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C v D1 And Another

Judgment Cited authorities 1 Cited in Precedent Map Related
Vincent
Judgment Date26 January 2021
Neutral Citation[2021] HKCFI 228
Year2021
Judgement NumberHCCT3/2021
Subject MatterConstruction and Arbitration Proceedings
CourtCourt of First Instance (Hong Kong)
HCCT3/2021 C v. D1 AND ANOTHER

HCCT 3/2021

[2021] HKCFI 228

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 3 OF 2021

________________________

IN THE MATTER of Section 21L of the High Court Ordinance (Cap 4)
and
IN THE MATTER of Section 45 of the Arbitration Ordinance (Cap 609)
and
IN THE MATTER of an arbitration agreement made between the Plaintiff and the 1st and 2nd Defendants in an Investment Framework Agreement [redacted]

________________________

BETWEEN

C Plaintiff
and
D1 1st Defendant
D2 2nd Defendant

________________________

Before: Hon Linda Chan J in Chambers (Not open to public)

Date of Hearing: 22 January 2021

Date of Decision: 22 January 2021

Date of Reasons for Decision: 26 January 2021

________________________

REASONS FOR DECISION

________________________


1. This is the Plaintiff’s (“P”) application by summons dated 13 January 2021 for an order to continue the ex parte proprietary injunction granted by Lisa Wong J on 12 January 2021 restraining the 1st and 2nd Defendants (“D1” and “D2”, together “Ds”) from, inter alia, dealing with shares of any entities operating or holding any part of any [redacted] business accessible on or through the website [www.b.com] (“Injunction”), and an ancillary disclosure order (“Disclosure Order”). Upon hearing the parties, I declined to continue the Injunction on the bases that (1) P failed to demonstrate that it had a proprietary interest in any or all of the [Subject Entities], and (2) P did not have any basis for proceeding ex parte.

2. These are the reasons for my decision.

A. Factual background

3. P is a very experienced businessman and an investor in start-ups and early growth companies. D1 is the founder of a [redacted] platform on [www.b.com] (“[B]”). D2 is a Hong Kong company and was, at least as at August 2017, the operator of [B].

4. On 22 August 2017, P entered into an Investment Framework Agreement (“IFA”) with Ds, pursuant to which P will be allotted a number of shares in a yet to be incorporated company (“Investment Platform Company”) which corresponds to a 5% interest in D2 or its successor (“Target Company”) in return for an investment of RMB 25 million (“Investment Sum”).

5. The IFA contains the following material terms:

5.1. Recital (1) provides that “[D2] (the “Target Company”) is a company … which operates the [redacted] platform business of [www.b.com]”.

5.2. Clause 1 provides that “Target Company” or “Company” means [D2], including but not limited to any new company that shall acquire the entire business and assets of the Company”.

5.3. Clause 2.1 sets out a restructuring exercise which Ds are obliged to perform within 90 days of the IFA (“Restructuring Plan”). In summary, Ds are to incorporate the Investment Platform Company and a “Holding Company”. The Investment Platform Company will, along with other shareholders, hold the Holding Company which, in turn, will hold 100% of the Target Company.

5.4. Clause 2.3 provides that P shall pay the first instalment of the Investment Sum of RMB 8 million upon the satisfaction or waiver of certain conditions (“1st Instalment”), and that he shall, upon incorporation of the Investment Platform Company, immediately pay the balance of RMB 17 million (“2nd Instalment”)

5.5. Clause 2.2 states that provided that P has paid in full the Investment Sum, the Investment Platform Company shall within 10 days after its incorporation and its acquisition of the shares of the Holding Company, allot shares to P corresponding to a 5% indirect interest in the Target Company.

5.6. Clause 4 sets out P’s rights to disclosure of information under the IFA:

(a) Clause 4.1 provides that “insofar as [P] […] holds shares directly or indirectly in the Investment Platform Company and/or the Target Company”, the Target Company and the Investment Platform Company shall, inter alia, provide P with the Target Company’s annual audited report and annual operation report, as well as notify P of specified material developments in the operation of the Target Company.

(b) Clause 4.2 provides that P has, inter alia, the right at any time to inspect any of the Target Company, the Investment Platform Company and their controlled related parties’ facilities, records and books, and to take notes and make copies of the same.

5.7. Clause 7.1 provides, inter alia, that if there is any applicable law and regulation that restricts or prohibits P from completing the transaction, each shall cooperate with P to make necessary adjustments to ensure the legalization of the transaction.

5.8. Clause 11 provides that the IFA is governed by Hong Kong law and that any dispute in relation to the IFA shall be referred to HKIAC arbitration.

6. On 25 August 2017, P paid the 1st Instalment.

7. Subsequently, D1 informed P that various changes would have to be made to the Restructuring Plan in light of certain regulatory changes enacted by the Mainland authorities. As such, Ds did not proceed with the Restructuring Plan within the 90-day timeframe as originally agreed.

8. On 15 December 2017, P paid the 2nd Instalment upon D1’s request despite the fact that the Investment Platform Company had not yet been incorporated.

9. Notwithstanding repeated demands, P did not receive any shares in the Investment Platform Company, D2, or any successor company. Nor did he receive any profit distributions or detailed financial information to which he is allegedly entitled under Clause 4 of the IFA.

10. On 14 September 2018, D1 sent a letter to various investors in [B] including, inter alia, P via WeChat in which he declared that he would not set up the corporate structure as planned due to “external factors”, and that [B] would instead operate as a “new type of organization” with no shares and no board of directors.

11. In or around July 2019, P (together with other investors in D2) began raising concerns with Ds about their failure to perform the IFA. It is unnecessary to set out the contents of these negotiations in detail (portions of which are in any event not before the Court as without prejudice material), save to note 2 events:

11.1. In March 2020, P was again informed that [B] would migrate to a “decentralized holding structure”, with no shares issued, no holding entity, no financial statements, no rights, no distribution of dividends and no transfer of shareholding.

11.2. On 22 December 2020, P’s solicitors issued a letter to D1, reiterating its request for information under Clause 4 of the IFA, and demanding that he provide a detailed description of [B]’s ownership structure. Ds’ solicitors provided a holding response by letter dated 30 December 2020.

B. The Injunction

12. P’s application was made under section 45 of the Arbitration Ordinance (Cap 609), in aid of an arbitration to be commenced in the HKIAC. It sought (and obtained on an ex parte basis) an order that:

“1. Until and including 22 January 2021 or until further Order of the Court, in respect of the shares of each of the entities operating or holding any business accessible through the website [www.b.com] (including the [redacted] listed in Schedule 1 herein – collectively the “[Subject Business]”) between 22 August 2017 and 12 January 2021 (“[Subject Entities]”), including but not limited to the following entities (the “Currently Known [Subject Entities]”):

(1) [L]

(2) [M]

(3) [N]

(4) [O]

(5) [P]

(6) [D2]

(7) [Q]

(8) [R]

(9) [S]

(10) [T]

(11) [U]

(12) [V]

(13) [W]

(14) [X]

(15) [Y]

(16) [Z]

each of [D1] and [D2] must not, [… ] in any way dispose of, or deal with, or diminish the value of, the shares of the [Subject Entities], […]”

13. Schedule 1 sets out a list of 13 [redacted] businesses which are said to be businesses accessible through the website [www.b.com].

14. P argues that there is a strong case that Ds have breached the IFA, and that P is entitled to specific performance in respect thereof. He says that while the IFA set out a complex structure through which P would hold an indirect interest in the Target Company, the “primary purpose” of the IFA was in effect to acquire a 5% interest in the Target Company. Since specific performance need not be ordered in strict accordance with the terms of the contract so long as there is performance in substance so to give effect to the mutual intentions of the parties, there is a strong case that he is entitled to an order for specific performance compelling Ds to transfer this 5% interest to him.[1]

15. As for the scope of the Injunction, P submits as follows:

15.1. In relation to the definition of “[Subject Business]”, P relies on the fact that Recital (1) of the IFA provides that the Target Company “operates the [redacted] business of [www.b.com]”. He accepts that the definition of [Subject Business] is wider than the statement in the Recital, but contends that there is “at least a serious issue to be tried that the expansion of the business from the original business held by the Target Company, or at least part of such expansion, should also be held by or enure to the benefit of the Target Company, since it is likely to have originated, in whole or in part, from, inter alia, the capital, profits, expertise or goodwill of the Target Company”.[2]

15.2. In relation to the list of the Currently Known [Subject Entities], P says that they are all entities involved in running the [Subject Business] and, as such, they all fall within the definition of “Target Company” in the IFA.[3]

15.3. As for the necessity of freezing the entirety of the shareholdings in all of the [Subject Entities], P argues that this is precipitated by the secretive manner in which the [Subject Business] has been operated and held as well as Ds’ persistent and continuous breaches of...

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