China North Industries Investment Management Ltd v China North Industries Investment Ltd
| Jurisdiction | Bermuda |
| Judgment Date | 25 November 2004 |
| Docket Number | Civil Appeal 2004 No. 6 |
| Date | 25 November 2004 |
| Court | Court of Appeal (Bermuda) |
In The Court of Appeal for Bermuda
Nazareth, P; Evans, JA; Ward, JA
Civil Appeal 2004 No. 6
Mr. Kessaram for the Appellant
Mr. N Hargun for the Respondent
Red Sea Tankers and Others v Popachristdis and Others (The Hellesport Ardent)UNK [1997] 2 Lloyd's Rep. 547
Lockland Builders v John Kim RickwoodUNK [1995] 77 BLR 38
Claim for unpaid management fees or damages in lieu — Termination of management agreement — Whether notice was valid — Wrongful repudiation and acceptance — Failure to disclose affairs of investments — Delivery of account books
The Appellant is China North Industries Investment Ltd., an Investment Company, hereinafter ‘the Company’. The Respondent is China North Investment Management Ltd., hereinafter ‘the Manager’, which the Company employed as its investment manager under a Management Agreement dated 5 September 1994.
The Manager is the plaintiff in these proceedings, claiming unpaid management fees, or damages in lieu, for the period from 1 July 1998 until 11 October 1999 when it contends that the Management Agreement came to an end. The claim is for the net figure of US$2,244,109.97 after giving credit for payments totalling US$2,500,000 made on 2 July 1998 and 30 December 1998. The Company's primary defence is that it terminated the Management Agreement on an earlier date, either 18 February 1999 or 7 June 1999, and that the outstanding fees amount to no more than $1,200,000. Against that claim, the Company claimed to set off the amount of its Counterclaim, which totals in excess of US$9,000,000.
The learned judge, the Hon Justice Storr, Assistant Justice, gave judgment for the Plaintiff after a hearing which lasted for ten days, from 30 June to 14 July 2003, and he dismissed the Company's Counterclaim. The Company now appeals.
The scope of the Appeal is much reduced from that of the trial. Mr Kessaram, who appeared on behalf of the Company (but did not appear at the trial), limited the issues to four, which may be summarised as follows:
(1) the judge was wrong not to find that the Management Agreement was lawfully terminated by the Company on 7 June 1999;
(2) alternatively, he ought to have found that the Management Agreement in fact was ended on that day;
(3) the judge ought to have upheld the Counterclaim as regards an allegation that the Manager failed to disclose to the Company a specific document, namely, a report made by D.S. Cheong, solicitors of Hong Kong, which is dated 14 June 1997, relating to the affairs of Zhong Bei (China North) United Communication Company, one of the Chinese companies in which the Company made an investment of its funds; and
(4) the judge failed to adjudicate on the Company's Counterclaim for an order for delivery up by the Manager to the Company all books of account etc relating to the affairs of the Company which the Manager has in its possession. (The Court gave leave to the Company to amend its Notice of Appeal to include this further claim.)
It is common ground that management fees cannot be recovered as a debt owed by the Company in respect of any period after the Management Agreement was ended. Alternatively, therefore, if the Court holds that the Management Agreement terminated on 7 June 1999, or on any date earlier than 11 October 1999, the Manager claims the same amount as damages for loss of fees during what was left of the period until 11 October 1999. The Company denies that it is liable for any damages; alternatively, that the Court should award no more than nominal damages; or in the further alternative, that the case should be remitted to the judge for damages to be assessed.
This was set out in some detail in the judgment, and as it is largely non-controversial the following summary will suffice.
The Company was formed in 1994 in order to take advantage of investment opportunities in the People's Republic of China (PRC). It was incorporated in Bermuda on 10 May 1994. The original Directors included leading figures from the business communities in China and Hong Kong. The chairman was Wang de Chen, the Deputy General of China North Industries, and the deputy chairman Mr Simon Murray was Group Chief Executive, Asia/Pacific of Deutsche Bank AG and a non-executive director of a number of major Hong Kong companies.
The Manager was incorporated in the British Virgin Islands in July 1994, and the Management Agreement is dated 5 September 1994. The Managing Director was Mr Bernard NS Ho. The Executive Director, Mr Ronald RC Chum, was also a Director of the Company. Mr Tony SM Wong was a Senior Consultant to the Manager and a member of the Board.
China North Industries Group is a major industrial conglomerate formed in August 1988. It is a state-owned ministerial-level organisation which in 1994 had more than 300 business entities under its direct administrative, financial and personnel control. Prior to 1994, the management of the Manager worked with H G Asia Ltd to review numerous proposals for potential joint ventures submitted by state-owned PRC enterprises controlled by China North. The Company, when it was formed, entered into provisional joint venture agreements with sixteen of these enterprises, and as at 31 August it proposed to enter into two more, a total of eighteen. This connection with China North was clearly valuable, at a time when the PRC was seen as offering significant opportunities to foreign non-PRC investors. On the other hand, the investment risks were considerable, not least because of political and social changes taking place within China from the 1980's, and specifically because of investment restrictions imposed by the Chinese government and uncertainties regarding the Chinese legal system and the largely untested operation of its Courts and regulatory schemes.
These risks and other relevant information were extensively set out in the Information Memorandum dated 28 September 1994 published when 185,000,000 Class A shares in the Company were offered for placement at $1.04 per share in the Irish Stock Exchange, with a secondary placing in Singapore. The offer was oversubscribed some 21/2 times and A Class shares were issued for a total investment of $187 million. The stated objective was ‘to invest primarily in joint ventures between wholly owned subsidiaries of the Company and 18 preselected unlisted PRC enterprises … managed by China North. In addition, ‘the Company may invest up to 15% of the Aggregate Subscription Price in joint ventures which are not described in this Information Memorandum’, with the overall objective of achieving ‘medium-term capital appreciation of minority investments in newly-established Sino-foreign joint ventures.’
The Placing Agent was HG Asia Ltd which was also named as the Financial Adviser to the Company. The directors included Mr Anthony K Y Lo, who was an executive director of HG Asia Ltd and had been ‘closely involved with the structuring and formation of the Company’.
Mr Simon Murray and Mr Anthony Lo, together with Sir John Page, were nominated to serve as Independent Directors for the duration of the Company, and there was provision for further Independent Directors to be appointed, up to five. Mr Ronald Chum was nominated by the Manager to serve as a director for the same period. The Information Memorandum stated that the Directors would ‘present to the Shareholders at the fifth annual meeting of the Company a resolution setting forth a plan to liquidate the Company and wind up its affairs not later than the seventh anniversary of the Closing Date’, which was ‘On or about October 11, 1994’.
The Information Memorandum provided that there would be an Investment Committee of the Board. It was intended that the original members of the Committee would be Mr Chum, Mr Lo and Mr Murray, and that the Committee, like the Board, would be controlled by a majority of Directors independent of the Investment Manager and China North.
The intended modus operandi of the Company's Board and the Investment Committee, and the Investment Manager, can conveniently be quoted from the Information Memorandum also:
‘The Investment Committee, subject to Board approval, will make all investment decisions. The Investment Committee will follow the Investment Objective, policies and restrictions set by the Board as well as supervise the activities of the Investment Manager. Subject to Board approval, the Investment Committee may approve investment recommendations in respect of the Investments by the Investment Manager ….’.
The Company appointed the Manager as Investment Manager by clause 2 of the Management Agreement dated 5 September 1994, and clause 3 defined the Manager's duties as follows:
‘3. DUTIES OF INVESTMENT MANAGER
(A) The Investment Manager shall:
(i) administer in accordance with directions of the Investment Committee the making of the investments …
(ii) develop a continuing and appropriate overall investment strategy for the investment in the Joint Ventures and consistent with the investment objectives and policies of the Company, as specified in the Information Memorandum
(iii) monitor each Investment in the Joint Ventures, report to the Investment Committee upon any development or potential problems with respect to any Investment in the Joint Ventures, provide quarterly reports to the Investment Committee (within 60 days of the end of each quarter) and a semi-annual report to Shareholders …. on the status of each of the Investments in the Joint Ventures …
(iv) designate one or more persons to act as members of the board of directors of each of the Joint Ventures …
…
(ix) provide general administrative services to the Company in accordance with Section 9 below
…
(B) The Company shall not...
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