Broadsino Finance Company Ltd v Brilliance China Automotive Holdings Ltd and Others

• Jurisdiction: Bermuda
• Judgment Date: 14 March 2005
• Date: 14 March 2005
• Docket Number: Civil Appeal 2004 No. 3
• Court: Court of Appeal (Bermuda)

In The Court of Appeal for Bermuda

Stuart-Smith, JA

Civil Appeal 2004 No. 3

BETWEEN:

Broadsino Finance Company Limited

Appellant

and

Brilliance China Automotive Holdings Limited and others

Respondent

Mr. Jarvis, QC for the Appellant

Mr. Brisby, QC for the Respondent

The following cases were referred to in the judgment:

Electra Private Equity Partners v KPMG Peat Marwick [1999] EWCA Civ 1247

Lawrence v Lord Norreys (1890) 15 AC 210

National Westminster Bank plc v DanielUNK [1994] 1 All ER 156

Wenlock v MaloneyUNK [1965] 2 All ER 871

Royal Brunei Airlines v TanELR [1995] 2 AC 379

Rafidain Bank v Agom Universal Sugar Trading Company Limited (CA) The Times Law Reports

Appeal against strike out judgment — Ownership of shares in holding company — Sale or transfer of shares — Deliberate material non disclosure — Beneficial interest in ownership of shares — Creation of trust

JUDGMENT of Stuart-Smith, JA

Introduction

This is an appeal from the judgment of Storr J given on 31 December 2003 in which he ordered that the Writ and Statement of Claim of the Plaintiff, Broadsino Finance Company Limited (‘Broadsino’) against the First Defendant, Brilliance China Automotive Holdings Limited (‘Brilliance’) should be struck out as an abuse of the process of the Court pursuant to Order 18 Rule 19(d). Brilliance's summons was dated 10 March 2003 and sought to strike out the pleadings under Order 18 Rule 19(a) (b) and (d) on the grounds that it disclosed no cause of action, was frivolous and vexatious and an abuse of the process of the Court and under the Court's inherent jurisdiction.

The Judge found against Broadsino solely on the basis that it never owned any shares in Brilliance, this being a fundamental element of Broadsino's case. He rejected, either expressly or impliedly, the other grounds upon which Broadsino sought to have the action struck-out. By its cross-notice, Brilliance seek to uphold the Judge's decision on one or more of the other grounds that were argued in the Court below, as well as supporting the basis of the Judge's decision. The Court also granted Brilliance leave to amend the cross-notice to raise a ground not argued in the Court below, namely, that the alleged trust was entered into for an illegal purpose, and for this reason the claim could not succeed.

Broadsino's case

The facts upon which Broadsino's claim is based, can be derived from the Statement of Claim, amplified to some extent by the Affidavit evidence filed in support. The moving force behind Broadsino is Mr Yang Rong, a successful Chinese businessman. He became involved in the manufacture of motor vehicles, especially minibuses, for the Chinese market. Broadsino was incorporated on 26 February 1991 in Hong Kong. Through Mr Yang Rong, Broadsino acquired 25% of the shareholding in a company incorporated in China named Shenyang Jin Bei Passenger Vehicle Manufacturing Company (‘Shenyang Automotive’). Broadsino was part of a joint venture with Jin Bei Automotive Shareholding Company Limited (‘Jin Bei’), which held 60% of the shares in Shenyang Automotive, and Hainan Huayan International Trust Investment Company Limited (‘Hainan Huayan’), which held 15% of the shares in Shenyang Automotive. Broadsino paid US$7.5 million for the purchase of the shares in Shenyang Automotive. By June 1992, Broadsino had acquired Hainan Huayan's 15% shareholding in Shenyang Automotive. In the result, Broadsino held 40% of the shareholding in the company, then valued at some US$12 million.

Mr Yang Rong wanted to raise capital on the New York Stock exchange to develop the motor manufacturing business and to this end he caused Brilliance to be incorporated in Bermuda on 9 June 1992. At about this time the Chinese Financial Education Development Foundation (‘the Foundation’), the Sixth Defendant, was formed in China. The initial formation costs of the Foundation were borne by Broadsino and another company controlled by Mr Yang Rong. The Foundation had charitable objects, being for the financial education and scientific research in the People's Republic of China (‘the PRC’). It was organised as a non-governmental organisation, with Broadsino as one of its sponsors. One stated purpose of the Foundation, as provided in its constitution, was to serve as a vehicle whereby assets could be held in accordance with the wishes of patrons or contributors. This would have included Broadsino and Mr Yang Rong. The idea of the Foundation was conceived by Mr Yang Rong, who discussed the project with Mr Shang Ming, at that time deputy governor of the People's Bank of China, the central bank of the PRC. The idea was that the Foundation would be able to raise funds so as to be able to purchase Broadsino's shares in Brilliance, which were valued at US$ 12 million.

Mr Yang Rong was advised that the use of the Foundation as the principal shareholder was more likely to be acceptable in a public flotation on the New York Stock exchange. This was the advice of Bermudian, American and Chinese advisers. In the event, the Foundation was unsuccessful in raising the money to purchase the shares in Brilliance. Consequently, in late September 1992, Mr Shang Ming, who was the chairman of the Foundation, agreed with Mr Yang Rong that despite the fact that the Foundation was unable to purchase the shares, they could still be placed in the name of the Foundation for the purpose of listing, but they would remain in the beneficial ownership of Broadsino. It is Broadsino's contention that whatever the precise language used by Mr Shang Ming and Mr Yang Rong, the effect was that the Foundation was to hold the shares on trust for Broadsino. For this service, Broadsino was to pay the Foundation an administration fee and make donations to the Foundation. It was further agreed that Mr Yang Rong would be vice-chairman of the Foundation and would have the sole authority to manage, control and administer the equity interest in Brilliance held by the Foundation. This authority was said to have been confirmed by a Power of Attorney to that effect dated 8 September 1992 signed by Mr Shang Ming, as chairman of the Foundation.

Mr Yang Rong did not tell his lawyers of this arrangement. All the documents for the flotation had been prepared on the basis that the Foundation was the beneficial owner of the shares. The documents thereafter did not record the true position as to the beneficial interest of the Brilliance shares. Broadsino relies, however, on the report of the Foundation dated 21 March 1994 which recorded: ‘the main business activity of this Foundation is to act on trust (entrustment) as majority shareholder of Brilliance China Automotive Holdings Limited and hold 73.8% of the shares of this company. The shares of this company were listed on the New York Stock exchange in October 1992. After deduction of costs and expenses required for the transaction, more than US$70 million was remitted to Jin Bei Automotive Company for its expansion of production. This Foundation will charge a certain amount of administration and service fees this year.’

Broadsino contends that this is an express recognition of the trust. In addition to the administration fees and donations made by Broadsino to the Foundation, Broadsino relies on the fact that Broadsino provided the accommodation for the Foundation without charge and the fact that the dividends on the Brilliance shares were paid into an account in the Cayman Islands which was under the sole control of Mr Yang Rong/Broadsino and the payments made from this account were for their benefit and not that of the Foundation. Broadsino also paid the legal and accountancy fees of the flotation, amounting to some US$1.8 million.

Mr Yang Rong was the chairman, president and chief executive officer of Brilliance until the 18 June 2002. The Second to Fifth Defendants were the executive directors of Brilliance. It is Broadsino's case that they were associates of Mr Yang Rong and must have been aware of the arrangements whereby the shares were held on trust for the Foundation, and they received substantial payments from the dividend account held in the Cayman Islands. Nevertheless, Broadsino accepts that throughout the period, Mr Yang Rong continued to make representations in many public documents that the Foundation was the beneficial owner of the shares. The same position was maintained in October 1999, when Brilliance shares were listed on the Hong Kong Stock exchange. His explanation for this is that it was too late in September 1992 when the Foundation was unable to raise the money, to change all the documentation, it having been prepared on the basis that the Foundation would purchase them, and thereafter, once the representation was made, it was ‘in nobody's interest to change it’.

Under Mr Yang Rong's management, Brilliance was extremely successful and by 2002 it was worth some US$500 million. However, the manufacture of motor vehicles in the PRC and the licences which were required, were dependent on local government in the PRC. A factory of Shenyang Automotive was situated in Liaioning Province in north-east China. In 2001, Mr Yang Rong was proposing to manufacture motor vehicles outside the Liaioning Province and this was opposed by the Liaioning Provincial Government (‘the LPG’). It is claimed by Broadsino that this was the trigger for a scheme entered into by the LPG and the Second to Fifth Defendants with a view to taking over the Brilliance shares held on trust by the Foundation. Mr Yang Rong was told by the LPG that the interests held by the Foundation were state assets and should be transferred to the LPG. In May 2003, Mr Yang Rong was threatened with house...