ZHANG XIUHONG v. LIU WENCHEN AND OTHERS

HCA 2118/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2118 OF 2012

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J U D G M E N T

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Introduction

1.  The plaintiff claims against the 4^th defendant for various declarations that changes in membership and directorship were void and of effect and that its register of members and directors should be rectified.

2.  On 23 December 2016, 3½ years after the 4^th defendant filed its defence, the 4^th defendant filed a notice to withdraw its defence.  In addition, the 4^th defendant filed an amended acknowledgement of service, indicating that it does not intend to contest the proceedings.

3.  Against these developments, the plaintiff seeks default judgment against the 4^th defendant. 

4.  The 4^th defendant’s solicitors have confirmed that the 4^th defendant would not appear at this hearing.

Background

5.  The 4^th defendant is a Hong Kong company with an authorized share capital of HK$40,000 divided into 40,000 shares (“the Shares”).

6.  By a series of transfers in January and March 2011, the plaintiff became the sole legal and beneficial owner of the 4^th defendant. 

7.  In about July 2012, the plaintiff became aware of a fraud whereby the Shares were purportedly transferred by him to the 1^st defendant; and later, the 1^st defendant transferred 14,000 Shares and 26,000 Shares to the 2^nd and 3^rd defendants respectively (“the disputed transfers”).  The plaintiff and his nominee (Mr Zhang Yanjie) were also removed from directorship.  In their place, the 1^st, 2^nd and 3^rd defendants, Wu Yunfeng, Li Yong, Fu Yanling and Wang Lei (collectively “the purported directors”) were purportedly appointed as directors of the 4^th defendant at different points in time.

8.  The disputed transfers were effected through signatures and fingerprints purporting to be the plaintiff’s but were in fact forged. 

9.  The plaintiff has since obtained default judgment against the 1^st to 3^rd defendants in June 2016 to set aside the disputed transfers and has recovered the Shares.  It was further ordered that the 1^st defendant do pay the plaintiff equitable compensation for breach of trust, and damages for wrongful interference with the plaintiff’s legal and contractual rights by unlawful means, with such compensation and damages to be assessed. 

10.  The 4^th defendant, being the subject company, is just a nominal defendant against whom the plaintiff seeks consequential reliefs.

11.  As regards the 5^th to 7^th defendants, in gist, the 5^th defendant is the sole practitioner of Messrs Augustine CY Tong & Co (“ACYT”), a firm of solicitors. The 7^th defendant is an employee (Office Manager and Legal Clerk) of ACYT, and the sole director and shareholder of the 6^th defendant.

12.  The plaintiff says that in implementing the disputed transfers and change of directorship in the 4^th defendant, the 5^th to 7^th defendants have acted in breach of their duty of care to the plaintiff.  Those defendants are allegedly also liable in the tort of unlawful interference, breach of trust in respect of the re-transfer of the dispute transfers, dishonest assistance of the 1^st defendant in his breach of trust, conspiracy to defraud or injure the economic interests of the plaintiff. 

Legal principles for entering default judgment

13.  The following principles regarding default judgment are well established:

(a) The statement of claim must show a case for the order the plaintiff seeks to obtain.  The Court’s task (in exercising its discretion) is to see whether the plaintiff appears to be entitled to judgment on his statement of claim.

(b) The Court cannot receive any evidence but must give judgment according to the pleadings alone.

(c) A plaintiff may apply for default judgment against a defendant and proceed with the action against other defendants if his claim against the defendant in default is severable from his claim against the other defendants.

Chan Ka Hay & ors v Sino Favour Development Limited & ors, HCA 2457/2008 (unreported, 9 October 2012) at §22; Hong Kong Civil Procedure 2017, Vol 1, at §§19/7/6 & 19/7/11:

14.  Further, there is a general proposition that a declaration will not be granted when giving judgment without trial (e.g. judgment in default of defence).  However, it is a rule of practice and not of law, and will give way to the paramount duty of the Court to do the fullest justice to the plaintiff to which he is entitled: Law Yuk Fong v Man Chung Wai & anor, HCA 2195/2015 (unreported, 16 January 2017) at §17, DHCJ Marlene Ng.

Plaintiff appears entitled to judgment

15.  In the present application, there are two claims of rectification orders against the 4^th defendant as follows:

(1)   An order that the 4^th defendant’s register of members be rectified so as to remove the 2^nd and 3^rd defendants as members and reinstate the 1^st defendant as a member holding the 40,000 shares.

(2)   An order that the 4^th defendant’s register of directors be rectified so as to remove the 2^nd and 3^rd defendants as directors and reinstate the plaintiff and Mr Zhang Yanjie as directors.

16.  The Court has power to rectify a register of members pursuant to section 633 of the Companies Ordinance (Cap 622).  It also has power to rectify a register of directors: eg She Tsu Yi v Tsui Ki Ting & ors, HCA 1684/2004 (unreported, 5 November 2007) at §123, Poon J (as he then was).

17.  The default judgment against the 1^st to 3^rd defendants shows a case for saying that without sufficient cause, the names of the 1^st to 3^rd defendants have been entered in the register of members of a company under section 633 of Cap 622.  Similarly, the purported removal of the plaintiff and Mr Zhang Yanjie as directors was also null and void.

18.  Thus the plaintiff entitled to require, as a matter of consequential relief, the 4^th defendant to rectify its register of members and register of directors accordingly. 

19.  Following from that, fullest justice can only be done to the plaintiff if it is declared that the following are null and void:

(1)   the Memorandum (forged);

(2)   the Letter of Resignation (forged);

(3)   the purported removal of Mr. Zhang Yanjie and the purported resignation of the plaintiff as directors of the 4^th defendant on or around 1 March 2012;

(4)   the purported appointment of the 1^st defendant as director of the 4^th defendant on or around 1 March 2012;

(5)   the purported appointment of the said Persons as directors of the 4^th defendant on or around 6 March 2012;

(6)   the purported appointment of the 2^nd defendant as director of the 4^th defendant on or around 5 April 2012;

(7)   the purported appointment of the 3^rd defendant as director of the 4^th defendant on or around 30 April 2012;

(8)   all directors’ resolutions purportedly passed by the 1^st defendant and all other acts purportedly done by the 1^st defendant as director of the 4^th defendant as from 1 March 2012; and

(9)   all directors’ resolutions purportedly passed by the purported directors, the 2^nd defendant or 3^rd defendant (or any of them) and all other acts purportedly done by them (or any of them) as directors of the 4^th defendant.

20.  These declarations do serve a practical purpose of showing third parties of the lack of authority of the 1^st to 3^rd defendants and the purported directors, and to bind the 4^th defendant.  These cannot be achieved only by ordering the re-transfer of shares and the rectification of registers.

Severability of claims against D5-D7

21.  There will be a full-blown trial against the 5^th to 7^th defendants. The claims against them are clearly severable from those against the 4^th defendant. The 5^th to 7^th defendants did not contest the plaintiff’s claims for setting aside the share transfer and appointment of directors.  They are simply contending that they had not breached any duty, were unaware of the fraudulent acts of the 1^st to 3^rd defendants and that the 5^th to 7 defendants were not part of the conspiracy.

22.  For the above reasons, I enter default judgment against the 4^th defendant for rectification of its register of members and directors and the declarations sought.  Costs shall be to the plaintiff to be borne by the 4^th defendant.

23.  I thank Mr Siu for his assistance.

HCA 2118/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2118 OF 2012

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D E C I S I O N

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INTRODUCTION

1.  There are 2 applications before this court:

(1)   The plaintiff’s summons seeking an order for split trial on liability and quantum; and

(2)   The question of costs upon withdrawal of the 5^th to 7^th defendants’ summons seeking to stay the present action pending determination of 4 actions in Mainland China.

BACKGROUND

2.  The following facts are adopted from the helpful summary in the skeleton submission of Mr Patrick Siu, counsel for the plaintiff.

3.  The 4^th defendant is a Hong Kong company with an authorized share capital of HK$40,000 divided into 40,000 shares (“the Shares”).  Its major asset is its 45% interest in a Sino-foreign joint venture company in the PRC called Hebei Chengjin Real Estate Development Co Ltd (“Chengjin RED”).  The other 55% interest is held by the Chinese joint venture party.

4.  Chengjin RED’s scope of business was to build and develop a project called “Fashion Big World”.  In this connection, it holds a valuable piece of land in Shijiazhuang City, the PRC.

5.  A domestic enterprise called Hebei Chengjin Asset Management Services Co Ltd (“Chengjin AMS”) was set up in Shijiazhuang City to manage the assets, operations, finance and personnel of Chengjin RED.

6.  By a series of transfers in January and March 2011, the plaintiff became the sole legal and beneficial owner of the 4^th defendant.  However, allegedly in breach of the shares transfer agreement, the 1^st defendant has failed to transfer his 45% interest in Chengjin AMS to the plaintiff.

7.  On 16 February 2011, a gang showed up at the office of Chengjin AMS, alleging that a Hebei Bo Shi Investment Company Limited has been entrusted by the PRC authority to take over Chengjin AMS.

8.  In addition, the Chinese joint venture partner has commenced proceedings in the PRC to apply for compulsory liquidation of Chengjin RED.  A “Liquidation Group” was formed.

9.  In September 2011, Chengjin RED acting through the Liquidation Group commenced a civil action against the 4^th defendant in the PRC, alleging that the 4^th defendant was not the foreign joint venture party of Chengjin RED (referred to as “Case 2” in the skeleton submission of Mr Leung, counsel for the 5^th to 7^th defendants).  If Chengjin RED were to succeed in that action, the 4^th defendant’s 45% interest in Chengjin RED would be completely lost.

10.  The plaintiff therefore caused the 4^th defendant to instruct a PRC lawyer to contest Case 2.  It was in these circumstances that the plaintiff became aware of a fraud whereby his shares in the 4^th defendant were purportedly re-transferred to the 1^st defendant and later to the 2^nd and 3^rd defendants respectively (“the disputed transfers”).  The plaintiff and his nominee were also removed from directorship and were replaced by the 2^nd and 3^rd defendants.

11.  The plaintiff alleges that the disputed transfers were effected through signatures and fingerprints purported to be his but were in fact forged.

12.  The plaintiff has since obtained default judgment against the 1^st to 3^rd defendants in June 2016 to set aside the disputed transfers and has recovered the Shares.  It was further ordered that the 1^st defendant do pay the plaintiff equitable compensation for breach of trust, and damages for wrongful interference with the plaintiff’s legal and contractual rights by unlawful means, with such compensation and damages to be assessed. 

13.  As regards the 5^th to 7^th defendants, in gist, the 5^th defendant is the sole practitioner of Messrs Augustine CY Tong & Co (“ACYT”), a firm of solicitors.  The 7^th defendant is an employee (Office Manager and Legal Clerk) of ACYT, and the sole director and shareholder of the 6^th defendant.

14.  The 5^th to 7^th defendants had acted for the plaintiff in the transfer of the Shares from the 1^st defendant to the plaintiff.  The plaintiff says that in implementing the disputed transfers and change of directorship in the 4^th defendant, the 5^th to 7^th defendants have acted in breach of their duty of care to the plaintiff.  In particular:

(a)   They have failed to obtain instructions and confirmations from the plaintiff.

(b)   They have failed to verify with the plaintiff whether the purported signature and fingerprints on the documents contained in the 1/3/2012 Witnessing Certificate belonged to the plaintiff.

(c)   They have failed to notice the discrepancies between that purported signature of the plaintiff and his usual signatures.

(d)   They have relied on a fake email from a person impersonating the plaintiff’s assistant as instructions of the plaintiff to transfer the Shares.

15.  The plaintiff has pleaded further causes of action against the 5^th to 7^th defendants in the tort of unlawful interference, breach of trust in respect of the re-transfer of the Shares from the plaintiff to the 1^st defendant, dishonest assistance of the 1^st defendant in his breach of trust, conspiracy to defraud or injure the economic interests of the plaintiff. 

SUMMONS ON SPLIT TRIAL

Legal principles

16.  The principles on ordering a split trial can be summarized as follows:

(a)   The general rule is that all the issues in a case should be tried together.

(b)   An order for split trial should only be made in “exceptional circumstances or on special grounds”. The Court should be “extremely cautious” before ordering a split trial.

(c)   The party who seeks a split trial has the burden of demonstrating exceptional circumstances which justify a split trial.

(d)   That party must inter alia provide information that enables the Court to estimate, with a reasonable degree of accuracy, how much time and costs would be saved by a split trial.  A failure to provide such information could, by itself, justify the Court in rejecting the application.

(e)   The Court would take into account, amongst others, the duplication of calling witnesses in the first trial and again in the second trial; and the delay to the second trial if the decision reached in the first trial is appealed against.

(f)   A split trial may be ordered where there is clear demarcation between the issues on liability and quantum or the issue of damages itself is detailed and complicated.

See: Secretary for Justice v Lau Hon Mo [2015] 3 HKLRD 561, §§22-23 per Registrar Lung; Pagoda Ventures Ltd v Je Fulfilment Ltd (13 June 2008) HCCL 39/2007, §§14-20 per Stone J; Mai Gou v Mak Chik Lun [2001] 3 HKLRD 248, 251B-J per Le Pichon JA; Telford Development Ltd v Shui On Construction Co Ltd [1990] 2 HKC 110 (CA), 117B-F per Bokhary J (as he then was).

17.  As far as the 5^th to 7^th defendants are concerned, the plaintiff no longer claims the loss in value of the Shares as those Shares have been returned to the plaintiff.  Rather, the plaintiff will be seeking:

(a)   Financing costs, ie the actual sum which the plaintiff had to borrow and the actual interest which the plaintiff had to pay: decision dated 14 November 2016, §47, DHCJ Wilson Chan (as he then was).

(b)   Administrative, legal and other costs and expenses incurred by the plaintiff in the PRC to preserve his rights in respect of the Shares.

(c)   Account of profits.

18.  In addition, the plaintiff has to show that those damages were not remote, were foreseeable and that he had mitigated loss. 

19.  Mr Siu gives 3 reasons for having a split trial:

(a)   The issue of quantum may be complicated in itself and that there was a clear demarcation from the issue of liability.  There could be substantial saving of time and costs saved if the liability is determined against the plaintiff.  (reason 1)

(b)   The plaintiff seeks an account of profits and order of equitable compensation from the 5^th to 7^th defendants, in the alternative to damages.  As a matter of recognized practice, the account taking exercise would be conducted separately.  (reason 2)

(c)   The plaintiff has obtained default judgment against the 1^st defendant. There would be a separate trial of the issue of equitable compensation for breach of trust, damages for wrongful interference with the plaintiff’s legal and contractual rights by unlawful means anyway. (reason 3)

20.  With regard to reason 1, although there are multi-issues (fraud, conspiracy, forgery of documents, legal relationship and whether fiduciary duties existed) in the case against the 5^th to 7^th defendants, essentially this is a case of tort and “professional negligence” which harmed only one plaintiff.  I query if the case can be said to be complicated.  There is no estimate as to the time needed for a trial on liability.

21.  Mr Leung has demonstrated that the issue of liability and quantum may have a significant degree of factual overlap.  In that regard, the plaintiff has pleaded, amongst others, the following facts as part of his case on liability:

(a)   In February 2011, the operations of Chengjin AMS (the company which manages the assets of Chengjin RED) were forcibly taken over by a gang.

(b)   In June 2011, Chengjin RED was put into liquidation in the PRC.

(c)   In August 2011, a sum of RMB 40 million was seized from Chengjin AMS by the “Liquidation Group” (清算組) of Chenglin RED.

(d)   In September 2011, Case 2 was commenced.

(e)   The 2^nd and 3^rd defendants did not contest Case 2, which (as pleaded by the plaintiff) demonstrated that the 2^nd and 3^rd defendants were not bona fide purchasers of the Shares.

(f)   The 2^nd and 3^rd defendants did nothing to cancel the board resolution of the 4^th defendant by which the 4^th defendant withdrew from Case 2. This (according to the plaintiff) again demonstrated that the 2^nd and 3^rd defendants were not bona fide purchasers of the Shares.

22.  I agree with Mr Leung that the events in the preceding paragraph would also affect the quantum of the plaintiff’s loss.  This is because the value of the Shares might have changed. It would have affected the plaintiff’s decision to borrow (presumably on security of the Shares) and the difference in interest rates if he could deploy the Shares than when he could not.  In that regard, he may have to commission a valuation report showing value of the Shares at different points in time when he had taken out or intended to take out loans.  It cannot be said that there was a clear demarcation of the issues of liability and quantum.

23.  More importantly, I am not satisfied on the amended statement of claim that the issue of damages is complicated.  The plaintiff claims for financing costs.  It is up to him to prove the interest rate, the interest period and the principal sum(s).  For administrative, legal and other costs, it would be a matter of adducing relevant invoices and receipts and establishing causation. 

24.  Mr Siu has not given the estimated time that would be saved if the issue of quantum is tried separately.  That is not fatal, provided there is evidence to enable the court to make an informed estimate.  The 5^th to 7^th defendants have no knowledge of much of the background and the plaintiff’s allegations. Presumably the evidence would largely come from the plaintiff’s side.  Given what needs to be proved as set out in paragraphs 22-23, it appears that the time for cross-examination of the plaintiff and the valuation expert would be about 2-3 days.  Saving of 2‑3 days for trial on quantum could hardly be regarded as substantial saving. 

25.  Reason 1 is not substantiated.

26.  Reason 2 is a relevant factor for ordering a split trial.  Mr Siu relies on the following case:

(a)   Re the Estate of Kong Wing Hong, HCMP 2045/2012, 24 February 2015, at §85: the ex-executor was found to have used the estate’s money for his own business, failed to lease out property of the estate and breached fiduciary duties.

(b)   Tagtrends Asia Ltd & anor v Tagtrends Global Ltd & ors, HCA 1847/2011, 3 February 2017, at §§12-19 was a case involving intellectual property rights, breach of fiduciary duties and the remedy of accounts.

27.  It was plainly correct to make a split trial order in those cases. However, I doubt if they have purported to establish a “practice” to order split trial whenever the remedy of accounts is sought.

28.  Reason 3 does not assist the plaintiff.  The 1^st defendant has never taken part in this action.  Even if he will take part in any assessment (eg to show the dividends received and profits made therefrom), his part will hardly be longer than a day.  There is no order for assessment as against the 2^nd and 3^rd defendants.

29.  Without disrespect, none of the reasons given by Mr Siu weigh in favour of a split trial. 

30.  More importantly, this case has only reached the stage of exchange of list of documents 5 years since its commencement.  For about 17 months, the plaintiff has refused to give discovery on quantum on the excuse that the summons for a split trial has not yet been disposed of.  This has hindered the 5^th to 7^th defendants in negotiating a settlement and is contrary to the underlying objective of facilitating settlement of disputes:  Order 1A, rule 1(e) of the Rules of the High Court.

31.  In the course of the arguments, I have asked Mr Siu whether, if I was minded to order a split trial, I could impose a condition for the plaintiff to provide, say, a statement of damages with a valuation report on the Shares. This would address the concern of the 5^th to 7^th defendants in negotiating a settlement.  Mr Siu was open to that idea and asked for 3 months to prepare the valuation report.  However, on reflection, I wonder if that course would result in substantial saving of costs.

32.  I am not satisfied that there are exceptional circumstances or special grounds to order a split trial.  The summons is dismissed with costs to the 5^th to 7^th defendants.

Costs on withdrawal of stay summons

33.  The 5^th to 7^th defendants have withdrawn the stay summons on their own volition.  As a starting point, costs should follow the event and be to the plaintiff.

34.  These proceedings were commenced by the plaintiff as of right and an application for stay of proceedings could only be granted in rare and compelling circumstances.  Any stay must not cause injustice to the plaintiff. The 5^th to 7^th defendants must satisfy the court that continuing the proceedings would be unjust to them.  AIG Europe Ltd & ors v Fast-Link Express Ltd & ors, HCAJ 114/2014, 10 January 2017, §§9-13. 

35.  There were 4 cases in the PRC that the 5^th to 7^th defendants had wanted to wait for the outcome.  Amongst them was Case 2, and Case 3 by one Mr Liu against the plaintiff, which apparently had been dismissed. 

36.  At the time the summons for stay was taken out (ie before Deputy Judge Wilson Chan granted leave to amend the statement of claim on 14 November 2016), the plaintiff’s own case was that the 4^th defendant’s major valuable asset was its 45% interest in Chengjin RED.  If Chengjin RED were to succeed in the PRC proceedings, the 4^th defendant would not be recognized as the foreign joint venture partner.  The 4^th defendant’s investment in Chengjin RED would then be lost and it would become completely worthless.  The only relief that the plaintiff sought against the 5^th to 7^th defendants then was for loss of value of the Shares. 

37.  Case 2 was thus highly relevant to the plaintiff’s case.  The 5^th to 7^th defendants have kept asking the plaintiff for information as to progress of the PRC actions but met with no reply.  They thus issued the stay summons.

38.  Mr Siu submits that the 5^th to 7^th defendants were bound to fail on the stay application because:

(a)   They have proceeded on an unsubstantiated basis that the 4^th defendant had no other asset except its interest in Chengjin RED.  The plaintiff has since filed an affirmation through his solicitor (Mr Wai) that the 4^th defendant does have other assets.  (reason (a))

(b)   In respect of Case 3, the 1^st defendant claimed that the plaintiff should return the Shares to him.  The 1^st defendant has already lost that case, the appeal thereunder and his application for retrial. It was fanciful for the 5^th to 7^th defendant to suggest that the present action should be stayed pending any other step by the 1^st defendant to overturn all previous decisions.  (reason (b))

(c)   Mr Siu further submits that the stay sought was too wide in scope as it sought to stay the whole action, ie even that part involving the 1^st to 4^th defendants (when there was no default judgment entered then).  (reason (c))

(d)   The stay, if granted, would be for an indefinite period given the progress of the PRC proceedings.  There was no reason why the plaintiff should need to wait for the outcome of the PRC proceedings.  (reason (d))

39.  With respect to Mr Siu, reason (a) would not assist the plaintiff.  At all stages of an action, parties have a duty to ensure that the court’s time will not be wasted on futile litigation.  On the plaintiff’s own case, it would have been unjust to the 5^th to 7^th defendants to continue this action.  I am of the view that the stay summons was taken out properly.

40.  However, such bases would have been erased when Mr Wai filed an affirmation to show that the 4^th defendant has other assets or upon amendment to the statement of claim.

41.  I accept Mr Siu’s submission on reason (b).

42.  For reason (c), once the court accepts the significance of Case 2 alone, there is a good case for a stay.   The width of the summons would not affect the stay except on the question of costs.

43.  For reason (d), this may be a valid reason that the court may weigh to refuse a stay.

44.  Taking all circumstances into account, it cannot be said that the stay summons was hopeless from inception.  I am of the view that the costs up to and including the filing and service of the affirmation in support of the stay summons should be costs in the cause.  Costs thereafter should be borne by the 5^th to 7^th defendants. 

45.  I order a set-off of the 2 sets of costs.  Overall, there shall be no order as to costs on both summonses save that costs of the stay summons up to and including the filing and service of the affirmation in support shall be in the cause.

CONCLUSION

46.  I order as follows:

(a) The summons for a split trial is dismissed;

(b) Leave is granted to the 5^th and 7^th defendants to withdraw the stay summons;

(c) On a nisi basis, there be no order as to costs on both summonses save that costs of the stay summons up to and including the filing and service of the affirmation in support shall be in the cause.

47.  I thank counsel for their able assistance and succinct arguments.

HCA 2118/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2118 OF 2012

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D E C I S I O N

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1.  This is the 5^th to 7^th defendants’ application for leave to appeal against the judgment of this court dated 14 November 2016 (“the Judgment”). The proposed grounds of appeal are set out in the draft Notice of Appeal attached to the Summons dated 28 November 2016.

2.  Leave to appeal will be granted only if the applicant can show that there is reasonable prospect of success.  This involves the notion that the prospects of succeeding must be “reasonable” and therefore more than “fanciful”, but without having to be “probable”.

3.  In the Judgment, this court exercised its discretion to grant the plaintiff leave to amend.  In an appropriate case, the Court of Appeal can overturn such an exercise of discretion.  This can be done if the decision below was plainly wrong, or based on a misapprehension of the facts, or fail to take into account relevant matters, or took into account irrelevant matters.

4.  The 5^th to 7^th defendants are essentially contending that the email correspondence relied on by the plaintiff is not sufficient to sustain an inference of fraud.  In other words, they are challenging this court’s assessment of the evidence.

5.  However, in paragraphs 37 to 42 of the Judgment, this court has analysed the email correspondence, before coming to the conclusion that this is not a case where the proposed amendments have no prospect of success.  Rather, the dispute must be resolved at trial, the proper inference to be drawn from the email is a matter for trial. 

6.  As to the pleas in paragraph 87 of the Amended Statement of Claim about financing cost and other expenses, the level of precision required in pleading a particular head of damage is determined by the need to provide a fair and sufficient indication of the case that is being brought and that the opposing party has to meet (see: McGregor on Damages, 19^th edition, at paragraph 3-005 on page 25).

7.  In my view, there is no sufficient basis for the 5^th to 7^th defendants to invite the appellate court to disturb this court’s ruling at paragraph 47 of the Judgment that the level of precision of the plea is already sufficient. Further details of such losses are a matter of evidence. As pointed out by this court at paragraph 47 of the Judgment, whether the plaintiff can prove such loss is of course a matter for trial.

8.  For the reasons stated above, I am not satisfied that the 5^th to 7^th defendants have reasonable prospect of success in their proposed appeal against the Judgment.  Application for leave to appeal is accordingly dismissed.

HCA 2118/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2118 OF 2012

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D E C I S I O N

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Introduction

1.  This the hearing of the plaintiff’s summons dated 29 July 2016 (the “Summons”) for leave to amend his Statement of Claim in respect of his claims against the 5^th to 7^th defendants.

Background

2.  The full background of the case has been set out in the Statement of Claim.  The summary below is adopted from the plaintiff’s Skeleton Submissions.

3.  The 4^th defendant is a Hong Kong company with an authorized share capital of HK$40,000 divided into 40,000 shares. 

4.  The 4^th defendant’s major asset is its 45% interest in a Sino-foreign joint venture company in the People’s Republic of China (“PRC”), called Hebei Chengjin Real Estate Development Co Ltd (“Chengjin RED”). The other 55% interest is held by the Chinese joint venture party, Shijiazhuang City Economic Development Company (“Shijiazhuang EDC”).

5.  Chengjin RED’s scope of business was to build and develop a project called “Fashion Big World”.  In this connection, it holds a valuable piece of land in Shijiazhuang City, the PRC. 

6.  A domestic enterprise called Hebei Chengjin Asset Management Services Co Ltd (“Chengjin AMS”) was set up in Shijiazhuang City to manage the assets, operations, finance and personnel of Chengjin RED.

7.  By a shares transfer agreement dated 19 December 2010, the 1^st defendant agreed to transfer to the plaintiff, at a consideration of RMB45 million, the following: (i) the 4^th defendant; (ii) the 1^st defendant’s 45% interest in Chengjin RED held through the 4^th defendant; and (iii) the 1^st defendant’s 45% interest in Chengjin AMS.

8.  On 11 January 2011, the 1^st defendant transferred all 40,000 shares in the 4^th defendant to the plaintiff and his nominees, namely: (i) 14,000 shares to the plaintiff; (ii) 13,200 shares to Mr Chen Chengji; and (iii) 12,800 shares to Mr Zhang Xutong.  On 18 March 2011, Mr Chen and Mr Zhang transferred the said 13,200 and 12,800 shares to the plaintiff, who had since then become the sole legal and beneficial owner of the 4^th defendant.

9.  On the other hand, the plaintiff alleges that in breach of the shares transfer agreement, the 1^st defendant has failed to transfer his 45% interest in Chengjin AMS to the plaintiff.  Further, on 16 February 2011, a gang showed up at the office of Chengjin AMS, alleging that a Hebei Bo Shi Investment Company Limited has been entrusted by the PRC authority to take over Chengjin AMS.

10.  In addition, Shijiazhuang EDC has commenced proceedings in the PRC to apply for compulsory liquidation of Chengjin RED.  A “Liquidation Group” was formed. 

11.  In September 2011, Chengjin RED acting through the Liquidation Group commenced a civil action against the 4^th defendant in the PRC, alleging that the 4^th defendant is not the foreign joint venture party of Chengjin RED.  If Chengjin RED succeeds in that action, the 4^th defendant’s 45% interest in Chengjin RED would be completely lost.

12.  The plaintiff therefore caused the 4^th defendant to instruct a PRC lawyer to contest that action.  It was in these circumstances that the plaintiff became aware of the following: –

(1)   On or around 1 March 2012, the 40,000 shares in the 4^th defendant registered in the plaintiff’s name were purportedly re-transferred to the 1^st defendant.  The plaintiff and his nominee ceased to be directors of the 4^th defendant, whereas the 1^st defendant was purportedly appointed as a director.

(2)   On or around 5 April 2012, the 1^st defendant purportedly transferred 14,000 shares in the 4^th defendant to the 2^nd defendant, and the 2^nd defendant was purportedly appointed as a director of the 4^th defendant.

(3)   On or around 30 April 2012, the 1^st defendant ceased to be a director of the 4^th defendant, and then the 3^rd defendant was purportedly appointed as a director.  On or around 8 May 2012, the 1^st defendant purportedly transferred the remaining 26,000 shares in the 4th defendant to the 3^rd defendant.

13.  It was discovered by the plaintiff in July 2012 that there were various documents with the forged signatures of the plaintiff in respect of the transfer of shares from the plaintiff to the 1^st defendant, and the removal of the plaintiff and his nominee as directors of the 4^th defendant, which were contained in a witnessing certificate dated 1 March 2012 (“1/3/2012 Witnessing Certificate”). 

Principles on amendment of pleadings

14.  The principles under which the court exercises its discretion to allow or refuse amendments to pleadings can be summarized as follows (per DHCJ Lok, as he then was, in Li Shiu To v Li Shiu Tsang, HCA 416/2003 (Decision dated 14/08/2012), at paragraphs 14 to 17 and 32): –

(1)   All amendments should be made as are necessary to enable the real questions between the parties to be decided.

(2)   Amendments should not be refused solely because they have been made by the honest fault or mistake of the party applying for leave to make them; it is not the function of the Court to punish parties for mistakes which they have made in the conduct of their cases by deciding otherwise than in accordance with their rights.

(3)   However blameworthy (short of bad faith) may have been a party’s failure to plead the subject-matter of a proposed amendment earlier, and however late the application for leave to make such amendment may have been, the application should, in general, be allowed, provided that allowing it will not prejudice the other party.

(4)   There is no injustice to the other party if he can be compensated by appropriate orders as to costs.

(5)   If the amendment application is made in circumstances offending the underlying objectives of the CJR, the court may have to balance all the factors in the case in determining whether to grant the application.

(6)   There is a heightened concern to guard against late applications after the implementation of the CJR.  If a party makes a late application to amend the pleading with the effect that the trial date may have to be adjourned, the court would be very reluctant in allowing the application unless there are exceptional circumstances.

(7)   The primary aim in exercising the case management powers of the court is to secure the just resolution of disputes in accordance with the substantive rights of the parties.

15.  To the above principles, Mr Wilson Leung, counsel for the 5^th to 7^th defendants, added the following: –

(1)   The court will not allow an amendment which has no prospect of success: C&A Consultants Ltd v Hong Kong Airlines Ltd, HCA 279/2007 (Judgment of DHCJ Carlson dated 17/08/2010), paragraph 28.

(2)   Thus, the court will scrutinise whether a proposed amendment has any substance.  This is especially important where a party is seeking to introduce an allegation of fraud or other serious wrongdoing for the first time (“the court will ask why this was not pleaded originally, and may require to be satisfied as to the truth and substantiality of the proposed amendment”: Dias v Cathay Pacific Airways Ltd, HCA 2372/2002 (Ruling of DHCJ Muttrie dated 18/11/2005), paragraph 33).

Existing pleas against the 5^th to 7^th defendants in the Statement of Claim

16.  The existing claims against the 5^th to 7^th defendants are set out in paragraphs 75 to 87 of the Statement of Claim. 

17.  In gist, the 5^th defendant is a practising solicitor in Hong Kong and is the sole practitioner of Messrs Augustine CY Tong & Co (“ACYT”).  The 7^th defendant is an employee (Office Manager and Legal Clerk) of ACYT, and the sole director and shareholder of the 6^th defendant. 

18.  From 7 May 2009 to 10 August 2012, the 6^th defendant was the company secretary of the 4^th defendant.  The plaintiff alleges that the 6^th defendant provided such secretarial service for and on behalf of the 5^th defendant, and as an agent of the 5^th defendant, for the following reasons: –

(1)   The bills for the company secretary services were issued by ACYT, not the 6^th defendant.  The fees were also paid by the plaintiff to ACYT’s bank account.

(2)   ACYT and the 6^th defendant share the same office premises.

(3)   In numerous forms and returns in respect of the 4^th defendant submitted to the Companies Registry, ACYT was the “presentor”.

19.  The 5^th to 7^th defendants acted for the plaintiff in relation to the 40,000 shares in the 4^th defendant and the affairs of the 4^th defendant.  In particular, the 5^th defendant acted for the plaintiff in the acquisition of the shares from the 1^st defendant.

20.  In implementing the purported re-transfer of the shares from the plaintiff to the 1^st defendant, and the changes of directors in the 4^th defendant, the 5^th to 7^th defendants have acted in breach of their duty of care to the plaintiff.  The 7^th defendant implemented the transfer as the 5^th defendant’s employee and the 6^th defendant’s representative, and the 6^th defendant implemented the transfer as the 5^th defendant’s agent. 

21.  The 5^th to 7^th defendants have breached their duty of care under tort and contract to the plaintiff in implementing the transfer, in that: –

(1)   They have failed to obtain instructions and confirmations from the plaintiff.

(2)   They have failed to verify with the plaintiff whether the purported signature and fingerprints on the documents contained in the 1/3/2012 Witnessing Certificate belonged to the plaintiff.

(3)   They have failed to notice the discrepancies between that purported signature of the plaintiff and his usual signatures.

(4)   They have relied on a fake email from a person impersonating as the plaintiff’s assistant as instructions of the plaintiff that the plaintiff intended to transfer his 40,000 shares to the 1^st defendant.

22.  The above pleas are not subject to any strike-out application.  In other words, it is accepted that those are triable issues, including the basis on which each of the 5^th, 6^th and 7^th defendant is said to owe a duty to the plaintiff.

Proposed additional pleas against the 5^th to 7^th defendants in the Amended Statement of Claim

23.  In paragraph 82A of the Amended Statement of Claim, the plaintiff pleads that in relation to the 40,000 shares and the 4^th defendant’s affairs, the 5^th to 7^th defendants owe fiduciary duties to the plaintiff.  In paragraph 83, the plaintiff proposes to add that the 5^th to 7^th defendants have breached not only their duty of care, but also their fiduciary duties.

24.  In section I3 of the proposed Amended Statement of Claim (ie paragraphs 85A to 85O), the plaintiff pleads the additional factual matters concerning the email correspondence between the 7^th defendant and the 1^st defendant or his associates (most of the emails were disclosed by the 5^th to 7^th defendants in February 2016): –

(1)   In the emails between 16 and 23 November 2012, the 7^th defendant was (i) liaising with the 1^st defendant’s PRC lawyer on the question of service of legal process in this action out of jurisdiction on the 1^st to 3^rd defendants; (ii) arranging with the PRC lawyer for the 1/3/2012 Witnessing Certificate to be notarized even when the 7^th defendantbecame aware that the signatures and fingerprints had been found to be false; and (iii) organizing the 2^nd to 4^thdefendants’ legal representation in this case.  In particular, the 7^th defendant in his email dated 23 November 2012 stated that “…科學鑒証，証明該律師見証書及其所有文件都是假的，基於這點，我們與律師需儘快見面開會商討應對方案，請儘快安排。”

(2)   In the email correspondence between the 1^st defendant and the 7^th defendant in February and March 2012, the 1^st defendant instructed the 7^th defendant on the steps to be taken by the 7^th defendant in relation to the transfer of shares from the plaintiff to the 1^st defendant and the change in directorship of the 4^th defendant, without any consultation with the plaintiff.  In particular, in the email dated 23 February 2012, the 1^st defendant wrote as follows to the 7^th defendant: “很高興深圳相見並感謝老弟的好主意！望時刻關注和幫助我事情搞成功，我定重酬謝！…關於註冊公司事宜…關鍵是註冊時間問題，我和合資中方(政府)商量一下…”.

(3)    In their email correspondence in March 2012, the 1^st defendantand the 7^th defendant created the fake email to be sent by the person who impersonated as the plaintiff’s assistant (one Li Hui).  In particular, in the two emails both dated 8 March 2012, the 7^th defendant provided the specimen of the wording of the fake email: “著他發過電郵給我 ，說: ‘公司所有股份已由張秀紅轉給了劉文臣，有關公司事情以後你可直接與劉先生聯絡’ ”and “…書信樣辦…本人張秀紅已將中系國際集團有限公司所有股份轉給了劉文臣先生，有關該公司日後事情，請直接與劉先生聯絡，而不須再與李輝先生聯絡”.

(4)   In the email correspondence in February 2012, the 7^th defendant actively assisted the 1^st defendant to set up a new company in Hong Kong with a name almost identical as that of the 4^th defendant, as part of the scheme to use this new company to take over the 4^th defendant’s 45% interest in Chengjin RED.  In this connection, the 1^st defendant informed the 7^th defendant in his email dated 8 May 2012 that he would cancel the original appointment of the PRC lawyer by the 4^th defendant and cause the 4^th defendant to withdraw from the PRC litigations.

(5)   In the email correspondence after May 2012, the 1^st defendant still gave directions to the 7^th defendant in relation to the 4^th defendant’s affairs, even though the 1^st defendant had transferred his shares to the 2^nd and 3^rd defendants.  The 7^th defendant also had a stake in the 1^st defendant’s endeavours.  In particular, in the email dated 29 June 2012, the 1^st defendant said to the 7^th defendant that “…咱弟兄的事業一定順利，一定會成功。老弟靜候佳音吧，成功之日我赴港請兄弟喝酒一醉方休。”

25.  In section I4 of the Amended Statement of Claim (ie paragraph 85P), the plaintiff pleads that by virtue of the above matters pleaded in section I3, the 5^th to 7^th defendants have breached their fiduciary duties to the plaintiff.

26.  In section I5 of the Amended Statement of Claim (ie paragraphs 85Q and 85R), the plaintiff pleads that the 1^st defendant has committed the tort of unlawful interference and breach of trust in respect of the transfer of the 40,000 shares from the plaintiff to the 1^st defendant (for which judgment has been obtained).  By virtue of the matters pleaded in section I3, the 5^th to 7^th defendants have also committed the tort and dishonestly assisted the 1^st defendant in his breach of trust.

27.  In section I6 of the Amended Statement of Claim (ie paragraphs 85S to 85V), the plaintiff pleads that by virtue of the matters pleaded in section I3, the 5^th to 7^th defendants have conspired and combined with the 1^st defendant to defraud the plaintiff or injure the economic interests of the plaintiff.

28.  In paragraph 86 of the Amended Statement of Claim, the plaintiff pleads that in addition to being liable for the 6^th defendant’s and the 7^th defendant’s breach of duty of care, the 5^th defendant is also liable for the 6^th defendant’s and the 7^th defendant’s breach of fiduciary duties, tort of wrongful interference, conspiracy and dishonest assistance.  Further, the 6^th defendant is also liable for the 7^th defendant’s acts.

29.  In paragraph 87 of the Amended Statement of Claim, the plaintiff pleads that his loss comprises not only the loss of the value of the 40,000 shares, but also the financing cost, and the legal and other costs and expenses incurred by the plaintiff in the PRC to preserve his rights in respect of his shares in the 4^th defendant.

No prejudice to the 5^th to 7^th defendants

30.  The starting point in determining whether the amendments should be allowed is to consider whether the plaintiff’s proposed amendments would cause prejudice to the 5^th to 7^th defendants.  After all, generally speaking, amendments to pleadings should be allowed unless the other party would be prejudiced and such prejudice cannot be compensated by costs.

31.  In this regard, it is clear from the 7^th defendant’s own Affirmation filed herein on 9 September 2016 that no prejudice is alleged by the 5^th to 7^th defendants as a result of the proposed amendments.

32.  In any event, I agree there is really no conceivable prejudice that will be caused to the 5^th to 7^th defendants: –

(1)   No trial date has been fixed.  In fact, in respect of the 5^th to 7^th defendants, these proceedings are still at an early stage, as the parties have only recently finished the process of general discovery of documents.

(2)   Any concern on the 5^th to 7^th defendants’ part for the need of proper case management (as alleged by the 7^th defendant in Paragraph 18 of his Affirmation) can be and should be addressed in their application to stay this action pending the resolution of the proceedings in the PRC. 

Whether the proposed amendments have prospect of success

33.  Mr Wilson Leung submits that the emails pleaded simply do not support the imputations cast upon them by the plaintiff in the Amended Statement of Claim.  Mr Leung submits that the emails show nothing more than the 7^th defendant (in his role as a law clerk and company secretary) communicated with the 1^st defendant and others to deal with matters relating to the 4^th defendant, such as the disputed transfer of shares by the plaintiff to the 1^st defendant.  Taken to their highest, such emails may be adduced by the plaintiff to support his existing case of negligence.  But the emails do not logically and reasonably justify the inference which the plaintiff is now asking them to support, ie that the 7^th defendant knew all along about the forgeries and colluded with the 1^st defendant in a dishonest scheme.

34.  Mr Leung further submits that, in fact, many of the emails flatly contradictthe plaintiff’s new allegation that the 7^th defendant conspired in a scheme with the 1^st defendant.  In the emails, the 1^st defendant repeatedly assured the 7^th defendant that the transfer documents were genuine.  Meanwhile, the 7^th defendant consistently referred to the transfer documents actually being prepared by the plaintiff and the plaintiff’s assistant Li Hui.  Such dialogue makes no sense if (as the plaintiff now alleged) the 7^th defendant was in on the fraud all along.

35.  In short, Mr Leung submits that there is inadequate material to support, even on a prima facie basis, the plaintiff’s new allegations of fraud.  The amendments are based on mere suspicion that is wholly unsubstantiated by the emails cited to support them. The plaintiff has failed to move beyond the realm of conjecture into the realm of legitimate inference.

36.  I do not agree with Mr Wilson Leung’s submissions.

37.  The proposed amendments in section I3 of the Amended Statement of Claim (ie the email correspondence) are not objectionable – the plaintiff is entitled to expressly place reliance on the documents disclosed by the 5^th to 7^th defendants in February 2016, and pleads the plaintiff’s interpretation of the implication of such emails.

38.  In the 7^th defendant’s Affirmation, the 7^th defendant attempts to explain that those emails are not as sinister as they appear to be or as the plaintiff suggests them to be.  In fact, that appears to be the main ground on which the 5^th to 7^th defendants oppose to the amendments.

39.  Their contention, however, is neither here nor there.  After all, how those emails should be interpreted and what inferences can be drawn from those emails are matters for trial.

40.  For the present purpose, it suffices for this court to come to the view that the implications of those emails and the proper inferences to be drawn therefrom are definitely not as clear-cut as suggested by the 7^th defendant.  This is not a case where the proposed amendments have no prospect of success.

41.  The 7^th defendant on the one hand tries to belittle his role by emphasizing that he just provided company secretarial service.  However, on the other hand, a case can be made that he was extensively involved in the 1^st defendant’s fraudulent scheme, to the extent that: –

(1)   He did not find it necessary to consult the plaintiffor Li Hui directly on the transfer of shares from the plaintiff to the 1^st defendant.  Instead, he took instructions from the 1^st defendant.

(2)   He would help the 2^nd to 4^th defendants to line up their legal representation in Hong Kong.

(3)   He found it necessary to discuss with the 1^st defendant in response to the forensic report showing that the fingerprints and signatures of the plaintiff are false.

(4)   The 1^st defendant said he would give heavy reward to the 7^th defendant.

(5)   The 1^st defendant would call the 7^th defendant “brother” and say the “brothers’ career” would succeed.

42.  All these are arguably inconsistent with the 7^th defendant’s professed innocence and his saying that he just provided usual company secretarial services.  I agree that these disputes must be resolved at trial.  The proper inferences to be drawn is a matter for trial.

43.  In sections I4, I5 and I6 of the Amended Statement of Claim, the plaintiff pleads that because of the matters pleaded in section I3, the 5^th to 7^th defendants have: –

(1)   Breached their fiduciary duties to the plaintiff.

(2)   Committed the tort of unlawful interference.

(3)   Dishonestly assisted the 1^st defendant in his breach of trust.

(4)   Conspired and combined with the 1^st defendant to defraud the plaintiff or injure the economic interests of the plaintiff.

44.  It is necessary for the plaintiff to include such amendments so as to formulate his claims against the 5^th to 7^th defendants as a consequence of those email correspondence.  Whether the plaintiff can prove his case is a matter for trial.

45.  It is also necessary for the plaintiff to amend paragraph 86 so as to make clear the ground on which he contends that the 5^th defendant is liable for the acts of the 6^th defendant and the 7^th defendant, and that the 6^th defendant is liable for the 7^th defendant’s acts. 

46.  Further, it is well established that if there is any special damage attributable to a wrongful act, that special damage must be averred and proved: McGregor on Damages (19^th Ed, 2014) at paragraph 3-005.

47.  It is therefore necessary for the plaintiff to amend paragraph 87 to specifically plead that he intends to recover the financing cost, and the legal and other costs and expenses incurred by the plaintiff in the PRC as a result of the 5^th to 7^th defendants’ wrongful acts.  In this regard, at the hearing, the plaintiff clarified that the reference therein to “4% per month based on the principal sum of RMB 50 million (fluctuating)” is a reference to the actual sum which the plaintiff has to borrow and the actual interest which the plaintiff has to pay.  Whether the plaintiff can prove such loss is of course a matter for trial.

Conclusion and Disposition

48.  To conclude, I am of the view that: –

(1)   This action is still at a relatively early stage, and the plaintiff’s proposed amendments willnot cause any prejudice to the 5^th to 7^th defendants that cannot be compensated by an appropriate order as to costs.

(2)   It is necessary for the plaintiff to introduce the amendments in order for him to refer to the email correspondence and formulate his claims against the 5^th to 7^th defendants arising from those emails.  It cannot be said that the proposed amendments have no prospect of success.

49.  In the premises, I make an order an order in terms of paragraphs 1 to 5 of the Summons.

50.  Further, I make the following order regarding costs: –

(1)   The plaintiff’s costs of the correspondence with Smyth & Co and the court regarding the arrangements and directions for the hearing of the Summons;

(2)   The plaintiff’s costs of and occasioned by the 7^th defendant’s Affirmation and the 20^th Affirmation of Wai Yip Hin; and

(3)   The plaintiff’s costs of the hearing on 21September 2016,

be paid by the 5^th to 7^th defendants to the plaintiff forthwith, such costs are to be taxed if not agreed.

51.  The order as to costs set out in paragraph 50 above is nisi and shall become absolute in the absence of any application within 14 days to vary the same.

52.  Lastly, I express my gratitude to counsel on both sides for their helpful assistance in this matter.

HCA 2118/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2118 OF 2012

____________

_____________

D E C I S I O N

_____________

1.  This is an application for an anti-suit injunction by the plaintiff against the 1st defendant. The summons seeks an order that:

“(1) the 1st defendant herein, whether by agents, servants, or otherwise howsoever be restrained from continuing as against the plaintiff the 1st defendant’s suit commenced on 29 November 2012 in the Intermediate People’s Court of Shijiazhuang, the People's Republic of China (PRC 石家莊市中級人民法院) and known as（河北省石家莊市中級人民法院（案號 2013）石民三初字第0041號）or commencing any other legal proceedings against the plaintiff in the PRC in respect of the subject matter of this action, including the following issues (whether the plaintiff or the 1st defendant who is in breach of the shares transfer agreement (股份轉讓協議書) dated 19 December 2010 made between the plaintiff, the 1st defendant and Wang Jienwei (王建偉) in respect of, inter alia, the sale and purchase of the entire shareholding of the 4th defendant; and

(2) who is presently the rightful legal and beneficial owner of the entire shareholding of the 4th defendant.”

The action in the Intermediate People’s Court of Shijiazhuang is hereinafter called “the mainland action”.

The background

2.  The plaintiff started this action on 13 November 2012 against the 1st defendant and others in relation to the shares of the 4th defendant.  The claim, in gist, is for the rectification of the 4th defendant’s register of members and register of directors so that the plaintiff would be reinstated as the shareholder of all 4,000 shares of the 4th defendant and that the plaintiff and its nominee, Zhang Yianjie, be reinstated as the only directors of the 4th defendant. 

3.  The ground of claim is that the plaintiff’s ownership of the shares of the 4th defendant and the plaintiff’s directorship and that of his nominee in the 4th defendant had been divested by the 1st defendant in favour of the 2nd and 3rd defendants with the use of forged documents containing the forged signatures of the plaintiff.  The plaintiff’s signatures appearing in the transfer documents and board resolutions of the 4th defendant have been purportedly confirmed by the Public Security Office of Shijiazhuang City, Hebei Province to be forged.

4.  On 14 December 2012, I ordered in this action the appointment of receivers and managers over the shares of the 4th defendant. 

Background

5.  I now introduce the relevant parties and the background of this dispute.  The 4th defendant is a Hong Kong company incorporated on 9 May 1996.  Its authorised share capital is HK$40,000 and divided into 4,000 shares.  These shares were registered in the name of the 1st defendant as at 10 January 2011.  Its then directors were the 1st defendant and his nominees.  Its major asset is the 45 per cent shares it holds in a Sino-foreign joint venture in Shijiazhuang. 

6.  The joint venture is called Hebei Chengjin Real Estate Development Company Limited (“RED”).  RED was set up in April 1996 with a registered capital of US$2.8 million.  RED is to build and develop an office and commercial complex of 9,400.431 square metres in Shijiazhuang.  Its current market worth is said to be no less than RMB 100 million.

7.  At all material times, the 4th defendant is and was the foreign partner of the joint venture, having taken over the 45 per cent shares in RED from a Hong Kong company called China System Group Company Limited (“China System”) on 5 October 1998.

8.  The Sino partner of RED which holds the other 55 per cent of its shares is Shijiazhuang City Economic Development Company (“EDC”), a company owned by the Government of the Xinhua District of Shijiazhuang. 

9.  Another company of significance is Hebei Chengjin Asset Management Services Company Limited (“AMS”).  It is a mainland company established on 19 March 2007.  Its registered capital is RMB 1 million.  The purpose of setting up AMS was for it to manage the assets and operations of RED.  Fifty-five per cent of the interests of AMS are held by one Zhang Pingjie for EDC.  The remaining 45 per cent interest of AMS used to be held by the 1st defendant on behalf of the 4th defendant. 

10.  Hence, RED and its management company AMS were held as to 55 per cent by EDC directly and through Zhang Pingjie respectively and as to 45 per cent by the 4th defendant directly and through the 1st defendant respectively.  The 4th defendant was, as at 10 January 2011, owned by the 1st defendant. 

11.  On 19 December 2010, the 1st defendant entered into a Chinese share transfer agreement with the plaintiff to sell to the plaintiff all the shares of the 4th defendant together with the 45 per cent shares held by the 4th defendant in RED and the 45 per cent interest of AMS. 

12.  The share transfer agreement, in effect, was to sell the entire interest of 1st defendant in the Sino-foreign joint venture in the form of RED to the plaintiff.  The price was RMB 45 million.  This share transfer agreement was to be performed in the mainland and it ultimately concerned the 45 per cent interest in RED, the Sino-foreign joint venture situated in Shijiazhuang in the mainland.  The only Hong Kong element is the 4th defendant which is a Hong Kong company.  The share transfer agreement necessitated changes to be made to the registers of members and directors of the 4th defendant and notification of such changes to the Hong Kong Companies Registry. 

13.  The share transfer agreement required the plaintiff to pay RMB 15 million within three days of the agreement to a guarantor, Mr Wang Jianwei.  The 1st defendant should, within 10 days, transfer the right to control the companies to the plaintiff.  After the right to control has been transferred to the plaintiff, the RMB 15 million would be released to the 1st defendant. 

14.  The 1st defendant should, within 30 days, complete the procedures for the change of the industry and commerce records of the 4th defendant and AMS.  Within three days of the completion of the procedures for change, the plaintiff should pay the 1st defendant the balance at RMB 30 million through the guarantor Wang.

15.  In late December 2010, the 1st defendant represented to the plaintiff that the 1st defendant had completed the procedure for transferring the 45 per cent AMS interest from the 1st defendant to the plaintiff at the Bureau of Industry and Commerce of Shijiazhuang in accordance with the share transfer agreement.  Pursuant to the share transfer agreement, the plaintiff paid the 1st defendant RMB 15 million on about 5 January 2011.  I suppose this payment would mean that the right to control the companies should have been transferred to the plaintiff as the transfer of this right is a condition for payment in the agreement and the plaintiff has not alleged that the 1st defendant has breached this condition.

16.  On 11 January 2011, the 40,000 shares of the 4th defendant were transferred by the 1st defendant to the plaintiff and its nominees. 

17.  Then sometime in January 2011, when the plaintiff had just moved into the development of RED, commenced participation in the business of AMS and was about to pay the 1st defendant the balance of RMB 30 million, the plaintiff said he was told by a representative of the management committee of AMS, one Mr Fu Jin, that the 1st defendant’s transfer of the 45 per cent interest in AMS to the plaintiff was without the knowledge and approval of the management committee which did not recognise the transfer.  Mr Fu was a representative of EDC, the Sino partner of the joint venture (paragraphs 54 and 56(9) of the plaintiff’s affirmation filed on 13 November 2012).  The plaintiff had also been advised by his legal advisers that article 27 of the Articles of Association of AMS provides that: 

“(1) any intended transfer of shares to any person other than a shareholder must be approved by not less than half of the other shareholders;

(2) the other shareholders shall have a prior right to purchase such shares.”

18.  The 1st defendant later confirmed to the plaintiff in the presence of a mainland lawyer that the documents provided by the 1st defendant to the plaintiff to prove the transfer of the 45 per cent AMS interest to the plaintiff had not really been signed by the representative of EDC, Mr Zhang Pingjie.  The 1st defendant further promised to replace the documents filed at the Bureau of Industry and Commerce of Shijiazhuang with proper documents.  The plaintiff in turn promised that if the 1st defendant could replace the documents, he would pay the 1st defendant the balance of RMB 30 million.  The plaintiff also found out later that the 1st defendant’s purported transfer of the 45 per cent interest in AMS had not been, and would not have been, approved by EDC, the Sino partner of RED (paragraph 59 of the plaintiff’s affirmation).

19.  Despite the problem over the transfer of the 45 per cent interest in AMS, there did not appear to be any problem about the transfer to the plaintiff of the shares of the 4th defendant and right of control the companies.  Hence the plaintiff was in control of the 4th defendant and its interest in 45 per cent of the shares of RED.  The 1st defendant also held the 45 per cent interest in AMS for the 4th defendant.  There is some evidence from the 2nd and 3rd defendants that the 1st defendant had chased the plaintiff for payment of the RMB 30 million but to no avail.  The situation seemed to have remained as it was.  Though the plaintiff did not have the 45 per cent interest in AMS validly transferred to him and he did not pay the remaining RMB 30 million to the 1st defendant, he seemed to be still enjoying the control of the companies and was knowledgeable about the affairs of AMS. In fact, one of the two deputy general managers of AMS, Mr Yan Zhenyong, was his personal assistant. 

20.  However, on 16 February 2011, a group of people from one Hebei Boshi Investment Company Limited (“Boshi Investment”) evicted the AMS staff from the office of AMS and took over the operation of AMS.  Boshi Investment was allegedly authorised by the Xinhua District Committee, Xinhua District Government and Xinhua District Management Committee of Shijiazhuang to take over AMS.  On the evidence of the plaintiff, these entities did not seem to be on friendly terms with the 1st defendant as the cause of the 1st defendant’s difficulty in transferring the 45 per cent interest in AMS to the plaintiff was the disapproval of the transfer by the Xinhua District Government.

21.  The plaintiff further said that on 10 June 2011, the Intermediate People’s Court of Shijiazhuang gave a judgment to EDC saying that the court would deal with EDC’s application for the compulsory liquidation of RED.  The grounds were that RED had not been subject to corporate examination in 2001 resulting in the revocation of its business licence on 19 November 2002. 

22.  The staff of AMS also discovered that, on 24 August 2011, the Reinforcement Bureau of the Xinhua District Court had seized RMB 45,013,218 from the bank account of AMS and paid the same to the liquidation group of RED.  The plaintiff said that this move was without the prior knowledge of the 4th defendant.

23.  On 12 September 2011, RED, acting through its liquidation group, commenced proceedings against the 4th defendant alleging that the 4th defendant was not China System, the original foreign shareholder holding 45 per cent shares of RED.  The change of shareholder from China System to the 4th defendant was allegedly not in compliance with the procedures of the Articles of Association of RED and had not been approved by the necessary approving body.  If the claim of the liquidation group should succeed, the 4th defendant’s 45 per cent interest in RED would be extinguished.  The plaintiff said that if that should happen, his investment in the 4th defendant and RED would be lost completely. 

24.  The plaintiff then, on 5 December 2011, instructed a mainland lawyer, one Miss Lu, to defend the proceedings for the 4th defendant.  However, in late June 2012, Miss Lu was advised by the mainland court that there had been major changes in the ownership of the 4th defendant and her authority to act for the 4th defendant had been revoked. 

25.  Miss Lu was also given documents by the mainland court showing that the 1st defendant and other purported directors of the 4th defendant had resolved on 26 March 2012 that the 4th defendant would not contest the claim brought by the liquidation group in the name of RED against it and that its representation by Miss Lu and its deputy general manager, Yan Zhenyong (the plaintiff’s personal assistant) be discharged. 

26.  Furthermore, the 2nd and 3rd defendants, as directors of the 4th defendant, had purportedly resolved, on 18 June 2012, to appoint the 1st defendant as the agent of the 4th defendant and a mainland lawyer, Mr Zhong, to represent the 4th defendant to participate in the liquidation of RED. 

27.  To cut the story short, the plaintiff later discovered that his shares in the 4th defendant had, on 1 March 2012, been transferred to the 1st defendant and the directorship of his and his nominees in the 4th defendant had also been replaced by the 1st defendant.  These changes were effected by certain company documents containing forged signatures of his, purportedly signifying his consent thereto.

28.  He then, through his solicitors, issued demand letters to the 1st, 2nd and 3rd defendants for rectification of the situation. But the 1st defendant replied on 2 August 2012 that he had defaulted in paying the remaining RMB 30 million to the 1st defendant and the 1st defendant’s retaking the shares of the 4th defendant from him was lawful.  He then started this action on 13 November 2013 to have the 4th defendant’s registers of members and directors rectified so that all be restored to the status before the unlawful changes. 

29.  On 14 November 2013, I appointed receivers and managers over the shares of the 4th defendant with a view to preserve the value of these shares pending the resolution of the dispute between the plaintiff and the 1st defendant.  The receivers and managers were also allowed to defend, on behalf of the 4th defendant, the proceedings brought by RED to challenge the 4th defendant’s ownership of the 45 per cent shares of RED.  The writ of summons and application for appointment of receivers were served on the 1st defendant on 21 November 2012. 

The mainland action

30.  On 29 November 2012, the 1st defendant commenced the mainland action.  That is the action that the plaintiff wants this court to enjoin the 1st defendant from pursuing.  The issues that the 1st defendant wants the mainland court to decide in the mainland action is whether it was the 1st defendant or the plaintiff who was in breach of the share transfer agreement and who is the rightful beneficial owner of the entire shareholding of the 4th defendant. 

31.  I think these are the very same issues that the plaintiff would want this court to resolve in this action.  Mr Lam, counsel for the plaintiff, also agreed that the question of who was in breach of the share transfer agreement is the crux of the matter between the parties.  However, if this court is to resolve these matters, it will be necessary for this court to be enlightened on the relevant laws of the mainland that govern the meaning and performance of the share transfer agreement and the remedies for its breach. 

32.  After the 1st defendant has commenced the mainland action, the plaintiff on 13 January 2013 applied to the mainland court to dismiss the mainland action on the ground of want of jurisdiction and that the dispute should be determined according to Hong Kong law.  The application was dismissed on 19 March 2013.  The plaintiff appealed, but the appeal was dismissed on 17 June 2013. 

33.  On 18 November 2013, the plaintiff applied to the mainland court for stay of the mainland action on the ground that there is already this action in Hong Kong and receivers and managers have been appointed over the shares of the 4th defendant.  Before the result of this application was known, the plaintiff applied, on 25 November 2013, in this action, for the anti-suit injunction against the 1st defendant.  The 1st defendant has not responded to this application.  There appears to be substantial delay in the bringing of this application by the plaintiff. 

34.  It now seems that the plaintiff’s application before the mainland court for stay of the mainland action has not been successful as I am told that the trial of the mainland action will take place tomorrow.

The legal principles

35.  The legal principles have been set out by Lord Hobhouse in Turner v Grovit [2002] 1 WLR 107 (HL) which have been referred by Hartmann JA in Liaoyang Shunfeng Iron and Steel Company Ltd & Anor v Yeung Tsz Wang & Anor, CACV 234/2011 at paras 84, 88 and 89:

“84. The underlying principle is that under our law a person “has no right not to be sued in a particular forum, domestic or foreign, unless there is some specific factor which gives him that right: Turner v Grovitt [2002] 1 WLR 107 (HL) at 118 per Lord Hobhouse.

…

88. A distinction is to be drawn between cases where the application for an anti-suit injunction is founded upon a contractual right and other cases, that is, cases (such as the present case) in which it is asserted that the foreign proceedings have been commenced in bad faith for the purpose of frustrating proceedings in Hong Kong.  In this regard, see Turner v Grovitt (supra) per Lord Hobhouse (paras 27 and 28): 

‘The applicant for a restraining order must have a legitimate interest in making his application and the protection of that interest must make it necessary to make the order. Where the applicant is relying upon a contractual right not to be sued in the foreign country (say because of an exclusive jurisdiction clause or an arbitration clause), then, absent some special circumstances, he has by reason of his contract a legitimate interest in enforcing that right against the other party to the contract. But where he is relying upon conduct of the other person which is unconscionable for some non-contractual reason, English law requires that the legitimate interest must be the existence of proceedings in this country which need to be protected by the grant of a restraining order…

It is recognised that to make an order against a person who is a party to proceedings before a foreign court may be treated as an interference (albeit indirect) in the foreign proceedings.  Thus English law requires the applicant to show a clear need to protect existing English proceedings.  The protection of English proceedings is, understandably, regarded as a legitimate subject matter for an English court.  It is not the concern of any other court.  The order made operates in personam and relies for its enforcement solely upon the English court.  In the present case, the Court of Appeal [2000] QB 345, 364, were at pains to stress that their orders were directed to the defendants and not the Spanish court.’

89. Lord Hobhouse (para 29) summarised the essential features which made it proper, under English law, for a court to exercise its power to grant an anti-suit injunction.  These are: 

‘… (a) the applicant is a party to existing legal proceedings in this country; (b) the defendants have in bad faith commenced and propose to prosecute proceedings against the applicant in another jurisdiction for the purpose of frustrating or obstructing the proceedings in this country; (c) the court considers that it is necessary in order to protect the legitimate interest of the applicant in the English proceedings to grant the applicant restraining order against the defendants.’”

36.  Hartmann JA further referred to a statement by Lord Goff in Airbus Industries GIE v Patel at paragraph 85 of Liaoyang Shunfeng: 

“85. That the being the case, the jurisdiction to grant an anti-suit injunction must be exercised with caution and only when the ends of justice require it: see Airbus Industries GIE v Patel [1999] 1 AC 119 (HL) at 133 per Lord Goff –

‘The broad principle underlying the jurisdiction is that it may be exercised when the ends of justice require it.  Generally speaking, this may occur when the foreign proceedings are vexatious or oppressive… But, as was stressed in the Aerospatiale case [Societe Nationale Industrielle Aerospatiale v Lee Kui Jak [1987] AC 871], in exercising the jurisdiction regard must be had to comity, and so the jurisdiction is one which must be exercised with caution…’”

37.  Finally, I would also like to refer to the words of Lord Scarman also in Airbus Industries which Hartmann JA referred to at para 119 of Liaoyang Shunfeng: 

“119. In this regard, the plaintiffs’ reliance on the words of Lord Scarman in his speech in British Airways v Laker Airways Ltd [1985] AC 58, at 95, has particular force. Lord Scarman, in speaking of the power of the courts to grant protection to an applicant from a foreign suit that is unconscionable and thereby unjust, spoke of ‘wide and flexible’ principles of equity being employed to afford that protection. Put another way, as I see it, our courts are not to employ a narrow, technical approach, one that more often denies a just solution rather than ensures it, our courts are instead adopt a broader approach to better identify the true justice of the matter. Lord Scarman said:

‘The approach [to the granting of an anti-suit injunction] has to be cautious because an injunction restraining a person within the jurisdiction of the English court from pursuing a remedy in a foreign court where, if he proves the necessary facts, he has a cause of action is, however disguised and indirect, an interference with the process of justice in that foreign court. Caution is needed even in a ‘forum conveniens’ case, i.e., a case in which a remedy is available in the English as well as in the foreign court. Caution is clearly very necessary where there is no remedy in the English court in respect of the cause of action which, if the facts be proved, is recognised and enforceable by the foreign court.

Nevertheless, even in the latter case, the power of the English court to grant the injunction exists, if the bringing of the suit in the foreign court is in the circumstances so unconscionable that in accordance with our principles of a ‘wide and flexible’ equity it can be seen to be an infringement of an equitable right of the applicant.  The right is an entitlement to be protected from a foreign suit the bringing of which by the defendant to the application is in the circumstances unconscionable and so unjust.  This equitable right not to be sued abroad arises only if the inequity is such that the English court must intervene to prevent injustice.  Cases will, therefore, be few: but the jurisdiction exists and must be sustained.’” [Emphasis of Hartmann JA]

38.  Mr Lam, for the plaintiff, urged me to employ the “wide and flexible” principles of equity and to adopt a “broader approach to better identify the true justice of the matter” rather than a “narrow technical approach which more often denies a just solution rather than ensures it”. 

Grounds of the application and decisions thereon

39.  Mr Lam has advanced a number of grounds to say that the mainland action was commenced by the 1st defendant in bad faith to frustrate or obstruct this action - the second feature that would justify the granting of the injunction. 

40.  The first ground relates to the 1st defendant’s use of documents containing the forged signatures of the plaintiff in transferring the shares of the 4th defendant to him and then to the 2nd and 3rd defendants.  Mr Lam submitted that on the 1st defendant’s case, he had the cause of action for transfer of the shares since early 2011 when the plaintiff did not pay him the RMB 30 million, but he did not sue the plaintiff.  Instead, he used forged documents to perpetrate his cause on 1 March 2012.  But when he sued the plaintiff in the mainland action, he asked for an order that the shares be returned by the plaintiff to him.  Mr Lam said that this is inconsistent with his position in his reply letter to the plaintiff’s demand letter on 2 August 2013 when he said that he had already taken the shares back. 

41.  However, I cannot see any problem in this.  If the transfer of the shares of the 4th defendant on 1 March 2012 was indeed effected by the 1st defendant by using forged documents, then it is a good thing that he is no longer relying on the transfer effected by such means but is trying to vindicate his rights under the share transfer agreement by legal proceedings in a court of law.  This shows that he is willing to abide by the law now despite what he had allegedly committed previously.  I cannot see how this can be taken against him and be the basis of stopping him from pursuing the mainland action but to compel him to vindicate his rights by contesting this action in Hong Kong. 

42.  Furthermore, even if he should be compelled to vindicate his rights only in this action in Hong Kong, I cannot imagine that he will not be allowed to take the so-called inconsistent stance of not relying on the transfer effected by forged documents but to rely on his rights, if any, under the share transfer agreement.  I see no merit in this ground.

43.  The second ground is that the 1st defendant, in seeking the return to him of the shares of the 4th defendant, is trying to frustrate the receiver’s efforts to defend the interests of the 4th defendant. This ground is based on the 1st defendant’s attempt in procuring the 4th defendant, in March 2012, not to contest the action brought against it by the liquidation group of RED.  If the 4th defendant should lose the action, the plaintiff says that the 4th defendant’s 45 per cent interest in RED would be extinguished.

44.  I think the evidence shows that the 1st defendant wanted to procure the 4th defendant to withdraw from that action and then to have the 4th defendant to participate in the liquidation of RED. Whether such a cause of conduct would prejudice the interests of the 4th defendant is not known.  Assuming that such conduct would prejudice the interests of the 4th defendant, I do not think the 1st defendant can, at present, procure the 4th defendant to take such course now that the receivers and managers are there vigilantly protecting the interests of the 4th defendant.  Mr Lam also agrees that so far nobody has done anything to obstruct the work of the receivers.

45.  If the 1st defendant should pursue the mainland action and lose it, then, as Mr Lam also agrees, there is every likelihood that the appointment of the receivers and managers will remain and the 1st defendant will not be able to procure the 4th defendant to withdraw from the action brought against it by RED or to participate in the liquidation of RED. 

46.  Even if the 1st defendant should succeed in the mainland action and have the shares of the 4th defendant returned to him, the appointment of the receivers and managers will still remain but subject to further order of this court, which it may make in the event of any application to be brought by the 1st defendant.  In that event, the 1st defendant would be the rightful owner of the shares of the 4th defendant.  If he should then procure the 4th defendant to withdraw from the action brought by RED and to participate in RED’s liquidation, it would not then be a matter for the plaintiff to disagree as the plaintiff would have no right to disagree. 

47.  Hence, this second ground is also of no use in saying that the 1st defendant had commenced the mainland action in bad faith. I cannot see any bad faith simply because if the 1st defendant should succeed in the action, then he may and would be able to procure the 4th defendant to take a course that the plaintiff would not prefer.

48.  The third ground is the timing of the mainland action.  Mr Lam said that the 1st defendant only started the mainland action on 29 November 2012, which was merely eight days after the papers in this action had been served on him.  But that alone is not enough to establish bad faith on the part of the 1st defendant.  Bad faith is not to be decided on who sued whom first.  Mr Lam submitted that the 1st defendant brought the mainland action to frustrate or obstruct this action.  That may or may not be right, but the important thing is whether there is evidence that the 1st defendant did it out of bad faith.  I cannot see any.

49.  In fact, the share transfer agreement was made and supposed to have been performed in the mainland.  The subject joint venture is situated in Shijiazhuang.  Payment was supposed to be made in the mainland in renminbi.  The acts constituting the alleged breaches, including the filing of documents with the Bureau of Industry and Commerce in Shijiazhuang that contained the forged signatures of Zhang Pingjie, all took place in the mainland.  The only Hong Kong element is the fact that the 4th defendant is a Hong Kong company and the performance of the share transfer agreement would necessitate changes in the 4th defendant’s registers of members and directors and notification of such changes to the Hong Kong Companies Registry.  It is thus more convenient to have the meaning and effect of the share transfer agreement and the alleged breaches to be tried by a mainland court which is familiar with the laws of the mainland and the legal remedies to be given upon proof of breach.

50.  Mr Lam also submitted that the 1st defendant had delayed the commencement of the mainland action for almost two years.  That is indeed the case.  The 1st defendant might have been contented with what he had achieved by forged documents in March 2012, but when he knew that he was sued in Hong Kong, he turned around and sued the plaintiff in the mainland court and relies on his rights, if any, in the share transfer agreement, rather than the forged documents.  Even if he should have delayed the commencement of the action, that alone does not, in these circumstances, show bad faith. 

51.  Mr Lam, in a supplemental written submission filed after the hearing, submitted that matters like title, ownership, effectiveness of the transfer of shares and incidence of ownership of shares may be governed by the laws of Hong Kong which is the lex situs of the shares of the 4th defendant.  However, these are not issues in this action or the mainland action.

52.  Regarding the third feature for granting of the injunction - protection of the legitimate interest of the plaintiff in this action, Mr Lam submitted that the effectiveness of this action and the functions of the receivers and managers need to be protected.  I think this action is instituted not for its own sake but for resolving the dispute between the parties.  The mainland action is for the same purpose.  I do not think there is any legitimate interest of the plaintiff which can justify the 1st defendant to be enjoined from pursuing the mainland action.

53.  Regarding the appointment of receivers and managers, the appointment is to protect the shares of the 4th defendant.  The mainland action will decide who is the owner of these shares.  It is for the owner to decide whether such protection will continue to be required and until when. 

54.  Mr Lam also submitted that there may be a risk of inconsistent findings.  But this is not a matter that I can take into account on this application.

Decision and costs

55.  In the premises, I can see no basis for this application.  I therefore dismiss it. 

56.  Since the 1st defendant has not taken part in the application, I make a costs order nisi that there be no order as to costs.

Mr Douglas Lam and Mr David Chen, instructed by Henry Wai & Co, for the plaintiff

The 1st defendant was not represented and did not appear

HCA2118/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2118OF 2012

_________________

_________________

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R U L I N G

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1.  This is an application by the 2^nd defendant Han and 3^rd defendant Qiang for leave to appeal against my order made on 20 June 2013 (“Order”). Reasons for my decision were handed down on 5 July 2013 (“Reasons”).

2.  I shall adopt the same abbreviations in the Reasons.

3.  The Order was made against Han, Qiang and the Company which is the 4^th defendant.  The Company has not sought leave to appeal.  The effect of the Order was briefly as follows:

(i) To continue the appointment of the Receivers  of the Shares in the Company under the order made in the Ex Parte Hearing, until final determination of the action or further order;

(ii) The powers and rights of Han and Qiang to cease forthwith save as otherwise authorized by the Receivers;

(iii) Upon Zhang providing a bank guarantee to the extent of HK$5m as fortification for his undertaking as to damages, the Receivers shall be expressly authorized to do those things as set out in the Order;

(iv) Costs to Zhang, to be taxed if not agreed, with certificate for two Counsel.

4.  In the Draft Revised Notice of Appeal (“Draft Notice”), the main grounds of appeal referred to in the Draft Notice are:

(i)  Findings of fraud and forgery clearly wrong and without proper evaluation of all the evidence;

(ii) Conclusion that no arguable defence shown by Han and Qiang clearly wrong;

(iii) There were material non-disclosures on the part of Zhang;

(iv) Wrong legal test applied re receivership: no necessity and/or deadlock shown.  Receivership only remedy of last resort.

(I) Findings of fraud and forgery clearly wrong and without proper evaluation of all the evidence

5.  It was stated in paragraph 66 of the Reasons that, so far, there had been no contradictory evidence to Zhang’s alleged forgery, and that at the time of the hearing on 20 June 2013 (“Hearing”) there was very strong evidence that the purported signatures of Zhang on the Zhang Documents were not his, and that they were forged based on the reports from the Examination Office which also had not been challenged.  As pointed out by Mr Lam, Counsel appearing for Zhang, what the court was doing was only weighing up the evidence before the court at that time which the court was entitled to do for an interlocutory injunction.  There was no conclusive “finding” of fraud and forgery by the court.

6.  Mr Kwok, Counsel appearing for Han and Qiang, relied heavily on a document which he calls a Power of Attorney.  This document is in fact part of the documents attached to the Witnessing Certificate referred to in paragraph 35 of the Judgment.  The so called Power of Attorney was a document marked “16” (“Document”). On the left side of the Document was a photocopy of the front and back of Zhang’s PRC identity card with Zhang’s signature in between, and on the right hand side of the Document were some handwritten words (“Handwritten Words”) to the effect that a Madam Xing Yanli was authorized to be the full attorney to deal with the transfer to Liu of the Shares in the Company and to sign all relevant documents.

7.  The alleged significance of the Handwritten Words was only raised in the Draft Notice for the first time.  According to Mr Kwok, the Handwritten Words provided a complete explanation and answer to Zhang’s allegations and that it tallied with what Liu said in Liu’s Explanation when he seemed to be stating that he had Zhang’s legal authorization to transfer the shares back and that as Zhang was unable to pay the balance of the consideration, the Shares belonged to Liu, and Zhang had agreed to re-transfer the Shares back to Liu. 

8.  The Document was disclosed and referred to by Zhang in his 1^st affirmation in support of his ex parte application.  In paragraph 67 of his 1^st affirmation, Zhang had produced a copy of the original Witnessing Certificate with the attached documents which were shown to him and of which photographs were taken by him during his meeting with Li, the 7^th defendant, the law clerk and office manager of ACYT. 

9.  Zhang had said in paragraph 68 of his 1^st affirmation that the original of the Witnessing Certificate with the attached documents which were shown to him and of which photographs were taken did not contain the Document. Zhang confirmed that his signature in between the photocopies of the front and back of his identity card was genuine, and this was certified by the Examination Office.  Zhang had said those Handwritten Words were added without his knowledge and approval, and he did not know why the Document was omitted from the version provided to him by Li.  Zhang’s position was thus quite clear, that the Handwritten Words were not written by him, and that they were added onto a document containing his specimen signature.

10.  The existence of the Document and the Handwritten Words and what Zhang said was in fact drawn to the court’s attention by Ms Eu SC, who was acting for Zhang during the Hearing, when she was explaining to the court as to which of Zhang’s signatures were certified to be forged by the Examination Office.  During the Hearing, Mr Leong SC was appearing for Han, Qiang and the Company.  There was no particular reference in Mr Leong’s skeleton arguments or in his oral submissions in relation to the Document, nor was any significance attached to the Handwritten Words.  The position of Han and Qiang at that time was simply that they were not in a position to comment on the evidential conclusiveness of the forensic evidence, as set out in paragraph 67 of Mr Leong’s skeleton arguments.

11.  Further, so far, there had been no evidence filed on behalf of Han and Qiang or the Company at all to deny or rebut what Zhang said about the Document and Handwritten Words in his 1^st affirmation.

12.  In the Draft Notice, Mr Kwok complained that Zhang had not adduced his defence filed in the 2^nd PRC Action between him and Liu, and that Zhang’s locus in relation to the Shares in the Company was in serious doubt, and that the court failed to take this matter into account in the Reasons.

13.  There was no dispute that the Shares had been transferred to Zhang’s name and he was the registered shareholder.  As set out in paragraphs 2 to 11 of Ms Eu’s Reply Submissions, under Hong Kong law,   even if Zhang were to be found to be in breach of the December 2010 Agreement, Liu’s remedy against Zhang would only be for the unpaid price or damages.  There was no evidence or any legal opinion placed before the court to indicate that the PRC law would be different on this issue, nor were there any submissions from Mr Leong to this effect.

14.  As stated in paragraph 63 of the Judgment, there was no documentary evidence attached in Liu’s Explanation as evidence of the alleged lawful authorization and undertaking of Zhang for Liu to “take back” the Shares.  Further, more importantly, none was referred to by Liu in his claim in the 2^nd PRC Action and in particular, there was no mention by Liu of the Document nor the Handwritten Words in Liu’s claim in the 2^nd PRC Action.

(II) Conclusion that no arguable defence shown by Han and Qiang clearly wrong

15.  Mr Kwok again mainly relied on the Document and the Handwritten Words for this ground.

(III) There were material non-disclosures on the part of Zhang

16.  Again, Mr Kwok relied mainly on the Document and the Handwritten Words alleging that those acting for Zhang did not make any specific reference and/or explanation to the Handwritten Words to Chan J at the Ex Parte Hearing, and that this was a material non-disclosure.  As mentioned earlier, the Document was disclosed in Zhang’s 1^st affirmation and he had explained about the Document and the Handwritten words in his 1^st affirmation.

(IV)  Wrong legal test applied re receivership: no necessity and/or deadlock shown.  Receivership only remedy of last resort.

17.  In relation to this ground, Mr Lam submitted in paragraphs 30 to 33 of his skeleton arguments there was no error in the legal test applied.  The reasons for the receivership were set out in the Reasons.

Whether to grant leave to appeal

18.  S 14 AA (1) of the High Court Ordinance provides that no appeal shall lie to the Court of Appeal from an interlocutory judgment or order unless leave to appeal has been granted and s 14AA (4) states as follows:

“Leave to appeal for the purpose of subsection (1) shall not be granted unless the court hearing the application for leave is satisfied that—

(a) the appeal has a reasonable prospect of success; or

(b) there is some other reason in the interests of justice why the appeal should be heard.”

19.  As pointed out by Mr Lam, the Draft Notice seeks to re-argue the Receivership Summons, and the main ground centers around the significance of the Document and Handwritten Words which were not raised on behalf of Han, Qiang or the Company at the Hearing. 

20.  Having considered all the circumstances set out above, I am not satisfied that the appeal has a reasonable prospect of success, or there is some other reason in the interests of justice why the appeal should be heard.

21.  I thus make the following order:

(i)  The summons issued on behalf of the 2^nd and 3^rd Defendants on 4 July 2013 be dismissed.

(ii)  Costs be to the Plaintiff in any event, to be taxed if not agreed.

HCA2118/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 2118 OF 2012

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REASONS FOR DECISION

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Introduction

1.  There were three summonses before this court:

(i) Under HCA2118 of 2012 (“Main Action”),

(a) The summons of the plaintiff (“Zhang”) issued on 14 November 2012 for, among other things, injunctive relief against the 2^nd defendant (“Han”), 3^rd defendant (“Qiang”), and 4^th defendant (“Company”), and the appointment of receivers in respect of 40,000 shares in the Company (“Receivership Summons”);

(b)   The summons issued by Han, Qiang, and the Company on 28 December 2012 (“Setting Aside Summons”) to set aside the order made on 7 December 2012 (“Ex Parte Order”), which also contained an alternative application for a stay of the Main Action.

(ii) Under HCA133 of 2013 (“the Privilege Action”),

(a) The Summons of Han, Qiang, and the Company against Zhang issued on 4 March 2013 (“Privilege Summons”), for certain declaratory and injunctive reliefs and delivery up orders against Zhang and his solicitors (“HWCO”) in respect of an affirmation filed by the former solicitor acting for the Company on the ground that the same was subject to legal professional privilege.

2.  So far as the Privilege Summons is concerned, at the hearing before this court on 20 June 2013 (“Hearing”), the parties were able to reach an agreement on certain undertakings of Zhang and/or HWCO. The Privilege Summons was then adjourned sine die with liberty to restore. Costs were reserved.

3.  As for the alternative stay application in the Setting Aside Summons, Han had said in his 1^st affirmation that he had been advised that Hong Kong Courts were not the convenient forum to deal with the disputed issues between Zhang and the 1^st defendant (“Liu”). Liu has not stepped forward so far to make this application.  There were no submissions made in relation to this part of the Setting Aside Summons at the Hearing, and in any event, there were no sufficient reasons put forward to support this application on behalf of Han, Qiang and/or the Company. This application was dismissed as part of the Setting Aside Summons.

4.  There was an oral application made on behalf of Zhang at the Hearing for leave to file a further affirmation in relation to the requirement of attestation of a company’s appointment of a lawyer.  I did not grant leave.

5.  In relation to the Receivership Summons, at the end of submissions, I gave an order (“Order”) at the Hearing granting receivership with reasons for decision to be handed down.  In summary, the Setting Aside Summons, including the stay application, was dismissed and the Order was granted upon Zhang providing a bank guarantee to the extent of HK$5m within 28 days as fortification of his undertaking as to damages.  Receivers were appointed for the 40,000 shares in the Company, with powers as set out in the Order.

6.  The reasons are now set out hereafter.

Brief background

7.  The dispute arises out of a sino-foreign joint venture through a company Hebei Chengjin Real Estate Development Co Ltd (“Chengjin RED”) established in Mainland China (“PRC”) on 29 March 1996 with a registered capital of US$2.8m.  Chengjin RED was involved in the development of a piece of land (“Land”) into a commercial complex thereon in Shijiazhuang city in Hebei.  The current market value of the Land is said to be not less than RMB100m.

8.  The original shareholders of Chengjin RED were a Hong Kong company China System Group Company Limited (“China System GCL”) on the foreign side owning 45% and a PRC company Shijiazhuang City Economic Development Company (“Shijiazhuang EDC”) on the sino side owning 55%.  China System GCL contributed capital of US$1.26m and Shijiazhuang EDC contributed capital of US$1.54m.

9.  The Company was incorporated in Hong Kong on 9 May 1996 with an authorized share capital of HK$40,000 divided into 40,000 shares of HK$1.00 each (“Shares”).  On about 5 October 1998, the Shijiazhuang Foreign Trade and Economic Co-operation Bureau approved that the foreign side of the above joint venture be changed to the Company’s name.  The validity of such change is now subject of litigation in PRC mentioned later herein.

10.  In November 2002, the Certificate of Approval for Enterprises with Foreign Investment and also the Business Licence of Chengjin RED were revoked apparently due to the fact that the annual audit for 2001 had not been undertaken. 

11.  Liu became a shareholder of the Company in 2004.

12.  On 19 March 2007, a new PRC company was established called Hebei Chengjin Asset Management Services Co Ltd (“Chengjin AMS”) for the purpose of managing the assets and operations of Chengjin RED. The registered capital of Chengjin AMS is RMB1m.  At the time of establishment, the shareholders were a Mr Zhang Pingjie (“ZPJ”), holding 55% of the registered share capital and contributing RMB550,000, and Liu holding 45% and contributing RMB450,000. ZPJ was appointed the “Legal Representative” (法人代表) of Chengjin AMS.

13.  It was not disputed that the two shareholders were not holding the shares in their respective personal capacity, but ZPJ was in fact representing and holding his 55% interest for the sino party Shijiazhuang EDC, and Liu was representing and holding his 45% for the foreign party, the Company.

14.  By 2010, Liu was the sole registered owner of the Shares.  On 19 December 2010, Liu entered into an agreement with Zhang and a guarantor Wang Jianwei (“Guarantor”) for the transfer of the Shares in the Company and other interest held by him in Chengjin RED and  Chengjin AMS, for a total of RMB45m payable in the manner stated therein (“December 2010 Agreement”)[1]. Thus, Liu was to transfer or caused to be transferred to Zhang the following:

(i) The entire shareholding of the Company, namely the Shares;

(ii) 45% interest in Chengjin RED held through the Company;

(iii) 45% interest in Chengjin AMS held by Liu on behalf of the Company.

15.  In late December 2010, according to Zhang, Liu represented to him that all the procedures for transferring the 45% held by him for the Company in Chengjin AMS had been completed and that registration records had been changed.

16.  On 5 January 2011, pursuant to the terms of December 2010 Agreement, Zhang paid a sum of RMB15m to Liu through the Guarantor.

17.  Pursuant to the terms of the December 2010 Agreement, on 11 January 2011, Liu transferred 14,000 of the Shares to Zhang. He further transferred 3,200 of the Shares and 12,800 of the Shares respectively to Zhang’s nominees.  These were subsequently all transferred to Zhang’s name by his nominees on 18 March 2011, and as of that date, Zhang became the sole registered shareholder of all the Shares in the Company.

18.  Shortly before Zhang was to pay the balance of RMB30m to Liu, according to Zhang, he was told by ZPJ that ZPJ had never signed any documents approving or otherwise relating to the purported transfer of the 45% shareholding in Changjin AMS by Liu to Zhang.

19.  Zhang said he then met Liu in about mid January 2011 together with Zhang’s lawyers, and confronted Liu with what he was told by ZPJ, and Liu admitted to Zhang that ZPJ did not sign the documents relating to the transfer of Chengjin AMS.  This meant the purported signatures of ZPJ on behalf of Chengjin AMS in relation to such transfer documents were not in fact ZPJ’s, but Liu promised he would replace the relevant documents with those bearing the true signatures of ZPJ for filing with the relevant Industry and Commerce Bureau (“Bureau”).

20.  According to Zhang, thereafter despite his repeated demands, Liu failed to obtain the proper signatures of ZPJ approving the transfer of the 45% interest in Chengjin AMS.  It was Zhang’s case that Liu had therefore been in breach in failing to perform the Chengjin AMS portion of the December 2010 Agreement, and Zhang withheld the payment of the balance of RMB30m under the December 2010 Agreement. 

21.  The effect of all this is that although Zhang has become the sole registered shareholder of the Company, and through the Company held 45% in Chengjin RED, the name of the shareholder holding the 45% interest in Chengjin AMS remained to be Liu at that time, although Liu was holding it on behalf of the Company.  Notwithstanding this, it seems Zhang and his people took over the operations of Chengjin AMS until the incident on 16 February 2011.

22.  To put it simply, on 16 February 2011, Zhang’s people were evicted from the premises of Chengjin AMS by what Zhang called a gang, and a company called Heibei Bo Shi Investment Company Limited took over the operations of Chengjin AMS, and this new company caused to be made new company chop, receipt chop and invoice shop of Chengjin AMS.

23.  Zhang subsequently obtained the documents purportedly signed by ZPJ from the Bureau.  These documents included:

(i) shareholders’ resolutions of Chengjin AMS dated 20 December 2010[2] bearing Liu’s signature and ZPJ’s signature, approving, among other things,  the transfer of Liu’s 45% shareholding to Zhang, for Liu to be removed as supervisor and Zhang elected as such, and for consequential amendments of the articles of association;

(ii) The amendments to the articles of association bearing ZPJ’s signature as Legal Representative[3];

(iii) an application form dated 27 December 2010 bearing ZPJ’s signature applying for change of the shareholders of Chenjin AMS from Liu and ZPJ to Zhang and ZPJ[4]

24.  The purported signatures of ZPJ on the above documents (“ ZPJ Documents”) were stated to be forged in a written report[5] from the Forensic Examination Office of the Shijiazhuang Police Bureau (“Examination Office”) produced by Zhang.

25.  In the meantime, Shijiazhuang EDC applied to liquidate Chengjin RED, and on 10 June 2011, a civil judgment was issued by the Intermediate People’s Court of Shijiazhuang EDC and the compulsory liquidation of Chengjin RED was ordered (“Liquidation Action”), and a liquidation group was appointed (“Liquidation Group”).

26.  Then, on 24 August 2011, Zhang discovered that a sum of RMB45,013,218 was seized from the bank account of Chengjin AMS by the Enforcement Bureau of the Xinhua District Court under a payment order issued by that Court, without notice to Zhang or the Company, whereby Chengjin AMS was required to pay the sum to the Liquidation Group.

27.  Further, on 12 September 2011, the Liquidation Group, acting on behalf of Chengjin RED, commenced a civil action against the Company challenging the validity of the change from China System GLC to the Company as the foreign party of Chengjin RED, alleging this change failed to comply with the Articles of Association of Chengjin RED, and the PRC Court was asked to confirm that the Company is in fact not the foreign party (“1^st PRCLitigation”) in the joint venture.

28.  It would appear if the Company were to lose in the 1^st PRC Action, the foreign party in the joint venture would then remain China System GCL but this company had already been dissolved on 4 September 1998.  In any event, it was not disputed at the Hearing that if the Company lost the 1^st PRC Action, the Company’s 45% interest in Chengjin RED would be extinguished and it would lose any entitlement to dividend/distribution in the Chengjin RED’s liquidation.  Zhang would have lost at least the amount of RMB15m he had paid Liu.

29.  On 5 December 2011, Zhang appointed his lawyer in Shijiazhuang (“Ms Lu”) to contest the 1^st PRC Litigation on behalf of the Company.  Ms Lu represented the Company until June 2012, when she was suddenly informed by the PRC Court that her authority to act for the Company had been revoked.

30.  Ms Lu was provided 2 board minutes of the Company by the PRC Court as evidence of the cessation of her authority to act on behalf of the Company:

(i) Board Minutes dated 26 March 2012[6] (“March2012 Minutes”)

(ii) Board Minutes dated 18 June 2012[7] (“June 2012 Minutes”)

31.  It then transpired that:

(i) On 1 March 2012, the Shares in the Company held by Zhang were transferred to Liu, and Zhang and his nominee were removed as directors of the Company, and Liu appointed in their place;

(ii) On 5 April 2012, 14,000 of the Shares were then transferred by Liu to Han;

(iii) On 8 May 2012, 26,000 of the Shares were transferred by Liu to Qiang;

(iv) On 30 April 2012, Liu ceased to be a director of the Company, leaving Han and Qiang as sole directors.

32.  It is Zhang’s case that the transfer documents relating to the transfer of his shares to Liu on 1 March 2012 (“Zhang Documents”) were forged and this was subsequently stated in a report from the Examination Office[8] produced by Zhang.

33.  Under the March 2012 Minutes signed by Liu, and others, as directors, it was resolved:

(i) The Company was to withdraw from the 1^st PRC Action (“Withdrawal Resolution”);

(ii) To discharge the representation of Ms Lu, and also Zhang’s personal assistant, who at that time was the deputy general manager of the Company;

(iii) New seals and chops be adopted as the Company had accidentally lost all its seals and chops.

34.  Under the June 2012 Minutes signed by Han and Qiang, as directors, it was resolved:

(i) Liu be appointed as the agent of the Company with full rights to represent the Company to deal with the Liquidation Action, and the operation and supervision and management of the assets belonging to Chengjin RED and other matters concerning the joint venture company;

(ii) To authorize Kang Da as representative of the Company to participate the Company in the Liquidation Action.

35.  Apart from the above two minutes, Ms Lu was also provided notarial certificates issued by Mr Augustine Tong (“Tong”), a China-Appointed Attesting Officer in Hong Kong, and the sole proprietor/partner of the 5^th defendant (“ACYT”) certifying the two board minutes and resolutions passed pursuant thereto.

36.  Upon the above discovery, Zhang said he then tried to contact the 7^th defendant (“Li”), a law clerk and office manager of ACYT, and finally on 5 July 2012, Li responded by sending to Zhang a copy of a “Witnessing Certificate” dated 1 March 2012 issued by one Jue Ce Law office in Shijiazhuang[9] certifying the attached Zhang Documents and some other documents (“Witnessing Certificate”).  A copy of the Witnessing Certificate was sent by Li to Zhang as evidence that Zhang no longer held any of the Shares.  Among the other documents attached to the Witnessing Certificate were documents each bearing a thumbprint purported to be that of Zhang’s.  According to another report from the Examination Office, these thumbprints were not Zhang’s.[10]

37.  The share transfers from Liu to Zhang under the December 2010 Agreement were handled by Li and ACYT.  The 6^th defendant (“Fine Happy”), of which Li was the sole director and registered shareholder, provides company secretaries services. From the Company’s annual returns, ACYT and/or Fine Happy had provided company secretarial services to the Company since about 2000 until 10 August 2012.  It is Zhang’s case that ACYT/Fine Happy/Li failed to exercise due care, skill and diligence by failing to verify and confirm direct with him in relation to the authenticity of the Zhang Documents and other documents attached to the Witnessing Certificate.

38.  Anyway, upon being sent a copy of the Witnessing Certificate, Zhang came to Hong Kong immediately with his team including PRC lawyers and held a meeting with Li on 13 July 2012, during which he required Li to give him the original of the Witnessing Certificate, but this was refused by Li.  The meeting was tape recorded by one of Zhang’s team.  Suffice to say at this stage, Zhang was eventually only allowed to take a photograph of the Witnessing Certificate.

39.  It is the case of Han and Qiang that they were bona fide purchasers of the Shares, in that they entered into a share transfer agreement with Liu on 3 April 2012 (“April 2012 Agreement”) under which Liu was to transfer the Shares to Han and Qiang at a consideration of RMB15m.  Han and Qiang paid RMB12m to Liu on 5 April 2012, and the Shares were then duly transferred to them respectively on separate dates.  Further, they said after their acquisition, they had actively sought to defend the 1^st PRC Litigation and to participate in the Liquidation Action.

40.  Zhang alleged that Liu, Han, Qiang, Li, ACYT, and Fine Happy all acted in concert and that Han and Qiang were not bona fide purchasers.

41.  Zhang issued the writ on 13 November 2012 in the Main Action against Liu, Han, Qiang, the Company, ACYT, Fine Happy and Li, and on the same day issued the Receivership Summons against Han, Qiang and the Company.

42.  On 26 November 2012, a firm of solicitors ECTW filed an acknowledgment of service on behalf of the Company indicating it would contest the Main Action.  On 25 December 2012, Zhang obtained leave for service out of jurisdiction, on Liu and Han on the Mainland and Qiang in Australia. 

43.  On 7 December 2012 (“Ex Parte Hearing”), Zhang obtained an order against Han and Qiang, and the Company.  The hearing was treated as ex parte on notice for Liu, Han and Qiang and as for the Company inter partes, because although its then solicitors ECTW were granted an order to cease to act earlier that same day, ECTW were still on record and a solicitor of ECTW was present throughout that hearing.  Under the Ex Parte Order, amongst other things, receivers were appointed in respect of the Shares (“Receivers”) with powers specified therein and security to be provided by them, Han and Qiang were restrained from dealing with the Shares and the Company was restrained from registering any transfer/issuing any new share certificates.

44.  On 17 December 2012, Liu’s action in PRC against Zhang and the Guarantor was formally issued (“2^nd PRC Action”)[11].  In the 2^nd PRC Action, Liu alleged breach of the December 2010 Agreement by Zhang for failing to pay the balance of RMB30m.  Liu sought an order for Zhang to return the Shares to him and for him to retain the deposit of RMB9m, plus damages for breach of contract and other losses, totaling RMB6m, which in effect seems to mean that Liu wants to retain the RMB15m paid by Zhang and the Shares be returned to him.

45.  On 28 December 2012, Han, Qiang, and the Company issued the Setting Aside Summons to set aside the Ex Parte Order.

46.  On 29 January 2013, an order was obtained by the Company, Han and Qiang for certain powers of the Receivers to be suspended upon certain undertakings by Han, Qiang and the Company pending the determination of the Receivership Summons (“Inter Partes Order”).  The main effect of the Inter Partes Order was that Han, Qiang and the Company could continue to instruct their solicitors Beijing Kang Da Law Firm (“Kang Da”) to represent the Company in the Liquidation Action and the 1^st PRC Action, in lieu of Ms Lu, and that Kang Da was to make a tri-weekly report to the Receivers.

47.  Prior to issuing the writ in the Main Action, Zhang’s solicitors had sent a letter before action respectively to Liu, Han, and Qiang on 2 August 2012[12] which were all sent on an urgent basis by courier to 3 addresses of Liu in Shijiazhuang, to Han’s address in Shijiazhuang, and Qiang’s address in Australia (“Pre-Action Letter”).  Liu was the only one who responded by sending a explanation of the situation[13] (“Liu’s Explanation”).  Neither Han nor Qiang replied although the waybill was signed by Han and the one for Qiang was signed also receipt by a person[14].

48.  So far, Liu has not participated in the Main Action at all.

Material non disclosure

49.  Mr Leong, Leading Counsel, for Han, Qiang and the Company, submitted that there had been material non-disclosure by Zhang at the Ex Parte Hearing, as follows:

(i) Liu had been pursuing Zhang for the unpaid balance payment of RMB30m;

(ii) Han, Qiang and the Company had taken steps to defend the Liquidation Action and the 1^st PRC Action;

50.  As for (i) above, Zhang had already set out the details in paragraphs 16-20 of his 1^st affirmation[15] as to the reasons why he had withheld the payment of the balance of RMB30m.  Although the 2^nd PRC Action was first lodged by Liu on 29 November 2012, in paragraph 45 of Han’s 1^st affirmation, Han himself stated that the case was not accepted by the PRC Court formally until 17 December 2012, which was some 10 days after the Ex Parte Hearing.  There was no evidence that Zhang was aware of the 2^nd PRC Action at the time of the Ex Parte Hearing.  According to Zhang’s 2^nd affirmation, he was only served with the 2^nd PRC Action in January 2013.

51.  As to whether Zhang ought to have mentioned in his 1^st affirmation that Han and Qiang had since June 2012 filed “multiple” submissions and applications in the PRC Court in respect of the Liquidation Action and the 1^st PRC Action. There was no sufficient evidence that documents filed in the PRC Court would be generally available for open inspection by the public.  Mr Leong submitted that Zhang/Ms Lu could have gained access of the files in the PRC Court in light of the fact that certain other documents were provided to her by the PRC Court.

52.  Zhang had disclosed in his 1^st affirmation all the documents obtained by/given to Ms Lu at that time.  Whether Ms Lu could have obtained access to other documents in the Liquidation Action and the 1^st PRC Action is at this stage only speculative, since so far I could see there was no sufficient evidence that such other documents were known to Zhang at the Ex Parte Hearing.

53.  Mr Leong also submitted that Zhang had misled the court at the Ex Parte Hearing in that the court was told that the PRC Court could not wait any further, and that no further adjournment would be allowed and that the trial was imminent.  There was no evidence that Zhang/Ms Lu could have known at the Ex Parte Hearing that the PRC judge would later decide to cancel that PRC hearing in December 2012 due to the judge’s personal reason that he was on training elsewhere.

54.  In the above circumstances, I do not find that there had been material non-disclosure on the part of Zhang in obtaining the Ex Parte Order.

Injunctions against Han, Qiang and the Company

55.  So far as the injunctions against Han, Qiang and the Company are concerned, they offered undertakings to the Court in terms of the Order, which this Court accepted at the Hearing.

Receivership

56.  Mr Leong has pointed out to this court the appointment of receivers and managers is an extremely serious matter for a company and the court have always recognized the need for great circumspection in granting such relief.  It is not to be granted without a proper consideration of the position of the company and unless the court is “convinced of its necessity”[16]. It has also been said by Yuen JA in the case of Macau First Universal International Ltd v Ding Xiaohung and others[17] that it is well-established law that the appointment of receivers is a remedy of last resort.

57.  Unlike the companies involved in the above two cases, the Company is not a trading company.  It is a holding company, holding 45% in Chengjin RED and 45% in Chengjin AMS through originally Liu.  I understand that the main asset of the Company to be its 45% interest in Chengjin RED and through Chengjin RED,  45% interest in the Land .

58.  In the present case, there have been serious allegations of fraud and forgery by Zhang in the Main Action.

59.  It has been said a forged transfer is in law no transfer, and gives the alleged transferee no rights, not even if the company issues to him a certificate stating that he is the holder of the shares which the transfer purports to assign, and if the company, acting upon a forged transfer, removes the true owner from the register and substitutes the supposed transferee, it can be compelled to reinstate the true owner and replace or restore his shares[18].

60.  It is also a well-established principle that nemo dat quod non habet, one cannot give or assign in law what one does not have[19].  There are exceptions to this principle, but they are quite restricted in their operation and broadly speaking there are 4 types of cases in which a purchaser in good faith can retain the goods (“Exceptions”)[20].

61.  It was stated in the Pre-Action Letter that Zhang was alleging the Zhang Documents and other documents attached to the Witnessing Certificate were procured by fraud and forgery without Zhang’s knowledge or approval, and that the purported transfer from Zhang to Liu on 1 March 2012 was null and void, and that Liu was liable to Zhang for damages for fraud.  Further, it was also made clear in the Pre-Action Letter that Zhang’s case was that Han and Qiang were not bona fide purchasers and that they were holding the Shares upon constructive trust for Zhang. 

62.  In Liu’s Explanation, he only tried to explain that up until end of February 2012, he had discussed with Zhang on several occasions in relation to non payment of the balance of RMB30m, and that Liu had no alternative but to “take back” on 1 March 2012 the Shares which originally belonged to him and then to transfer to other person.  He claimed that his “take back” was lawful, as it had Zhang’s lawful authorization and also Zhang’s undertaking to relinquish the Shares.  Further, Liu said the legal dispute should be dealt with in Shijiazhuang and not in Hong Kong.

63.  Notwithstanding what was stated in Liu’s Explanation, no documentary evidence was attached as evidence of the alleged lawful authorization and undertaking of Zhang. None was referred to by Liu in the 2^nd PRC Action either[21].  In fact, as I have mentioned earlier, in the 2^nd PRC, Liu was seeking the return of the Shares from Zhang, which seemed to indicate he accepted the Shares were at that time in the possession of Zhang.

64.  What is clear is in Liu’s Explanation that he did not deny Zhang’s allegation of forgery.  Liu was merely explaining why he said he was entitled to “take back” the Shares.

65.  Han filed two affirmations on behalf of himself, Qiang and the Company.  It is their case that Liu did not inform them of the dispute between him and Zhang, and that they did not know who Zhang was when they received the Pre-Action Letter, and they did not see the need to reply thereto, as they had no interests and there was no need for them to become involved in the dispute between Liu and Zhang.  Han said the purchase of the Shares was completely bona fide, and he provided evidence of the payment on 5 April 2012.

66.  Thus, so far, there was no contradictory evidence to Zhang’s alleged forgery, and I have said during the Hearing before this court that at this stage, there is very strong evidence that the purported signatures of Zhang on the Zhang Documents was not his, and that they were forged, based on the reports from the Examination Office which so far have not been challenged. 

67.  Mr Leong did not dispute the general principles, but submitted that it was wrong in law to accept Ms Eu’s submission that the forgery was undisputed, and that the case might not be as clear a case of Nemo Dat as submitted by Ms Eu.  He further posed the question “what if there was an arrangement between Zhang and Liu for some sort of ‘claw back’”.  I understood him to mean that what if there was some sort of arrangement between Zhang and Liu for Liu to “take-back” the Shares in view of Zhang’s withholding the payment of the balance of RMB30m.  As I have mentioned earlier, so far as I can see, apart from what was alleged in Liu’s Explanation, there had been no other evidence of the alleged arrangement, nor was such referred to in the 2^nd PRC Action.  Zhang’s case was clearly there was no such arrangement and that the transfer was without his knowledge and approval.

68.  Mr Leong pointed out that Han and Qiang had acted on a notarial certificate issued by Tong, and that they were in possession of the bought and sold notes, and that one of the Exceptions applied, namely that goods were in the hands of the transferee.  My understanding of this of the Exceptions is that this generally involves cases where the possessor is in possession of the owner’s goods with the owner’s consent in relation to a contract for the sale of goods and where the possessor is acting in a particular capacity[22].

69.  Liu has not entered into the picture yet so far as the Main Action is concerned.  As I have mentioned earlier, Liu received the Pre-Action Letter and responded with Liu’s Explanation.  He then managed to retrieve the original Witnessing Certificate through Qiang from Tong/ACYT/Li in October 2012 and proceeded to launch the 2^nd PRC Action in November 2012 to seek the return of the Shares.  I am of the view that he should have had notice of the Main Action by now, notwithstanding he has not yet been properly served.

70.  So far as the evidence before the court at this interlocutory stage, I accept Ms Eu’s submissions that none of the Exceptions apply in this case and further that being bona fide purchasers is not a defence in this case.

71.  Although Han and Qiang did not admit to the forgery, no other expert or forensic evidence had been adduced by them or by the Company to rebut, or at least to cast doubt upon the reports from the Examination Office.

72.  It seems that Han and Qiang had been in close contact with Liu and that after their purported purchase of the Shares, they in fact appointed Liu to handle the Liquidation Action on behalf of the Company as seen from the June 2012 Minutes, and further it was Qiang who returned the original Witnessing Certificate and attached documents to Liu, and it further seems that Han was aware of the 2^nd PRC Action even before Zhang was served.

73.  It is Zhang’s case that there are cogent reasons to doubt the bona fides of Han and Qiang.  As set out earlier, in the March 2012 Minutes, there was the Withdrawal Resolution that the Company would withdraw from the 1^st PRC Action.  The March 2012 Minutes were filed in the PRC Court in the 1^st PRC Action.  After the purported purchase of the Shares by Han and Qiang, it seems nothing was done, or at least no evidence to show that any steps were taken to inform the PRC Court formally that the Company would not withdraw from the 1^st PRC Action and that the Company would be defending the 1^st PRC Action.  No further resolution was passed by the new directors of the Company after the purported purchase to cancel or withdraw the Withdrawal Resolution. The Withdrawal Resolution in my view must prejudice the Company’s position in the 1^st PRC Action.  There were no explanations so far from any one as to why that Withdrawal Resolution was passed in the first place.  So far as I can see, there had been no defence filed by the Company in the 1^st PRC Action notwithstanding Mr Leong submitting that Zhang should have filed a defence in the 2^nd PRC Action by the time of the Hearing and not disclosing it. 

74.  The other matter which has caused Zhang concern is the return of the original of  the Witnessing Certificate and the attached documents, by Tong/ACYT/Li, to Liu through Qiang on about 11 October 2012[23].  Qiang was said to be residing in Australia, and it is not quite clear how the return was effected, as Qiang had filed no affirmation in this matter.  Anyway, this has been described by Ms Eu as “bizarre”, as by then all of the defendants knew of Zhang’s allegation of fraud and forgery. The explanation given by Han was to me not convincing.

75.  Ms Eu has further submitted that where no arguable defence is advanced, there is no need to consider ‘balance of convenience’, and has referred this court to the judgment of Chung J in Yeko Trading Ltd v Chow Sai Cheong Tony & Ors[24], which has in turn relied on Official Custodian for Charities v Mackey[25](a post American CyanamidCoEthicom Ltd [26]decision).  Based on the evidence so far, I consider the present case is such a case, and that there is therefore no need to consider the ‘balance of convenience’.

76.  Even if there is an arguable defence and I had to consider the principles set out in the American Cyanamid case and the ‘balance of convenience’, I would have still have concluded in Zhang’s favour for the following reasons:

(i) There is a serious question to be tried, and on Zhang has a real prospect of success, and it is common ground that the Company will be seriously affected unless it succeeds in the 1^st PRC Action;

(ii) The 1^st report from Kang Da to the Receivers was the one dated 31 January 2013[27].  This first of all stated that they were under no duty to communicate with a third party any matter concerning the litigation, and only reluctantly do so in accordance with instructions from the Company.  Kang Da then stated that they were instructed towards the end of May 2012 and listed the documents they filed on behalf of the Company in the 1^st PRC Action up until the date of their report, and according to them, they could only wait for the next step which was for the exchange of evidence, and that the hearing date originally fixed on 5 December 2012 was cancelled by the judge in charge who was on training elsewhere and was not able to return for the hearing.  The documents filed were (1) documents filed in the Liquidation Action; (2) a letter of authorization dated 14 October 2012; (3) an explanation of situation, explaining that Zhang was no longer a shareholder and that he had no right to participate in the litigation; (4) the evidence to be exchanged which consist of only 2 relevant certificates/licenses issued for the joint venture.

(iii) Save for one report of 2 April 2013 in which Kang Da apparently went to the judge in charge to make a request to protect the shareholder’s rights and to participate in the Liquidation Case, as far as the 1^st PRC Action was concerned, all the tri-weekly reports under the Inter Partes Order showed that there had been no further progress.  According to Kang Da, Ms Lu had applied to cease the 1^st PRC Action and she further had cast doubts on the capacity of Kang Da to represent the Company, and this had caused interference to the matter.  Although Kang Da claimed to have taken steps to defend the 1^st PRC Action, according to the Receiver’s letter containing a situation report from Ms Lu[28], up to date Kang Da had not submitted to the PRC Court a duly attested letter of authorisation or a power of attorney from the Company.

(iv) No credible explanation has been given by Han and Qiang for not withdrawing or cancelling the Withdrawal Resolution, nor did it seem Kang Da was instructed to take any action to apply for the withdrawal of the March 2012 Minutes from the PRC Court.

(v) Han did not explain why Kang Da had not been instructed to apply to stop the 1^st PRC Action as Ms Lu had attempted to do and what Kang Da had done to counter Ms Lu’s challenge of its authority to act on behalf of the Company.  More importantly, none of the documents Kang Da filed so far as I can see were in relation to defending the actual claim by the Liquidation Group in the 1^st PRC Action or in relation to the merits of that claim.

(vi) There was no sufficient evidence as to why the Liquidation Action should take priority over the 1^st PRC Action as alleged by Han.  The Liquidation Group had already been appointed and so far, there has not even been a confirmation from the PRC Court that the Company’s request to participate in the Liquidation Action has been accepted.

(vii) Based on the above, I am not satisfied that the Company’s interests in the joint venture had been adequately protected and I am satisfied that there is risk of dissipation, in that the Company might lose its interests in Chengjin RED and in turn its interests in the Land.  Having considered all the circumstances, including what is further set out hereinafter, I am satisfied that the balance of convenience is in favour of granting the Order.

77.  I have considered whether there are alternatives to appointing receivers.  In asking for the discharge of the Ex Parte Order as varied by the Inter Partes Order and the discharge of the Receivers, the only undertaking offered by Han and Qiang, other than the undertaking not to deal with or otherwise dispose of the Shares, was to continue to instruct Kang Da to participate in and to defend all the rights, interests and assets of and/or belonging to the Company in the Liquidation Action and the 1st PRC Action and all related PRC disputes, including but not limited to the application of any interim protection order (s) if so advised.

78.  No other proposals were put forward at the Hearing.  Both Han and Qiang are outside jurisdiction and in light of the events in this case, I do not consider the above undertaking would be sufficient to protect the assets of the Company, and I am of the view that it is necessary to continue the appointment of the Receivers for the Shares.

79.  The whole purpose of the application by Zhang is to preserve the assets of the Company pending a court’s final decision on the merits of his case in the Main Action.  The preservation of the assets of the Company could only be in the interests of the Company and its shareholders, whoever they may be ultimately.  Han had said that the Receivers are new to the case and they would incur much professional costs and/or time in reading-in and familiarizing themselves with the matter and there will be additional costs to instruct new PRC legal advisers to handle the matter.  The Receivers have been in place since the Ex Parte Order, although so far their hands have been somewhat tied.  I understand that Ms Lu will continue to be appointed to act on behalf of the Company and she has been involved since December 2011.  If it is found that there are additional costs and damage to Han, Qiang and the Company in the event they succeed in the Main Action, these can be covered under Zhang’s undertaking as to damages as set out in the Order.

80.  Mr Leong submitted that if I were to grant Zhang’s application, there should be security of costs and that Zhang’s undertaking in the ExParte Order should be fortified.  No application has been made for security of costs.  As for Zhang’s undertaking in the Ex Parte Order, Zhang has produced a “certificate of creditworthiness” issued by the Bank of Communications[29] and I understand that a production of this certificate was accepted by L Chan J at the Ex Parte Hearing.  Having considered the circumstances of the case, although no formal application has been made for fortification, I have ordered fortification of Zhang’s undertaking as to damages, as set out in the Order.

81.  Ms Eu has produced a draft order prior to the Hearing setting out the powers of the Receivers.  Apart from the fortification of Zhang’s undertaking, there were no other submissions from Mr Leong on the draft.

82.  For all the reasons set out above, I made an order in terms of the Order.

83.  Lastly, I would like to thank all Counsel for their  submissions and assistance in this matter.