China Constructions Realty Ltd v Sino Business Services Pty Ltd
[2003] VSC 89
•20 March 2003
SUPREME COURT OF VICTORIA
COMMERCIAL AND EQUITY DIVISION
PRACTICE COURT
No. 8253 of 2001
| CHINA CONSTRUCTIONS REALTY LTD | |
| Plaintiff | |
| v | |
| SINO BUSINESS SERVICES PTY LTD AND OTHERS | Defendants |
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JUDGE: | HARPER, J. | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | 19 MARCH 2003 | |
DATE OF JUDGMENT: | 20 MARCH 2003 | |
MEDIUM NEUTRAL CITATION: | [2003] VSC 89 | |
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Injunction – Mareva injunction – Share sale agreement – Risk of defendants divesting themselves of assets within the jurisdiction – Security for undertaking as to damages.
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| APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr J. Langmead SC with Mr R. Attiwill | Grundy Maitland & Co. |
| For the Defendants | Mr P. Santamaria SC with Mr R. Peters | Gadens Lawyers |
HIS HONOUR:
This is an application for a Mareva injunction. More specifically, by summons dated 6 March 2003, the plaintiff seeks the following orders:
"1.An interlocutory injunction until trial or further order, restraining the first defendant, whether by itself, its servants or agents or otherwise howsoever, from transferring, disposing of, encumbering, alienating or otherwise dealing with any shares in the second defendant.
2.An interlocutory injunction until trial or further order, restraining the second defendant, whether by itself, its servants or agents or otherwise howsoever, from transferring, disposing of or encumbering, alienating or otherwise dealing with any shares in China Hotel Holdings Ltd.”
The dispute arises out of an agreement dated 26 June 1997. It was for the sale of shares in a company then called Wonderful Investment World Wide Ltd, and now known as Golden Pebble Beach Development Ltd (“G.P.B.”). I will hereafter refer to it by its present name.
In June 1997 the plaintiff was the owner of 90% of the issued capital in G.P.B. As such the plaintiff was the vendor pursuant to the agreement. The other party was the first defendant. It nominated its wholly owned subsidiary, the second defendant, to be the purchaser. The G.P.B. shares were, of course, the subject matter of the sale. They had value because they gave their owner a stake in a development on a resort in the municipality of Dalian in the Liaoning Province of the People’s Republic of China.
The consideration for the purchase is set out in Clause 3.2 of the share sale agreement. It amounts in all to $A46,500,760 There was to be a “down payment” of $A500,760, which was to be made on or before 14 July 1997. That sum has in fact been paid. The balance has not. Of that balance, $A10m. was to be paid on or before 31 December 1998. A further $A10m. was payable a year later. The final payment, of $A26m., was due on 31 December 2000.
In accordance with the agreement, the plaintiff transferred the shares in question to the second defendant. It has subsequently effected a further transfer: on this occasion, the transferee is a company called China Hotel Holdings Ltd (“C.H.H.”), a company 90% of the shares in which are held by the second defendant. Now, C.H.H. owns all the shares in G.P.B., the former having acquired the remaining 10% in January 1998.
The share sale agreement came to an end before the second instalment of the purchase price was due. By letter dated 13 November 1998, the first defendant informed the plaintiff that the agreement had been terminated. The plaintiff took that as a repudiation by the first defendant. It has since informed the first defendant that it has accepted that repudiation. Whether the plaintiff’s or the first defendant’s analysis is correct is a question for another day. One way or another, however, the agreement has, at least in essence, been brought to a close. The plaintiff nevertheless claims that a vestige remains. That claim is relevant to this application.
By Clause 3.3(c) of the agreement, the first defendant “undertakes that as collateral for payment of the consideration [the plaintiff] will be entitled to call on [the first defendant] to deliver securities in the following order until the consideration is satisfied:
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(c)all shares in [the second defendant] to be valued at its net asset book values or other securities as nominated by [the first defendant]."
By its statement of claim the plaintiff alleges that it “has called for, alternatively hereby calls for, the whole of the shares in [the second defendant] to be transferred to it”. If, however, there is any evidence to support the allegation of a call made before the issue of the writ, that evidence was not such as would, in my opinion, enable me to find that a call was made. I cannot, therefore, proceed upon the basis that whatever security was accorded to the plaintiff by virtue of Clause 3.3 was activated before the agreement was terminated. Nor do I think that it is fairly arguable that by the statement of claim itself the plaintiff activated that clause. I do not, therefore, proceed on the basis that the plaintiff has, by virtue of the agreement, any security interest in the shares in the second defendant.
In my opinion, two undisputed facts not previously mentioned in this judgment are crucial to the outcome of this application. The first is that the first defendant is a wholly owned subsidiary of a company which otherwise has no connection with this proceeding. The second is that the first defendant’s only asset is its shareholding in the second defendant. The defendants’ case is that that shareholding is worth much less than it would have been had the assumptions upon which the first defendant entered into the share sale agreement been well founded. It was because they were not that the first defendant sought to terminate that agreement. But if the plaintiff succeeds in its claim, the first defendant may face a judgment debt of over $A46m. It follows that the first defendant’s holding company has a very real interest in doing that which is in its power to do: namely, require the first defendant to divest itself of its only asset while at the same time ensuring that the ultimate holding company retains its control over that asset. In this way it would preserve to itself the value of that asset, if any, by ensuring that it was not affected by any judgment.
The ultimate holding company is likewise in a position to effect the divesting by the second defendant of its shareholding in C.H.H. Again, the effect could be to place that shareholding beyond the reach of any judgment, while not diminishing the ultimate shareholders’ control over it.
The plaintiff is thus exposed to a much greater extent than most litigants to the risk that, should it succeed at trial, there will be no assets upon which execution can be levied. In this respect, it is in an analogous position to the plaintiff in Kimm v. Melton Wool Pty Ltd[1], an unreported decision of Beach, J. delivered on 25 February 1999. In that case, the sole business of the defendant was as the operator of a wool processing plant in Melton. The defendant was in turn the wholly owned subsidiary of a company without assets in Victoria. It came to the notice of the plaintiff in that case that the defendant was proposing to sell the processing plant; indeed, an offer had already been received for it.
[1][1999] VSC 52.
After reciting those facts, his Honour continued in his judgment:
"It is also clear in my opinion that if the defendant’s wool processing plant is sold, there is a risk that after the defendant has paid out its secured creditors, it will remove the balance of the proceeds of the sale from the jurisdiction. I say that because there is simply no reason for it to retain that balance in this State. As I have already pointed out, the defendant is a wholly owned subsidiary of a [foreign] company and its only asset in this State is the wool processing plant. There is no suggestion in the affidavits filed on its behalf that it proposes to invest the net proceeds of sale in some other business venture or form of investment in Victoria, and so I ask rhetorically, why would it not transfer the net balance to its parent company? If it did, there would be no assets in this State from which it could satisfy any judgment obtained against it by the plaintiff."
In the present case, all the evidence is that the order sought by the plaintiff against the first defendant, if granted, will not prejudice the first defendant. It does not seek to transfer, dispose of, encumber, alienate or otherwise deal with its shareholding in the second defendant. See the affidavit of Sai Ming Lee exhibited to the affidavit of Wayne William Kelcey sworn on 18 March 2003. I accept this evidence. Indeed, I accept the whole of paragraphs 6 and 7 of Mr Lee’s affidavit. They state as follows:
"6.On 14 February 2003 [the first defendant] did not transfer, dispose of, encumber, alienate or otherwise deal with the shares it owns in [the second defendant]. Those shares are [the first defendant’s] only assets. [The first defendant] has not done so to the date of this affidavit and presently has no intention of doing so. [The first defendant] does not intend to sell any of its assets prior to the trial of this proceeding.
7.On 14 February 2003 [the second defendant] did not transfer, dispose of, encumber, alienate or otherwise deal with the shares it owns in China Hotel Holdings Ltd or any of the assets owned by [the second defendant]. [The second defendant] has not done so to the date of this affidavit, and presently has no intention of doing so. [The second defendant] does not intend to sell any of its assets prior to the trial of this proceeding."
The defendants rely on this evidence in making the point that there is no risk that the defendants will rid themselves of the assets to which the plaintiff will look if it obtains judgment. The problem with this analysis, however, is that while neither defendant may presently have the requisite intention, each is controlled by the ultimate holding company. No evidence of the intention of that company (a company called Central Business Asia Ltd) is before me.
There being here a risk of the kind which led to the decision of Beach, J. to grant the injunctive relief sought in Kimm v. Melton Wool Pty Ltd, and there being no evidence that the relief sought by the plaintiff will have a relevantly adverse effect on the defendants, I propose, on the plaintiff giving appropriate undertakings, to make the order sought in the plaintiff’s summons. In coming to this conclusion I have been influenced by the fact that the trial is listed to commence on 7 April this year.
Mr Langmead, are you in a position to give appropriate undertakings?
MR LANGMEAD: Yes, Your Honour, I have instructions to give the undertaking which appears in the minutes of proposed orders, the draft of which was attached to the submissions handed up to you yesterday.
(Discussion ensued.)
HIS HONOUR:
In my opinion, the defendants are justified in seeking security. I think it should be more than a nominal amount, although I take the point that the defendants, as does the plaintiff, will have liberty to apply and that, on the defendant’s own evidence, it would seem that there is no present intention to deal with the shares which are the subject of this proceeding. I will require the plaintiff to provide the Prothonotary of the court within seven days, in a form approved by the Prothonotary, security in the sum of $40,000 in respect of the plaintiff’s undertaking as to damages.
I will direct that if this direction is not complied with the orders I am about to pronounce be dissolved forthwith.
(Discussion ensued.)HIS HONOUR: Subject to any problem that counsel might draw to my attention, the orders I propose to make this morning are as follows. Under the heading “Other Matters” the orders will record the giving by counsel on behalf of his client the usual undertaking in respect of damages. Then there will be orders:
1.That the first defendant, whether by itself, its servants or agents or otherwise, be restrained until trial or further order from transferring, disposing of, encumbering, alienating or otherwise dealing with any shares held by the first defendant in the second defendant.
2.The second defendant, whether by itself, its servants or agents or otherwise, be restrained until trial or further order from transferring, disposing of, encumbering, alienating or otherwise dealing with any shares held by the second defendant in China Hotel Holdings Ltd.
3.The plaintiff provide to the Prothonotary of the court, in a form approved by the Prothonotary, on or before 4 p.m. on Thursday 27 March 2003 security in the sum of $40,000 in respect of its undertaking as to damages. In the event that the plaintiff does not comply with this paragraph of these orders, paragraphs 1 and 2 will be dissolved forthwith.
4.The first and second defendants have leave to file and serve an amended defence and counterclaim substantially in the form of Exhibit WWK7 to the affidavit of Wayne William Kelcey sworn 11 March 2003 by 4 p.m. on Friday 28 March 2003.
5.The costs of these applications be reserved.
6.There be liberty to apply.
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