SMART EDGE LTD v. HG PROPERTY INVESTMENT HK LTD

CACV 138/2023, [2026] HKCA 149

On appeal from [2023] HKCFI 1059

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 138 OF 2023

(ON APPEAL FROM HCMP 2146 OF 2022)

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J U D G M E N T

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Hon Barma JA (giving the Judgment of the Court):

1.  This is an appeal by the defendant against the judgment of Cheng J (“the Judge”)  dated 27 April 2023[1] (“the Judgment”).

2.  By the Judgment and an Order of the same date (“the Order”), the Judge made declarations (“the Declarations”)  that:

(i)  the Writ of Summons filed in HCA 1469 of 2022 (“the HCA Proceedings”)  on 3 November 2022 (“the Writ”)  by the defendant against each of Cheng Mei Holdings Limited and Goal Eagle Limited, being shareholders of the plaintiff (“the Shareholders”), is not a lis pendens affecting the property known as the parcel or piece of land registered in the Land Registry as New Kowloon Inland Lot No 6314 with the building thereon known as Goldin Financial Global Centre, No 17 Kai Cheung Road, Kowloon (“the Property”); 

(ii)  the amended Writ filed on 20 January 2023 (“the Amended Writ”)  by the defendant against the Shareholders and the plaintiff is not a lis pendens affecting the Property; 

(iii)  the agreement for sale and purchase dated 22 September 2022 (“the Agreement”)  between the Shareholders and the defendant is not an instrument affecting the Property; 

(iv)  the Writ, the Amended Writ and the Agreement (“the Instruments”), among others[2], are not instruments registrable on the land register of the Property under the Land Registration Ordinance (Cap 128)  (“the Ordinance”). 

3.  By the Order, the Judge also ordered the defendant to (i) procure the removal from the register of all references to (among others)  the Instruments (including as a “deed pending registration”); and (ii)  be restrained from delivering or causing to be delivered to the Land Registry the Instruments for registration against the title of the Property. 

4.  By its Notice of Appeal filed on 5 May 2023 (“the NoA”), the defendant seeks to set aside the Judgment and Order, and further seeks a declaration that the Instruments are registrable on the land register of the Property under the Ordinance. 

5.  By a Summons dated 9 May 2023, the defendant applied to the Judge for a stay of execution of [54] and [55] of the Judgment, which were essentially the Judge’s declarations and orders set out above, pending appeal.  By a decision dated 30 May 2023[3] (“the CFI Stay Decision”), the Judge dismissed the application for the reasons given therein. 

6.  The defendant renewed its stay application before the Court of Appeal (Barma and Au JJA)  by a Summons dated 13 July 2023.  The renewed application was dismissed by this Court’s judgment dated 31 July 2024 (“the CA Stay Judgment”)[4].

7.  We heard the appeal on 21 August 2024.  At the hearing, the defendant was represented by Mr Edward Chan SC (“Mr E Chan”)  and Mr Jeffrey Tam, while Mr Abraham Chan SC (“Mr A Chan”)  and Mr James Wood represented the plaintiff.[5] At the conclusion of the hearing, we reserved our judgment, which we now give.  The parties were agreed that costs of the appeal should follow the event. 

Background

8.  We do not propose to repeat in detail the background to these proceedings, which has been set out by the Judge in the Judgment at [4]‑[28], and by this court in the CA Stay Judgment at [10].  For the purposes of this appeal, it suffices to highlight the following facts.

9.  The plaintiff is a limited company, the issued shares of which (“the Shares”)  are wholly owned by the Shareholders.  The plaintiff also owed certain loans to the Shareholders (“the Loans”).  Since 13 July 2020, joint and several receivers and managers (“the Receivers”)  have been appointed in respect of the Shares and the plaintiff’s assets. 

10.  The Agreement, from which the issues central to the proceedings below (and to this appeal)  arise, was entered into by the Shareholders (as vendor)  with the defendant (as purchaser)  on 22 September 2022.  The Agreement was for the sale and purchase of the Shares and the Loans. 

11.  Material provisions in the Agreement of particular relevance for this appeal include (with emphasis supplied):

(a)  Cl.2.1: On Completion (as therein defined), subject to certain terms and conditions, the Shareholders as vendor shall sell the Shares and shall assign the Loans to the defendant as purchaser;

(b)  Cl.4.1(a) / Cl.4.2(a): Breach of the warranties given by the Shareholders (which are set out in Schedule 3 to the Agreement)  would entitle the defendant to cancel the transaction under the Agreement by way of written notice;

(c)  Cl.4.1(d): Completion of the Agreement was to be conditional upon the defendant providing to the Shareholders, within 14 days after the date of the Agreement, written confirmation from the defendant’s Financier (as therein defined), in form and substance satisfactory to the Shareholders, that the said Financier has completed all necessary due diligence in respect of the defendant’s Finance Facility (as therein defined)  and obtained all necessary internal approvals (including investment committee approval)  to provide funding under the defendant’s Finance Facility;  

(d)  Cl.6.1(b)(i): Subject to the satisfaction of the conditions in cl.4.1, completion shall take place, and upon receipt of the balance of the consideration, the Shareholders shall deliver to the defendant the items particularised at cl.6.1(b)(i)(1)-(12), such as duly executed instruments of transfer and sold notes in respect of the Shares;  

(e)  Cl.6.1(b)(ii): Apart from the items particularised at cl.6.1(b)(i)(1)-(12), the Shareholders shall also on completion procure the immediate discharge or release of all charges, liens, mortgages, security and Encumbrances (as therein defined)  over, inter alia, the Property; 

(f)  Cl.8.1: The Property shall be delivered to the defendant subject to the existing tenancies and any lettings etc. granted or to be granted or modified by the Shareholders pursuant to cl.8.10; 

(g)  Cl.8.11(b): Vacant possession of such part or portion of the Property (other than the Leased Premises, as therein defined)  shall be delivered to the defendant on completion;

(h)  Cl.8.11(c): The defendant shall be deemed to have obtained vacant possession of such part or portion of the Property other than the Leased Premises (as therein defined)  on completion upon the Shareholders’ delivery to the defendant of the key(s)  thereof and the Shareholders’ obligation to deliver vacant possession shall be discharged accordingly;

(i)  Cl.11: The Property will be delivered to the defendant on completion subject to various matters or interests, such as all rights, rights of way and other easements etc. affecting the Property, as well as to terms and conditions in the Agreement and those in the Government Grant etc.;

(j)  Cl.13.1: As from the date of the Agreement, the Property shall be at the sole risk and responsibility of the defendant as regards loss, expenses and damage etc;

(k)  Schedule 3 (Vendor’s Warranties): This sets out Warranties offered by the Shareholders, among which paragraph 1.5(b)  stipulated that the execution, delivery of, and the performance by the Shareholders of their obligations under the Agreement will not require them to obtain any consent or approval necessary for the purpose of the transactions under the Agreement.

12.  The defendant did not comply with cl.4.1(d)  within the time stipulated. Notwithstanding that an extension of time for compliance (until 14 October 2022)  was granted by the Shareholders to the defendant on 7 October 2022, compliance was not forthcoming, and thus on 1 November 2022, the Shareholders notified the defendant that the Agreement had been terminated due to its failure to comply with cl.4.1(d), and completion of the Agreement did not take place.

13.  On 3 November 2022, the Writ in the HCA Proceedings was issued by the defendant against the Shareholders for alleged wrongful termination of the Agreement.  The Writ was delivered by Messrs ONC Lawyers (solicitors then acting for the defendant)  to the Land Registry for registration against the Property. However, on 24 November 2022, this attempt at registration was retracted by Messrs ONC Lawyers.

14.  On 25 November 2022, the Receivers entered into an agreement with another party, Goldstone Asset (HKSAR)  Limited, for the sale and purchase of the Property. Shortly thereafter, on 28 November 2022, Messrs Khoo & Co (another firm of solicitors representing the defendant)  attempted to register another copy of the Writ and a copy of the Agreement against the Property at the Land Registry.  The present proceedings were therefore commenced by the plaintiff to remove the attempted registration of and references to these documents on the land register. 

15.  The Writ was later amended (by the Amended Writ), to include the plaintiff as a defendant in the HCA Proceedings.  A further attempt was then made by Messrs Khoo & Co to register the Amended Writ on 27 January 2023. 

The proceedings below

16.  As at the date of the hearing before the Judge, the Instruments remained on the land register in respect of the Property as “deeds pending registration”, and remained there until such references were removed pursuant to the Order. 

17.  Before the Judge (see [32] of the Judgment), Mr A Chan’s position for the plaintiff was essentially that under s.2(1)  of the Ordinance, an agreement must create some legal or equitable interest in land for it to be registrable.  Further, although proceedings in which there is a claim to land or where some interest in land is asserted may be registrable as a lis pendens (see Thian’s Plastic Industrial Co Ltd & ors v Tin’s Chemical Industrial Co Ltd & anor [1970] HKLR 498), proceedings concerned with agreements for sale and purchase of shares in a company (notwithstanding that that company may itself hold or own an interest in land)  are not a registrable lis pendens as they do not relate to land or an interest in land(see s.1A of the Ordinance; Health First Technology Ltd & anor v Chan Chi Cheung & ors [1993] 2 HKLR 473).

18.  Mr A Chan placed particular reliance on Good Profit Development Ltd v Leung Hoi [1993] 2 HKLR 176 for the proposition that even where the proceedings involve an acquisition of shares in a company which is being done for the very purpose of indirectly acquiring a landed property held by that company, such proceedings are nonetheless not registrable as a lis pendens.

19.  Mr E Chan did not disagree with the principles established by the authorities relied upon by Mr A Chan.  Notably, Mr E Chan agreed that agreements for sale and purchase of shares in a company (which itself holds property)  are not registrable on the land register (see [35], the Judgment).  His case was however that the Agreement was more than one for the mere acquisition of the Shares and that it was one “pursuant to which [the defendant] was to acquire an interest in the Property” (Judgment at [36]); He further submitted that cl.11, when read together with cls.6 and 8 (and in particular the sub-paragraphs in these clauses highlighted above), showed that the Shareholders were obligated to deliver vacant possession of the Property to the defendant, and that this was (in Mr E Chan’s submission)  “tantamount to an assignment” (Judgment at [36]-[40]).

20.  Thus, said Mr E Chan, the obligation to deliver vacant possession created a right or interest in the Property, rendering the Instruments registrable (see [40], the Judgment).

21.  The Judge rejected these submissions.  Her findings and reasoning leading her to do so were essentially as follows (see Judgment at [41]-[45]):

(a)  Cl.2 provided that the subject matter of the Agreement was for the sale and purchase of the Shares and the Loans, as opposed to the Property. 

(b)  Sale of the Shares would only mean that the defendant would become the owner of the plaintiff, which in turn owns “various items of property, including the Property”.

(c)  Cls.8 to 11 merely provided for the features of the Property at the time of completion (or the “state of affairs” concerning the Property)  which the parties had agreed upon, such as cl.8.11(c)  (a clause not relied upon or referred to by Mr E Chan in submissions)  which deals in substance with the delivery of the keys to the non-leased parts of the Property, by the Shareholders to the defendant, upon completion (see fn 4 at p 16 of the Judgment).

(d)  Unlike cl.6, which provided a detailed list of items to be delivered by the Shareholders to the defendant on completion (which did not include vacant possession of the Property), the different language, in the passive voice, used in cls.8 and 11 of the Agreement (which did refer to vacant possession and the Property itself)  suggested that no positive obligation was imposed on the part of the Shareholders to deliver vacant possession of the Property to the defendant.

(e)  The owner of the Property, the plaintiff, was not even a party to the Agreement; so that there was no basis to suggest that the Shareholders were capable of conferring an interest in the Property on the defendant by the Agreement (Good Profit Development Ltd; Salomon v Salomon [1897] AC 22; c.f. In re Duomatic [1969] 2 Ch 365).

(f)  Mr E Chan’s reliance on the Sch.3 warranties, in attempt to advance his case that the Instruments were registrable under the Ordinance, was misconceived.  First, the warranties did not confer any interest in land on the defendant, and in any event there were remedies (including but not limited to the cancellation of the transaction under cl.4.2(a))  for breach of warranty.  Moreover, even if there was an obligation on the part of the Shareholders to procure the plaintiff to deliver vacant possession to the defendant (“the Obligation to Procure”), this obligation (if any)  under the Agreement would not itself have conferred on the defendant any interest in land.

22.  It followed, as the Judge held, that for the primary reason that the Agreement’s subject matter consisted of the Shares/Loans and not the Property, the Agreement was not registrable against the Property under the Ordinance.  As the HCA Proceedings concerned the alleged wrongful termination of the Agreement, it followed that the Writ and the Amended Writ were not registrable as lis pendens (see the Judgment at [46]-[53]).

The grounds of appeal

23.  The grounds of appeal advanced by the defendant are set out in the NoA.  Although there are a total of 4 proposed grounds, Ground 1 is in effect a generalised complaint against the Judge’s finding that the Instruments were not registrable, which ties in with all the other grounds.  In the circumstances, we propose to express the grounds of appeal (based on the summary by the Judge in [8] of the CFI Stay Decision[6])  as follows:

(a)  Ground 1: The Judge should have found, but failed to find, that on a proper construction of cl.11 of the Agreement, the Obligation to Procure was imposed on the Shareholders.  In particular, the Judge failed:

  (i)  to adopt a contextual approach in her reading of other relevant clauses (such as cls.6.1, 8.1, 8.11(b), 8.11(c)  and 13.1)  with cl.11; had she done so, she ought to have found that cl.11 gave rise to the Obligation to Procure; and

  (ii)  to appreciate that the decisions of the Shareholders (being the only shareholders of the plaintiff)  were binding on the plaintiff and thus should the court hold that the defendant[7] was entitled to enforce the Obligation to Procure (notwithstanding that the Property’s ownership is vested in the plaintiff), an order for specific performance of the obligation to deliver vacant possession to the defendant may be made against the Shareholders;

(b)  Ground 2: the Judge failed to consider all the circumstances of the case and the context in which the Instruments arose in determining whether they affected land.  In particular, the Judge’s consideration of whether the Agreement involved transfer of the Shares was “immaterial”, and the “change of possession” of the Property, as required by cl.11, affected land “upon its performance” and thereby rendered the Instruments registrable.

(c)  Ground 3: the Judge failed to properly consider the issue of specific performance of the Agreement in light of the obligation on the Shareholders to deliver vacant possession of the Property to the defendant in the Agreement.

24.  Mr E Chan for the defendant lodged his written submissions on 24 July 2024 (“D’s Skel”), while Mr A Chan lodged his written submissions for the plaintiff on 7 August 2024 (“P’s Skel”).  We have, of course, also had the benefit of oral submissions by leading counsel at the hearing of the appeal.

25.  We will now deal with each Ground in turn. 

Discussion

Ground 1

26.  Under this ground, Mr E Chan advances several arguments in support of the contention that cl.11, which provides that the Property “will be delivered” to the defendant on completion, imposes the Obligation to Procure on the Shareholders, and that the Judge was wrong to interpret it otherwise (D’s Skel, [4]).  As pointed out by Mr E Chan in D’s Skel (at [4]), the determination of this ground essentially boils down to an exercise in interpreting cl.11.

27.  In this connection, Mr E Chan argued that the Judge was wrong to find against the existence of the Obligation to Procure merely because the relevant wording in cl.11 was expressed in the passive voice (D’s Skel, [5]‑[12]).  Relying on authorities such as Building Authority v Appeal Tribunal (Buildings)  (ENM Holdings Ltd) (2018)  21 HKCFAR 194, Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 and Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, Mr E Chan submitted that due regard must be paid to the “purpose” of cl.11 and the background that is objectively or reasonably known to the parties at the time of the Agreement.  He further warned against “technical interpretations” and “undue emphasis on niceties of language”.  He submits that the Judge ought to have paid (but failed to pay)  due regard to the objective background known to the parties, which was the acquisition of the Property by the defendant by way of purchasing the plaintiff’s Shares (D’s Skel, [6]-[10]).

28.  To make good his argument, Mr E Chan (as he had done in the court below)  relies on a contextual approach to interpreting cl.11 by reference to cls.6.1, 8.1, 8.11(b), 8.11(c)  and 13.1, which he says impose the Obligation to Procure on the Shareholders that is “tantamount to an assignment” (D’s Skel, [13]-[18]).

29.  The relevant principles concerning contractual interpretation are established and undisputed.  The court will endeavour to ascertain the objective meaning of the language in the terms and provisions in the contract.  The contract must be considered as a whole in order to find that objective meaning, by employing the iterative exercise of checking the suggested interpretations against the provisions therein textually and contextually as well as investigating the commercial consequences.  See Da Shing Group Ltd v Rich Promise Ltd[2021] HKCA 960; Wood v Capita Insurance Services Ltd [2017] UKSC 24.

30.  The Judge’s interpretation of cl.11 was that as a matter of language and when the meaning of cl.11 was checked against other relevant provisions in the Agreement, cl.11 did not expressly impose the Obligation to Procure.  For the following reasons, we do not see any errors in the Judge’s reasoning and analysis regarding the interpretation of cl.11, at [38] to [41] of the Judgment.

31.  As pointed out by Mr A Chan (P’s Skel, [17]), the starting point must be cl.2, which unequivocally identified the subject matter of the Agreement as the sale of the Shares and the assignment of the Loans (and not as a sale of the Property).  This was rightly identified by the Judge at [41.1] of the Judgment.  It is, to our mind, the key consideration.  Had the defendant wished to purchase the Property, it could have done so by transacting with the plaintiff.  It did not, choosing instead (no doubt for good commercial reasons)  to acquire the Shareholders’ shares in the plaintiff and the Loans.

32.  Thereafter, the Judge considered cls.8 and 11, which in her view were provisions providing for the “features of the Property” rather than creating a positive obligation on the Shareholders to deliver vacant possession (see Judgment at [41.2]-[41.3]).  In particular, the Judge had regard to the fact that cls.8.11(b)  and (c)  (which referred to the delivery and obtaining of vacant possession in the parts of the Property which were not Leased Premises)  only served to deal with the situation as to tenancies which may or may not have been in existence at the time of completion, as well as the impact, if any, of such a situation on the Shareholders’ rights ([41.2.1], the Judgment).

33.  The Judge also considered cl.11 of the Agreement itself, which was entitled “Matters subject to which the Property is made”.  This provision listed out the “various rights and matters” to which the Property is subject, and provided for the “state of affairs which [the defendant] was to accept” (the Judgment, [41.2.2]-[41.2.3]). 

34.  As can be seen, the fact that the language used in cl.11 (and cl.8), as opposed to cl.2.1 and cl.6, was in the passive voice, was only one of several bases in support of the Judge’s interpretation of cl.11 (see [41], the Judgment; [11], the CFI Stay Decision).  That said, we agree with the Judge, and Mr A Chan, that whereas the language of cl.2.1 and cl.6.1(b)(i)  clearly imposed an obligation on the Shareholders, the language employed in cl.11 is clearly different and is not expressed in the form of an obligation on the part of the Shareholders. 

35.  We therefore agree with the Judge’s conclusion that no Obligation to Procure arises out of the Agreement, and nor does the Agreement confer upon the defendant any interest affecting land. 

36.  For completeness, we note that the Judge also rightly acknowledged that the owner of the Property, namely the plaintiff, was not a party to the Agreement.  There was clearly no basis to suggest that the Shareholders were capable of conferring an interest in the Property on the defendant by way of the Agreement when they themselves had no such interest(s)  (the Judgment, [41.5]).  Had the Agreement proceeded to fruition, there would, on completion have been no change in possession (nor ownership)  of the Property (as pointed out by Mr A Chan at [17], P’s Skel).

37.  In this connection, Mr E Chan submits that the fact that the plaintiff was a non-party to the Agreement “only bears on issues of technicality”, as the Shareholders (as the only shareholders of the plaintiff)  could procure the plaintiff to deliver vacant possession to the defendant without requiring approval from any other party, and that given this entitlement, specific performance could be ordered against them to ensure delivery (D’s Skel, [21]-[24]).  To reinforce his position, Mr E Chan relies on In re Duomatic Ltd [1969] 2 Ch 365 for the proposition that a decision will bind the company if all shareholders assent regarding a matter which a general meeting can put into effect (D’s Skel, [20]).

38.  With respect to Mr E Chan, we do not see merit in this argument.  As noted by the Judge, with whom we agree, the Property, being an asset of the plaintiff, was not held or owned by the Shareholders.  The Agreement likewise would not bind the plaintiff as a non-party.  See Good Profit Development Ltd at 183; Salomon v Salomon; the Judgment at [42]; P’s Skel at [21]. 

39.  As to the possibility of specific performance, we have already concluded above (in agreement with the Judge)  that no Obligation to Procure arose out of cl.11, so that Mr E Chan’s argument in this respect takes matters no further.

40.  In any event, we also agree with the Judge that, even if it is assumed that there was an Obligation to Procure on the part of the Shareholders, so that a refusal on their part to deliver vacant possession would amount to a breach of the Agreement, such obligation would not have conferred any interest in land capable of registration (the Judgment at [44]).  Similarly, even if there were a breach of the Sch.3 warranties, this would also not have created any registrable interest in land, as the recourse available to the defendant would have been to cancel the transaction under cl.4.2(a)  or to pursue other traditional remedies for breaches of warranty (see the Judgment at [43]).

41.  There is thus no merit in Ground 1 and it falls to be dismissed.

42.  The remaining grounds may be dealt with relatively briefly.

Ground 2

43.  The crux of Mr E Chan’s argument under this ground is that the obligation to transfer the Shares by the Shareholders and the Obligation to Procure are separate, non-concurrent obligations, and that as long as the instrument in question “affects” land in the wider sense, it may be registrable (D’s Skel, [25]-[28]).  Given that we have affirmed the Judge’s rejection of the existence of any Obligation to Procure (arising out of cl.11 of the Agreement or otherwise), this argument falls away.

44.  Mr E Chan also complains that the Judge ought to have considered all the circumstances of the case and the context in which the Agreement, the Writ and the Amended Writ arose, and that had she properly done so, she would have concluded that the Instruments affect land and thus are registrable (D’s Skel, [32]).  We disagree. 

45.  As explained above and as submitted by Mr A Chan, the transaction in the form of the Agreement was specifically structured as a sale of the Shares (and an assignment of the Loans)  as opposed to a sale of the Property (P’s Skel, [23]; Agreement, cl.2.1).  The Agreement did not alter the legal or beneficial ownership of the Property, and it is well settled that proceedings concerning the sale and purchase of a company’s shares, notwithstanding that the company also owns an interest in land and even if an indirect acquisition of the property through the share acquisition was envisaged by the purchaser of shares, do not give rise to a registrable interest or amount to a registrable lis pendens under s.1A of the Ordinance.  See Health First Technology Ltd; Good Profit Development Ltd.

46.  The Judge was not only alive to the contextual background to the Agreement and its provisions, she also conducted a sound and detailed exercise of contractual construction in determining against the defendant the question of whether the Obligation to Procure arose from the Agreement (cl.11)  and whether the Agreement (and as a consequence the Writ and the Amended Writ)  affected land.

47.  There is therefore no merit in Ground 2.

Ground 3

48.  Mr E Chan (at [33] of D’s Skel)  reasonably accepted that this ground stands or falls with the determination of the question of whether cl.11 of the Agreement imposed any Obligation to Procure on the Shareholders.  We have already affirmed the Judge’s negative answer to that question.  Ground 3 therefore, too, falls away.

49.  For the sake of completeness and clarity, we note that in the NoA at [4], with reference to [53] of the Judgment, it was said that the Judge erred in finding that the specific performance of the Agreement is not a claim to an interest in land.  With respect, this is not an accurate statement of the Judge’s finding.  What the Judge in fact said at [53] of the Judgment was that a claim for specific performance of the Agreement cannot be a claim to an interest in land if the Agreement does not create any legal or equitable interest in the Property on the part of the defendant. Although the statement at [4] was elaborated at [4(e)] of the NoA by a repetition of the defendant’s contention that the Agreement “effectively transfers the possession of the Property to [the defendant] upon completion”, we have already expressed our disagreement with that contention for the reasons explained above.

Disposition and costs

50.  For these reasons, the appeal is dismissed.

51.  As we have noted, the parties agreed at the end of the hearing that costs should follow the event.  We therefore order that the costs of the appeal are to be paid by the defendant to the plaintiff, to be taxed on the party and party basis if not agreed.

Mr Edward Chan SC and Mr Jeffrey Tam, instructed by Messrs Tung, Ng Tse & Lam, for the defendant (appellant)

Mr Abraham Chan SC and Mr James Wood, instructed by Messrs Weil, Gotshal & Manges, for the plaintiff (respondent)

CACV 138/2023, [2024] HKCA 744

On appeal from [2023] HKCFI 1059

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 138 OF 2023

(ON APPEAL FROM HCMP NO 2146 OF 2022)

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J U D G M E N T

_________________________

Hon Barma JA (giving the Judgment of the Court):

1.  This is the defendant’s renewed application by Summons dated 13 July 2023 (“the Summons”), seeking a stay of execution of [54] and [55] of the judgment of Cheng J (“the Judge”) dated 27 April 2023 (“the Judgment”) ([2023] HKCFI 1059) pending the determination of its appeal to the Court of Appeal, pursuant to RHC Order 59 rule 13. The appeal is fixed for hearing on 21 August 2024.

2.  By the Judgment, the Judge made (at [54]) the following declarations and/or orders:

(1)  The agreement for sale and purchase dated 22 September 2022 between the shareholders of the plaintiff (“Shareholders”) and the defendant (“the Agreement”), and the writ of summons and amended writ of summons filed by the defendant in HCA 1469/2022 (“the Writ” and “the Amended Writ” respectively) are not instruments registrable on the Land Register of the Property under the Land Registration Ordinance (Cap. 128) (“LRO”);

(2)  The defendant do procure the removal of references to the Agreement, the Writ and the Amended Writ from the Land Register of the Property; and

(3)  The defendant be restrained from delivering the Agreement, the Writ and the Amended Writ to the Land Registry for registration against the Land Register of the Property.

3.  The Judge also made a costs order nisi that the costs of and occasioned by the plaintiff’s Originating Summons (and the Amended Originating Summons) should be paid by the defendant to the plaintiff, to be taxed if not agreed (see [55] of the Judgment).  

4.  The defendant lodged a Notice of Appeal against the Judgment on 5 May 2023.  On 9 May 2023, the defendant applied to the court below for a stay of execution.

5.  By her Decision dated 30 May 2023 ([2023] HKCFI 1441) (“the Decision”), the Judge dismissed the defendant’s application, and made a costs order nisi that the defendant should pay the costs of and occasioned by the said application to the plaintiff, such costs to be summarily assessed.

6.  The defendant’s renewed application is supported by the 1^st Affirmation of Song Jian Bo filed on 13 July 2023.  The application is opposed by the plaintiff, relying on the 2^nd Affidavit of Cosimo Borrelli filed on 4 August 2023.  In response, the defendant thereafter filed the 2^nd Affirmation of Song Jian Bo on 21 August 2023.

7.  Mr Edward Chan SC (leading Mr Jeffrey Tam) for the defendant lodged written submissions in support of the Summons on 4 September 2023.  Written submissions in opposition dated 18 September 2023 were lodged for the plaintiff by Mr Abraham Chan SC (leading Mr James Wood).  Thereafter, reply submissions on behalf of the defendant were lodged on 25 September 2023.

8.  Having considered the parties’ respective written submissions, we are of the view that it would be appropriate to dispose of this application on paper pursuant to RHC Order 59 rule 14A.   

The Judgment

9.  By its Amended Originating Summons dated 21 February 2023 (“Amended OS”), the plaintiff sought declarations that the Agreement, the Writ and the Amended Writ (collectively, “the Instruments”) are not instruments registrable on the Land Register of the Property under the LRO.  It also sought an order that the defendant do forthwith procure the removal from the Land Register of the Property of all references to the Instruments.

10.  The background to this matter and the parties’ respective positions were set out by the Judge at [3] to [28] and [32] to [37] of the Judgment.  For present purposes, it suffices to highlight the following:

(1)  At all material times, the plaintiff was the sole legal and beneficial owner of the Property.

(2)  On 13 July 2020, Mr Cosimo Borrelli and Mr Ma Siu Ming Simon (“the Receivers and Managers”) were appointed as the joint and several receivers and managers of the shares in and assets of the plaintiff.  The shareholders of the plaintiff (“the Shareholders”) were Cheng Mei Holdings Limited (Receivers and Managers Appointed) and Goal Eagle Limited (Receivers and Managers Appointed).  Between them, they owned the entirety of the issued shares of the plaintiff (“the Shares”).  There were also loans and indebtedness due and owing by the plaintiff to the Shareholders (“the Loans”).

(3)  On 22 September 2022, the Shareholders entered into the Agreement with the defendant to sell the Shares and Loans to the defendant. Under clause 4.1(d) of the Agreement, completion was conditional upon the defendant providing to the Shareholders, within 14 days, certain written confirmations from its financier.  On 1 November 2022, the Shareholders gave written notice to the defendant of termination of the Agreement on the grounds of the defendant’s failure to comply with clause 4.1(d).

(4)  On 3 November 2022, the defendant filed the Writ in HCA 1469/2022 (“the Action”) in relation to the Shareholders’ termination of the Agreement. At that stage, the only defendants named in the Action were the Shareholders.

(5)  On 25 November 2022, the Receivers and Managers entered into a sale and purchase agreement (“Goldstone SPA”) to sell the Property to Goldstone Asset (HKSAR) Limited (“Goldstone”). The Goldstone SPA was registered against the Property on 19 December 2022.

(6)  On 28 November 2022, the defendant’s solicitors delivered to the Land Registry a copy of the Writ and a copy of the Agreement for registration against the Property.

(7)  By its Originating Summons issued on 16 December 2022, the plaintiff commenced these proceedings against the defendant, seeking to remove the attempted registrations of the Writ and the Agreement from the Land Register of the Property.

(8)  On 20 January 2023, the defendant filed the Amended Writ, adding the plaintiff as the 3^rd defendant in the Action.  On 27 January 2023, the defendant’s solicitors delivered a copy of the Amended Writ to the Land Registry for registration against the Property.

(9)  The Writ, Amended Writ and the Agreement currently continue to appear in the “Deeds Pending Registration” section of the Land Register of the Property.

11.  The plaintiff’s case in the Amended OS is that neither the Agreement nor the Writ/Amended Writ is registrable against the Property. To be registrable under section 2(1) of the LRO, an instrument must create some legal or equitable interest in the land.  However, the plaintiff contends that the Agreement is only for the sale and purchase of the Shares and the Loans and therefore does not affect or create any legal or equitable interest in the Property.  Furthermore, the plaintiff points out that the Action asserts no claim to, or proprietary interest in, the Property.

12.  The defendant’s position is that the Agreement is not merely a simple agreement for the sale and purchase of Shares in the plaintiff.  It is said to be an agreement pursuant to which the defendant was to acquire an interest in the Property, and which is therefore registrable.  Specifically, it is contended that clause 11 of the Agreement,[1] interpreted in light of other clauses, requires the Shareholders to deliver possession of the Property to the defendant, or to procure that this be done.

13.  Having heard the parties’ submissions, the Judge allowed the plaintiff’s application and granted the relief in the Amended OS for the following reasons. 

14.  First, the Judge held that the Agreement does not create any legal or equitable interest in the Property on the part of the defendant and hence the Agreement is not registrable under section 2(1) of the LRO (see [38] to [45] of the Judgment):

(1)  The subject matter of the sale and purchase under the Agreement is the Shares and the Loans.   

(2)  Sale of the Shares would mean that the defendant would become the owner of the plaintiff, who owned various items of property including the Property.  However, upon construction of clauses 8[2] and 11 of the Agreement, they simply provide for the features of the Property as at the time of completion, which the defendant was to accept.

(3)  Clauses 11 of the Agreement, read in conjunction with clause 8, does not impose an obligation on the Shareholders to deliver vacant possession of the Property such that an interest in land was conferred on the defendant.

(4)  The plaintiff, as the owner of the Property, is not a party to the Agreement.  Even though the Shareholders’ act of entering into the Agreement would bind the plaintiff, this could not amount to the plaintiff conferring any interest in the Property on the Shareholders. 

15.  Second, the Judge held that the Action does not properly assert any claim to, or proprietary interest in, the Property so as to make it registrable as lis pendens. A claim to a lien in respect of the shares of a company is not a claim to a proprietary interest in the company’s land (see [46] to [51] of the Judgment).

16.  Third, as for the claim to specific performance of the Agreement, the Judge held that this cannot be a claim to an interest in land if the Agreement itself does not create any legal or equitable interest in the Property on the part of the defendant (see [53] of the Judgment):

The Decision

17.  The Notice of Appeal sets out its three grounds of appeal (summarized by the Judge at [8] of her Decision):

(1)  Ground 1: on a proper construction of clause 11 of the Agreement, the clause imposed an obligation on the vendor under the Agreement, namely the Shareholders, to procure the plaintiff to deliver vacant possession of the Property to the defendant.

(2)  Ground 2: the Judgment did not consider all the circumstances of the case and the context in which the Agreement, the Writ and the Amended Writ arose when considering whether the Agreement affected land.

(3)  Ground 3: the Judgment did not properly consider specific performance of the Agreement in the light of the obligation on the Shareholders to deliver vacant possession of the Property to the defendant in the Agreement.

18.  After the defendant filed the Notice of Appeal, it applied to the Judge for a stay of execution of the Judgment pending appeal.  The Judge determined the said application on paper and dismissed it.

19.  The Judge held that the defendant had not identified any arguable grounds of appeal against the Judgment.

(1)  For Ground 1, the Judge held that clause 11 of the Agreement does not expressly impose an obligation on the Shareholders to procure the plaintiff to deliver possession of the Property to the defendant.  Clause 11 refers, in the passive voice, to possession being delivered on the basis that it would be subject to, and have the benefit of, certain rights and obligations ([9] to [11] of the Decision).

(2)  For Ground 2, the Judge held that the legal and beneficial ownership of the Property is not altered by the Agreement.  The Agreement only provides for the transfer of the Shares and the Loans ( [12] to [14] of the Decision).

(3)  For Ground 3, the Judge held that the claim to specific performance of the Agreement cannot be a claim to an interest in land if the Agreement does not create any legal or equitable interest in the Property on the part of the defendant ( [15] to [16] of the Decision).    

20.  As the Judge did not consider that the defendant had established the minimum requirement of an arguable appeal, she dismissed the application for a stay. She held that she did not need to go on to consider whether she would have exercised the discretion to grant a stay in the defendant’s favour, had she considered that there was an arguable appeal.   

Legal principles

21.  The principles governing the grant of a stay of execution pending appeal are well-settled.  They are set out in the judgment of Ma J (as he then was) in Star Play Development Ltd v Bess Fashion Management Co Ltd [2007] 5 HKC 84 at [6] to [10], and have been consistently applied since then.   

22.  An appeal does not operate as a stay of execution of the decision below.  Unless an appellant can justify a stay by demonstrating that good reasons for granting one exist, a stay will not be ordered.  The existence of a strong appeal will usually by itself constitute a good reason for granting a stay, whereas the existence of a merely arguable appeal (i.e. one with reasonable, but not strong, prospects of success) does not by itself amount to sufficient reason for a stay. 

23.  While the existence of a strong appeal would tend to lead the court to exercise its discretion in favour of granting a stay, the threshold is a high one.  This court has held that the requisite strength of the grounds of a “strong appeal” must be such that would lead the court to conclude that “something has grievously gone wrong with the process of law in the court below”, or in other words, the appellant is “almost bound to succeed” in the appeal.  See Ming Hsieh v Xu Zhe & ors[2018] HKCA 390 at [10], per Kwan JA (as she then was).

24.  For the purposes of a stay application, the court is only required to form a preliminary view on the merits.  It would be impractical and undesirable for the court to go deeply into the strength of the appeal, and the court should refrain from embarking upon detailed discussion and analysis of the grounds of appeal.  See [9] of Ming Hsieh, supra.

25.  Ultimately, the court carries out a balancing exercise and uses its common sense, bearing in mind at all times the starting point that the successful party is not to be deprived of the fruits of his success.

Discussion

(i) Merits of the appeal

26.  In the parties’ written submissions to this court, they raise essentially the same arguments which had been canvassed before the Judge below.  Having considered the Judgment and the Notice of Appeal, adopting the approach indicated above, we take the view that the defendant has not demonstrated that the appeal is so strong that it is almost bound to succeed.  At best, the appeal is arguable.  The merits of the appeal do not of themselves justify the grant of a stay.  That being so, something more is required.

(ii) Would the appeal be rendered nugatory without a stay

31.  Where there is no very strong ground of appeal, the starting point is that the winning party should be entitled to the fruits of his success.  It is necessary for the appellant must show additional good reasons to justify a stay. 

32.  The defendant submits that if a stay is not granted, the appeal would be rendered nugatory.  In this regard, the defendant essentially made two main submissions:

(1)  First, in light of the fact that the Goldstone SPA was completed on 29 June 2023, if a stay is not granted, the defendant would lose its chance to put Goldstone on notice of its alleged interest in the Property even if the Appeal should ultimately succeed.  The inclusion of the Instruments on the register serves to protect the defendant’s interest, and removal of such protection would render the appeal nugatory because the plaintiff’s rights (if established) would lose priority over the Goldstone SPA.

(2)  Second, on 13 July 2023, the defendant filed a summons to join Goldstone as the 4^th defendant in the Action and intends to claim against Goldstone for a declaration that the Goldstone SPA constituted a disposition of property by the defendants with the intent to defraud creditors and for an order to set aside the Goldstone SPA.  There is a real need for a stay of execution of the Judgment pending the appeal as the lis pendens would protect the defendant’s interests in the Property.  Refusal of a stay would render the defendant’s claims in the Action futile. 

33.  In our view, the defendant is unable to demonstrate that the lack of a stay would render the appeal nugatory.

34.  At the outset, it is to be noted that this appeal concerns whether the Instruments are registrable against the Land Register of the Property under section 2(1) of the LRO.  It must be borne in mind that the Instruments have not as yet been registered against the Property and they currently remain in the “Deeds Pending Registration” of the Land Register.

35.  We agree with the plaintiff that the defendant’s first argument is founded on the false premise that the Instruments would take priority over the Goldstone SPA.  The Goldstone SPA, which was executed on 25 November 2022, was submitted for registration within one month of the date of execution (on 19 December 2022).  It follows that the Goldstone SPA would take priority as from the date of its execution by virtue of section 5 of the LRO.  In contrast, the Instruments were only presented for registration on 28 November 2022 and they remain pending registration.  Even if the defendant were to ultimately succeed in the appeal, and the Instruments were to be treated as having been registered on 28 November 2022, the defendant’s interest pursuant to the Instruments would nonetheless be subject to the Goldstone SPA, which would be a prior registered interest. 

36.  We are also unable to accept the defendant’s second argument that it would render the Action futile if a stay were not granted.  It is trite, and it is not disputed by the parties, that registration of a lis pendens only serves as a notice to third parties and does not have the effect of restraining the dealing of the Property.  When the lis pendens still remains pending registration, it makes no practical difference to the defendant’s position regardless of whether a stay is granted, as the defendant would lose priority to any third party’s interests in the Property which have been registered pending the determination of the appeal.  As a result, refusal of a stay would not render the appeal or the Action nugatory.

37.  In the circumstances, in the absence of any other good reasons to justify a stay, we take the view that the plaintiff should not be deprived of the fruits of success and we would therefore refuse to grant a stay of execution of [54] and [55] of the Judgment.   

(iii) Disposition and costs

38.  For the foregoing reasons, we would dismiss the defendant’s Summons.  As to the costs of this application, we order the defendant to pay the plaintiff its costs, such costs to be summarily assessed on paper.  For this purpose, we direct the plaintiff to file and serve its statement of costs within 14 days, and the defendant shall file and serve any grounds of objection within 14 days thereafter.