on 13 January 2016 was necessitated only because the draft corrective amendments were not ready in view of the pressing circumstances of the case. The quantum of costs to the plaintiffs should more properly be allowed on the basis of time for preparation of the draft corrective amendments and hearing instead of fresh briefs/refreshers.
61. I thank counsel for their assistance.
 (Queeny Au-Yeung)
 Judge of the Court of First Instance
 High Court