Before: The Hon. Mr. Justice Rogers
 
 

B E T W E E N

JUDGMENT
 
DATED: 18 February 1997

Mr. Justice Rogers:

This was an application by the plaintiff for the appointment of receivers of one share of Burlion

This is an application for the appointment of receivers. The application is for the appointment of receivers of one share of Burlion Holdings Ltd which is registered in the name of the first defendant Mr Cheung Siu Ki and it is for the receivers to be appointed until trial primarily for the purpose of exercising the rights of Burlion Holdings Ltd in such shares as they hold in the Wuhan Prosperous Taxi Co Ltd (the taxi company).

I will endeavour to set out the history of this matter as briefly as I can leaving as much of the details out as I consider are unnecessary for the purpose of this decision.

The first defendant Mr Cheung came to know of an opportunity to invest in the Wuhan Taxi Co in November 1992. Again, without going into the details, it was eventually decided that a company would be formed, which was eventually the plaintiff company, to purchase 50% of the taxi company and effectively that was accomplished by 31 March 1993.

Mr Cheung was not the only shareholder in the plaintiff company at that stage. There were a number of other shareholders. It is not necessary to go into the exact number of investors whether directly or indirectly although it is significant to observe that a Mr Pang was also an investor.

The idea behind the creation of the plaintiff and its 50% interest in the Wuhan Taxi Co was that the Jin Loong Co which hitherto had owned the whole taxi company would go on owning the remaining 50% and that was thought at that stage at least by Mr Cheung to be an advantage since it had knowledge of the running of the taxi company.

However, by July or August of 1993, the first defendant, Mr Cheung, came to be offered the remaining 50% of the taxi company. It appears that he decided to take that 50% shareholding in the name of another company, namely, Burlion Holdings Ltd. In September, it seems that he agreed to sell one of the two shares in Burlion to Mr Pang.

Matters can be taken up as from 15 June 1994 because by then it seems that the parties had fallen out. The remaining participants in the running of the Wuhan Taxi Co -- and those were the persons involved in the operation of the plaintiff -- attempted to remove Mr Cheung from his position as chairman of the Wuhan Prosperous Taxi Co.

One of the reasons for necessary caution on my part in this case is my lack of knowledge of Chinese company law. But it seems at any rate from the undisputed evidence in this case that the position of chairman of a company in the PRC may be important either necessarily or perhaps simply in this case -- he is the person who as chairman is the authorised legal representative of the company. He therefore, as I understand it, speaks on behalf of the company and acts on its behalf.

Mr Cheung for his part claimed and has claimed ever since 1994 that the assets of the Wuhan Prosperous Taxi Co were being sold at an undervalue and indeed that the proceeds from that company were being sent from the PRC and explicitly to Hong Kong.

Those allegations are countered on the basis that it was necessary for the taxis to be sold, they were rather old and uneconomical to run and it was better that they be sold, for example, to the persons driving the taxis who might be disposed to look after them better if they were driving their own property than if they were driving the property of the company. These are all matters which it is impossible for me to go into at this stage.

I can however observe that the amount of litigation which this one deal has brought about seems to be almost endless. There have been winding up proceedings brought by Mr Cheung in respect of the plaintiff itself. That was disposed of as long ago as almost eighteen months. It was disposed of on the basis that Mr Cheung's shares in the plaintiff would be bought out at a valuation as of 1994 and that is a matter which I also have to bear in mind today. There have been criminal proceedings which have been brought in Hong Kong against Mr Cheung resulting from matters involved in this case. Those concluded in an acquittal last year. There have been a number of High Court actions in Hong Kong, the present one being one of them, and there have been actions both in the courts of the PRC and action taken in the Administrative Offices in the PRC.

The effect as far as the taxi company is concerned is that the plaintiff itself owns 50% of the shares of the taxi company and Burlion owns the other 50%. Mr Pang's 50% of Burlion is, at any rate as far as the plaintiff is concerned today, secured for its own benefit and that leaves solely the one share in Burlion which Mr Cheung holds.

The subject of the present action is that the plaintiff says that it is entitled to that one share in Burlion which is held by the defendant. It is said that the only business of the plaintiff is the running of the Wuhan Taxi Co and indeed the only business of Burlion is to hold its interest in the Wuhan Taxi Co.

The basis of the plaintiff's claim in this case can be summarised in para 6 of the statement of claim where it is said that: In or about August or September 1993 the 1st defendant, whilst he was a director of the plaintiff and/or whilst acting or performing his duty as such, obtained or received information from Jin Loong that it was interested in disposing of or selling its remaining interest, being the balance of 50% of its interest, in Wuhan Prosperous.

The statement of claim goes on to say: The said information was an opportunity for the plaintiff to further invest in Wuhan Prosperous and to obtain complete control of the management and operation of its business in Wuhan Prosperous. Wrongfully and in breach of his fiduciary duty aforesaid and by reason of having obtained or received such information as aforesaid the 1st Defendant entered into an agreement with Jin Loong to purchase its remaining interest in Wuhan Prosperous and the transfer of the said bonus shares to him at the price of HK $6,000,000.

Sir John Swaine QC, who appeared on behalf of the defendant, argued that there was no basis for the claim that was made since the knowledge of the Wuhan Taxi Co and the opportunity to purchase the shares came to the first defendant not by reason of his directorship but considerably before the formation of the plaintiff. Indeed, it was said that there was nothing to contradict the defendant's assertion that the opportunity was presented to Mr Cheung as long previously as 19 November 1992.

The case of Regal (Hastings) Ltd v. Gulliver [1967] 2 AC 134 which is the foundation of the plaintiff's case was sought to be distinguished on the basis that liability arises where the corporate opportunity comes to a person by reason of his being a director. It was argued that in the Regal case the directors came by the opportunity to purchase the shares in the two cinemas only by virtue of having come by knowledge as directors whereas in the present case this was not so. The history of the negotiations leading up to the setting up of the plaintiff itself demonstrated that the whole deal resulting in the Wuhan Taxi Co was introduced by and indeed to a large extent negotiated by Mr Cheung himself. What is said is based importantly upon such evidence as para 58 onwards of Mr Cheung's second affirmation and that the opportunity to purchase the remaining 50% of the interest in the Wuhan Taxi Co came not because of Mr Cheung's directorship but by reason of his friendship with Mr Lau and by reason of the fact that he had been first approached by Mr Lau, who had been a former colleague, to take up that investment.

However, that is not the defence which is pleaded in para 18 of the defence. There, it is pleaded that:

(a) In or about July or August 1993, the Defendant learned that Jin Loong intended to dispose of its remaining 50% of the issued shares in the Taxi Company ('the Balance 50% Shares'), whereupon the Defendant informed Pang and Mei Yee of the same and discussed with them whether the Plaintiff should take the opportunity to purchase the Balance 50% Shares.

(b) Both Pang and Mei Yee expressed concern that the Plaintiff would not be in a position to raise sufficient funds to acquire the Balance 50% Shares and indicated that the Plaintiff would not take up the Balance 50% Shares.

(c) In those circumstances, the Defendant informed Pang and Mei Yee that he would consider acquiring the Balance 50% Shares by himself.

(d) Neither Pang nor Mei Yee raised any objection to the Defendant's proposal to acquire the Balance 50% Shares by himself.

(e) Later, still in or about July or August 1993, the Defendant successfully negotiated with Jin Loong for the purchase of the Balance 50% Shares at the price of HK $6,000,000.00

(f) In or about August or September 1993, Pang learned from the Defendant that he was about to enter into a formal agreement with Jin Loong to purchase the Balance 50% Shares and expressed an interest in participating in this further investment in the Taxi Company.

It seems to me that here what is being alleged is that a new opportunity had arisen, not the same opportunity which had arisen on 19 of November 1992 but a further opportunity this time to purchase the remaining 50% of the shares, and, in my view, Mr Tang QC is correct that this August opportunity to purchase the remaining 50% of the shares in the taxi company was a new opportunity.

It seems to me that other matters are also relevant here. Indeed, it is almost undeniable that the knowledge as to the running, profitability and viability, to say the least, of the taxi company must be considerably enhanced by a person being a director of a company which is a joint venture partner in the running of that taxi company. It was indeed conceded in the course of argument that acquiring knowledge of the taxi company would have put Mr Cheung at an advantage over the outside world but it was said that provided that he does not owe that the opportunity to purchase to being a director then any interest he acquired is not under trust.

I would say it is also relevant in my view to consider whether Mr Cheung put himself in a conflict between his interests and that of the company. At some stage no doubt the time would come when realisation of one of the parties' interests in the taxi company might be wanted and at that stage Mr Cheung's own interest through his interest in Burlion might well conflict with that of the plaintiff.

However, as I have indicated, not only does the defendants' argument proceed on a wrong basis of fact at any rate as it stands at the moment, but in my view it also proceeds on a misconception of the law. It is based on the proposition that directors are only prohibited from making their own investment if knowledge of the investment opportunity comes to them by reason of their directorship. That in my view is too narrow a statement of the law and I would draw attention to the speeches in the House of Lords in Regal (Hastings) Ltd v. Gulliver [1967] 2 AC 134 and specifically to Viscount Sankey at 137G where he says: "The general rule of equity is that no one who has duties of a fiduciary nature to perform is allowed to enter into engagements in which he has or can have a personal interest conflicting with the interests of those whom he is bound to protect. If he holds any property so acquired as trustee, he is bound to account for it to his cestui que trust. The earlier cases are concerned with trusts of specific property: Keech v. Sandford (1726) Sel Cas Ch 61 per Lord King LC. The rule, however, applies to agents, as, for example, solicitors and directors, when acting in a fiduciary capacity."

And then he cites from ex p James (1803) 8 Ves 337 but I will go to his citation of the case of Hamilton v. Wright (1842) 9 Cl & F 111 where he cites the passage from the headnote : "A trustee is bound not to do anything which can place him in a position inconsistent with the interests of his trust, or which can have a tendency to interfere with his duty in discharging it. Neither the trustee nor his representative can be allowed to retain an advantage acquired in violation of this rule".

Then, from Lord Brougham's speech, where he said: "The knowledge which he acquires as trustee is of itself sufficient ground of disqualification, and of requiring that such knowledge would not be capable of being used for his own benefit to injure the trust. The ground of disqualification is not merely because such knowledge may enable him actually to obtain an undue advantage over others".

Viscount Sankey also cited from the Aberdeen Railway Co v. Blaikie Brothers (1854) 1 Macq 461 and in particular Lord Cranworth LC, where he said : "A corporate body can only act by agents, and it is of course the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting. Such agents have duties to discharge of a fiduciary nature towards their principal. And it is a rule of universal application that no one having such duties to discharge shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect."

One of the other cases which was relied upon by their Lordships in that case was another case of Lord King's, namely, the famous case of Keech v. Sandford (1726) Sel Cas Ch 61 in which a trustee who had taken a renewal of a lease of a market himself was held liable notwithstanding the fact that the lease could not have been renewed for the benefit of the beneficiary of the trust because the beneficiary was an infant and as Lord Russell cited , Lord King said (at 62): "This may seem hard, that the trustee is the only person of all mankind who might not have the lease: but it is very proper that the rule should be strictly pursued, and not in the least relaxed ..."

At 149 Lord Russell said: "The liability was based on the view, which was not disputed by Lord Hatherley, that the director stood in a fiduciary relationship to the company. That relationship being established he could not keep the profit which had been earned by the funds of the company being employed in taking up the debentures."

The courts in Scotland have treated directors as standing in a fiduciary relationship towards their company and, applying the equitable principle, have made them accountable for profits accruing to them in the course and by reason of their directorships. It will be sufficient to refer to Huntington Copper Co v. Henderson, in which the Lord President cites with approval the following passage from the judgment of the Lord Ordinary:

"Whenever it can be shown that the trustee has so arranged matters as to obtain an advantage whether in money or money's worth to himself personally through the execution of his trust, he will not be permitted to retain, but be compelled to make it over to his constituent."

At 153 Lord Macmillan said: "The equitable doctrine invoked is one of the most deeply rooted in our law. It is amply illustrated in the authoritative decisions which my noble and learned friend Lord Russell of Killowen has cited. I should like only to add a passage from Principles of Equity by Lord Kames, 3rd ed. (1778) vol. 2, p. 87, which puts the whole matter in a sentence: 'Equity,' he says, 'prohibits a trustee from making any profit by his management, directly or indirectly.'"

Lord Wright said at 156 : "Many instances can be quoted from the books of the stringency with which the courts have enforced the rule that a director must account to his company for any benefit which he obtains in the course of and owing to his directorship, even though the benefit comes from a third person and involves no loss to the company."

Lord Porter cited the legal proposition thus on p 158 where he said: "The legal proposition may, I think, be broadly stated by saying that one occupying a position of trust must not make a profit which he can acquire only by use of his fiduciary position, or, if he does, he must account for the profit so made."

Over the page, at p 159 (AC), he carried on: "Directors, no doubt, are not trustees, but they occupy a fiduciary position towards the company those board they form. Their liability in this respect does not depend upon breach of duty but upon the proposition that a director must not make a profit out of property acquired by reason of his relationship to the company of which he is director. It matters not that he could not have acquired the property for the company itself -- the profit which he makes is the company's, even though the property by means of which he made it was not and could not have been acquired on its behalf."

In summary, therefore, I have to express myself as regards the merits of this case on the present state of the pleadings that I find it difficult to see what defence there is to the claim even if the defence were amended along the lines of the affidavits which have now been filed. Again, I consider that the plaintiff has at the very least a very strong case for the purposes at any rate of today.

I turn then to the more immediate matters which lead up to today's application.

The purported removal of Mr Cheung as the chairman of the Wuhan Taxi Co on 15 June 1994 has resulted in a considerable amount of activity particularly in the People's Republic of China and specifically in the Industrial & Commercial Administration Bureaus both in Wuhan City and Hubei Province and, I understand, the National Bureau.

The upshot as far as the present situation is concerned seems to be this -- that although the City Bureau at first registered the transfer of the chairmanship to Mr Pang it then rescinded that on the basis of representations which had been made that the relevant documentation had been forged. Then as a result of legal proceedings and further applications to various organs of the Bureau that decision was changed and it seems to have been resolved that there was no forgery. However the appropriate procedure had not been properly carried out and that has resulted in a document which is headed 'Notice Regarding the Relevant Question on the Registration of Change of Chairman of Wuhan Prosperous Taxi Co Ltd' dated, I am told, 6 November 1996 issued by the Hubei Provincial Bureau. That Bureau directed the City Bureau to rectify the change of chairmanship which, as I understand it, would bring about the effect that Mr Cheung would remain the chairman. It has also directed the City Bureau to carry out re-registration of the company pursuant to the document of State Council No 17 of 1996 and the regulations of the 'Company Law' as provided by the State Industrial & Commercial Bureau VL 1995 No 215. I have not been told specifically what those referred to, but it seems that there has been some change in the corporate law in the PRC and that some changes in the articles of association of the company may be necessary to bring it in line with current law.

As a result of the further decision which has been made resulting from that, this time by the Wuhan City Bureau, Mr Cheung saw fit to place various advertisements in local newspapers circulating in Wuhan and to send circulars to employees of the taxi company. In short, he there required an expression of allegiance to the taxi company as operated by himself in default of which the employees were liable to find themselves unemployed.

I approach the evidence in respect of investigations which had been made amongst the officials of the various bureaus which has been filed on both sides with some degree of caution. I do so notwithstanding that it has been submitted that the decision relating to the acquittal of Mr Cheung may be inadmissible in these proceedings. I cannot say I am impressed necessarily by the reliability of any of the parties in this case. For that reason alone, it seems to me that caution is necessary.

Nevertheless, it is said on the plaintiff's behalf that unless steps are taken in a short space of time -- and that is indicated to be by the end of this month -- and the articles of association of the taxi company are amended that the operation of the taxi company would be suspended -- I refer there inter alia to para 26 of the second affirmation of Lau Yat Wah. Although that is disputed by Mr Cheung in his third affirmation, I have to say that the alternative scenario which Mr Cheung puts forward does not instil very much greater confidence in me. He says, speaking of his inquiries of a Mr Shek who is one of the officials in the Wuhan City Bureau: "Mr Shek told me that the Wuhan City ICAB would hope that the shareholders of the Taxi Company to convene a shareholders meeting on or before the 28th of February 1997 in order to resolve the differences between all shareholders internally. Failing which, the Wuhan City ICAB will take such appropriate steps in accordance with the laws of the People's Republic of China, such as, to apply to the court for an order to prevent any disposition or transfer of the assets of the Taxi Company, to seize all the books records and accounts of the Taxi Company for purpose of audit as referred to in paragraph 66 of my 2nd Affirmation filed herein on the 10th of February 1997."

Now, whatever effect that would have -- that was a matter of dispute between Mr Tang QC and Sir John Swaine QC -- it does seem to me that at any rate the prohibition on disposition or transfer of assets could well be serious, since on the face of it it looks something like a Mareva injunction the effects of which, of course, are serious. The reference to seizure of books and records of accounts in a taxi company is stated to be only for the purposes of audit and that matter, which, as I will come to in a moment, is to happen in any event.

The reason for the application for the appointment of a receiver was put in Mr Lau's first affirmation on the basis of what is said in paras 26 and 31.

In para 31, he said: "Based on the information I obtained from the key personnel in the Taxi Co, in particular from the Deputy General Manager Mr. Leung Hak Kong of the Taxi Co. that out of the total of 156 taxis rented out, 101 drivers (64.74%) refused to pay their management fees. 66 drivers (42.31%) of drivers who bought taxis refused to pay their outstanding price of their taxis owed to the Taxi Co. Up to the end of December 1996, there are uncollected balance of up to RMB2,555,032.00, unpaid management fees RMB143,597.00, outstanding reimbursements from drivers which they refused to pay the Taxi Co RMB163,871.30. All these add up to a total of RMB2,862,500.30."

It seems to me that on the basis of that that the situation of the taxi company is serious.

I turn to the principles upon which a receiver should be appointed. My attention has been drawn to two textbooks in respect of this.

The first is Snell on Equity (29th ed) and there it is said, at p 694: "The jurisdiction formerly exercised by the Court of Chancery thus extends to other courts. Yet although the courts will now appoint a receiver in many cases in which equity would not in practice have exercised its jurisdiction, they still will not do so in cases where equity regarded itself as having no jurisdiction. Thus a receiver will not be appointed to perform a duty which statute has imposed on a public authority. The principles relating to the grant of injunctions are relevant, for where an injunction would be granted, it follows on principle that in an appropriate case a receiver will be appointed. Conversely, where the plaintiff has no cause of action justiciable in England (and so could not obtain an injunction), a receiver will not be appointed. In practice, most applications for the appointment of a receiver are made in the Chancery Division."

A passage in Kerr on Receivers (17th ed) puts the matter in a slightly different way where it is said that: If the court is satisfied upon the materials it has before it that the party who makes the application has established a good prima facie title, and that the property the subject-matter of the proceedings will be in danger, if left until the trial in the possession or under the control of the party against whom the appointment of a receiver is asked for, or, at least, that there is reason to apprehend that the party who makes the application will be in a worse situation if the appointment of a receiver be delayed. If there is no danger to the property, and no fact is in evidence to show the necessity or expediency of appointing a receiver, a receiver will not be appointed.

The difference between the two is the standard of proof of the cause of action. The citation from Kerr refers back to cases extending back to the last century. Of course in those days it seems that the basis for the grant of an interlocutory injunction may have required the establishment of a good prima facie case. The principles for the grant of an interlocutory injunction have now been set out of course in American Cyanamid Co v. Ethicon Ltd [1975] AC 396.

My view of the matter is that the appointment of a receiver to act under the powers of the court must like an interlocutory injunction be a flexible power since it is a discretionary power. It should be exercised as is said in Snell on a similar basis to that of an interlocutory injunction.

As I have already indicated, I consider in any event that the plaintiff does have a strong arguable case for the purposes of today. Even if I did not so hold I would approach it on the basis that what must be the aim of the court is to preserve the assets over which a receiver is sought to be appointed if it is thought to be necessary to put both parties in as good a position as possible when it comes to a court deciding the final merits at the trial seeking to do justice between the parties.

Sir John Swaine QC has strongly argued that what is sought to be effected by the appointment of a receiver in this instance is in fact control of a PRC company and that in effect might be interfering with events in the People's Republic of China and interfering in the operation of, for example, the various bureaus and courts in the PRC. I do not consider that to be so.

In effect, the claim in this case is for the 25% interest which the first defendant has in respect of the taxi company. The importance of that to the plaintiff is the preservation of its interest in the taxi company.

It occurred to me on reading the evidence particularly that of para 31 and similar paragraphs in Mr Lau's affirmation to which I have already referred that there is a considerable danger in respect of the assets of the taxi company.

The plaintiff now, on the face of it, has the equivalent of at least a 75% interest in the taxi company and the defendant merely retains a 25% interest. Again because of my ignorance of the laws in PRC I know not what a 25% interest entails. Of course, under Hong Kong law, a 75% interest would enable amendments to articles to be effected and almost all resolutions of any import to be passed. 75% interest in a company carries almost absolute control of that company.

In my view, it is appropriate in this case to appoint a receiver. I have considered what safeguards can be imposed. I think one condition of the appointment of a receiver should be that there be an undertaking by the plaintiff to use its best endeavours to see that the audit which it appears to be agreed on both sides has to be completed by 28 February 1997 should be completed.

I have been concerned as to the question of how good the plaintiff is for its undertaking as to damages. I will give the defendants liberty to apply for fortification of that undertaking if they consider it appropriate and I do not consider I can take it any further at this stage because it does seem to me that their interest in the taxi company, given the fact that the buy out of the shares was ordered in the winding up proceedings has now perhaps altered at my rate to this extent that whereas before they had a greater than 25% interest now it is merely 25% interest and it is really the value of that interest which they seek to preserve. In those circumstances I will hear the parties as to any further orders which I will be asked to make and as to costs.

I also propose to give directions directed to the further conduct and hearing of this action as well as the further conduct of Action No 372/95 which is an action brought by the plaintiff against Mr Cheung and Wellward Ltd. Although the events which gave rise to that action are not directly relevant to this application I consider it can conveniently be heard at the same time as the present action.

By this decision I do not intend to prevent Mr Cheung from taking such steps as he shall wish to protect his interests whether in the PRC or in Hong Kong and I shall give the parties liberty to apply should any difficulties arise.