Wu Yang Construction Group Ltd v Mao Yong Hui and Another
| Jurisdiction | Singapore |
| Judge | Andrew Ang J |
| Judgment Date | 13 December 2007 |
| Neutral Citation | [2007] SGCA 55 |
| Court | Court of Appeal (Singapore) |
| Year | 2007 |
| Published date | 17 December 2007 |
| Plaintiff Counsel | Hee Theng Fong, Tay Wee Chong and Wendy Low Wei Ling (Hee Theng Fong & Co) |
| Defendant Counsel | Cheah Kok Lim (Ang & Partners),Foo Maw Shen and Ong Wei Chin (Yeo Wee Kiong Law Corporation) |
| Subject Matter | Civil Procedure,Mareva injunctions,Whether court having jurisdiction to grant injunction,Whether dispute referable to arbitration existing,Applicable principles in granting Mareva injunctions,Section 12(7) International Arbitration Act (Cap 143A, 2002 Rev Ed),Order 69A Rules of Court (Cap 322, R 5, 2004 Rev Ed),Companies,Shares,Allotment,Company diversifying business by buying over business of another company as going concern,Allotment of shares forming purchase consideration,Whether company financing dealings in its own shares,Whether transaction in breach of s 76 Companies Act (Cap 50, 1994 Rev Ed),Relevance of whether transaction in commercial interests of company,Section 76(1)(a) Companies Act (Cap 50, 1994 Rev Ed),Parties having standing to invoke s 76 Companies Act (Cap 50, 1994 Rev Ed),Prescribed persons under s 76A(3) Companies Act (Cap 50, 1994 Rev Ed),Sections 76A(2) Companies Act (Cap 50, 1994 Rev Ed) |
| Citation | [2007] SGCA 55 |
| 13 December 2007 |
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Introduction
1 Wu Yang Construction Group Ltd (“Wu Yang”), the appellant in this appeal, was the plaintiff in Originating Summons No 343 of 2005 (“OS 343”). The defendants originally named in OS 343 were: (a) Zhejiang Jinyi Group Co, Ltd (“ZJL”), (b) Chen Jinyi (“CJY”) and (c) Kingsea Limited (“Kingsea”). Subsequently, Mao Yong Hui (“Mao”) and VGO Corporation Limited (“VGO”) were joined as fourth and fifth defendants respectively.
2 This appeal concerned the validity of a freezing order (Mareva injunction) granted by the judge in the court below (“the Judge”) on Wu Yang’s ex parte application to restrain CJY and Kingsea from dealing with, inter alia, the shares of VGO held by or registered in the name of Kingsea (“the freezing order”). It was common ground in this appeal that the freezing order affected a block of 59,339,238 shares in VGO (“the Escrow Shares”) which had earlier been held by VGO in escrow to secure certain liabilities of Kingsea. The Escrow Shares formed part of a larger block of 134,705,882 shares in VGO (“the New VGO Shares”) which were to have been issued by VGO to Kingsea as consideration for the acquisition of the food and beverage business of Kingsea’s wholly-owned subsidiary, Spring Wave Ltd (“Spring Wave”). The number of New VGO shares which were to be issued was eventually reduced to 123,918,506: see [12] below. Wu Yang claimed that it had equitable title to the Escrow Shares as CJY (the sole shareholder of Kingsea) had transferred them to Wu Yang to offset the amount which ZJL owed to Wu Yang.
3 Mao and VGO then intervened in the proceedings and succeeded in obtaining an order to vary the freezing order by excluding the Escrow Shares from it. Wu Yang appealed against the Judge’s variation order, claiming that it had prior equitable title to the Escrow Shares vis-à-vis VGO and Mao by reason of their inequitable conduct.
4 We dismissed the appeal at the conclusion of the hearing on several grounds, which we will elaborate on after we have summarised the relevant facts that led to this appeal.
How Wu Yang acquired its claim to the VGO shares
5 Wu Yang and ZJL are Chinese companies which had business dealings with each other. ZJL’s managing director and controlling shareholder was CJY (holding 50.23% of its issued shares), who was also the sole shareholder of Kingsea, a British Virgin Islands company. Between 1 June 2003 and 18 November 2003, ZJL borrowed a total sum of RMB30m from Wu Yang. This transaction was documented in nine agreements. Under the fifth agreement dated 12 July 2004, CJY indicated his willingness to “pledge” 134,700,000 shares in VGO (with a market value of about S$15.08m) to Wu Yang. On 12 August 2004, CJY confirmed to Wu Yang that Kingsea held 31,764,784 shares in VGO, and that all those shares would be pledged to Wu Yang “as irrevocable joint liability guarantee for the repayment of the amount owed by [ZJL] to Wu Yang”. ZJL and CJY later confirmed (via an agreement dated 10 October 2004) that the value of those 31,764,784 shares was not less than S$3,176,478.40.
6 The last agreement dated 3 February 2005 (“the Set-Off Agreement”) provided that CJY would transfer “all his shareholding in VGO” to “offset the amounts owed by [ZJL] and [CJY] to [Wu Yang]” (then totalling RMB40m). Pursuant to this agreement, CJY signed a share transfer registration document in Chinese, which was not registrable in Singapore.
How Mao acquired his interest in the Escrow Shares
7 Between 15 and 19 March 2005, VGO’s wholly-owned subsidiary, Hangzhou Velizia Food Co Ltd (formerly known as Hangzhou Kingsea Food Co Ltd (“HKFC”)), sent three letters of demand to Kingsea for payment of the sum of RMB23,626,039 which Kingsea owed as a result of its breach of certain warranties (set out at [10] below) since 2003. When Kingsea failed to make payment, VGO, which was then holding the Escrow Shares as security for Kingsea’s fulfilment of those warranties, exercised its power of sale and sold the shares to Mao on 22 March 2005 for S$3,560,354.28, payable in instalments.
How Kingsea acquired its interest in the VGO shares
8 In 2002, VGO (then called “e-World of Sports.com Ltd”, a public company listed on the Singapore Stock Exchange) decided to diversify its existing business into the food and beverage industry. At that time, Spring Wave was carrying on a food, beverage and mineral water business through a few subsidiaries in China; amongst them were HKFC and Heilongjiang Kingsea Wudalianchi Mineral Water (Group) Co Ltd (“KSWDLC”).
9 On 7 October 2002, VGO entered into a sale and purchase agreement with Kingsea (“the S&P Agreement”) to acquire: (a) the entire issued share capital of Spring Wave, which then comprised only one fully paid ordinary share of US$1, and (b) a shareholder’s loan of RMB42.1m (approximately S$8.7m), which Kingsea had advanced to Spring Wave to acquire the business of HKFC. The purchase consideration was agreed at RMB55m and was to be satisfied by the allotment of the New VGO Shares of S$0.01 each, credited as fully paid, at an issue price of S$0.085 per share. The initial understanding was that the completion of this transaction was subject to the consolidated net asset value (“NAV”) of Spring Wave being confirmed at RMB55m.
10 Under cl 5.8 of the S&P Agreement, Kingsea gave six main warranties which it undertook to make good. The two warranties relevant to the present appeal were:
(a) “the concession warranty” – a warranty that KSWDLC would acquire an exclusive concession and/or right to extract a minimum of 85 tons of spring water per day from the Wu Da Lian Chi spring (valued at RMB5m) within three months from the “Completion Date” (defined as the seventh business day after the fulfilment of the last condition precedent under the S&P Agreement), failing which Kingsea would pay RMB2.513m to HKFC; and
(b) “the Agang debt warranty” – a warranty that the long-term debt of RMB4,456,723 owed by KSWDLC to Agang Group Co Ltd (“the Agang debt”) would be forgiven and waived by the creditor within three months from the Completion Date, failing which Kingsea was to pay to KSWDLC such amount as was necessary to satisfy the debt.
These two warranties concerned an asset and a liability which Wu Yang has characterised, in this appeal, as non-existent assets of Spring Wave. It is alleged that VGO issued part of the New VGO Shares to Kingsea in exchange for these non-existent assets (see [24] below).
11 Under cl 5.9 of the S&P Agreement, Kingsea agreed to deposit 81,175,347 of the New VGO Shares (with a market value of about RMB33.14m) with VGO as security for the performance of its obligations under cl 5.8. Under cl 5.10, VGO had the right to sell as many of the New VGO Shares held in escrow as would be necessary to satisfy the liabilities of Kingsea in the event of the latter breaching any of its obligations under cl 5.8. Under cl 5.11, VGO undertook to release to Kingsea the shares held in escrow upon the latter’s full compliance with its obligations under cl 5.8.
12 On 17 March 2003, VGO entered into a supplemental deed with Kingsea (“the Supplemental Deed”) to provide for the consequences of an audit done that month, which lowered the NAV of Spring Wave as at 1 January 2003 from RMB55m to RMB50,596,000, resulting in a shortfall of RMB4,404,000. In spite of Spring Wave’s lower NAV, the parties agreed to complete the transaction. The Supplemental Deed provided that: (a) only 123,918,506 of the New VGO Shares would be issued on completion so as to reflect Spring Wave’s lower NAV; and (b) Kingsea would inject cash or other assets into HKFC to the amount of RMB4,404,000 within two months after the Completion Date, whereupon VGO would issue a second tranche of 10,787,376 of the New VGO Shares.
13 Completion of the transaction took place on 17 March 2003 when VGO issued the first tranche of 123,918,506 of the New VGO Shares (“the Issued VGO Shares”) and 12,430,240 “Introducer Shares” (the latter were issued to Mao and one Chai Wei for their services in introducing the transaction to VGO). Further, instead of holding in escrow 81,175,347 of the Issued VGO Shares as originally agreed (see [11] above), VGO released 36,737,968 of those shares to Kingsea as Kingsea had fulfilled one of the warranties under cl 5.8 of the S&P Agreement, leaving a balance of 44,437,379 of the Issued VGO Shares held in escrow to secure Kingsea’s other warranties.
14 On 23 February 2004, VGO and Kingsea signed a further supplemental agreement under which Kingsea acknowledged that it was in breach of the remaining five warranties under cl 5.8 of the S&P Agreement (“the breached warranties”). The parties agreed that the breaches would be remedied in the following ways:
(a) Kingsea would assist VGO to dispose of HKFC’s interest in KSWDLC, failing which Kingsea would pay VGO the sum of RMB6,969,723 in respect of its total liability under both the concession warranty and the Agang debt warranty; and
(b) Kingsea would pay VGO the sum of RMB1,104,000 and deposit with VGO an additional 9,068,861 of the Issued VGO Shares as security for the sums payable in respect of the breached warranties.
15 On 28 December 2004, VGO and Kingsea signed another agreement whereby Kingsea deposited a further lot of 5,832,998 of the Issued VGO Shares as additional security for Kingsea’s continuing breach of the warranties. After this deposit, VGO held 59,339,238 of the Issued VGO Shares in escrow (these 59,339,238 shares were the Escrow Shares mentioned at [2] above).
16 As mentioned at [7] above, the Escrow Shares were sold by VGO to Mao upon Kingsea’s failure to pay the sums due in respect of the breached warranties (see [14] above).
Summary of the competing claims to the Escrow Shares
17 On the date of completion of the S&P Agreement (ie, 17 March 2003), VGO was an equitable mortgagee of 44,437,379 of the Issued VGO Shares, which it...
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