Hong Kong Treasure Int’l Ltd v. Cheung Kin Wah and Others

HCA 1193/2019

[2021] HKCFI 565

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1193 OF 2019

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BETWEEN

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Before: Madam Recorder Eva Sit SC for paper disposal

Date of Written Submissions: 21, 23 and 25 September 2020

Date of Decision: 18 March 2021

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D E C I S I O N

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1.This is the 1^st to 3^rd Defendants’ appeal against the decision of Master Anthony H.K. Chan dated 23 July 2020 granting summary judgment to the Plaintiff (“HK Treasure”) against the 1^st to 3^rd and 9^th Defendants.

2.This application was directed to be disposed of on the papers. Upon consideration of the papers and written submissions by the parties, the appeal is dismissed.

3.The real issue in dispute in this case comes down to one point – whether the 1^st Defendant had authority to enter into a tenancy agreement dated 15 October 2017 (“Tenancy Agreement”) on behalf of HK Treasure with the 3^rd Defendant, by reason of his being a director of HK Treasure at the time. 

4.In my view, there can be no dispute that the 1^st Defendant was not a director of HK Treasure at the time of the Tenancy Agreement, and no triable issue arises with respect to the same.  Accordingly the 1^st Defendant is unable to demonstrate an arguable defence, and since the defence of the 2^nd, 3^rd and 9^th Defendants wholly depends on that of the 1^st Defendant, judgment must be entered against all of them.

THE FACTS

5.The Tenancy Agreement which is at the centre of this dispute concerns the following properties:-

(1)  Flat No 2 including portion of the flat roof on 4/F of Mai Kwai Mansion, No 87 Wo Tong Tsui Street, Kwai Chung, New Territories, Hong Kong;

(2)  Flat No 3 including portion of the flat roof on 4/F of Mai Kwai Mansion, No 87 Wo Tong Tsui Street, Kwai Chung, New Territories, Hong Kong;

(3)  Flat No 5 including portion of the flat roof on 4/F of Mai Kwai Mansion, No 87 Wo Tong Tsui Street, Kwai Chung, New Territories, Hong Kong.

(collectively “Mai Kwai Flats”).  The Mai Kwai Flats are further subdivided into 12 units, and have been leased out for residential use.

6.HK Treasure is the registered owner of the Mai Kwai Flats.  It is a property holding company incorporated in Hong Kong.

7.Since 10 November 2014, the sole shareholder of HK Treasure has been Cheer Holdings Limited (“Cheer Holdings”).  This state of affairs came about when 2 out of the 6 issued shares in Cheer Holdings (then held by Man Lai Bing, “Ms Man”, the ex-wife of the 1^st Defendant) were transferred to Cheer Holdings on 10 November 2014.

8.Cheer Holdings was the vehicle through which Mr Lee Wang Hin (“Mr Lee Snr”), the 1^st Defendant, the 2^nd Defendant and others cooperated to carry on the business of care homes in Hong Kong for those who are physically or mentally challenged.  In addition to HK Treasure (which operates a leasing business), Cheer Holdings also wholly owns Bridge of Rehabilitation Services Limited (“Bridge Rehab”) and Graceful Rehabilitation Services Limited (“Grace Rehab”), which operate the care home business under various brands.

9.The evidence shows that Mr Lee Snr’s camp and the 1^st Defendant’s camp have been embroiled in disputes over a period of time with respect to their investments into the Cheer Holdings business.

(1)  The parties’ cooperation commenced in 2011.  Pursuant to a shareholders’ agreement in Chinese dated 1 October 2011, it was agreed (inter alia) for Mr Lee Snr to inject the care home business he then operated into Cheer Holdings, and each of the investors (including the 1^st Defendant) would become shareholders in Cheer Holdings.

(2)  In May 2012, it was decided that the 1^st Defendant’s camp should also inject the care home business they operated, under Bridge Rehab, Grace Rehab and HK Treasure (collectively “3 Companies”), into Cheer Holdings.  This was to be effected by Cheer Holdings acquiring all the issued shares of the 3 Companies from their registered shareholders at a total consideration of HK$8.32 million.

(3)  At the time, the 1^st Defendant and Ms Man held shares in each of the 3 Companies respectively.  Specifically, with respect to HK Treasure, Ms Man held 2 of its 6 issued shares.  Pursuant to a share transfer agreement in Chinese dated 28 May 2012, the 1^st Defendant and Ms Man agreed to transfer their respective shareholdings in the 3 Companies to Cheer Holdings for a total sum of HK$2.54 million (“2012 Share Transfer Agreement”).

(4)  It is the 1^st Defendant’s case that at around the time of the 2012 Share Transfer Agreement, Cheer Holdings represented to him that as long as he continued to act as a guarantor of HK Treasure’s liabilities in connection with a mortgage loan granted by Chiyu Bank secured on the Mai Wai Flats, the 1^st Defendant could continue to act as a director of HK Treasure (“Cheer Holdings Representation”).

(5)  The 1^st Defendant says that as Cheer Holdings was unable to perform or fully perform its obligations under the 2012 Share Transfer Agreement, the parties entered into further discussions and there was an oral variation to the terms of the 2012 Share Transfer Agreement (“2013 Oral Agreement”).  It is his case that one of the terms of the 2013 Oral Agreement was that the share transfers for the 3 Companies from all of their then existing shareholders would not be completed until after Cheer Holdings had fully discharged its obligation to pay the whole of the consideration under all the agreements with the then shareholders of the 3 Companies.  The 1^st Defendant says that the sum then owing to him and Ms Man was HK$1,417,335.

(6)  The 1^st Defendant accepts that on 13 November 2013, Cheer Holdings paid HK$1,284,546 to him as part payment of the outstanding consideration, whereupon he directed Ms Man to execute bought and sold notes and instrument of transfer in respect of the 2 shares in HK Treasure in favour of Cheer Holdings.

(7)  The 1^st Defendant says he found out thereafter that Mr Lee Snr had procured funds from other associated companies of Cheer Holdings to be used to discharge Cheer Holdings’ obligations under (inter alia) the 2012 Share Transfer Agreement, which he alleges to be a breach of duty on the part of Mr Lee Snr and a breach of the 2013 Oral Agreement.  On his basis he attempted to stop the completion of the share transfer by instructing HK Treasure’s company secretary not to proceed with the same.  This led to (i) Cheer Holdings’ commencement of HCA No. 879 of 2014 against the 1^st Defendant and Ms Man for breach of the 2012 Share Transfer Agreement; and (ii) the 1^st Defendant petitioning for the winding up of Cheer Holdings on just and equitable ground in HCCW No. 177 of 2014 (“2014 Proceedings”).  The 2014 Proceedings have been directed to be heard together, and little progress has been made in prosecuting the same.

10.It appears that although HCA No. 879 of 2014 has yet to be concluded, Cheer Holdings had managed to secure completion and registration of the share transfer for the 3 Companies.

11.Meanwhile, on 10 August 2014, the 1^st Defendant, who was then the warden of the Bridge of Rehab home, was arrested for sexual offences committed on female inmates who were under mental disabilities. The incident provoked public outcry, which resulted in the revocation of the licence of the Bridge of Rehab home by the Social Welfare Department, and the closing down of the same.

12.Whist the 1^st Defendant was remanded in custody, on 2 September 2014:

(1)  Cheer Holdings convened an extraordinary general meeting, and resolved by majority votes (70% in favour, 30% by the 1^st Defendant in opposition) to (i) suspend the 1^st Defendant from all of his duties and directorships and prohibit him from entering the care homes; and (ii) appoint Mr Li Wing Yiu (“Mr Li Jnr”), the son of Mr Lee Snr, to take over the management and operation of the care homes and HK Treasure. 

(2)  Specifically in relation to (ii) above, the shareholders’ resolution empowered Mr Li Jnr to (inter alia) exercise all the powers of HK Treasure, including the power to attend and vote at the general meetings and board meetings of HK Treasure, according to what he considered to be in the best interests of the company.

(3)  It appears that some form of a shareholder’s resolution of HK Treasure was passed (although the precise form is not clear on the papers) removing the 1^st Defendant as director.

13.After removal of the 1^st Defendant, Mr Li Jnr and another investor in Mr Lee Snr’s camp were appointed directors of HK Treasure.

14.In or around 2015, the 1^st Defendant was charged with the offence of having unlawful sexual intercourse with a female with mental disability.  He was released from police custody on 13 March 2015.  No step had been taken by the 1^st Defendant with respect to the business or management of Cheer Holdings and its group companies in the meantime.

15.Mr Lee Snr passed away on 2 February 2016.

16.On 17 May 2016, the criminal charge against the 1^st Defendant was dropped, as the victim was unable to testify due to post trauma depression.

17.After the charge was dropped, the 1^st Defendant purported to convene an extraordinary general meeting of Cheer Holdings on 8 July 2017 to remove all the directors of Cheer Holdings and to appoint himself sole director of Cheer Holdings.  There is no evidence of any meeting held with respect to HK Treasure.

18.On 11 July 2017, the 1^st Defendant filed statutory forms at the Companies Registry claiming to be the sole director of Cheer Holdings and HK Treasure.

19.Cheer Holdings and HK Treasure then commenced proceedings against the 1^st Defendant under section 42 of the Companies Ordinance (Cap 622).  Hon Au-Yeung J held that the shareholders’ meeting of Cheer Holdings purportedly held on 8 July 2017 was invalid; there was no shareholder’s meeting convened for HK Treasure at all; and the purported removal of the existing directors of Cheer Holdings and HK Treasure and the purported appointment of the 1^st Defendant as sole director thereof were also invalid. Au-Yeung J’s decision has since been upheld by the Court of Appeal in CACV No. 71 of 2018 (collectively “s.42 Proceedings”). 

20.In the meantime, on 15 October 2017, the 1^st Defendant purported to act on behalf of HK Treasure to enter into the Tenancy Agreement in favour of the 3^rd Defendant, of which the 1^st Defendant and the 2^nd Defendant, another investor of Cheer Holdings in the 1^st Defendant’s camp, were the only directors and the 2^nd Defendant was its sole shareholder. 

21.The Tenancy Agreement contains highly unusual terms, including the following:-

(1)  The term of the lease is for 96 months (ie 8 years).

(2)  The monthly rental of all of the Mai Wai Flats is HK$12,000 only.

(3)  There is effectively no obligation to pay the above monthly rental, since the 3^rd Defendant is also contracted to provide “services” to HK Treasure under the Tenancy Agreement for which it is entitled to charge a monthly service fee of HK$12,000, which payment HK Treasure is entitled to set off from the monthly rental payable.

22.It is not disputed by the 1^st to 3^rd Defendants that armed with the Tenancy Agreement, they gave instructions to all of the existing occupiers of the Mai Kwai Flats to pay their monthly rent to the 3^rd Defendant; the 3^rd Defendant received all such payments which would otherwise be payable to HK Treasure; and upon termination of existing occupation the 3^rd Defendant would purport to enter into new arrangements with others to occupy the Mai Kwai Flats.

23.There is no serious dispute that HK Treasure has been denied access to the Mai Kwai Flats, and has no information on who is in current occupation thereof.  Hence the joinder of the 9^th Defendant in these proceedings.

THE PARTIES’ RESPECTIVE CASES

24.HK Treasure’s case is a simple one.  It says that the 1^st Defendant was not a director in 2017 and had no authority to enter into the Tenancy Agreement on its behalf, and the 1^st and 2^nd Defendant, acting on behalf of the 3^rd Defendant, had wrongfully entered into and occupied the Mai Kwai Flats.  It therefore seeks (inter alia) a declaration that the Tenancy Agreement is invalid, delivery of vacant possession of the Mai Wai Flats and mense profits and/or rent wrongfully received by the 1^st to 3^rd Defendants. 

25.The 1^st to 3^rd Defendants have not yet filed any defence, but have filed 3 affirmations to oppose HK Treasure’s summary judgment application, where their defences have been set out.

26.The 1^st to 3^rd Defendants’ affirmations contain a lengthy but selective recitation of the underlying disputes between the 1^st Defendant’s camp and Mr Lee Snr’s camp, but without any mention of the s.42 Proceedings or the court’s findings therein.

27.The 1^st to 3^rd Defendants’ defences can be summarized as follows:-

(1)  The 1^st Defendant says that he had authority to enter into the Tenancy Agreement on behalf of HK Treasure by reason of the fact that he was and remained a director of HK Treasure at the relevant time.

(2)  His basis for so contending is three-fold:-

(a)  He was (through Ms Man) the owner of 2 out of the 6 issued shares of HK Treasure, which transfer to Cheer Holdings was not completed by reason of Cheer Holdings’ breach of the 2013 Oral Agreement.

(b)  There was no lawful or valid meeting on 2 September 2014 to remove him as director of HK Treasure.

(c)  He relies on the Cheer Holdings Representation and the fact that he remains a guarantor of HK Treasure to date to argue that Cheer Holdings is estopped from removing him as a director of HK Treasure.

(3)  There is further argument, not related to the 1^st Defendant’s authority, that the 3^rd Defendant was entitled to take over management of the Mai Kwai Flats by reason of an agreement in Chinese dated 5 November 2013 purportedly entered into between Cheer Holdings (acting by the 1^st Defendant) and the 3^rd Defendant (acting by the 2^nd Defendant) (“Chinese Agreement”), whereby Cheer Holding stated it was to become the sole shareholder of HK Treasure and it agreed thereafter to hand over all of HK Treasure’s tenancy matters, including those relating to the Mai Kwai Flats, to the 3^rd Defendant.  HK Treasure disputes the authenticity of the Chinese Agreement in its evidence but does not rely on this in its written submissions.

(4)  The 2^nd, 3^rd and 9^th Defendants have not advanced independent defences and relied wholly on the 1^st Defendant’s case to justify the Tenancy Agreement and their conduct.

28.On 23 July 2020, Master Anthony H.K. Chan granted summary judgment against the 1^st to 3^rd and 9^th Defendants on relief (a), (b), (c), (n), (o) (amended to “delivery of vacant possession of the Mai Kwai Flats unlawfully occupied by the 1^st, 2^nd, 3^rd and 9^th Defendants to the Plaintiff”) and (q) as prayed in the Statement of Claim.

APPLICABLE PRINCIPLES

29.This is an appeal from a master’s decision, which is a hearing de novo.

30.The principles applicable to summary judgment applications are well-established and undisputed between the parties. 

31.If a plaintiff’s application is properly constituted, the burden shifts to the defendant to show there is a triable issue or an arguable defence. The tests at this stage is whether the defendant’s assertions are believable and whether there is a fair or reasonable probability of the defendant having a real or bona fide defence. Summary judgment is not appropriate where there is a difficult point of law or dispute as to the facts which ought to be tried.

32.The 1^st Defendant attempts to invoke the “fraud exception”. The relevant principles are set out in Zimmer Sweden AB v KPN Hong Kong Ltd [2016] 1 HKLRD 1016, §18 (per Yuen JA).  However it has no application in this case as it is clear that neither HK Treasure’s claim nor the 1^st Defendant’s defences include a claim for which an allegation of fraud would have to be made in order to establish or maintain that claim.

DETERMINATION

33.As indicated above, the central question in this case, which is joined between HK Treasure and the 1^st Defendant, is whether the 1^st Defendant was a director of HK Treasure in October 2017 by reason of which he was said to have authority to enter into the Tenancy Agreement on behalf of HK Treasure.

34.HK Treasure’s case is a simple one.  In 2017 the 1^st Defendant was not a director of HK Treasure.  There was no valid meeting in July 2017 to remove the then directors and to appoint the 1^st Defendant as its sole director.  The invalidity of the 1^st Defendant’s purported appointment has already been determined against him in the s.42 Proceedings, of which both the 1^st Defendant and HK Treasure were parties.  As such, the 1^st Defendant is issue estopped from contending otherwise.

35.None of the defences raised by the 1^st Defendant in §27 above amount to an arguable defence to the above.

36.First, the 1^st Defendant has no answer to the fact that the court has found, in the s.42 Proceedings, that he was not a director of HK Treasure between (at least) 8 July 2017 and 27 February 2018 (date of judgment of Au-Yeung J in the s.42 Proceedings).  That finding has been upheld by the Court of Appeal.  The 1^st Defendant is issue estopped from contending otherwise, given (i) the judgment and appeal decision in the s.42 Proceedings are final judgments; (ii) the identity of parties (the 1^st Defendant and HK Treasure); and (iii) the identity of subject matter (whether the 1^st Defendant was a director on 15 October 2017).

37.Second, the 1^st Defendant’s allegation that he was wrongfully removed on 2 September 2014, such that he should still have been a director of HK Treasure in 2017, is not one that is open to him.

(1)  Both parties have referred to Ko Hon Yue v Chiu Pik Yuk (2012) 15 HKCFAR 72 and advanced arguments in respect of the Henderson v Henderson (1843) 3 Hare 100, 67 ER 313 type of abuse.

(2)  However, the relevant issue is not one of Henderson v Henderson abuse, but whether (i) a determination has been made in the s.42 Proceedings that the shareholders’ meeting of Cheer Holdings held on 2 September 2014 and the resolutions made thereat were valid; and (ii) such determination, if made, was “necessary” or “fundamental” to the decision in the s.42 Proceedings.  This is because only a determination that is so fundamental to the decision that the latter cannot stand without it will found an issue estoppel: Keen Lloyd Energy Ltd v Bank of China (Hong Kong) Ltd, HCA 1299/2004 & 1092/2006 (unrep, 11 January 2008), §18.

(3)  It is clear from the judgment of Au-Yeung J and that of the Court of Appeal that a determination has been made as to the validity of the shareholders’ meeting and resolutions on 2 September 2014.  That is clearly spelt out in §37 of the judgment of the Court of Appeal (see also §§32-34 of the judgment of the Court of Appeal).  Even though there is no express reference to this point in Au-Yeung J’s judgment, this must have been the premise upon which the court made the finding that the statutory forms unilaterally filed by the 1^st Defendant in 2017 should be removed from the Companies Register, and the 1^st Defendant should be restrained from holding himself out to be a director of (inter alios) HK Treasure.

(4)  Further, such a determination is plainly necessary and fundamental to the decision of Au-Yeung J and the Court of Appeal, which made (inter alia) the orders set out in (3) above.

(5)  Accordingly, it is no longer open to the 1^st Defendant to raise the issue that there were irregularities in the meeting held on 2 September 2014 and his removal as director was wrongful.

38.Third, even if the aforesaid issue had been open to the 1^st Defendant, it is wholly devoid of merits on the undisputed facts and no arguable defence could have been raised in respect of it.

(1)  Notice of the shareholders’ meeting for Cheer Holdings had been given to the 1^st Defendant, and the 1^st Defendant actually voted against the resolutions tabled (see §12(1) above).  He was the minority and the resolutions were carried by a majority of votes.

(2)  There is no merit in the 1^st Defendant’s allegation that Ms Man’s shares in HK Treasure were transferred to Cheer Holdings using false documents. It is the 1^st Defendant’s own evidence that after receiving the majority of outstanding consideration from Cheer Holdings (whether from the 2012 Share Transfer Agreement or the 2013 Oral Agreement), he directed Ms Man to execute bought and sold notes and instrument of transfer with respect to those shares, which had been handed over to Cheer Holdings (see §9(7) above).  It was clearly in recognition of Cheer Holdings possessing valid documents to effect transfer that the 1^st Defendant attempted to pressure the company secretary to desist from registering the same, which led to the commencement of HCA No. 879 of 2014 against him.

(3)  As Cheer Holdings was the 100% shareholder of HK Treasure at the time, it was in a position to resolve to remove the 1^st Defendant as the latter’s director, either by written resolution or under the Duomatic principle.  As such, there can be no valid basis for complaint that the 1^st Defendant was not validly removed as director of HK Treasure.

(4)  As to whether the 1^st Defendant may have a claim against Cheer Holdings for (i) alleged breach of the 2012 Share Transfer Agreement and/or the 2013 Oral Agreement; or (ii) the Cheer Holdings Representation, these allegations:

(a)  would not have affected the question, from a company law point of view, whether Cheer Holdings and HK Treasure had the power to and had validly removed the 1^st Defendant as director;

(b)  would have to be separately litigated (as the parties recognized, hence the 2014 Proceedings which are yet to be concluded), and

(c)  what would have been the appropriate relief if the 1^st Defendant were successful in his claim remains to be determined, since the court would not normally override the normal decision-making process of a company to direct who should be its directors.

39.Fourth, nor does the allegation concerning the Chinese Agreement assist the 1^st Defendant, since:

(1)  The Chinese Agreement is not (and does not purport to be) authorization by the proper organ of HK Treasure to enter into the Tenancy Agreement.

(2)  Nor can one rely on the Chinese Agreement to infer that Cheer Holdings and HK Treasure had agreed to the Tenancy Agreement.  First, the Chinese Agreement pre-dated the Tenancy Agreement by nearly 4 years.  Second, the Chinese Agreement only referred to the 3^rd Defendant managing the Mai Kwai Flats, not the conferral of an interest therein through the grant of a long lease.

40.For completeness, the 1^st Defendant also attempts to challenge HK Treasure’s authority to commence these proceedings against (inter alios) him.  There is no substance in this allegation given (i) HK Treasure has produced a board resolution dated 18 September 2018 authorizing the commencement of proceedings against (inter alios) the 1^st to 3^rd Defendants to recover the Mai Kwai Flats; and (ii) the purported removal by the 1^st Defendant of the directors of HK Treasure on 2 July 2017 has already been held to be invalid by the court in the s.42 Proceedings.

CONCLUSION

41.Accordingly the appeal of the 1^st to 3^rd Defendants is dismissed, and summary judgment is granted in favour of the 1^st to 3^rd and 9^th Defendants in terms as set out in §28 above.

42.As to costs:-

(1)  HK Treasure should have costs of this appeal.  Directions for gross sum assessment have been given and the parties have filed their respective statements of costs.  I assess HK Treasure’s costs of this appeal to be HK$78,500.

(2)  Since summary judgment has been entered against the 1^st to 3^rd and 9^th Defendants, HK Treasure should have costs of this action against them.  However there is no information placed before me concerning such costs.  Accordingly HK Treasure’s costs of the action as against the 1^st to 3^rd and 9^th Defendants would have to be assessed in the usual course.

Mr Gavin Wan, instructed by C F Lee & Co, for the plaintiff

Mr Victor K H Chiu, instructed by Alex To & Co, for the 1^st to 3^rd defendants