AU KAI TO KAREL v. END USER TECHNOLOGY LTD AND OTHERS

HCA 170/2015

[2018] HKCFI 594

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 170 OF 2015

____________

____________

_____________________

D E C I S I O N

_____________________

Introduction

1.  On 28 September 2017, after trial, this court handed down the judgment in this action (“the Judgment”) by which one of the claims of the plaintiff (“Mr Au”) against End User Technology Ltd (“EUT”) and Merdeka Mobile Group Ltd (“MMG”) is allowed with costs. In the Judgment, this court ordered, among other matters, that EUT and MMG be jointly and severally liable to pay damages to Mr Au in the sum of HK$4.4 million (“the Award”). This is a joint application of EUT and MMG for a stay of execution of the Judgment pending their appeal to the Court of Appeal by their summons dated 21 November 2017 (“Summons”).

2.  In this Decision, I shall adopt the abbreviations used in the Judgment, unless otherwise stated. I shall refer to the Judgment for the background facts and shall not make any repetition of the same here.

3.  This court has identified three issues in the Judgment. The appeal of EUT and MMG relates to the second issue only, i.e., the Share Certificate Issue. On the Share Certificate Issue, briefly stated, I made a factual finding that EUT had failed to provide the Share Certificate to Mr Au. I concluded that, by reason of this failure are, EUT breached the Agreement. I further held that both EUT and MMG are jointly and severally liable to Mr Au for their breach of the Agreement given the common ground that EUT entered into the Agreement and holds the Sale Shares on behalf of MMG as its agent/nominee.

Applicable legal principles

4.  Mr Lam, for EUT and MMG in the stead of Mr Chow, the trial counsel, refers to the following principles summarised by Chow J in Lam Mo Chu Susie v Lam Sik Ying Victor, Administrator of the Estate of Lam Tim alias Stan Lam, HCA 1974/2015, 23.1.2018, [2018] HKCFI 97 at §5 on the basis of the judgment of Ma J (as he then was) in Star Play Development Ltd v Bess Fashion Management Co Ltd [2007] 5 HKC 84. There is no dispute about the summary, which is reproduced as follows:

“5. The principles governing an application for a stay of execution of a judgment pending appeal are well established.

(1)   The applicant is required to demonstrate a “good reason” for a stay of execution.

(2)   Generally speaking, the existence of merely an arguable appeal cannot by itself amount to a sufficient reason to justify a stay.  It is the minimum requirement before a court would even begin to consider granting a stay.

(3)   If the court is not convinced that there exist arguable grounds of appeal, no stay will be granted however exceptional the circumstances may otherwise be justifying a stay of execution.

(4)   On the other hand, the existence of a strong appeal or a strong likelihood of success will usually by itself enable a stay to be granted because this would constitute a good reason for a stay.

(5)   In most cases, where the court is faced with simply the existence of an arguable appeal, it becomes necessary for the applicant to provide additional reasons as to why a stay is justified.

(6)   Commonly, this is done by demonstrating that without a stay the appeal would be rendered nugatory, for example, because of an appreciable risk that the respondent to the appeal would not be able to repay in the event of a successful appeal against a money judgment, or because the failure to grant a stay would have a serious deleterious effect on the applicant.     

(7)   In considering an application for a stay pending appeal, it would be impractical and even undesirable for the court to go deeply into the merits or strengths of the appeal, although the court must still form a preliminary view of these aspects.”

5.  Where the appeal is against an award of damages, the long established practice is that a stay will normally be granted only where the appellant satisfies the court that, if the damages are paid, then there will be no reasonable prospect of his recovering them in the event of the appeal succeeding, see Hong Kong Civil Procedure 2018, Vol. 1 p. 1183 and China Citic Bank International Ltd v Durrant Simon Patrick Michael, unreported, CACV 127/2014, 21.7.2014, [2014] HKCA 353.

6.  With these principles in mind, I now turn to the major grounds advanced on behalf of EUT and MMG.

Merits of the appeal

7.  Mr Lam submits that there are strong grounds of appeal and in the main he makes two points.

8.  First, Mr Lam submits that this court erred in law and principle to hold that there was a breach of the Agreement on the evidence of Mr Au and the facts as found by this court. He submits that the Share Certificate had been withheld from Mr Au with his consent and not against his wishes and therefore there was no breach of the Agreement. Mr Lam stresses that there is no attempt to challenge the fact findings of this court in the Judgment.

9.  I see no substance in this ground. I have considered all the circumstances and those matters mentioned in the written submissions of Mr Lam were actually narrated in the Judgment. The Share Certificate was finally returned to Mr Au on 14 July 2014 but Mr Au was asked to return the same to MMG so that the Consideration Shares could be transferred to one Lui Cui. Mr Au had been misled into believing that a new share certificate would be issued to him to replace the Share Certificate to reflect his enhanced shareholding with the addition of rights shares: §57 of the Judgment.

10.  Mr Lam is correct to point out that there is no allegation of fraud or deceit in respect of the Share Certificate Issue. This, nevertheless, does not affect the validity of my conclusion that the said return of the Share Certificate to Mr Au on 14 July 2014 could not be held as an act of fulfilling the obligations under the Agreement on the part of EUT/MMG, as explained in §65(5) the Judgment.

11.  Further, it is not the pleaded case of the defence that the Share Certificate was returned to Mr Au on 14 July 2014 in fulfilment of their obligations under the Agreement. The defence merely relies on the alleged delivery of the Share Certificate to Mr Au on 18 July 2013: see §12(7) of the Defence and Counterclaim.

12.  All in all, this court accepts the evidence of Mr Au on this issue including his allegation that despite repeated demands, Mr Lau refused to return the Share Certificate to him: see §56 of the Judgment. I am unable to discern any error in law that this court has made in the factual conclusion that EUT/MMG failed to deliver the Share Certificate to Mr Au pursuant to the Agreement.

13.  Next, Mr Lam highlights that MMG was never a party to the Agreement and even the pleaded case of Mr Au did not contain such an allegation. Mr Lam refers to §66 of the Judgment that this court mentioned that it was common ground that EUT entered into the Agreement and holds the Sale Shares on behalf of MMG as its agent/nominee. He points out that no such common ground exists whether in the pleadings, witness statements, submissions, oral and written, of the parties at trial. Thus, he submits that this court erred in concluding that MMG should also be held in breach of the Agreement by reason of the breach of EUT.

14.  In the first place, I myself made it clear in the Judgment (§68 of the Judgment) that Mr Au does not claim against MMG for breach of the Agreement in the prayer for relief despite an allegation that EUT and/or MMG breached the Agreement by their refusal or failure to deliver the Share Certificate to Mr Au in §19 of the Amended Statement of Claim (“ASOC”).

15.  I now turn to the submission on the absence of the common ground. At the very outset of the trial, as shown in the transcript, I invited counsel on both sides to have a discussion about their respective cases.  The entire discussion, as shown in the transcript, has to be understood in its context.

16.  First, Mr Chow confirmed to this court that a vendor of shares should deliver the share certificate to his purchasers. Mr Ng, for Mr Au again, explained that in the present case, Mr Au had an allegation that Mr Au was deprived of the Share Certificate, which was in the custody of MMG. Mr Chow confirmed that he did not accept the allegation. I observed that it was a factual dispute and I asked Mr Chow if I ruled against his client on this matter, his client must be in breach. Mr Chow confirmed that they do accept that.

17.  When this court discussed the allegation of breach of contract with Mr Ng, he confirmed that it was his case that both EUT and MMG were in breach. He clarified with the assistance of Mr Chow that EUT was the party to the Agreement. Then this court asked Mr Ng whether it was the case of Mr Au that EUT entered into the Agreement on behalf of MMG. Mr Ng answered in the affirmative and it was the basis why he said both EUT and MMG should be liable.

18.  At this juncture, I should explain why I posed the question to Mr Ng. It was due to the following matters pleaded in the ASOC:

(1)   MMG used EUT as a corporate vehicle for the purpose of the purchase and holding of the Sale Shares (§3 of the ASOC);

(2)   EUT was an alter ego acting entirely on the instructions of MMG (§3 of the ASOC);

(3)   Under the Agreement, the consideration for the Sale Shares was the Consideration Shares to be issued and allotted by MMG to Mr Au. In other words, the consideration was to be provided by MMG (§4 of the ASOC);

(4)   Indeed, the Consideration Shares were issued by MMG for the purpose of the Agreement (§4 of the ASOC).

(5)   There is an allegation that EUT and/or MMG and/or Mr Lau had failed or refused to deliver the Share Certificate to Mr Au (§10(b) of the ASOC);

(6)   It is pleaded that such a failure or refusal on the part of EEU and/or MMG constituted a breach of the Agreement. (§19 of the ASOC).

19.  In the course of further discussion, Mr Ng confirmed that the case of Mr Au was that Mr Lau deliberately withheld the Share Certificate from him and in doing so, he induced a breach of the Agreement by both EUT and MMG.

20.  Mr Chow raised no objection to all these. Nor did he ever submit or suggest that EUT did not enter into the Agreement on behalf of MMG throughout the trial.

21.  Mr Lam fairly agrees that the use of singular form in the course of the discussion could not be indicative of whether only either EUT or MMG was actually referred to.

22.  Moreover, as rightly pointed out by Mr Ng, Mr Chow conducted the trial and cross-examine Mr Au on the basis that MMG was a party to the Agreement.

23.  The only defence witness, Mr Lau, managing director of both EUT and MMG, accepted that there was no dispute that MMG was the true party of the Agreement under cross-examination.

24.  On the basis of the foregoing matters and in light of the pleaded case of Mr Au, I was, and still am, of the view that there is no dispute that EUT in fact entered into the Agreement on behalf of MMG.  I agree that Mr Ng did not say precisely that in doing so, EUT was the agent or nominee of MMG but it is only a reasonable and obvious conclusion to be drawn.

25.  In any event, as fairly accepted by Mr Lam, if EUT entered into the Agreement on behalf of MMG, MMG would also be liable for any breach on the part of EUT.

26.  On the other hand, Mr Lam validly points out that there is no allegation of any agency relationship in the ASOC. Nor is there any allegation that EUT entered into the Agreement on behalf of MMG.

27.  Mr Lam invites my attention to Kwok Chin Wing v 21 Holdings Ltd (2013) 16 HKKCFAR 663 for the importance of pleadings and the general prohibition of unpleaded issues to be canvassed at trial.

28.  I agree that unpleaded issues should not be raised to ensure fairness. But here, given those matters already pleaded, the agreement of the parties or at least the non-objection of the defence and the own evidence of the defence witness, Mr Ng was entitled to ask this court to arrive at the conclusion that EUT entered into the Agreement on behalf of MMG. In a nutshell, the defence took no issue about this at all despite the express confirmation of Mr Ng of Mr Au’s case during the discussion. It is not the case that Mr Au slipped in an unpleaded issue by way of his own evidence and as a result the defence was prejudiced.  

29.  In the premises, I do not think the pleading argument can assist the defence on appeal.

30.  Mr Lam lastly complains that as a matter of law, if EUT only entered into the Agreement on its behalf as its agent or nominee, no contractual liability could attach to EUT and it could not be jointly and severally liable together with MMG. I do not think that this is the correct legal position.

31.  Mr Ng rightly points out, and Mr Lam subsequently agrees, that in law an agent can be held jointly and severally liable for contractual liabilities together with his principal: Bowstead & Reynolds on Agency (21^st ed) at §9-009(2), p.572. I find no substance in this complaint and in any event it does not assist MMG in the winding-up proceedings commenced by EUT against it.

32.  In conclusion, my preliminary view is that the appeal of EUT and MMG is unmeritorious, let alone being supported by strong grounds. With all the factual findings which this court was entitled to make, I do not think EUT and MMG could avoid liabilities for their undeniable breach of the Agreement. The appeal being unarguable, it should be the end of this matter.

33.  Nevertheless, I continue to consider the last ground, which can be disposed of briefly. Mr Lam submits that the appeal would be rendered nugatory because of a real risk that Mr Au cannot return the Award to EUT and MMG in the event of a successful appeal.

34.  In the supporting affirmation of Mr Cheng, the following matters discovered by the investigator engaged by EUT and MMG are relied on:   

(1)   Mr Au does not own any real property in Hong Kong;

(2)   Mr Au is a director of two companies but he has no shareholding interest in either of them;

(3)   Mr Au is a director and shareholder of Wealth Key Holdings Limited (“Wealth Key”). Investigation revealed that it is only a shell company with an issued share capital of HK$1. It holds no property in Hong Kong.

(4)   Mr Au has 6 criminal records and all the convictions relate to his failure to pay business registration fees.

(5)   Mr Au is not found to hold any other assets.

35.  I am not satisfied that a case of Mr Au’s impecuniosity can be made out on such assertions. The criminal convictions of Mr Au, which are more than 10 years old, are of little probate value in particular. I agree with Mr Ng that the reference to such convictions is more for the purpose of prejudice.

36.  I bear in mind that the onus is on the appellant to show by way of credible evidence that there is a real risk and a legitimate fear that any payment to the successful party could not be recovered despite the victory of his appeal. The burden is not on the successful party to make an exhaustive list of his assets to disprove such a risk and to allay such a fear.

37.  For completeness, I turn to the evidence of Mr Au. He discloses that Wealth Key owns a 3/8 share of 3 pieces of land in Cheung Island (collectively “the Land”).

38.  Mr Cheng then came back and avers that the Land falls within the Green Belt zone and should be of limited market value. In the eleventh hour, Mr Au filed a reply affirmation exhibiting thereto a provisional sale and purchase agreement and a formal agreement relating to the sale of the Land.

39.  It transpired that on 16 January 2018, Wealth Key entered into the provisional sale and purchase agreement to sell the land at the price of HK$15 million and the completion date would be on 18 June 2018. On 1 February 2018, the formal agreement was signed.

40.  Mr Lam then makes a submission that Mr Au has already dissipated his own assets and the risk that he will be unable to repay the Award is looming large.

41.  I cannot accept this submission. If EUT and MMG genuinely believe that the Land is of limited value, the fact Mr Au is able to sell the Land can only strengthen his financial position. Furthermore, I also see no reason why Mr Au had to begin dissipation of his assets only after the Summons was taken out. If he had had no conviction in his claim and defence to the counterclaim, he would not have waited until a favourable judgment was obtained to start dissipating his assets to avoid liabilities.

42.  To conclude, I am not satisfied that the financial condition of Mr Au can cause any reasonable concern. I cannot hold that the appeal will be rendered nugatory in the absence of a stay of execution.

43.  Lastly, Mr Lam impresses upon this court that MMG is financially sound and it should not be wound up compulsorily. This court is not dealing with the winding-up petition and the financial position of MMG has no bearing on this application. In passing, I would observe that given its purported financial strength, it should reconsider Mr Au’s suggestion that it should pay into court the entire amount of the Award for a stay of execution in the winding-up proceedings.

Conclusion and disposition

44.  For the reasons given above, I am not convinced that any valid grounds can be made out and there is no reason why I should exercise my discretion to order a stay of execution. Accordingly, I dismiss the Summons.

45.  I fail to see any reason to depart from the general rule of costs following the event.  I make an order nisi that Mr Au’s costs of and occasioned by the Summons should be borne by EUT and MMG, to be taxed if not agreed.

46.  I thank both counsel for their helpful assistance.

HCA 170/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 170 OF 2015

____________

____________

________________

JUDGMENT

________________

Introduction

1.  The core dispute in this action arose out of a written sale of shares agreement entered into between Mr Au and End User Technology Limited (“EUT”) dated 2 May 2013 (“the Agreement”) whereby Mr Au agreed to sell to EUT the entire shareholding of Quasicom Systems Limited (“QS”) at a consideration of HK$8 million (“the Price”).

2.  EUT is a wholly-owned subsidiary of Merdeka Mobile Group Limited (“MMG”), the shares of which are listed on the Growth Enterprise Market of the Hong Kong Stock Exchange (HKSE Stock Code: 8163). EUT was used by MMG to enter into the Agreement on its behalf and EUT holds the shares in QS for MMG.  Under the Agreement, it was specifically provided the Price was to be settled by EUT by procuring MMG to issue an aggregate of 20 million shares (“the Consideration Shares”) at HK$0.4 per share.

3.  Mr Lau is and was the managing director of EUT and the managing director of MMG.

4.  Whilst Mr Au transferred all the shares in QS to EUT pursuant to the Agreement, he has not been able to obtain the share certificate for the Consideration Shares (“the Share Certificate”). Hence, he commenced this action. He alleges that there were fraudulent misrepresentations and the Agreement was induced by deceit practised by Mr Lau on behalf of EUT and/or MMG. He also complains that EUT and/or MMG was in breach of the Agreement in that they have withheld the Share Certificate from him.

5.  On the other hand, MMG counterclaims against Mr Au for his breach of an oral agreement allegedly made between them in or about late July 2013 to the effect that Mr Au would not resign from his position in QS until the annual net profit of QS (after tax) reached HK$2 million (“the Oral Agreement”). It is not in dispute that Mr Au tendered his resignation by his email dated 10 September 2014 (“the 10/9 Email”).

Issues

6.  Mr Ng, for Mr Au, in his closing submissions, indicates to this court that Mr Au no longer pursues his pleaded plea of inducing breach of contract against Mr Lau. Further, Mr Ng curtails the scope of the allegation of fraudulent misrepresentation and/or deceit and relies on only two misrepresentations.

7.  Mr Chow, for the defence, accepts that EUT/MMG would be in breach of the Agreement if they failed to deliver the Share Certificate to Mr Au upon the completion of the Agreement.

8.  In light of these positions, the differences between the parties are down to the following three factual issues:  

(1)  Did Mr Lau make the alleged misrepresentations fraudulently on behalf of EUT and/or MMG to procure Mr Au to enter into the Agreement (“the Misrepresentation/Deceit Issue”)?

(2)  Did EUT and/or MMG ever withhold the Share Certificate from Mr Au thereby in breach of the Agreement (“the Share Certificate Issue”)?

(3)  Was the Oral Agreement validly formed and binding on Mr Au (“the Oral Agreement Issue”)?

9.  I shall first outline the essential background facts for the purpose of my resolution of the three factual issues identified above.

Background facts

10.  The following background facts are either not in dispute or indisputable.

11.  As a starting point, I turn to the Agreement and an announcement made by MMG through Hong Kong Exchanges and Clearing Limited (“HKEX”) and the Stock Exchange of Hong Kong Limited in relation to the disclosure of the Agreement dated 2 May 2013 (“the Announcement”). A copy of the Announcement was emailed to Mr Au by Mr Lau on 3 May 2013.

12.  The following information can be gleaned from these two documents.

13.  QS is a local company incorporated in March 2009 for the purpose of taking over a sole proprietorship business commenced in 2007 by Mr Au. It was principally engaged in the business of distributorship of renowned to information technology products with expert technical support services.

14.  Mr Au is an expert in IT matters and prior to the completion of the Agreement, he held all the 5,001 issued and paid up shares in QS with the remaining 4,999 unissued shares held in reserve. The 5,001 shares of Mr Au (“the Sale Shares”) became the subject matter of the Agreement.

15.  EUT is an investment holding company incorporated in British Virgin Islands and is an indirectly wholly-owned subsidiary of MMG.

16.  Before the acquisition of QS, the major business of MMG was in forestry and plantation. Due to the downward pressure on the general demand for forestry products and market prices of timber and palm oil, MMG explored other potential business opportunity and one of the steps taken was to recruit additional directors with different business background and expertise.

17.  First, Mr Lau, with a strong background in information system and operation system, joined MMG in August 2012. Mr Lau came to know Mr Au through one Mr Roy Lau and they met each other for the first time in or about December 2012 (“the 1^st Meeting”). They discussed the terms of acquiring QS.  

18.  As shown by the financial information of QS extracted from its unaudited management accounts for the preceding three years prior to the Agreement, it had been operated at a loss.

19.  Nevertheless, according to the Announcement, the acquisition of QS was considered a good opportunity for MMG to enter into information system industry due to its business track record and reputation and its team of high-calibre staff amply equipped with technical know-how.

20.  Under the Agreement, the consideration of the Price should be settled by EUT procuring MMG to allot and issue the Consideration Shares at the issue price and credited as fully paid to Mr Au or his nominees. The Consideration Shares the allotted and issued under the outstanding general mandate granted to the directors to allot and issue up to 23,943,245 new shares granted by the members of MMG at an AGM on 3 May 2012.

21.  The issue price was defined to be HK$0.4 per Consideration Shares (“the Issue Price”). HK$0.4 was the par value of the ordinary shares of MMG at the material time. The Announcement further explained that the determination of the Issue Price was based on arm’s length negotiation between MMG and Mr Au with reference to the prevailing market price and the par value of the ordinary shares as MMG is not allowed to issue share below par value and represented a premium of approximately 95.89% over the average closing price of approximately HK$0.202 per share as quoted on the Hong Kong Stock Exchange on 2 May 2013, being the closing price of the ordinary shares as at the date of the Agreement.

22.  Completion of the Agreement was subject to the usual requirement of due diligence. It was first fixed on 2 May 2013 and was ultimately postponed to 30 September 2013.

23.  It was stated in the Announcement that upon completion, Mr Lau would sit on the board of directors of QS and, together with Mr Au, be responsible for the day to day operation of QS.

24.  Mr Ng Tai Yin (“Mr TY Ng”), having a strong IT background, joined QS as chief executive officer in late 2013. His employment with QS was terminated in August 2014.

25.  Since the date of the Agreement, a few changes took place in the share capital of MMG. Mr Au has annexed to his Statement of Claim a table setting out all such changes and I shall conveniently annex the same to this Judgment and refer to it as “The Share Table”.

26.  The following changes, apart from the issue of the Consideration Shares, are of particular relevance to the pleaded case of Mr Au.

27.  On 17 July 2013, 91,671,490 rights shares were allotted by way of a rights issue (“the July 2013 Rights Issue”).  The existing shareholders were offered 2 rights shares for every 5 shares held by them.

28.  On 18 December 2013, 45,000,000 general mandate placing shares were placed to not less than 6 placees pursuant to the general mandate (“the December 2013 Placing”).

29.  On 30 January 2014, 150,000,000 special mandate placing shares were placed to not less than 6 placees pursuant to a special mandate (“the January 2014 Placing”).

30.  On 3 March 2014, 77,000,000 placing shares were placed to not less than 6 placees under the general mandate (“the March 2014 Placing”).

31.  On 22 July 2014, 2,451,400,860 rights shares were issued by way of a rights issue (“the July 2014 Rights Issue”). The existing shareholders were offered 4 rights shares for every 1 share held by them.

32.  QS was dissolved on 8 May 2017 upon the petition of its creditors who commenced the Creditors’ Voluntary Winding-up proceedings after the departure of Mr Au on 10 September 2014.

The Misrepresentation/Deceit Issue

33.  The pleaded case of Mr Au in respect of his plea of misrepresentation and/or deceit is not pursued entirely after close of evidence. The remaining allegation is that in order to induce Mr Au to enter into the Agreement to sell to EUT the Sale Shares, shortly before the making of the Agreement, Mr Lau acting on behalf of himself and EUT and/or MMG represented and warranted to him that:

(a)  The consideration of the Sale Shares was HK$8,000,000 which would be paid to Mr Au by means of an allotment of the Consideration Shares representing approximately 8.73% of the issued share capital of MMG to be issued by MMG (§5(a) of the Statement of Claim) (“the Consideration Representation”) and

(b)  MMG would not issue any further new shares or dilute the shares of MMG without the prior consent of Mr Au (§5(c) of the Statement of Claim) (“the No-Dilution Representation”).

34.  It is further pleaded that in order to fortify the two misrepresentations, the defendants caused and secured the board of MMG to make three public announcements relating to the Agreement including the Announcement.

35.  The complaints about the Consideration Representation and the No-Dilution Representation are made on the same basis. Due to the subsequent changes in the share capital of MMG, these two representations became false.

36.  In respect of the Consideration Representation, the pleaded falsity is that the defendants never had any intention to honour the transfer of the Consideration Shares at the then existing value of HK$8,000,000.00 and/or representing 8.73% of the total issued share capital of MMG.

37.  It is alleged by Mr Au that he relied and acted on the Consideration Misrepresentation when entering into the Agreement. He completed his obligations thereunder on 18 July 2013.

38.  Mr Ng submits that the falsity of the Consideration Representation is assessed when it was actually acted upon albeit after the signing of the Agreement. He relies on the following passage in Actionable Misrepresentation by Spencer Bower & Hanley (5^th Edn., 2014) at §5.08,

“A misrepresentation also becomes fraudulent when the representor fails to reveal supervening events which, to his knowledge, have falsified his statement before it is acted upon by the representee. A continuing representation is being continually repeated and if it becomes false before being acted upon, the representee is entitled to avoid the transaction. If the representor becomes aware that it has become false, it becomes fraudulent.”

39.  Mr Ng finds it necessary to argue that the Consideration Representation only became false after the signing of the Agreement due to a supervening event taking place between the date of the Agreement and the completion of the Agreement on the part of Mr Au on 18 July 2013.  

40.  Indeed, in the evidence of Mr Au, he makes two allegations about the Consideration Representation. First, he avers that the par value of the shares of MMG was subsequently reduced from HK$0.4 to HK$0.01 contrary to the Consideration Representation due to capital reduction and sub-division effective on 25 November 2013. He further avers that MMG filed the relevant proposal for capital reduction with the HKEX on 5 June 2013. Hence, he alleges that the transfer of the Consideration Shares was never intended by the defendants to be made on the basis of the then existing par value of 20,000,000 shares, i.e., the Price at HK$0.4/share.

41.  On the other hand, Mr Au avers that the Consideration Shares could never represent 8.73% of the total issued shares to the knowledge of the defendants. He relies on two supervening events. First, the July 2013 Rights Issue rendered the Consideration Shares to be diluted to be 6.23% of the total issued shares of MMG only as opposed to the promised 8.73%.

42.  Second, the allotment of the Consideration Shares on 17 July 2013 in itself increased the number of the total issued shares of MMG meaning that the Consideration Shares could not represent the promised 8.73% after the allotment.

43.  For the No-Dilution Representation, Mr Ng in his closing submissions sensibly relies on the July 2013 Rights Issue only. All other alleged dilutions took place after completion of the Agreement and could not possibly be the subject matter of actionable misrepresentations.

44.  In his witness statement, Mr Au says that he believes that the dilution of his shares and capital reduction were premeditated and it was a scheme orchestrated by Mr Lau either personally and/or in collaboration with EUT and/or MMG, in order to fraudulently misrepresent to him and to induce him to enter into the Agreement.

45.  I then turn to the oral evidence of Mr Au. Generally speaking, he stuck me as an honest and straightforward witness. He had little regard as to whether or not or how his answers might prejudice his case and sounded very forthcoming. He agrees that the initial offer made by Mr Lau to acquire his shares in QS at the 1^st Meeting was HK$2,000,000. He did not find it to be attractive.

46.  The Consideration Shares, however, appeared to him to be reasonable. Mr Au frankly agrees that he never expected to make HK$8 million out of the Agreement. He knew that the market value of the Consideration Shares was HK$0.22/share and the Issue Price of HK$0.4 was just the par value of each of the Consideration Shares. Mr Au intended to sell all the Consideration Shares in the open market shortly after completion so as to yield approximately HK$4.4 million. This was the sum that he had expected to be the quid pro quo for his Sale Shares.

47.  It is remarkable that he agrees that he did not pay much attention to the ratio of the Consideration Shares to the total issued shares of MMG. His focus was on the market price of the Consideration Shares as at the time of the Agreement.  

48.  Mr Au says that he was not aware of the Announcement and the July 2013 Rights Issue. He agrees that he acquired knowledge of the same only in or about August 2013 but still he did not find it necessary to make any complaint to any of the defendants about the dilution of his shares. His concern remained to be the market price of the Consideration Shares and his evidence is that the market price was more or less the same after the dilution in August 2013 and so he did not raise any issue about the dilution with Mr Lau.

49.  Mr Lau simply makes a bare denial in regard to the Consideration Representation and the No-Dilution Representation in both his Defence and his witness statement.

50.  On the evidence, on balance of probabilities, I am unable to accept that Mr Lau had ever made the Consideration Representation and the No-Dilution Representation either for himself or for EUT and/or MMG and that Mr Au had ever relied on any of them in entering into the Agreement for the following reasons:

(1) The Consideration Representation is not supported by Mr Au’s own evidence at all. On his admission, he knew very well that the Price was not the actual consideration and it was computed on the basis of the Issue Price and the par value of each of the Consideration Shares only. Mr Au, without hesitation, accepts that the amount of HK$4.4 million was the fruit that he had expected to reap under the Agreement.

(2) Mr Au was concerned about the market value of the Consideration Shares rather than their par value at the time of the Agreement. He accepts that even after the July 2013 Rights Issue, the market price of the Consideration Shares was more or less the same.

(3) In the circumstances, Mr Lau had no reason to make the alleged representation concerning the stated consideration of HK$8 million. Nor could Mr Au possibly have relied on the same even it had been made in light of his evidence.

(4) As regards the alleged representation concerning the percentage of the Consideration Shares, it is a non-starter. The Consideration Shares represented 8.73% of the then existing issue share capital of MMG and Mr Au must know very well from the Agreement that the Consideration Shares were to be allotted to him for the purpose of the Agreement. He should know that after the allotment, the number of the total issued shares of MMG must be increased and hence the percentage of 8.73% must be altered even without the July 2013 Rights Issue.

(5) The July 2013 Rights Issue was not a secretive process and MMG duly made public announcements about this event through the HKEX. According to the public announcement dated 16 July 2013, of which Mr Au denies any knowledge, there was already a public announcement dated 11 June 2013 disclosing the details of the July 2013 Rights Issue. Mr Lau had no reason to believe that he could conceal the July 2013 Rights Issue from Mr Au and make him convinced of the ever-constant 8.73% by the Consideration Representation and/or the No-Dilution Representation.

(6) Indeed, by reason of the matters mentioned, I do not believe that the percentage of 8.73% was ever the concern of the parties. Mr Lau had no reason to make the Consideration Representation and Mr Au had no reason to rely on the same.

(7) For the same reasons, I cannot accept the allegation of the No-Dilution Representation. The following matters further fortify my conclusion.

(8) Mr Lau is merely the managing director of MMG. Even if he had full control of the board of directors of MMG, he could not avoid any changes in the share capital of MMG, which can be brought about by the members of MMG. He had no reason to make and Mr Au had no reason to believe let alone relying on the No-Dilution Representation.

(9) Mr Au must be aware of all the subsequent changes in the share capital of MMG after the completion of the Agreement. There were bound to be notices issued to the members and public announcements. I cannot accept his evidence that he only discovered them after his resignation. He, however, never made any complaint about any of them.

(10) Indeed, Mr Au even signed proxy forms to authorise Mr Lau to vote on his behalf at the two Extraordinary General Meetings (“EGMs”) to approve the resolutions for the January 2014 Placing and the July 2014 Rights Issue. In the former case, the proxy form referred to the notice of the EGM setting out the two proposed resolutions. Mr Au should be made aware of the proposed January 2014 Placing by the relevant notice. In the latter case, the proxy form actually mentioned the July 2014 Rights Issue. In other words, Mr Au was well aware of these events. Not only did he make no complaints, he actually allowed Mr Lau to vote in support of the resolutions resulting in dilution of the Consideration Shares.

(11) In the circumstances, I cannot believe that Mr Lau ever made the Consideration Representation and the No-Dilution Representation to Mr Au. I cannot believe that Mr Au ever acted on either of them in any event.     

51.  I then come to the conclusion that the plea of misrepresentation and/or deceit is not substantiated and must be rejected.

The Share Certificate Issue

52.  This is a purely factual issue as to whether the defendants ever withheld the Share Certificate from Mr Au.

53.  The evidence of Mr Au is that on 18 July 2013, Mr Lau, one Mr Thomson Lai who was the company secretary of MMG and him met in the office of MMG to complete the Agreement. During the meeting, after Mr Lau and Mr Au executed the bought and sold notes for the transfer of the Sale Shares, Mr Lau and Mr Lai showed Mr Au the Share Certificate and asked him to sign on its back and a receipt of them. Mr Au did so.

54.  However, Mr Lau immediately took the Share Certificate away from Mr Au and told him that it would be kept in the safe in the office of MMG for safekeeping. Mr Lau explained that MMG needed time to confirm whether the company records and documents of QS delivered to MMG pursuant to the Agreement were in good order before the Share Certificate could be released to Mr Au.

55.  Indeed, under Clauses 6.2 to 6.3 of the Agreement, EUT/MMG was not obliged to complete the transaction unless Mr Au fulfilled his obligations to deliver to EUT/MMG a number of documents relating to QS.

56.  Thereafter, despite repeated demands, Mr Lau refused to return the Share Certificate to Mr Au.

57.  Mr Au further mentions an important incident. When he was asked by Mr Lau to sign the proxy form dated 10 June 2014 in respect of the resolution of the July 2014 Rights Issue, Mr Lau assured him that his financial interest would be taken care of by MMG in the imminent rights issue and the proportionate rights shares would be purchased for him with the funds of MMG. Mr Lau explained to him what he needed to do was to first return the Consideration Shares to MMG, i.e. pool returning (“還倉”) and MMG would issue a new share certificate to replace the Share Certificate to reflect his enhanced shareholding the addition of rights shares. Mr Au believed him.

58.  No such new share certificate has ever been issued to Mr Au eventually. The shareholders list of MMG as at 31 August 2014 shows that Mr Au was no longer a member. 

59.  To effect pooling returning, Mr Au was given a set of documents including the Share Certificate calling for his signatures on or about 14 July 2014. These documents were placed on his desk in his office. Mr Au did so and return all of them including the Share Certificate (“the Pool Documents”) to MMG. He specifically recalls having signed a share transfer document to authorise the transfer of his shares whilst no transferee was identified in the share transfer document.

60.  In an interview with the ICAC subsequently, Mr Au, as a potential witness, was shown by the investigating officer a copy of the share transfer document bearing his signature whereby the Consideration Shares were transferred to one Lui Cui. Mr Au did not know Lui Cui at all and has not received any consideration from him in exchange of the Consideration Shares.

61.  The Share Transfer Journal of MMG for the month ended 31 July 2014 shows that Liu Cui (and not Lui Cui) acquired the Consideration Shares (in addition to other shares) on the same date, i.e. 28 July 2014, when Mr Au disposed of the Consideration Shares. Liu Cui ceased to be a member of MMG as shown in the shareholders list of MMG as at 30 September 2014.

62.  I am alive to the failure of Mr Au to mention Lui Cui or Liu Cui in his witness statement. Nor did he make any mention of the ICAC interview. I have no idea when the interview took place. It might be held after the making of his witness statement. In any event, I have no reason to disbelieve Mr Au. His oral evidence is actually supported by the documentary evidence which was only disclosed by the defence during the trial.

63.  The evidence of Mr Lau in his 6-page witness statement is simply that Mr Au signed the receipt acknowledging the transfer of the Consideration Shares on the day of completion.

64.  In his oral testimony, Mr Lau says that he was not even present in the office during the completion of the Agreement. He claims that the transaction was handled by the solicitor of MMG and Mr Lai. Being absent, he could not have taken away the Share Certificate from Mr Au as alleged.   

65.  I have no hesitation in preferring the evidence of Mr Au and accepting his evidence in relation to the Share Certificate Issue for the following reasons:

(1) The purported absence of Mr Lau during the completion must be a complete answer to the detailed allegations of Mr Au concerning what transpired at the meeting, which must appear to him to be a sheer fabrication. Mr Lau however only waited until cross-examination to disclose his absence. Mr Lau could not explain why he had not disclosed this complete answer earlier.

(2) Furthermore, there is no reason why Mr Lau did not secure the testimony of the solicitor and Mr Lai in support of his purported absence at the meeting. Mr Lau could not provide any explanation for his failure to do so. This court is entitled to rely on the maxim of omina prasesumuntur contra spoloatorem and draw an adverse inference against the allegation of absence on the part of Mr Lau.

(3) In any event, Mr Au’s evidence is credible. He could not have made up the alleged representation made by Mr Lau that the Share Certificate was to be kept in the safe when Mr Lau accepts that the availability of a safe in the office of MMG is very much a private matter.

(4) In a similar vein, Mr Lau’s silence on the allegation of pool returning is deafening. Mr Au’s evidence is well-supported by the documentary evidence which is not in dispute. I do note that he made an error of the name of Liu Cui but it is perfectly understandable as he was only shown briefly the share transfer document by the ICAC investigating officer. It follows that I accept that the Share Certificate had been kept by MMG before it was returned to Mr Au as part of the Pool Documents on or about 14 July 2014.

(5) Despite the return of the Share Certificate to Mr Au, I am unable to hold that it was an act of fulfilling the obligations under the Agreement on the part of EUT/MMG. Nor is it ever the case of the defence. The Share Certificate was returned to Mr Au as part of the Pool Documents purportedly for the purpose of the issue of a replacement certificate for the Consideration Shares plus the rights shares after the July 2014 Rights Issue. In fact, it was a deception and the Consideration Shares were transferred to Liu Cui at the expense of Mr Au.

66.  In the premises, I conclude that EUT breached by the Agreement in that it has failed to provide the Share Certificate to Mr Au. It is common ground that EUT entered into the Agreement and holds the Sale Shares on behalf of MMG as its agent/nominee. I therefore hold that both EUT and MMG are jointly and severally liable to Mr Au for their breach of the Agreement.

67.  As a result of the breach, Mr Au is deprived of the fruit of the Agreement despite his complete performance of the same. In my view, his loss is HK$4.4 million being his bargain under the Agreement. EUT and MMG must be jointly and severally liable to pay Mr Au the sum of HK$4.4 million as damages.

68.  I am aware that in the prayer for relief in the Statement of Claim, Mr Au does not claim against MMG for breach of the Agreement. Instead, he relies on other causes of action including the inducement of breach of the Agreement by EUT together with Mr Lau. I am of the view that given the common ground that EUT was merely the agent or nominee of MMG in respect of the Agreement, on the evidence accepted by this court, I am entitled to find MMG to be in breach of the Agreement and hence liable to pay Mr Au damages.

69.  In his closing submissions, Mr Ng quite sensibly abandons the claim of procuring of breach of contract against Mr Lau. I therefore dismiss all the claims against Mr Lau.

70.  What remains is the counterclaim of MMG based on the Oral Agreement.

The Oral Agreement Issue

71.  This issue is again purely factual and can be disposed of rather briefly.  I first turn to the pleaded case of MMG.

72.  First, it is alleged that after the completion of the Agreement, Mr Au requested MMG through Mr Lau to inject HK$ 2,000,000 for the purpose of acquiring a distributorship from CA (Hong Kong) Limited (“CA”).

73.  Then it is alleged that in late 2013, the Oral Agreement was reached between Mr Au and MMG that MMG would inject HK$3,000,000 into QS to acquire the distributorship from CA and for the business operation of QS. In return, Mr Au agreed not to resign and would remain as an employee and a director of QS until the annual net profit of QS (after tax) reached HK$2,000,000 (“the Profit Target”).

74.  There is a further promise made by Mr Au but for present purposes, it is not relevant given the express abandonment of such an allegation by Mr Chow.

75.  The gravamen of the complaint of MMG is that before the Profit Target was reached, Mr Au, by the 10/9 Email, resigned from his position with immediate effect. Actually, according to the unaudited financial statements of QS for the year ended 31 December 2014, QS suffered a loss of HK$537,101.

76.  The resignation of Mr Au in those circumstances is alleged to be a breach of the Oral Agreement. Mr Chow submits that MMS is entitled to recover a sum of HK$2,000,000 from Mr Au as damages for his breach of the Oral Agreement.

77.  In passing, I should make it clear that I am unable to see the legal basis for the alleged quantum.

78.  In his witness statement, Mr Lau merely repeats the allegations pleaded in the Counterclaim.

79.  In his evidence, Mr Au explains at length the financial problems of QS and the reluctance of MMG to inject funds for the business operation of QS. He explained that the distributorship with CA had long been secured before the payment of HK$2.2 million by MMG to QS on 28 March 2014. The said amount was to settle the outstanding payment due to CA on 31 March 2014. On 28 April 2014, QS returned the like amount to MMG on 2 May 2014.

80.  Mr Au denies that in order to secure the injection of HK$2 million to QS, he reached any oral agreement with MMG. Mr TY Ng also testified to in support of Mr Au. Mr TY Ng had, before joining QS, worked for CA. He was a very impressive witness and sounded very cautious and reasonable. I find him to be a reliable witness.

81.  On the Oral Agreement Issue, I have full confidence in the testimony of Mr Au and Mr TY Ng and I reject the evidence of Mr Lau for the following reasons:

(1) The starting point is that the evidence of Mr Au and Mr TY Ng relating to the payment of HK$2.2 million is well supported by documentary evidence. The evidence of Mr Lau is plainly unreliable.

(2) The alleged promise made by Mr Au does not make commercial sense to both parties and is inherently improbable. Mr Lau himself fairly accepts that it was commercial unrealistic to keep Mr Au until the Profit Target was met when there was no certainty that it could be met at all. Nor can I believe that Mr Au would make such a promise when the business prospect of QS was grim.

(3) The texted messages exchanged between Mr Au and Mr Lau by Whatsapp immediately after the receipt of the 10/9 Email are most telling. If Mr Au’s unexpected resignation had been in breach of the Oral Agreement, Mr Lau must have pointed this out to Mr Au and demanded him to honour his obligation. Nevertheless, Mr Lau did not make any mention of the Oral Agreement at all. This is inexplicable.

(4) Mr Lau explains in cross-examination that his immediate concern was about the handover matters. I cannot accept his explanation. I cannot believe that he would fail to make the slightest effort to retain Mr Au pursuant to the Oral Agreement. If Mr Au agreed, no handover issue would arise at all.

82.  I believe I have dealt with all the essential factual disputes for the purpose of resolving the pleaded issues. I am aware that there are other allegations not dealt with in this Judgment but I do not believe that they have any bearing on the core issues.

Conclusion and dispositions

83.  In summary, on the Misrepresentation/Deceit Issue, I find for the defence and I dismiss Mr Au’s claim based on this plea.

84.  On the Share Certificate Issue, I find for Mr Au and I am satisfied that his claim for breach of the Agreement is made out against EUT and MMG. EUT and MMG are jointly and severally liable to pay damages to Mr Au in the sum of HK$4.4 million. I dismiss Mr Au’s claim against Mr Lau for inducing/procuring breach of the Agreement.

85.  On the Oral Agreement Issue, MMG failed to prove the Oral Agreement and I dismiss its counterclaim.

86.  On the issue of costs, there is no reason why Mr Au’s costs of the action including the counterclaim and all costs previously reserved not to be borne by EUT and MMG jointly and severally. As regards the costs of Mr Lau, I believe that, looking at the matter in the round, the fairest order is that his costs of this action including any costs previously reserved should be borne by EUT and MMG jointly and severally. I make a costs order nisi in these terms.

87.  Lastly, I thank Mr Ng and Mr Chow for their helpful assistance rendered to this court.

Mr Ernest Ng, instructed by Christine M. Koo & Ip, for the plaintiff

Mr Tony C.H. Chow, instructed by S.H. Chou & Co., for the defendants