Civil Action2007

INFO ALLIED LTD v. LEUNG TZE CHING AND OTHERS

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74560-EN-2010-12-20

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HCA774/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 774 OF 2007

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BETWEEN

	INFO ALLIED LIMITED	Plaintiff
and
	LEUNG TZE CHING	1^st Defendant
	LEUNG KA WOO	2^nd Defendant
	NG YAU YUNG	3^rd Defendant
	YOUNG SIU SUN	4^th Defendant
	LEUNG HO CHIU	5^th Defendant
	NEWIDE PACIFIC LIMITED	6^th Defendant

---------------------

Before : Hon Fok J in Chambers (Open to Public)

Date of Hearing : 20 December 2010

Date of Judgment : 20 December 2010

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JUDGMENT

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Introduction

1. This is an application for specific discovery pursuant to RHC O.24, r.7. It arises in the following circumstances.

2. In this action, the plaintiff alleges that by an agreement made on or about 13 October 2006 the 5^thdefendant agreed to sell to it 50,000 ordinary shares of the issued share capital of Group Benefit Development Limited (“GBDL”) for a consideration of HK$50.

3. Notwithstanding that purchase of the shares by the plaintiff, the 5^th defendant is alleged to have sold the same shares subsequently to the 6^thdefendant. On 10 March 2007, the 1^st to 4^thdefendants, as directors of GBDL, approved the transfer of the shares from the 5^thdefendant to the 6^thdefendant.

4. Accordingly, the plaintiff advances a claim in equity alleging that since 14 October 2006, or at the latest, 16 November 2006 (when the bought and sold notes and instrument of transfer for the shares executed by the 5^thdefendant in favour of the plaintiff were stamped), the 5^thdefendant was, by virtue of the agreement for sale and purchase of the shares, a bare trustee of the legal title of those shares in GBDL for the plaintiff and therefore owed fiduciary duties to the plaintiff in respect of the shares.

5. As against the 5^thdefendant, the plaintiff claims damages for conversion of the title of the shares and also damages for breach of fiduciary duty.

6. As against the 1^st to 4^thdefendants, the plaintiff seeks injunctive relief against their approving the transfer or registration of transfer of the shares registered in the name of the 6th defendant without the consent of the plaintiff. The plaintiff also seeks an injunction that the 1^stdefendant take all necessary steps and provide all necessary documents to enable the 6^th defendant to transfer the shares back to the plaintiff. Alternatively, the plaintiff seeks equitable damages in lieu of the injunctive relief. Further or alternatively, the plaintiff claims damages for procuring or dishonestly and/or knowingly assisting the 5^thdefendant (i) to convert a replacement share certificate issued in respect of the 50,000 shares, and (ii) to act in breach of his fiduciary duties.

7. As against the 6^thdefendant, the plaintiff claims a declaration that the 6^thdefendant is holding the shares as constructive trustee for the plaintiff and injunctive relief to require the 6^thdefendant to transfer the shares to it. It also makes the same further or alternative claim for damages as advanced against the 1^st to 4^thdefendants.

8. It is material to mention that, in his Defence and Counterclaim, the 5^thdefendant alleges that he was induced by misrepresentations made on behalf of the plaintiff to agree to transfer the 50,000 shares in GBDL to the plaintiff by way of gift. The 5^thdefendant maintains that, since the board of GBDL has not approved the transfer, the gift has been rendered imperfect. The 5^thdefendant avers that the plaintiff has no equitable interest in the shares.

9. The plaintiff and the 5^thdefendant have since agreed terms of settlement which are embodied in a Tomlin Order dated 22 December 2009. The schedule to the order includes a term that the 5^thdefendant shall pay the plaintiff a sum of HK$400,000 on the signing of the consent order “in full and final settlement of the Plaintiff’s claim against the 5^thDefendant in this action”. It is also provided that the 5^thdefendant shall provide the plaintiff with a witness statement conforming with the terms of a letter written by his solicitors dated 12 November 2009 on the signing of the consent order.

The application

10. By summons dated 8 October 2010, the 1^st, 3^rd, 4^th and 6^thdefendants (which I shall hereinafter refer to as “the applicants”) apply for an order that the plaintiff give discovery of the following specific documents set out in the schedule to the summons, which reads as follows :

“SCHEDULE
1. Documents created in the context of the negotiation and settlement (the “settlement”) between the Plaintiff and the 5^th Defendant culminating in the signing of the Tomlin Order dated 22^nd December 2009, including but not limited to exchange of correspondence between Solicitors for the Plaintiff and Solicitors for the 5^th Defendant and agreement between the Plaintiff and the 5^th Defendant made in writing or evidence in writing of the agreement between the Plaintiff and the 5^th Defendant.
2. Internal memoranda minutes notes and/or reports of the Plaintiff prepared about the discussion and decision on the settlement.”

11. The applicants say that the fact of the settlement between the plaintiff and the 5^thdefendant gives rise to a crucial issue, namely whether the plaintiff is still entitled to maintain its claim against the other defendants. The applicants refer to MCC Proceeds Inc v Lehman Brothers Industrial (Europe) [1998] 4 All ER 675 at 686 as authority for the proposition that damages for conversion of a share certificate are the value of the shares. They submit that, where damages for conversion are assessed on the footing that the claimant is being compensated for the whole of his interest in the goods, settlement of a claim for damages for the wrong extinguishes the claimant’s title to the interest. They also submit that it would offend the rule against double satisfaction for a claimant compensated in full nonetheless to retain beneficial ownership of something for which he has already been compensated.

The applicable principles

12. There is no dispute between the parties as to the relevant applicable principles. On an application under O.24, r.7, the court may require a party to make an affidavit stating whether any document or any class of documents has at any time been in his possession, custody or power if the document relates to one or more of the matters in question in the cause or matter.

13. There are three prerequisites to the exercise of the Court’s discretion to make an order for specific discovery, namely :

(1)   There is sufficient evidence that the documents exist which the other party has not disclosed;
(2)   The document or documents relate to matters in issue in the action; and
(3)   There is sufficient evidence that the document is in the possession, custody or power of the other party.

14. Even if the prerequisites are established, the Court retains a discretion whether or not to order disclosure. By virtue of O.24, r.8, the Court will not order discovery if it is of the opinion that discovery is not necessary either for disposing fairly of the cause or matter or for saving costs.

Discussion

15. The plaintiff submits that the evidence as to the existence of the documents of which discovery is sought is based on speculation and that it is not sufficient to demonstrate a prima facie case that the documents exist and are in the possession, custody or power of the plaintiff.

16. What the applicant says in this regard is set out in paragraph 7 of the affirmation of Mak Ka Yan Claire dated 6 October 2010 made in support of the application. That paragraph reads as follows :

“Before the Plaintiff and the 5^th Defendant arrived at their settlement, it is more likely than not that there has been correspondence back and forth for the negotiation; and recording the terms of offer and counteroffer that ultimately formed the basic terms of the settlement; and it is also quite possible that the Tomlin Order was made pursuant to some agreement made or evidence in writing between the Plaintiff and the 5^th Defendant. Such documents obviously exist but the same have not been disclosed. All these documents relate to matters in issue in the action and they are apparently in the possession, custody or power of the Plaintiff.”

17. I do not think the applicant’s contention that the documents exist and are in the possession, custody or power of the plaintiff is mere speculation. In my view, it is most improbable that the settlement reflected in the consent order dated 22 December 2009 was not the result of some form of negotiation or correspondence between the respective solicitors of the plaintiff and the 5^thdefendant. On the contrary, I consider it simply a matter of commonsense to infer that there must have been written communications between the plaintiff and the 5^thdefendant’s respective solicitors and also written internal communications of the plaintiff concerning the terms of the settlement. Settlements of the type reflected in the consent order do not, as a general rule, come out of the blue and are rarely, if ever, the result of pure oral negotiations. In the present case, prior to the date of the consent order, the action had already been on foot for well over two and a half years and a number of interlocutory steps had already occurred. In this regard, I note that : the 5^thdefendant had already filed a substantive defence and counterclaim; the 5^thdefendant had already made an application to strike out the prayer for damages for conversion; and the plaintiff had already made an unsuccessful application for summary judgment against the 5^thdefendant.

18. As to the need to demonstrate that the documents of which discovery is sought have not been disclosed, it is sufficient to note that the plaintiff has only filed one list of documents in this action, being the List of Documents dated 24 September 2009 and no such documents are listed there. It is, of course, possible that the settlement agreement had not yet been reached between the plaintiff and the 5^thdefendant as at the date of the plaintiff’s List of Documents but no further list of documents has been filed by the plaintiff. In answer to a letter from the applicant’s solicitors dated 16 September 2010 inviting the plaintiff to file a supplemental list of documents, the plaintiff’s solicitors responded by letter dated 17 September 2010 stating their view that the request for discovery was groundless and confirming that the plaintiff would not make discovery as requested.

19. The plaintiff also submits that the documents of which discovery is sought are, in the event, not relevant to matters in issue in the action.

20. I have no hesitation in rejecting this contention. By an amendment to their defence made on 10 February 2010, the applicants pleaded that by reason of the settlement reflected in the consent order, the plaintiff is no longer entitled to maintain its claim against the 1^st, 3^rd and 4^thdefendants for the injunctive relief sought against them and the declaratory and injunctive relief sought against the 6^thdefendant “in that the damage allegedly suffered by the Plaintiff in respect of the Subject Shares and its alleged equitable interest therein has been fully satisfied, thereby discharging all causes of action which the Plaintiff might previously have had against the Defendants”. In the particulars under this plea, the applicants referred to clause 2 of the schedule to the consent order which stipulates that the 5^thdefendant shall pay the plaintiff a sum of HK$400,000 upon the signing of the consent order in full and final settlement of the plaintiff’s claims against the 5^thdefendant in this action. The particulars plead that the HK$400,000 sum was paid on or about 21 December 2009 with the result that (a) the plaintiff’s alleged damage in respect of the shares has been fully satisfied so that all causes of action it had previously were thereupon discharged, and (b) if the 5^thdefendant had ever divested himself of his equitable interest in the shares, the same has become vested back in the 5^thdefendant.

21. In the light of the pleading referred to above, there is no doubt, in my opinion, that the documents of which discovery is sought are plainly relevant to a matter in issue in the action. The cases of Jameson v Central Electricity Generating Board [2000] 1 AC 455 and Heaton and others v Axa Equity & Law Assurance Society and others [2002] 2AC 329, in my view, support this conclusion. Indeed, the latter case demonstrates clearly that the intention of the parties as reflected in the settlement agreement will be relevant to the question of whether a claim against concurrent tortfeasors has been satisfied by virtue of a settlement reached with one tortfeasor.

22. A more substantive ground of objection to the application for discovery, however, is the plaintiff’s reliance on the rule of evidence which excludes without prejudice correspondence and communications.

23. In Rush & Tomkins Ltd v Greater London Council & Anor [1989] 1 AC 1280, the issue arose as to whether without prejudice correspondence leading to a compromise agreement between the plaintiffs and one of the defendants in that case was liable to be disclosed to the remaining defendant. Lord Griffiths, with whom the other Law Lords agreed, held (at p.1305) :

“I have come to the conclusion that the wiser course is to protect ‘without prejudice’ communications between parties to litigation from production to other parties in the same litigation. In multi-party litigation it is not an infrequent experience that one party takes up an unreasonably intransigent attitude that makes it extremely difficult to settle with him. In such circumstances it would, I think, place a serious fetter on negotiations between other parties if they knew that everything that passed between them would ultimately have to be revealed to the one obdurate litigant. What would in fact happen would be that nothing would be put on paper but this is in itself a recipe for disaster in difficult negotiations which are far better spelt out with precision in writing.
If the party who obtains discovery of the ‘without prejudice’ correspondence can make no use of it at trial it can be of only very limited value to him. It may give some insight into his opponent’s general approach to the issues in the case but in most cases this is likely to be of marginal significance and will probably be revealed to him in direct negotiations in any event. In my view this advantage does not outweigh the damage that would be done to the conduct of settlement negotiations if solicitors thought that what was said and written between them would become common currency available to all other parties to the litigation. In my view the general public policy that applies to protect genuine negotiations from being admissible in evidence should also be extended to protect those negotiations from being discoverable to third parties.” (Emphasis added)

24. Rush & Tomkins was cited with approval by Ribeiro J (as he then was) in Gross Fortune International Limited v Set Win International Limited, unrep., CACV192/1999, 29.10.99.

25. It was submitted on behalf of the applicants that the rule in Rush & Tomkins only made admissions in the correspondence inadmissible but did not mean the documents themselves were not discloseable. This submission cannot, in my view, stand with the passage I have cited from Lord Griffiths’ speech above.

26. No basis has been put forward to justify lifting the without prejudice privilege rule so as to make the without prejudice correspondence and communications between the plaintiff and the 5^thdefendant and the plaintiff’s own internal memoranda in respect of the settlement negotiations admissible in evidence. That being so, I can see no proper basis for allowing the applicants to have sight of that inadmissible evidence by way of discovery.

27. There is no doubt that the basis of the settlement between the plaintiff and the 5^thdefendant is relevant to the issue of the entitlement of the plaintiff to continue to maintain its claim against the applicants. The substance of the settlement agreement between the plaintiff and the 5^thdefendant is set out in the schedule to the consent order dated 22 December 2009. It will be a matter of submission in due course as to whether, given the terms of the settlement, it still remains open to the plaintiff to pursue its claims against the 1^st to 4^thdefendants and the 6^thdefendant.

28. It was suggested in the course of submissions on behalf of the applicants that there might be open correspondence within the schedule to the summons that ought to be disclosed and for which privilege could not be claimed. I am not satisfied that it has been shown that such open correspondence exists. The more natural inference, in my opinion, is that documents of the type set out in the schedule to the summons would be without prejudice materials and therefore would be privileged. Finally, I do not consider that the reference in the Tomlin Order to one specific letter from the 5^thdefendant’s solicitors to the plaintiff’s solicitors would lead to a waiver of privilege attaching to that item of correspondence. The schedule to the Tomlin Order is not a pleading or affidavit and reference to it does not, in my view, constitute a waiver of privilege.

Disposition and costs

29. In the circumstances, I dismiss the applicants’ summons for specific discovery.

30. Having done so, I would add that, as I have noted above, the plaintiff’s original (and only) list of documents was filed before the settlement was reached between the plaintiff and the 5^thdefendant. It is plain that the plaintiff must file a supplemental list of documents in which reference is made to the without prejudice materials for which privilege has been claimed. I direct the plaintiff to file a supplemental list of documents within 14 days of today’s date, such list to be verified by an affidavit or affirmation by the plaintiff.

31. I will hear the parties on costs.

(Joseph Fok)
Judge of the Court of First Instance
High Court

Mr Bernard Mak, instructed by Messrs Anthony Siu & Co., for the Plaintiff

Mr Alric C.H. Tang, of Messrs Wong, Hui & Co., for the 1^st, 3^rd, 4^th and 6^th Defendants

60758-EN-2008-04-14

INFO ALLIED LTD v. LEUNG TZE CHING AND OTHERS

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HCA 774/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 774 OF 2007

____________

BETWEEN

	INFO ALLIED LIMITED	Plaintiff
	and
	LEUNG TZE CHING	1^st Defendant
	LEUNG KA WOO	2^nd Defendant
	NG YAU YUNG	3^rd Defendant
	YOUNG SIU SUN	4^th Defendant
	LEUNG HO CHIU	5^th Defendant
	NEWIDE PACIFIC LIMITED	6^th Defendant

____________

Before: Hon Saunders J in Chambers

Dates of Hearing: 10-11 April 2008

Date of Judgment: 14 April 2008

______________

J U D G M E N T

______________

The applications:

1. The primary application before me is an application by the plaintiff, (IAL), for summary judgment against the 5^th defendant, (Dr H. C. Leung), and the 6^th defendant, (Newide). The application for summary judgment includes an application to strike out Dr H. C. Leung’s counterclaim against IAL.

2. Dr H. C. Leung, for his part makes application to strike out a prayer in the Amended Statement of Claim for damages for conversion, and to amend his Defence and Counterclaim.

3. Newide resists summary judgment

Background:

4. The history of the matter is accurately set out in paragraphs 4-28 of the judgment of Deputy High Court Judge Gill, delivered on 10 July 2007, in which he dealt with an interlocutory injunction sought by IAL. I gratefully adopt that formulation of the circumstances.

5. Since that judgment IAL’s pleadings have been amended. The primary claim on the part of IAL is now a claim in equity alleging that since 14 October 2006, or at the latest, 16 November 2006, Dr H. C. Leung has, by virtue of an executed agreement for sale and purchase, been a bare trustee of the legal title of his shares in Group Benefit Development Ltd, (GBDL). A claim of conversion of the title of the shares by Dr H. C. Leung remains, and an additional claim based upon breach of fiduciary duty on the part of Dr H. C. Leung, that duty arising from the allegation of trusteeship of the shares, has been added.

The arguments to resist summary judgment:

6. In his proposed Amended Defence and Counterclaim, Dr H. C. Leung pleads primarily that he entered into the contract for the sale of his shares in GBDL to IAL in reliance upon two representations made by the chairman of IAL, (Dr John Shum), and his wife, namely:

(a) that Dr John Shum and his wife believed that the managing director of GBDL, Dr Vincent Leung, (the 1^st defendant), had been discharging his director’s duties dishonestly; and

(b) that the purpose and intention of IAL in acquiring Dr H. C. Leung’s shares in GBDL were to form a majority group of the GBDL shareholders in order to improve the governance of GBDL;

7. Dr H C Leung says that both of these representations were misrepresentations, as follows:

(a) in fact neither Dr John Shum nor his wife honestly held a belief that Dr Vincent Leung was dishonest, and further there was no proper foundation in fact for such a belief; and

(b) in fact the true purpose of IAL was not to improve governance of GDBL, but to sell on the GBDL shares to a buyer for a profit.

8. By virtue of the alleged misrepresentations it is contended that Dr H. C. Leung was entitled to rescind any contract there may have been to sell his GBDL shares to IAL, and to sell them to Newide.

9. The argument made for Dr H. C. Leung is that there are triable issues on these allegations of misrepresentation, and that accordingly there should be no summary judgement.

10. The argument for Newide first adopts the contention of Dr H. C. Leung, that by virtue of the misrepresentations there was no enforceable contract between IAL and Dr H. C. Leung, and that accordingly Dr H. C. Leung was free to sell his shares in GBDL to Newide. Second, it is said that Newide was a bona fide purchaser for value of Dr H. C. Leung’s shares in GBDL, without notice of any beneficial interest of IAL in the shares.

Discussion:

11. As I have concluded that there should be no summary judgment, and that the matter should proceed to trial, I do not propose to comment on the merits of the arguments made by both Dr H. C. Leung and Newide, other than to say that in the circumstances I am unable to say that the contentions fall within the category of “moonshine”, they being, on the face of the papers, at least arguable.

12. I say that for the following reasons.

13. Dr John Shum acknowledges in his 3^rd affidavit, (para 13(c)), that:

“…. Eva Shum and I probably told Dr H. C. Leung that we had reasons to suspect that Vincent Leung had acted dishonestly in conversations with him.”

However he then arguably purports to resile, at least in part, from the allegation of dishonesty. Instead of asserting the basis upon which he alleged dishonesty, he uses somewhat less pejorative language, conceding only to an assertion that Dr Vincent Leung:

“had not been discharging his duties properly and that he has received excessive remuneration without proper authorisation.”

14. In his 1^st affidavit whilst asserting to “evasion” on the part of the Dr Vincent Leung, and a “lack of proper authorisation”, he does not go so far as to make direct allegations of dishonesty. In his 5^th affidavit he merely said that Dr Vincent Leung’s management: “lacked transparency and accountability”.

15. In the light of his concession that the expression “dishonestly” may have been used in the discussions with Dr H. C. Leung, and having regard to the terms of his affidavits, I am satisfied that there is a triable issue as to whether or not such a representation was made, and the terms of any such statement.

16. In seeking to assert that the true purpose of IAL was to acquire and resell the GBDL shares at a profit, and that there was no intention to improve governance, Dr H. C. Leung takes on a heavy burden for there are significant and extensive documents in support of IAL’s contention that it wished to improve the governance of GBDL. That said however, there is evidence to substantiate the proposition that prior to the contract between IAL and Dr H. C. Leung for the acquisition of the GBDL shares, GBDL had been in discussion with a prospective purchaser. There is no direct evidence of IAL communicating that fact to Dr H C Leung.

17. An issue is raised on the papers as to the precise point in time at which Dr H. C. Leung learned of those discussions. If Dr H. C. Leung had not learned of that prospective sale prior to entering into the contract to sell his GBDL shares to IAL, I am unable to say that his contention that, in failing to disclose those negotiations or discussions to him, IAL has misrepresented its true position, is unarguable.

18. I accept too, that, if made in the terms alleged by Dr H C Leung, it must be an issue for trial, as to whether the misrepresentations, if any, were material in the decision of Dr H. C. Leung to sell his GBDL shares to IAL.

19. For Newide, two points are made. First, if there is an arguable case that Dr H. C. Leung did not have a specifically enforceable contract with IAL, in relation to the GBDL shares, then it is contended that Dr H. C. Leung was free to sell those shares to Newide.

20. Having found that Dr H. C. Leung does have an arguable case that he was entitled to rescind the contract with IAL, it follows that there can be no summary judgment against Newide.

21. A second contention on the part of Newide, that it did not have notice of the transaction between IAL and Dr H. C. Leung is, in the light of the facts, simply incapable of serious argument.

22. Dr Vincent Leung admits, (1^st affidavit, paragraph 75), that IAL applied to the board of GBDL, of which he is the chairman, for approval to register the share transfer from Dr H. C. Leung to IAL. Irrespective of the precise nature of the transaction between IAL and Dr H. C. Leung, whereby Dr H. C. Leung’s GBDL shares were transferred to IAL, in his capacity as chairman of GBDL, Dr Vincent Leung unarguably knew of the fact of the transfer. What is important as far as notice is concerned is the fact of the transfer, not the means by which the transfer was to be effected.

23. It is clear that the attempts to register share transfers took place well prior to 27 February 2007, the date upon which Newide and Dr H. C. Leung assert they entered into a contract for the sale of the shares in GBDL. In all of those circumstances, the assertion by Dr Vincent Leung in paragraph 9 of his 1^st affidavit that he was not aware that Dr H. C. Leung had transferred his shares to IAL prior to 27 February 2007, is plainly untenable.

24. Dr Vincent Leung is the sole shareholder and director of Newide, a BVI company. The knowledge he had in his capacity as chairman of GBDL is not confined that capacity. He carries that knowledge to his position in Newide, which is vested with that knowledge. In those circumstances there is simply no foundation whatsoever upon which it might be contended that Newide, in entering into a contract purchase Dr H. C. Leung’s shares in GBDL, was a bona fide purchaser for value without notice, and unaware of the prior transfer to IAL.

25. Notwithstanding that that secondary argument is destined to failure, Newide is entitled to defend the action upon the basis that Dr H. C. Leung was arguably able, by virtue of the alleged misrepresentations, to rescind his contract with IAL.

26. Both defendants have managed to succeed in reaching the low threshold required to establish that they have an arguable defence.

The application to strike out the counterclaim:

27. The application to strike out Dr H. C. Leung’s counterclaim, which seeks, first, rescission or cancellation of the transaction in favour of IAL, and second, damages for malicious falsehood, is not now pressed by Mr Jat.

28. First, having found there is an arguable case as to misrepresentation, the counterclaim for rescission must be allowed to stand.

29. Second, Mr Jat acknowledges that the summons to strike out the counterclaim for malicious falsehood was based on a misunderstanding that the claim was for malicious prosecution. In the circumstances, with the allegation as to whether or not the representation of dishonesty was made by Dr John Shum and his wife, and whether or not they honestly held that belief, being alive and matters for trial, the counterclaim, being based upon the assertion that the representation was made, and was not honestly held, must go to trial.

30. Accordingly, the application to strike out the counterclaim must fail.

The conversion issue:

31. This is in reality a mere pleading point. Mr Chan makes the point that the allegation in the Amended Statement of Claim is an allegation of conversion of “title to shares”. He refers to the decision of the Court of Final Appeal in China Everbright-IHD Pacific Ltd v Ch’ng Po (2002) 5 HKCFR 630 at 661F, where Millet NPJ said:

“It is trite law that converge and must be conversion of corporeal personal property: choses in action cannot be converted: Clerk & Lindsell on Torts (18^th Ed).”

“Title to Shares” is a chose in action. The certificate evidencing the right to title to those shares is, on the other hand, corporeal personal property.

32. At the time of the transaction between IAL and Dr H. C. Leung, the share certificate representing the shares in GBDL owned by Dr H. C. Leung had been lost. In order to enable the registration of the transfer application for a new share certificate was made to GBDL. Although the board of GBDL refused to issue a new share certificate for the purpose of registering that transfer, it did issue a new share certificate to enable registration of the transfer to Newide.

33. It is clearly arguable that if the transaction between IAL and Dr H. C. Leung was not capable of being rescinded, then upon the issue of the new share certificate, Dr H. C. Leung was obliged to hand it to IAL, to enable IAL to register its transaction. His act in handing the share certificate to Newide instead is arguably a conversion of the share certificate.

34. A simple amendment to the statement of claim remedies the matter. The application to strike out the prayer for damages for conversion is accordingly refused. IAL must make the appropriate amendment.

Amendment of the Defence and Counterclaim:

35. It follows, summary judgement having been refused, that Dr H. C. Leung may have leave to make the amendments in accordance with the draft filed.

Costs:

36. All questions of costs on each of the applications heard by me will be in the cause. There will be a certificate for two counsel.

	(John Saunders)
	Judge of the Court of First Instance High Court

Mr Jat Sew Tong, SC, instructed by Messrs Anthony Siu & Co., for the Plaintiff

Mr Chan Chi Hung, SC, leading Ms Christine Y K Tam, instructed by Messrs C L Chow & Mackinson Chan., for the 5^th Defendant

Mr David H P Wong, of Messrs Wong Hui & Co., for the 6^th Defendant

57706-EN-2007-07-10

INFO ALLIED LTD v. LEUNG TZE CHING AND OTHERS

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HCA 774/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 774 OF 2007

____________

BETWEEN

	INFO ALLIED LIMITED	Plaintiff
	and
	LEUNG TZE CHING	1^st Defendant
	LEUNG KA WOO	2^nd Defendant
	NG YAU YUNG	3^rd Defendant
	YOUNG SIU SUN	4^th Defendant
	LEUNG HO CHIU	5^th Defendant
	NEWIDE PACIFIC LIMITED	6^th Defendant

____________

Before: Deputy High Court Judge Gill in Chambers

Date of Hearing: 4 July 2007

Date of Judgment: 10 July 2007

______________

J U D G M E N T

______________

1. There are two applications. The first is to grant an interlocutory injunction pending trial. It has already been ordered on an interim basis, but on this date comes to an end. The second, running in tandem, is an application to discharge the interim injunction.

2. The injunction sought is to prevent the registered holder of a block of shares in a private limited company from dealing with the same in any way pending trial and that includes exercising voting rights of the shares.

3. Properly to set out the issues, I think it appropriate to record a history of events leading to the dispute and the action and the interlocutory injunction now asked for.

History

4. Dr Vincent Leung is a practising paediatrician in Hong Kong. In 1987 it came to his attention that a CT scan was on the market. It crossed his mind that this might form the basis of a profitable business venture, the running of an outpatients clinic at affordable prices. He shared these thoughts with colleagues in the medical profession, many of whom agreed to commit. Thus they pooled their resources, bought the CT scan and set up a clinic.

5. The vehicle used for the purpose was a company incorporated in 1987 called Group Benefit Development Limited (GBDL). The participants were allotted shares in accordance with the level of their invested capital.

6. Dr Leung (whom I shall call from now on Vincent Leung to distinguish him from another, unrelated, Dr Leung) was appointed Chairman and Managing Director, posts he has held ever since and to date.

7. One of the other founder shareholders (via a trust) and directors is Dr John Shum. He and Vincent Leung have known each other since childhood days and had remained firm friends through medical school and thence into practice. Dr Shum, too, has been on the Board throughout and to date.

8. Since its inception GBDL has proved by and large to be profitable and successful, and there are now four clinics owned and run by it.

9. But in 2005 cracks began to appear in what had been a convivial undertaking, engaged in by friends and colleagues in the medical profession.

10. It was said of Vincent Leung, who was essentially in control of the management, that he could be less than forthcoming when asked about the accounts and other internal matters. Dr Shum took up the cause, and found on investigation what he thought might be irregularities in the accounting. I do not need to consider the strength or depth of these concerns; that may be for another forum. Suffice to say that a body of shareholders, headed by Dr Shum, formed the view that the time had come whereby the affairs of GBDL should be conducted in a more open and transparent manner, and managed in a way that was more accountable to the shareholders. To this end it would be necessary to reconstitute the Board.

11. Vincent Leung strongly rejected the proposition that there had been any misconduct or irregularity in his management of the affairs of GBDL, and resisted the need for a change of the Board or of the way in which GBDL was run. And he had supporters amongst the shareholders.

12. Thus from about mid-2006 there came to emerge two camps amongst the shareholders, one led by Vincent Leung and the other by Dr Shum.

13. Dr Shum’s group realized that the Board could only be changed by a majority vote at a general meeting of GBDL. A tally of shares held by those in the Shum camp revealed that there was in fact a majority; but only just.

14. A decision was made to solidify the group under one head. To this end they incorporated, in October 2006, a company called Info Allied Limited (IAL). Dr Shum and those of GBDL who were in his camp were allotted shares in IAL in return for their shares in GBDL. An important document in the documentation prepared to bring this about was one headed “Info Allied Limited — Memorandum of Understanding,” which was signed by all the participating shareholders.

15. When the numbers were totalled up IAL had 51.13% of the shareholding of GBDL, thus a narrow but clear majority.

16. But when the transfers of shares to this new shareholder were submitted to the Board of GBDL for registration, that was adjourned and then, on 31 January 2007, rejected. But the transactions having been completed, on the face of it the original shareholders would thenceforth have been holding the shares in trust for and subject to the direction of the purchaser IAL.

17. Included amongst the former shareholders of GBDL who signed the Memorandum of Understanding and who pursued this course, selling his 50,000 shares in GBDL in return for a stake in IAL, was another Dr Leung, whom I shall refer to as H C Leung to distinguish him from Vincent Leung. H C Leung’s registered interest in GBDL was 1.47% of the total shareholding.

18. Meanwhile, Vincent Leung had been garnering his own support. He caused to be incorporated a BVI company called Newide Pacific Limited (Newide), which purchased or otherwise acquired the shares hitherto owned by those in the Leung camp. The mechanics of these transactions are not clear, though it would seem on a reading of the relevant minutes of the Board meeting of 31 January 2007 that these may have been similar to those employed by Dr Shum, save that Vincent Leung is the sole shareholder and sole director of Newide.

19. By this means Newide came to hold 47.99% of the shareholding of GBDL; thus close to the number held by IAL but not a majority.

20. Whilst at the meeting of 31 January the Board had declined to register the transfers to IAL, at the same meeting they approved of and registered the transfers to Newide.

21. To complete the picture to date, a company called Charm Advance Limited (Charm) owns 30,000 shares in GBDL. This amounts to .88% of the shareholding. Charm is a subsidiary of Hong Kong Health Check and Laboratory Holdings Company Limited (Health Check) which is a publicly listed company that features in the saga as I shall come to.

22. Then there was a startling development, one which gave rise to this action.

23. In March 2007, prior to the 10^th, H C Leung, who as I have said was one of those shareholders who had assigned his shares to IAL in return for shares in IAL, purported to sell the 50,000 shares still registered in his name to Newide in the sum of $615,000. Then at a Board meeting of 10 March 2007 registration of that transfer was approved.

24. H C Leung having completed the sale must have done so freely but then there was a change of heart, for in a letter handwritten dated 11 March, which I have seen, sent to Vincent Leung, he attempted to undo the sale, declaring it null and void. The letter reads in part:

“I have already sold my shares to IAL … The shares belong to IAL not to me. I have no right to those shares and no right to sell the shares to Newide …”

25. On the same day he wrote again, which letter stated in part:

“I will not complete the bought and sold agreement and the voting right will stay in my hand. I will not accept any sum of money related to the said agreement and I have not accepted any money from you.”

26. But by then there had been registration. The shares thenceforth were in Newide’s name. And that is the present position.

27. The significance of this goes to how closely matched are the shareholdings of the two camps in GBDL. Without H C Leung’s shares, IAL would be left with 49.66% and Newide 47.99%. H C Leung’s small holding is enough to alter the balance of power.

28. Dr Shum wrote to the Board demanding a cessation of the process whereby Newide had acquired H C Leung’s shares, without authority of the beneficial owner thereof, IAL. When that was declined, IAL brought these proceedings.

The Action

29. H C Leung is sued as D5 in conversion for selling shares belonging to IAL. Vincent Leung and three others as D1 to D4 are joined as directors who approved and registered the wrongful sale. Newide is joined as D6 because against it are sought first a declaration that it holds the shares it acquired from H C Leung as constructive trustee of IAL and secondly an injunction that it shall not deal with the shares in any way including exercising its voting rights other than in accordance with IAL’s instructions.

30. In essence, for determination at trial will be whether the sale between H C Leung and IAL was a genuine and valid sale that was completed, and if so, whether Newide can establish that it acquired H C Leung’s shares as a bona fide purchaser without notice, so as to defeat IAL’s equitable interest therein.

These Applications

31. Shortly after issuing this writ, IAL applied on 30 April 2007 for an interlocutory injunction against Newide to restrain it from dealing in any way with the H C Leung shares, including exercising its voting rights, except in accordance with instructions from IAL pending judgment in the action proper. This is the first matter before me.

32. On 4 May 2007 an interim injunction in terms was ordered. That order remains extant until the date of this judgment.

33. Meanwhile there is also an application made by Newide to discharge the interim injunction.

Recent Developments

34. On 7 June 2007 the GBDL Board approved and registered a transfer of Newide’s shareholding in GBDL (but save and except the H C Leung shares) to a company called Speedco Pacific Limited (Speedco) which is another BVI company controlled by Vincent Leung.

35. On 8 June there was an announcement by Health Check that Charm, its subsidiary, had entered into an agreement conditional upon due diligence to purchase all of Speedco’s interest in GBDL; that is 47.99% of the total shareholding, thus increasing Charm’s holding to 48.87% of the total.

Matters to Come

36. Finally there is one further pertinent development but that is for the future; namely, 14 July 2007.

37. On that date there is scheduled to take place an EGM sought by Dr Shum and others in his camp to give effect to the proposals to alter the make-up of the Board.

38. If this goes through, those in the camp of Dr Shum will have effective control of the Board. That said, the proposal does not seek to exclude Vincent Leung.

The Legal Principles

39. The law relating to the granting or refusal of applications for interlocutory injunctions emerges from the speech of Lord Diplock in American Cyanamid Co. v Ethicon Ltd (1975) AC 396.

40. First is that there must be a serious question to be tried. If not, the application fails at this point.

41. Second is to consider whether, if the plaintiff succeeds after trial, it could be adequately compensated in damages. If so and the defendant has the means to pay, there should be no interlocutory injunction. If not then third is to consider if the interlocutory injunction is granted, whether after trial a successful defendant could be adequately compensated by the plaintiff’s undertaking in damages, and that it has the means to pay. If so, then this would not be a reason to refuse the injunction.

42. Where there is doubt about the adequacy of damages in respect of both parties the court is obliged to weigh the needs of the parties the one against the other to establish where the balance of convenience lies.

43. This is now well settled law and recognised in Hong Kong; see the White Book at 29/1/9.

A Serious Issued to be Tried?

44. It is apparent from the pleadings and affidavit evidence filed against the application that the genuineness and validity of the contract between H C Leung and IAL is challenged; further, it is said that Newide had neither actual nor constructive notice of that sale, real or otherwise.

45. It is not for me to attempt to resolve material disputes of fact and I do not. Suffice for me to find that IAL has a strong chance of success in demonstrating on the papers that the transaction was genuine and complete, and in resisting the proposition that Newide had no notice, either actual or constructive.

46. One only has to consider the roles played by Vincent Leung; on the one hand the controlling mind of Newide; on the other a director of GBDL instrumental in the refusal to register the transfers to IAL which included the H C Leung block of shares. I say no more about that.

47. There is, most assuredly, a serious issue to be tried.

Damages an Adequate Remedy?

48. For IAL, I think not.

49. I have already mentioned the balance of power enjoyed by the ultimate holder of the H C Leung block of shares. If Newide is unrestricted it can transfer them to Speedco. Then if the transfer to Charm becomes unconditional Charm will have a majority shareholding in GBDL. IAL will be a minority partner in an arrangement not of its making, and prospectively very different from that of the original make up of GBDL, which was a body of doctors getting together to run a profitable undertaking.

50. If on the other hand a sale by IAL to Charm goes on to the table, the shareholding being a minority interest, the offering price may be significantly lower than might otherwise have been the case.

51. As has been submitted, all sorts of factors can influence what shares are worth and how much a buyer might be prepared to pay for them. But what is not refutable is that a majority interest will be worth more than a minority one.

52. This is a prejudice which may not be able to be reversed, particularly as final resolution may be months or even more than a year away. IAL’s loss of majority control in GBDL is not, as I find, something that can be quantified and recognised in damages.

53. As for Newide, it currently has but 1.47% in GBDL. It has already rid itself of the 47.99% formerly held. If for the meantime it is denied the opportunity to exercise its voting rights or otherwise dispose of the shares it seems to me that the deprivation following a successful defence could and probably will be adequately addressed in damages.

54. In these circumstances there is no good reason to withhold the granting of the injunction.

Balance of Convenience

55. Although there is no need for me to consider this any more, I do so to demonstrate that were it to have been a matter for determination I would have found in favour of IAL.

56. The loss of majority control by IAL would be irreversibly prejudicial for reasons I have given.

57. The loss of majority to Newide and, going behind the corporate veil, the Vincent Leung camp, will probably amount to a change of composition of the Board of Directors of GBDL and possible change in governance. That will not necessarily be prejudicial; indeed it would be expected to be otherwise, given that the emphasis is said to be on improving management, and on transparency and accountability to shareholders, and that means all shareholders. And Vincent Leung will still be on the Board unless he chooses otherwise.

58. In any event, a minority shareholder with a genuine grievance has his remedies available to him.

The Result

59. IAL shall have its injunction in terms applied for. The interim order having run its course, there is no need for me to deal with the application to discharge it.

60. Costs are nisi. These, including those reserved, shall be to the plaintiff in any event.

(D M B Gill)
Deputy High Court Judge

Mr Jat Sew Tong, SC, leading Mr B Mak, instructed by Messrs Anthony Siu & Co., for the Plaintiff

Miss W Tsui, instructed by Messrs Wong Hui & Co., for the 6^th Defendant