The Companies Act (2022 Revision) and Seahawk China Dynamic Fund

• Jurisdiction: Cayman Islands
• Judge: Justice David Doyle
• Judgment Date: 09 August 2022
• Court: Grand Court (Cayman Islands)
• Docket Number: CAUSE NO. FSD 23 of 2022 (DDJ)

In the Matter of the Companies Act (2022 Revision)

And in the Matter of Seahawk China Dynamic Fund

Before:

The Hon. Justice David Doyle

CAUSE NO. FSD 23 of 2022 (DDJ)

IN THE GRAND COURT OF THE CAYMAN ISLANDS

FINANCIAL SERVICES DIVISION

HEADNOTE

Dismissal of winding up petition based on the just and equitable ground — assessment of the oral and documentary evidence — consideration of whether there was a quasi-partnership — whether there was justifiable and irretrievable loss of trust and confidence — whether there was serious lack of probity, dishonesty and oppression — whether there was a need for an urgent investigation — whether the Petitioner had a legitimate expectation of participating in the management of the company — whether the Petitioner was unreasonably failing to pursue alternative remedies including the redemption of his shares

Appearances:

Sebastian Said, Andrew Jackson and Ryan Kuss of Appleby (Cayman) Ltd on behalf of the Petitioner Lau Chun Shun Tom Smith QC instructed by Paul Smith and Caitlin Murdock of Harneys on behalf of Hao Liang

Tom Lowe QC instructed by Jamie McGee of Bedell Cristin on behalf of fourteen minority shareholders namely Jin Cheng, Qianyi Zhang, Junchen Feng, Min Zhao, Wentian Wu, Ming Hu, Yulin Deng, Chun-Hsia Chiang, Lingxiao Li, Long Chen, Po Yee Rosa Au-Yeung, Yong Yu, Yulu Mo and Qian Luo

Introduction

1 It is a very serious step to make an order winding up a solvent company. In the particular circumstances of this case I have not been persuaded that it is just and equitable to make such an order and I therefore dismiss the winding up petition.

2 The two main protagonists in this case are Lau Chun Shun (“Mr Lau”) and Hao Liang (“Mr Liang”).

3 Mr Lau is stated to be part of the well known “Nine Dragons” family in the People's Republic of China (“PRC”). He is the son of Madam Cheung Yan who is the founder of Nine Dragons Paper (Holdings) Limited which is listed on the Hong Kong Stock Exchange. Mr Lau's wife is Chen Li (“Ms Lau”) and she is also engaged in the family business.

4 Mr Liang was born in China and has been interested in the financial markets since the age of 13. He is the son of He Hui. Various internet articles feature him as an investment prodigy and he appears to be well known as an investment manager. Mr Liang's wife is April Li (“Ms Liang”). Ms Liang is described as an expert in primary market private equity investment.

5 The paths of Mr Lau and Mr Liang appear to have first crossed in September 2017 when they were introduced through a relative of Mr Lau and a former schoolmate of Mr Liang. Mr Liang had set up Seahawk China Dynamic Fund (the “Company” or the “Fund”) in the Cayman Islands in August 2017 and was on the look out for investors. Mr Lau seemed interested. Mr Lau had a family investment management company, incorporated under the laws of Hong Kong, called Gold Dragon Worldwide Asset Management Limited (“Gold Dragon” or the “Manager”). Both Mr Lau and Mr Liang saw good potential for cooperation with Mr Lau becoming a significant investor and Mr Liang being key in respect of investment management and producing significant financial returns. At a meeting in November 2017 in Hong Kong, Mr Lau met Ms Liang and Mr Liang met Ms Lau. Mr Lau became a significant investor in the Company. Mr Liang directed management of the investments and produced very significant financial returns and was described by Mr Lau as “awesome”. Sadly however the relationship between Mr Lau and Mr Liang deteriorated culminating in Mr Lau presenting a petition for the winding up of the Company.

Mr Lau's case

6 Mr Lau says that he has justifiably and irretrievably lost all confidence in the Company's management because of the clear lack of probity of Mr Liang, the Company's sole voting member. Mr Lau says that Mr Liang has abused and misused his power and authority in connection with his control and management of the Company and has acted in a manner that favours his own interests to the detriment of the interests of the Company, Mr Lau and other investors.

7 In particular Mr Lau complains about two specific issues, which he describes as (1) the Unauthorised Scheme and (2) the Late Trade Allocations.

8 In respect of the Unauthorised Scheme, Mr Lau says that Mr Liang “attempted to secretly strip approximately US$19,997,219.62 for his own benefit from the Company” (paragraph 11 (a) i. of the petition).

9 In respect of the Late Trade Allocations, Mr Lau says that Mr Liang “has orchestrated a deliberate and cynical system to siphon moneys to the Hover4pi Funds (controlled by Mr Liang and his wife) while simultaneously causing significant losses to the Company”. Mr Lau adds that “In doing so [Mr Liang] deliberately preferred the interests of the Hover4pi Funds, and ultimately himself, and has deliberately caused the Fund to suffer losses of approximately USD 8,073,918.07” (paragraph 11 (a) ii. of the petition).

10 Mr Lau complains about significant amendments to the Company's constitutional documents and the Investment Management Agreement (the “IMA”) between the Manager and the Company without formal notice to him. Mr Lau alleges that Mr Liang convened board meetings “without providing the requisite notice to [him], who was entitled to such notice as a director, despite dishonestly recording the contrary in relevant minutes” (paragraph 11 (a) iv of the petition).

11 Mr Lau makes the general complaint that Mr Liang “sought to conceal his illegitimate actions and acted with a complete lack of transparency by failing to inform investors and the Manager of his conduct” (paragraph 11 (a) vi of the petition).

12 Mr Lau complains that Mr Liang created a new class of shares which he allocated to himself and that Mr Lau was removed from the board of the Company.

13 Mr Lau alleges that the Company was operated by Mr Lau and Mr Liang “akin to a quasi-partnership and the personal relationship involving mutual trust and confidence on which it was founded and operated (as part of an effective ‘consolidation’ of [Mr Lau's] business through the Manager) has irretrievably broken down. The legitimate expectations that had arisen on account of that relationship and the understanding between Mr Liang and [Mr Lau], have been disregarded by Mr Liang. Accordingly, there is no or no reasonable hope of reconciliation between Mr Liang and [Mr Lau].” (paragraph 11 (b) of the petition).

14 Mr Lau further alleges that Mr Liang has used his voting power to cause “oppression and prejudice to Mr Lau's interests as a shareholder, exclude him from the Fund's management as a director and to further his own personal interests.” (paragraph 11 (c) of the petition).

15 Mr Lau also says that there is an urgent need for an investigation into Mr Liang's actions explaining that the Late Trade Allocations have been reported to the regulator in Hong Kong and the Unauthorised Scheme is the subject of civil proceedings brought by the Manager in Hong Kong (paragraph 11 (d) of the petition).

16 Mr Lau says that he seeks a winding up of the Company “as, in the circumstances, there is no other more suitable remedy to pursue.” (paragraph 13 of the petition).

17 Mr Lau at paragraph 21 of his petition says that the following matters are demonstrative of a relationship of trust and confidence between Mr Lau and Mr Liang “similar to that obtaining between partners”:

• (a) each became a director of the other's entity: Mr Liang a director and CEO of the Manager an entity owned and run by Mr Lau and his family, and Mr Lau became a director of the Company which had been founded by Mr Liang;

• (b) Mr Lau agreed to manifestly uncommercial terms, pursuant to which the substantial majority of the fees normally payable to the Manager would be paid to Mr Liang as a bonus (as to 80%);

• (c) Mr Lau settled Mr Liang's bonus entitlements for 2018 and 2020 in the manner requested by Mr Liang, contrary to the General Terms, and personally ensured Mr Liang was paid a bonus for 2019 notwithstanding Mr Liang's lack of entitlement to the same (paragraph 21 of the petition).

18 Mr Lau at paragraph 77 of his written closing submissions submits that the Fund should be wound up for the following reasons:

• “(1) First, the Fund was a quasi-partnership and the relationship of mutual trust and confidence which previously existed between [Mr Lau] and Mr Liang as quasipartners has irretrievably broken down on account of:

  (a) The Late Trade Allocations; and/or

  (b) The Unauthorised Scheme; and/or

  (c) Mr Liang's removal of [Mr Lau] as a director of the Fund.

• (2) Second, [Mr Lau] held a legitimate expectation that he would remain a director of the Fund and, in breach of that legitimate expectation, Mr Liang unjustifiably removed [Mr Lau] as a director of the Fund and, thus, excluded him from its management.

• (3) Third, [Mr Lau] has lost confidence in Mr Liang managing the Fund due to a serious lack of probity of the part of Mr Liang in his conduct of the Fund's affairs, and in particular on account of his dishonesty in respect of:

  (a) The Late Trade Allocations; and

  (b) The Unauthorised Scheme.

• (4) Fourth, [Mr Lau] has been oppressed on account of [Mr Liang's] actions as part of the implementation of the Unauthorised Scheme, where his complete voting control of the Fund was used to e.g. create the new class of Performance Allocation Shares.

• (5) Fifth, given inter alia, the seriousness of the matters which have been the subject of the Petition, their recent discovery, and concerning aspects of the evidence in respect of the approach to the corporate governance of the Fund, there is clearly an urgent need for an investigation into the affairs of this CIMA-regulated Fund.”

19 At paragraph 1 of his written closing submissions Mr Lau says that he applies for a winding up order on the just and equitable basis “primarily as a result of two courses of dishonest conduct:...