Sky Joy Investment Ltd v. Zheng Dunmu and Another

HCA 395/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 395 OF 2016

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DECISION

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1.This is the hearing of an application by Li Chiu Yue (“Li”), by summons dated 20 December 2016 (“the Summons”) seeking to (1) be joined as an interested party and (2) set aside paragraphs 4 and 5 of the judgment of Deputy High Court Judge Seagroatt which the plaintiff obtained by default (“the Default Judgment”) against the 2^nd defendant, Pure Sheen Limited.

2.Paragraphs 4 and 5 of the Default Judgment are declaratory relief in the following terms:

“ (4) A declaration that the Share Pledge (as defined in the SOC) and related documents delivered were effective in transferring and did transfer to the Plaintiff the full legal and beneficial right, title and interest in 150,000,000 shares of Changgang Dunxin Enterprise Company Limited;

(5) Consequently upon paragraph (4) above, declarations that:

(a) The issuance of the New Share Certificates (as defined in the SOC) to the Plaintiff was valid and subsisting;

(b) The subsequent sale of the shares by the Plaintiff is also valid and subsisting;

(c) The net sum of the sale of the shares by the Plaintiff is to be set off against the judgment debt.”

(“The Declarations”)

Background facts

3.According to the plaintiff’s pleaded case in the statement of claim, on or about 18 August 2015, the plaintiff and the 1^st and 2^nd defendants entered into an oral loan agreement pursuant to which the plaintiff agreed to provide a loan in the sum of HK$68,000,000 to the 1^st defendant (“the Loan”).  The 2^nd defendant is a company incorporated under the laws of the British Virgin Islands and is wholly-owned by the 1^st defendant. 

4.In respect of the Loan, the 2^nd defendant agreed to enter into a share charge agreement with the plaintiff as security for the Loan.  The share charge agreement would provide a charge over 150,000,000 shares of Changgang Dunxin Enterprise Company Limited (HKEX Stock Code 2229) (“the Listed Co”) being 15.11% of the total issued shares of the Listed Co. (“the Shares”)

5.The 1^st defendant is the chairman of the board of directors of the Listed Co, and through the 2^nd defendant, held 383,990,000 shares in the Listed Co.  Through the 2^nd defendant and other entities, the 1^st defendant controls over 50% of the shares in the Listed Co.

6.Pursuant to the aforesaid oral loan agreement, a sum of HK$23,000,000 was transferred to the 1^st defendant.  On or about 30 September 2015, the plaintiff and the defendants reduced the aforesaid oral loan agreement into a written loan agreement (“the Written Loan Agreement”).  On or about the same date, the 2^nd defendant executed a deed of share charge (“the Share Charge”) in favour of the plaintiff as security for the Loan.

7.By the Share Charge, the 2^nd defendant pledged to the plaintiff 150,000,000 shares in the Listed Co.  Pursuant to the Share Charge, the 2^nd defendant delivered documents purporting to be the share certificates of the said 150,000,000 shares (“the Share Certificates”) and relevant signed transfer documents to the plaintiff.  (See paragraph 12 of the Statement of Claim)

8.On 30 September 2015, the balance of HK$45,000,000 was transferred to the 1^st defendant. 

9.It is the plaintiff’s case that on or about 13 November 2015 it discovered that the 1^st defendant has been and was continuing to be involved in various litigation matters in the People’s Republic of China. This, the plaintiff pleaded, amounted to an event of default pursuant to clause 17.1 of the Written Loan Agreement. 

10.Accordingly, pursuant to clause 17.2 of the Written Loan Agreement, on 13 November 2015 and 27 November 2015, the plaintiff issued two demand letters to the defendants demanding the defendants to repay the Loan, interest and all other fees and expenses.  The 1^st defendant has only repaid HK$5 million, on or about 11 December 2015, as partial repayment of the Loan. 

11.As at 23 January 2016, the 1^st defendant was indebted to the plaintiff in the amount of HK$73,265,138.89. 

12.In view of the breach by the defendants, the plaintiff enforced the Share Charge by delivering the Share Certificates to Tricor Investor Services Limited (“Tricor”) and, in reliance on the transfer documents already delivered, transferring the said 150,000,000 shares to the plaintiff’s name on or about December 2016.  Tricor then issued 15 new share certificates in the plaintiff’s name, for 10 million shares each (“New Share Certificates”).

13.On 30 December 2015, the plaintiff delivered 2 of the New Share Certificates to Kingsway Financial Services Group Limited (“Kingsway”).  In early January 2016, the plaintiff further delivered 6 of the New Share Certificates with instructions that the 80 million shares should be realised and sold.  45 million shares were sold for and on behalf of the plaintiff.   The proceeds from the sale was HK$22,050,000, HK$9,700,000 of which were deposited into the plaintiff’s account with China Construction Bank Limited. 

14.For the purpose of this hearing, it is important to note that at paragraph 13 of the Statement of Claim, it is pleaded that:

“ The Plaintiff was later informed that the Share Certificates sent to him by the 2^nd Defendant were defective, and in those circumstances, the portion of the sale proceeds held in China Construction Bank had been frozen.”

15.What happened was that on 20 January 2016, Tricor (the registrar for Changhang Dunxin) informed the plaintiff that the Share Certificates provided by the 2^nd defendant were “believed to be fake and forged”.  In the letter dated 20 January 2016, Tricor stated:

“ We … wish to advise that the old share certificates (under certificate nos 2503–2517) for a total of 150,000,000 shares in the Company registered under the name of Pure Sheen Limited surrendered/lodged to us for registration with your Company’s name on 16 December 2015 … are believed to be fake and forged. We would further advise that this transfer has been reported to the Regulator and Police.

In this respect, the new share certificates (under certificate no.2635–2649) for a total of 150,000,000 shares issued to your Company should be returned to us. We understand that 80,000,000 shares (under certificate no.2635–2642) under the name of your Company have been recently lodged with Kingsway Financial Services Group Limited for deposit and these share certificates will be released to us through Hong Kong Securities Clearing Company Limited. In this respect we should be grateful if you would return the remaining share certificates (under certificate no.2643–2649) for a total of 70,000,000 shares in your possession to us ASAP but not later than 22 January 2016.

We would reinstate that the transfer of 150,000,000 shares in the Company from Pure Sheen Limited to your Company was invalid and void and accordingly all the new share certificates (under certificate no 2635-2649) under the name of your Company are invalid for all purposes.” (emphases added)

16.On 25 January 2016, Kingsway (with whom the plaintiff maintained a security account) wrote to the plaintiff and stated:

“ … During the period, 45 million shares of 2229 (ie Changgang Dunxin) were sold under your instructions. However on 20 January 016, we were informed that CCASS has invalidated all the said 80 million Shares of 2229. As such, your Account is currently short of 45 million Shares of 2229.

Demand is hereby made for you to deposit 45 million Shares of 2229 into your Account IMMEDIATELY …”

17.On 29 January 2016, Kingsway further wrote:

“ We write to inform you that … Tricor … has advised Hong Kong Securities Clearing Company Limited that:

‘the 20,000,000 shares (under certificate nos 2650 and 2651) issued by us to HKSCC Nominees Limited were invalid and they are not to be transferred out in your system’ and

‘the 60,000,000 shares (under our transfer receipt no.39, dated 8 January 2016 with old certificates nos 2637– 2642) to be transferred to HKSCC Nominees Limited had been cancelled and declared void by us’.

As set out in our letter to you on 25 January 2016, unless you deposit 45 million shares into your account, when the Shares of the Company resume trading, we will be required to purchase 45 million Shares on your behalf and you will be responsible for any shortfall due to the purchase.” (emphases added)

18.The plaintiff did not return the new share certificates (under certificate nos 2635 – 2649) to Tricor.  Instead, it issued a writ of summons together with a statement of claim on 15 February 2016 and proceeded to obtain the Default Judgment on 2 November 2016 before Deputy High Court Judge Seagroatt. 

19.I find it odd that in view of the questionable status (to put it neutrally) of the New Share Certificates the plaintiff proceeded to apply for the Declarations in default of defence.  I have no idea how the court could declare that the issuance of the New Share Certificates to the plaintiff is valid and subsisting when the issuer clearly stated that the same are invalid for all purposes.  Mr Law, for the plaintiff, fairly accepted that, in view of the present state of affairs, the plaintiff cannot insist to be the legal owner of the Shares, nor can the New Share Certificates be declared to be valid and subsisting without hearing evidence. 

20.I note that in Leung Pak Ki v The Estate of Pang Kau, deceased and Anor HCA 624/2009, unreported, 1 March 2016, Deputy High Court Judge Paul Lam SC at paragraph 5 said:

“ 5. Leung made a second affirmation dated 14 January 2016 to support this application. It is trite that in an application made under Order 19 rule 7, the court cannot receive any evidence but must give judgment according to the pleadings alone (Hong Kong Civil Procedure 2016, Vol 1 §19/7/11 at p 472). I have repeated this fundamental procedural point in my judgment in Bisotime International Investment Ltd v Finance Heson Paper (HK) Co Ltd [2015] 2 HKLRD 658 at 661, §§7 – 8. I also note that this procedural point was repeated in recent cases including Li Sau Sing v CTMA Holdings Ltd and others, DCCJ 4825/2014 (5 October 2015, unreported), §§6 – 7, pp 3 – 4; Tsui Ming Sin v Tsui Chi Ping and another, HCA 2550/2014 (2 February 2016, unreported), §§10 – 11, pp 3 – 4; Li Sau Sing v CTMA Holdings Ltd and others, DCCJ 4825/2014 (3 February 2016, unreported), §9, pp 5 – 6). It is disappointing that legal practitioners still needed to be reminded of such a fundamental procedural rule.”

21.Li comes into the picture because in fact on 10 September 2014, the 2^nd defendant entered into a loan agreement with Li.  By clause 3 of the said loan agreement, the 2^nd defendant agreed to grant an option for HK$10,000 to Li to acquire 200,000,000 shares in the Listed Co.

22.By a supplemental loan agreement dated 9 March 2016, the 2^nd defendant and Li agreed, inter alia, to amend the terms of the option to be granted such that (i) the option would allow Li to purchase a total of 240,000,000 shares in the Listed Co by 6 batches of 40,000,000 shares and (ii) the price of the option was changed to HK$1,000 per batch. 

23.Li’s case is that he duly exercised the options on 8 September 2016 and 11 November 2016.  Li asserts that the numbers of the Share Certificates delivered by the 2^nd defendant to the plaintiff (nos 2503–2517) overlap with the numbers of the 20 share certificates delivered by the 2^nd defendant to Li pursuant to the loan agreement dated 10 September 2014.  Li, hence, doubts the authenticity of the Share Certificates. 

24.Upon notice of the present action and the Default Judgment, Li took out the present application on 20 December 2016. 

Joinder Application

25.Mr Law, for the plaintiff, did not object to Li’s application to be joined as an interested party.  In Hong Kong Civil Procedure, Vol 1, §15/4/5, at p 317, it is stated that persons who claim an interest in the subject matter of the action, or who have, or are alleged to have, an interest therein, may be defendants.  Where a person claims a right, that is a ground for making him party to an action claiming a declaration or an injunction: see Tipping v Eckersley (1855) 2 K&J 264; followed in Thornhill v Weeks (No 2)[1913] 2 Ch 464. 

26.Accordingly, I make an order in terms of paragraph 1 of the Summons to join Li as an interested party in these proceedings. 

Test for setting aside regular default judgment

27.Mr Law’s main submission is that the fundamental problem of Li’s application is that even on his own case, and placing his evidence at its highest, Li has failed to establish any interest in the Shares that prevails over the plaintiff’s interest. 

28.In an application to set aside a regular judgment, the burden is on the applicant to satisfy this court that his case has “a real prospect of success”, such that he is entitled to set aside the default judgment: see The Selby Paradigm [2004] 2 Lloyd’s Rep 714 at §29, per David Steel J and Universal Capital Bank v Deep Sea Seafood Trading Ltd (unreported) HCA 1213/2015, 17 December 2015 at §§12, 24 per Deputy High Court Judge Kwok SC. 

29.Mr Lam, relying on the case of Latif v Imaan Inc [2007] EWHC 3179 (Ch) at §§13 – 14 per Briggs J, submitted that in the case of an interested third party, unlike a defendant who had been properly served but chose not to defend the proceedings and allowed judgment to be entered on default, the interested third party had no notice of the application for default judgment and hence the threshold of setting aside a default judgment should be a lower one, namely, whether the interested third party can establish “a sufficiently arguable case” so as to justify the setting aside of the default judgment. 

30.I agree with Mr Law that there was no proper discussion about the correct test in Latif v Imaan Inc (supra) in view of concession by counsel in that case.  In any event, Mr Law’s submission is that Li could not demonstrate a sufficiently arguable case, let alone a real prospect of success.  For reasons stated below, I agree with Mr Law. 

Competing priority between the plaintiff and Li

31.There is no dispute that both the plaintiff and Li are not the registered and hence legal shareholders of the Listed Co.  Mr Lam submitted that the plaintiff does not even have an equitable interest in the Shares because it is unthinkable that any of the parties to the Share Charge would think that one could create any charge on the strength of fake certificates.  I disagree.  First, I do not consider it right that the validity of the Share Charge depends on the genuineness of the Share Certificates.  It is established law that shares are legal choses in action and share certificate is nothing but prima facie evidence of the title to the shares.  In Cheung Pui Yuen v Worldcup Investments Inc (2009) 12 HKCFAR 31, Lord Scott of Foscote NPJ at paragraph 13 said:

“ Shares in a company are legal choses in action. They are not chattels. Share certificates, the pieces of paper issued by the company which record the issue of the shares to which they relate, are, on the other hand, chattels. … Share certificates are chattels but their role in relation to the shares themselves is evidential (see Longman v Bath Electric Tramways Ltd [1905] 1 Ch 646 at pp.659, 660, and 665, 666). In Longman Romer LJ said at p.665, uncontroversially, I would have thought, that “… a certificate of shares is not a negotiable instrument …”. He was not speaking of bearer shares but of registered shares. …

…It is, in my opinion, an error to equate a share certificate with the shares in the company to which the shares relate and I repeat that the role of a share certificate is evidential.  Possession of the share certificate enables the holder to represent to the company that he is the owner, or is entitled to be treated as the owner, of the shares to which the certificate relates.  And, a fortiori, the shares themselves are not negotiable instruments.”

32.Similarly, in Pennington’s Company Law (8^th ed) at p 385, the learned author stated:

“ A share certificate issued under the company’s seal or securities seal is prima facie evidence of the named shareholder’s title to the shares specified in it, but it is not conclusive evidence. It would seem that share certificates which are merely signed by two of the company’s directors, or by a director and the company’s secretary, or by any other officer or agent authorised by the company, are also evidence of the shareholder’s title, at least as against the company itself. Shares belong to the person who can show a complete chain of title from the original issue by the company down to the disposition to himself, and if by accident or by fraud a share certificate is issued to a person other than the true owner of the shares to which it relates, the issue of the certificate in no way affects the title of the true owner. Likewise, if the register of members shows a person other than the true owner as the proprietor of the shares, the true owner may have the register rectified. It is true that a share certificate which is irregularly issued is not wholly devoid of legal effect, as will be shown in the next chapter, but the issue of the certificate, of itself, has no effect on the legal title to the shares.”

(emphasis added)

33.In Gower’s Principles of Modern Company Law (10^th ed), the learned authors at paragraph 27-5 stated:

“ … Legal title does not pass by mere delivery of the certificate to the transferee but upon registration of the transferee by the company. In fact, even registration is not conclusive of the transferee’s legal title. Section 127 provides that the register of members is only ‘prima facie evidence’ of matters directed or authorised to be inserted in it and s. 768 correspondingly says that a share certificate issued by the company (for example, to the transferee) is ‘prima facie evidence’ of the transferee’s title to the shares. Where there is a conflict between the register and the certificate, the former is stronger prima facie evidence than the latter but neither is decisive. Ownership of the shares depends on who is entitled to be registered. Suppose, say, that A, who is registered and is entitled to be registered, loses his certificate, obtains a duplicate from the company and transfers to B who is registered by the company. Subsequently A finds the original certificate and, either because he has forgotten about the sale to B or because he is a rogue, then purports to sell the shares to C. The company will rightly refuse to register C whose only remedy will be against A (who may by this time be a man-of-straw).” (emphasis added)

34.Mr Lam further submitted that as a matter of contractual construction, the delivery of share certificates is a condition precedent to the validity of the plaintiff’s Share Charge.  Mr Law rightly pointed out that the conditions precedents as set out in the Written Loan Agreement do not include the delivery of Share Certificates.  In any way, if the 2^nd defendant, for whatever reasons, failed and/or refused to deliver up the Share Certificates, that refusal or failure cannot, in my view, in any way affect the validity of the Share Charge.  The plaintiff may well have a right to claim against the 2^nd defendant for specific performance and to seek an order against the 2^nd defendant for delivery up of the Share Certificates.  In the creation of an equitable mortgage of the Shares, it is not necessary to have the Share Certificates delivered at all.  In Pennington’s Company Law (supra) at p 472, the learned author stated:

“ An equitable mortgage can also be created by the mortgagor agreeing expressly to create a legal mortgage of his shares; the agreement can be oral or in writing; and it is not necessary that the mortgagor’s share certificate or a blank transfer should be delivered to the mortgagee.” (emphasis added)

35.Similarly, in Gore-Browne on Companies (45^th ed) at paragraph 23[10], the learned editors stated:

“An equitable mortgage or charge upon shares can be created simply by deposit of the share certificate as security for the relevant advance. Alternatively, or in addition, the parties may execute an agreement or memorandum setting out the terms of the mortgage, or the mortgagor may execute and deliver to the mortgagee a transfer in blank.”

36.An agreement to charge shares as security can take effect as a valid charge even without the deposit of the Share Certificates.  (See Cresswell etc (ed), Encyclopaedia of Banking Law Issue 133 at para 906).  I have no doubt that the Share Charge dated 30 September 2015 is an agreement to create a charge or mortgage between the plaintiff and the 2^nd defendant.  Hence, I rule that the plaintiff does have an equitable interest over the Shares even without the Share Certificates. 

37.In the course of oral submissions, Mr Lam also submitted that the plaintiff does not even have an equitable interest over the Shares because there was no intention to transfer the Shares as a security to the plaintiff by the 2^nd defendant.  I reject this submission outright because whilst it is true that equitable interest passes by the operation of intention, such intention has to be assessed objectively.  At the present stage, without the hearing of evidence, it is not right for this court to make any ruling based on speculations as to the 2^nd defendant’s subjective intention which is irrelevant in any event. 

38.Mr Lam also submitted that the plaintiff was not bona fide, which somehow affected its equitable interest in the Shares.  He submitted that as the Share Certificates all bear the same watermark, the plaintiff should be able to spot such irregularity and conduct an inquiry into the genuineness of the Shares Certificates.  The fact that it had not done so demonstrates that it did not act bona fide in accepting delivery of some questionable share certificates as security.  I have no hesitation in rejecting this submission.  First, one should not lose sight of the fact that even Tricor, an experienced service provider in respect of registration of shares did not notice that the Share Certificates were problematic initially.  It is simply unrealistic to expect the plaintiff to carry out a Sherlock Holmes’ job when accepting the Share Certificates delivered by the 2^nd defendant.  Secondly and importantly, this court cannot, at this stage, determine the issue of whether the plaintiff was bona fide at the material time without hearing any evidence. 

39.Given that the plaintiff has an undoubted equitable interest in the Shares, the next question is who has priority over it.  Mr Lam accepted that Li is also not a registered shareholder of the Company.  He submitted that Li’s registration was prevented by an injunction the background of which this court is not privy.  Be that as it may, the fact remains that, for one reason or another, Li has not been registered as a shareholder up to the present stage.  I can well understand that if Li is a registered or legal owner of the Shares, then his legal interest trumps the plaintiff’s equitable interest, but the fact remains that he is not a registered shareholder at the moment. 

40.This presents a classic situation where there are two competing claims over the same subject matter by two seemingly innocent parties (when the fraudster who provided the false share certificates had disappeared).  In such circumstances, the disputes between the two seemingly innocent parties are to be resolved by the priority rules.  In Goode on Legal Problems of Credit and Security (5^th ed by Gullifer), the learned editor at paragraph 6-39 stated:

“ The normal priority rules apply. While the security interest is merely equitable it is subordinate to a prior equitable interest under the first-in-time rule, although the holder of the subsequentinterest could obtain priority if he has procured the deposit of the share certificate and a blank transfer form and registers himself as holder. This is the case even if he knows of the prior equitable interest at the time of the registered transfer. A subsequent equitable security interest is also liable to be displaced by a subsequent mortgage or sale to a third party who acquires the securities in good faith, for value and without notice and becomes registered as the holder. This could occur where the debtor fraudulently procures a fresh share certificate by misrepresenting that he has lost the original. A mortgage with notice of prior equitable interests takes subject to them. However, if in the latter case the mortgagee grants a sub-mortgage and the sub-mortgagee is registered as transferee and takes without notice of the equitable interests he will have priority even though the mortgage himself was subordinated.”

41.In Macmillan Inc v Bishopsgate Trust (No 3) [1995] 1 WLR 978, at 999H – 1000B, Millett J (as he then was) said:

“ In English law the order of priority between two competing interests in the same property depends primarily on whether they are legal or merely equitable interests. Where both interests are equitable—or both legal, for that matter—the basic rule is that the two interests rank in the order of their creation. In the case of equitable interests the order of priority may be reversed in special circumstances, but ‘where the equities are equal, the first in time prevails.’ The absence of notice of the earlier interest by the party who acquired the later interest is irrelevant, even if he gave value. He cannot gain priority as a bona fide purchaser of the legal estate without notice if he has not acquired the legal estate.”

42.In the present case, there is no dispute that the Share Charge in favour of the plaintiff was executed by the 2^nd defendant on or about 30 September 2015 and the Share Charge was enforced in December 2015.  On the other hand, Li exercised his options in September and November of 2016.  As a matter of law, the equitable interest that Li might have in the Shares only arose at the time when Li exercised his options.  This is well after the plaintiff’s acquisition of an equitable interest in September 2015.   In Pennington’s Company Law (supra), the learned author at p 417 stated:

“ Likewise, if a shareholder gives another person an option to buy specifically identified shares, the option vests an equitable interest in those shares in that other person when the option is exercised.”

43.In J Sainsbury v O’Connor [1991] 1 WLR 963, Lloyd LJ, at 972B–D said:

“ So there is good authority for the view that ‘the beneficial owner’ of shares, when that term is used in a statute in contrast to the registered holder, means the equitable owner; neither more nor less. By equitable owner is meant, inter alia, the purchaser under a specifically enforceable contract. Applying that test in the present case, G.B. was not the equitable owner of five per cent. of the shares which were the subject of the option agreement, since it could not claim specific performance until it had exercised its option under the agreement, and it could not exercise its option under the agreement until five years after the incorporation of Homebase Ltd. namely, 12 November 1984. Indeed Mr. Park did not even argue that equitable ownership had passed to G.B.”

44.Insofar as Mr Lam’s reliance on the case of Taylor v Russell [1892] AC 244 is concerned, I agree with Mr Law that this case is not directly relevant as in that case the second equitable mortgagee (Russell in that case) later acquired the legal estate in the land and thus Russell’s legal interest would trump the prior equitable interest of the appellant Taylor (see pp 252 – 253, per Lord Herschell and at 259, per Lord Macnaghten).  In the present case, both the plaintiff and Li are not the legal owner of the Shares in question.  It is yet to be seen who can be registered as the legal owner of the Shares.  But for the time being, on the evidence before this court, both the plaintiff and Li only has an equitable interest in the Shares and Li’s equitable interest being acquired later in time must be subordinate to the plaintiff’s equitable interest in the Shares. 

45.Such being the case, I agree with Mr Law that whether this court applies the “real prospect of success” test or the “sufficiently arguable” test, Li has failed to discharge the relevant burden to set aside the Default Judgment and as such, the other paragraphs of the Summon should be dismissed. 

46.However, that is not the end of the matter.  I have at the beginning of the hearing indicated to Mr Law that this court is concerned that given that the plaintiff has not, prior to the Default Judgment, obtained legal title to the Shares, it would not be right for the court to make a declaration to that effect.  Similarly, given the questionable status of the New Share Certificates, it would not be right for this court to make a declaration that the New Share Certificates are valid and subsisting, particularly given the stance taken by Tricor and Kingsway. 

47.Mr Law fairly did not argue about the declaration on the validity of the New Share Certificates but submitted that applying the doctrine that equity treats as done which ought to be done, the plaintiff should be entitled to have the declaration that it is also the legal owner of the Shares.  The court can only enter default judgment according to the pleadings alone.  There is no pleaded case by the plaintiff as to how it acquired legal title to the Shares. Indeed, Mr Law fairly agreed that the plaintiff is at present not the legal owner of the Shares.  It still has to take out proceedings for registration of the Shares.  In the circumstances, it would not be right for the court to pre-empt this dispute over the legal ownership of the Shares by making the declaration without hearing evidence. 

Setting aside declaratory relief

48.Mr Lam referred this Court to the case of Top One International (China) Property Group Co Ltd v Top One Property Group Ltd[2011] 1 HKLRD 606, per Fok J (as he then was) at paragraph 78 for the proposition that in general, a declaration will not be granted when giving judgment in the absence of defence.  This principle is, however, a rule of practice and not of law and will give way to the paramount duty of the court to do the fullest justice to the plaintiff to which he is entitled. 

49.The legal principles in relation to applying for declaratory relief in default of defence are clearly set out in Hong Kong Civil Procedure 2017 Vol 1, 19/7/20 at p 483.  Insofar as they are relevant to this application, they are as follows:

(1)   “ It is not the normal practice of the court to make a declaration without a trial, particularly where the declaration is that the defendant in default of defence has acted fraudulently (Wallersteiner v. Moir (No. 1) [1974] 1 W.L.R. 991; Top One International (China) Property Group Co Ltd v. Top One Property Grp Ltd [2011] 1 H.K.L.R.D. 606, [83] & [85], per Fok J (as he then was).”

(2)   “ However, this is only a rule of practice which should not be followed when the plaintiff had a genuine need for the declaratory relief and justice would not be done if such relief were denied (Lam Shing Shou v. Lam Hon Man [2002] 1 H.K.L.R.D. D3; Lai Wai Kuen v. Wong Shau Kwng, (unrep., HCA 3424/2003, [2004] H.K.E.C. 1373).”

(3)   “ Where declaratory relief is sought, the court will scrutinize the application for default judgment carefully and does not hastily grant the relief sought: Chan Yan Chi Catherine v. The Incorporated Owners of Fung Wah Factorial Building (unrep., DCCJ 1459/2014, [2014] H.K.E.C. 1211), [14]; Chan Wing Go v. The Incorporated Owners of Wing Hong Factory Building (unrep., DCCJ 1736/2014, [2014] H.K.E.C. 1649, [20]: ….”

(4)   “ Where declaratory relief is sought, the court expects maximum assistance to be provided in order for the relief to be granted.  However straightforward this kind of applications may seem, the court should not be expected to deal with the matter on a do-it-yourself basis and rubber-stamp the uncontested application without further ado; Ho Kwai Chun v. Lai Yu (unrep., DCCJ 916/2013, [2014] H.K.E.C. 1106), [25]; Shue Huei Yue v. Tan Chung Meng (unrep., DCCJ 2294/2013, [2014] H.K.E.C. 1558), [24]–[25].”

(5)   “ The declaratory reliefs to be granted should not be in terms wider than what the plaintiffs are entitled to and what is necessary to do justice to them (Lee Kwok Leung v. Li Foa Shang (unrep., DCCJ 2165/2014, [2015] H.K.E.C. 569), [16].”

50.I should also add that given the nature of an application for default judgment, akin to an ex parte application, the applicant must make a full and frank disclosure of matters which militates against the grant of declaratory relief to the court so that the court can properly assess the merits of granting the same without the benefit of full submissions from both sides. ‌

51.Applying the above legal principles, I have no hesitation to set aside paragraphs 4 and 5 of the Default Judgment as firstly, given that the plaintiff is not the legal owner of the Shares and the issue of legal ownership is yet to be resolved, it would not be right for the court to make such a declaration.  The plaintiff is not entitled to such a relief when it is not presently the legal owner of the Shares.

52.Secondly, given the questionable status of the New Share Certificates, it is also not proper for the court to make declarations on the validity of the New Share Certificates.  This court is mindful of the fact that both Tricor and Kingsway are not represented in this hearing.  The New Share Certificates were issued by Tricor and it demanded the plaintiff to return the same because it considers the same to be null and void.  It would not be right for the court, without hearing evidence, to declare the New Share Certificates to be valid and subsisting.

Deposition

53.For reasons stated above, I make the following orders:

(1) Paragraph 4 of the Default Judgment be set aside and be replaced by the following order:

“A declaration that the Share Pledge and related documents delivered were effective in transferring and did transfer to the Plaintiff the equitable right, title and interest in the 150,000,000 shares of Changgang Dunxin Enterprise Company Limited.”

(2) Paragraph 5 of the Default Judgment be set aside. 

Costs

54.As far as costs is concerned, Mr Law submitted that the plaintiff should be entitled to costs against Li as nearly all of Li’s submissions have been dismissed and the orders at paragraph 53 above are made on the court’s own volition.  Mr Lam did not resist the application for costs save that he submitted that the costs of the BVI legal opinion should be disallowed as the same is not necessary for this hearing.  Mr Law fairly agreed that the BVI legal opinion is not needed.  Mr Lam also submitted that this is not a case where a certificate for two counsel should be granted. 

55.Having heard parties’ submissions on costs, I make the following orders on costs:

(1) The plaintiff is to have the costs of the application, save and except the costs relating to the BVI legal opinion, against the interested party, Li, on a party to party basis, to be taxed if not agreed;

(2) The plaintiff is to have 80% of the costs of the hearing against the interested party, Li, on a party to party basis, to be taxed if not agreed;

(3) Certificate for one counsel.  For the avoidance of doubt, the certificate is to cover Mr Law’s Brief and related fee.

56.Finally, it remains for me to thank Mr Law (together with him Miss Xu) and Mr Lam for their very helpful assistance to this court. 

Mr. LAM Chiu Chung Gary instructed by Messrs. Lo, Wong & Tsui for the Interested Party Li Chiu Yue.

Mr. LAW Man Chung and Ms. Cherry Xu instructed by Messrs. K & L Gates for the Plaintiff.

1^st Defendant in person, absent.

2^nd Defendant in person, absent.