Liao Zhiqiang and Others v. Cheung Sin Ling, Vickki and Others

HCA 1886/2013
HCA 1246/2018
[2022] HKCFI 892

HCA 1886/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1886 OF 2013

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(By original action)

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(By counterclaim)

HCA 1246/2018

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1246 OF 2018

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(Heard together)

Before:  Hon Linda Chan J in Court

Dates of Hearing:  11 – 12, 14 January 2022

Date of Judgment:  28 March 2022

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J U D G M E N T

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A.  INTRODUCTION

1.This is the trial of 2 actions, HCA 1886/2013 (“Action 1”) and HCA 1246/2018 (“Action 2”) (together “Actions”), commenced by the 1^st to 5^th plaintiffs in Action 1 and the 1^st to 7^th plaintiffs in Action 2 (collectively “Ps”) against, inter alios, Ms Cheung Sin Ling, Vickki (“Vickki”), Mr Chow Yee Fai (“Chow”) and their corporate vehicle, Jackpot Development Limited (“Jackpot”) (collectively “Main Ds”). Ps and Main Ds are shareholders or persons agreed to be shareholders of China Northern Newenergy Investment Limited (“Company”).

2.The dispute in Action 1 arose when Vickki and Chow qua directors purportedly disallowed the votes cast by Ps at a general meeting and, thereafter, forfeited their shares on the ground that those shares had not been paid up pursuant to the call notices issued by the Company.

3.Ps rely on the “Core SHA” (as defined in §21 below) said to have been reached between the then shareholders and the Company (acting by its sole director) in August 2011 whereby the parties agreed that the shares issued would only be payable in full by the end of 2014. In any event, Ps had attempted to pay the amounts in full in March and April 2014 and there was no basis for Vickki and Chow to cause the Company to forfeit their shares. Ps seek:

(1)  a declaration that their votes were wrongfully disallowed at the “2^nd GM” (as defined in §34 below) held on 12 September 2013;

(2)  declarations that the shareholders’ and board resolutions purportedly passed by Vickki and Chow (a) requiring Ps to pay the amounts on their shares and (b) approving the appointment of 范衍廷 (“Fan”) and 楊麗明 (“Yang”) as directors were invalid; and

(3)  an order requiring Vickki to repay RMB1.5 million allegedly misappropriated from the Company.

4.Main Ds, Fan and Yang (collectively “Ds”) deny all the allegations made by Ps. In their counterclaim, Ds seek declarations that (1) Fan and Yang were properly appointed as directors; (2) the Company was entitled to forfeit Ps’ shares; and (3) rescission of the Core SHA.

5.The parties settled their disputes in relation to the Company, including those in Action 1, by entering into a settlement agreement dated 2 January 2017 (“SA”). Following Main Ds’ refusal to recognise the validity of the SA, Ps commenced Action 2 to seek a declaration that the purported forfeiture of Ps’ shares in April 2014 was invalid such that Ps remained shareholders and hold the same number of shares prior to the purported forfeiture, alternatively, a declaration that their shareholdings are those stated in the SA.

6.At trial, Ms Ebony Ling, counsel for Ps, readily accept that if, as Ps contend, the SA is valid and binding between the parties, it is not open to Ps to pursue any claims and reliefs in Action 1 and Action 2 insofar as they are inconsistent with what the parties agreed under the SA.

7.However, rather than seeking a stay of Action 1 pending determination of Action 2, the parties saw fit to allow both Actions to proceed in parallel when it is neither necessary nor expedient to do so.

8.The following pleadings were filed by the parties:

(1)  Ps’ statement of claim filed on 4 October 2013 in Action 1 (“SOC1”).

(2)  Ds’ defence and counterclaim filed on 10 December 2013 in Action 1 (“D&CC1”).

(3)  Ps’ reply and defence to counterclaim filed on 20 February 2014 and amended defence to counterclaim filed 29 September 2014 (“Reply1”).

(4)  Ps’ statement of claim filed on 30 May 2018 in Action 2 (“SOC2”).

(5)  Ds’ defence filed on 31 August 2018 as amended on 9 March 2020 (“Defence2”).

(6)  Ps’ reply filed on 23 November 2018 (“Reply2”).

B.  FACTUAL BACKGROUND

9.Save where otherwise stated, the following facts and matters are not in dispute or are indisputable.

B1.  Inception of the Company and the Subsidiary

10.The Company was incorporated in Hong Kong on 20 April 2010. According to the annual return filed on 21 April 2011, the share capital of the Company was HK$10,000,000 divided into 10,000,000 shares of HK$1 each.

11.The Company was the vehicle acquired by the “Core Shareholders” (as defined in §21 below) for the purpose of holding 80% equity in錦州新北方民安供熱有限公司 (“Subsidiary”), a sino-foreign equity joint venture established in Jinzhou in the Mainland. The other 20% equity is held by 中國遼寧新北方熱力集團有限公司 (“JV Partner”), a company established in the Mainland and controlled by Mr Tung Yauqing (董友慶) (“Tung”). The Subsidiary invests in and holds a project which provides heating for domestic users as part of the urban renewal program in Jinzhou (“Project”). On 16 June 2011, the business licence was issued to the Subsidiary.

12.As stated in its Articles of Association (“AA”), the registered capital of the Subsidiary is RMB 20 million of which RMB16 million is to be contributed by the Company. The Company and the JV Partner were required to pay up the registered capital in full within 6 months of the issue of the business licence (i.e. by 15 December 2011).

13.According to the 1^st to 8^th capital verification reports (驗資報告) issued by an accounting firm in Jinzhou, the Company and the JV Partner did not inject the registered capital in full within the time limit. Instead, the amounts injected into the Subsidiary are as follows:

Date of   Contribution/   Report	From	Capital Injected (RMB)	Total Capital Paid up (RMB)
14/11/2011	Company	5,614,506.69   (HK$6,869,800)	5,614,506.69
26/12/2011	JV Partner	1,400,000	7,014,506.69
20/8/2012	Company	1,227,150   (HK$1,500,000)	8,241,656.69
6/9/2012	Company	1,634,800   (HK$2,000,000)	9,876,456.69
18/9/2012	Company	1,634,056.58   (HK$1,999,800)	11,510,513.27
5/12/2012	Company	2,767,963.80   (HK$3,437,800)	14,278,477.07
21/1/2013	Company	1,587,438   (HK$1,959,800)	15,865,915.07
28/5/2013	Company	1,534,084.93   (HK$1,920,000)	17,400,000.00
Total	Company	(HK$19,687,200)   RMB 16,000,000
	JV Partner	RMB 1,400,000

B2.  Allotments and transfers of shares in the Company

14.At the time of the incorporation of the Company, Ms Lin Jinju (2^nd plaintiff) (“Ju”) was its sole director and shareholder, holding one issued share. Ju was the nominee of her ex-husband, Mr Woo Chi Wai (“Woo”), and acted exclusively upon his directions and instructions. Until November 2012, Ju was the sole authorised signatory of the Company’s bank account at Wing Lung Bank (“WL”), no. 020-607-001-4223-3 (“WL Account”).

15.Woo was effectively the founder of the Company, and he looked for and introduced investors into the Company. Other than acting as the company secretary until 5 December 2012, Woo did not hold any share or position in the Company.

16.On 3 August 2011, the authorised capital of the Company was increased from HK$10,000,000 to HK$20,000,000 and 12,999,999 shares were allotted to the following shareholders:

Shareholder	No. of shares	Shareholding
Ju	5,300,000	40.77%
Ms Liu Hairong (3rd plaintiff) (“Rong”)	5,300,000	40.77%
Mr He Yangjun (5th plaintiff in Action 2) (“He”)	2,000,000	15.38%
Ms Wu Fei (“Wu”)	400,000	3.08%
Total	13,000,000	100%

17.It is Ps’ pleaded case that pursuant to Ju’s requests, the Core Shareholders paid a total amount of HK$4,501,760 as initial investment (“1^st Contribution”) for remittance to the Subsidiary as follows[1]:

Shareholder	Amount (HK$)
Bun	1,128,500
Rong	1,973,260
He	1,200,000
Wu	200,000
Total	4,501,760

18.In around the end of 2011, Woo began to discuss with Vickki and Chow about injecting new capital into the Subsidiary. They used Jackpot, a company incorporated in the BVI on 13 April 2012, as their vehicle to hold shares in the Company. Vickki and Ju became directors and shareholders of Jackpot, and their shareholdings were 80% and 20% respectively.

19.On 13 April 2012, the authorised capital of the Company was further increased to HK$30,200,000 and 15,400,960 shares were allotted to Jackpot.

20.On 19 April 2012, a total of 1,797,000 shares were allotted, with 1,120,000 shares to (1) Mr Lau Hing Bun (4^th plaintiff) (“Bun”); (2) 460,000 shares to He; and (3) 217,000 shares to Wu. On the same day, 1,000,000 shares were transferred from Ju to Ms Wang Yanhua (5^th plaintiff in Action 1 and 6^th plaintiff in Action 2) (“Wang”), and 1,500,000 shares were transferred from Rong to Bun. It appears that Ju also transferred 800,000 shares to Bun, and the shareholders of the Company became as follows[2]:

Shareholder	No. of shares	Shareholding
Ju	3,500,000	11.59%
Rong	3,800,000	12.58%
He	2,460,000	8.15%
Wu	617,000	2.04%
Jackpot	15,400,960	51%
Bun	3,420,000	11.33%
Wang	1,000,000	3.31%
Total	30,197,960	100%

21.It is Ps’ pleaded case that except Jackpot, the aforesaid 6 shareholders were Core Shareholders. In August 2011, there was an oral agreement between the Company (acting by Ju) and the then shareholders (Ju, Rong, He and Wu) that:

(1)  the Core Shareholders would subscribe for shares in the Company;

(2)  the Core Shareholders would pay the amount required by Ju as initial investment for remittance to the Subsidiary to satisfy its capital requirement; and

(3)  the remaining amount of share capital would only be payable in full by the end of 2014, when the Company was expected to receive substantial dividends from the Subsidiary, which would be sufficient to pay off their respective portion of unpaid capital (“Core SHA”)[3].

22.In late August 2012, Woo procured RMB1,600,000 to be remitted to his bank account of which 2 sums totalling RMB1.5 million (“Sum”) was transferred to Vickki’s personal bank account on 27 and 30 August 2012. Ps say that the Sum was the Company’s money and was misappropriated by Vickki while Ds say that the Sum was paid by Woo as his capital contribution to Jackpot.

23.By 7 September 2012, Vickki/Chow paid a total of HK$10,005,078 on the shares allotted to Jackpot, leaving around HK$5.4 million unpaid. It is not clear how the amount was paid.

24.At the meeting of the shareholders held on 28 November 2012 in Shenzhen (“2012 Meeting”), it was agreed, inter alia, that Jackpot would transfer 5,400,000 shares to Rong as an interim arrangement and the Company would look for new investors to take up those shares.

25.After the 2012 Meeting, Woo and Ju gradually reduced their involvement in the Company in that:

(1)  on 29 November 2012, Ju transferred all her shares in Jackpot to Vickki and resigned as its director, leaving Vickki as its sole shareholder and director;

(2)  Vickki replaced Ju as the sole authorised signatory of the WL Account in November 2012[4];

(3)  on 5 December 2012, Woo resigned as company secretary of the Company and was replaced by JBL Secretary Services Ltd “JBL”);

(4)  on 5 December 2012, Jackpot transferred 5,400,000 shares to Rong, and the Company’s shareholdings became as follows:

Shareholder	No. of shares	Shareholding
Ju	3,500,000	11.59%
Rong	3,800,000   5,400,000 (interim)	12.58%   17.88% (interim)
He	2,460,000	8.15%
Wu	617,000	2.04%
Jackpot	10,000,960	33.12%
Bun	3,420,000	11.33%
Wang	1,000,000	3.31%
Total	30,197,960	100%

(5)  on 25 January 2013, Ju resigned as director of the Company, and Vickki, Chow, Wang, Bun and Rong were appointed as directors.

26.Meanwhile, the Company found new investors to take up the 5,400,000 shares surrendered by Jackpot:

(1)  It is Ps’ case that in late December 2012, Mr Liao Zhiqiang (1^st plaintiff) (“Liao”) paid HK$4,500,000 to the Company (“2^nd Contribution”), and Dr Wong Yun Kuen (7^th plaintiff in Action 2) (“Dr. Wong”) paid HK$900,000 to the Company (“3^rd Contribution”)[5].

(2)  On 6 March 2013, Rong transferred 900,000 shares to Dr. Wong and 4,500,000 shares to Liao.

(3)  On 18 March 2013, Wu transferred all her 617,000 shares to Dr. Wong and ceased to be a shareholder.

27.Following the above transfers, as at 18 March 2013, the shareholders of the Company were as follows:

Shareholder	No. of shares	Shareholding
Ju	3,500,000	11.59%
Rong	3,800,000	12.58%
He	2,460,000	8.15%
Jackpot	10,000,960	33.12%
Bun	3,420,000	11.33%
Wang	1,000,000	3.31%
Dr. Wong	1,517,000	5.02%
Liao	4,500,000	14.90%
Total	30,197,960	100%

28.By May 2013, the Company injected a total amount of RMB16,000,000 into the Subsidiary.

B3.  Appointment of additional directors and forfeiture of shares

29.On 30 June 2013, JBL resigned as company secretary and was replaced by A&F Secretariat Co. Limited (“A&F”).

30.At the 1^st board meeting of the Company held on 6 August 2013 attended by all the directors, Vickki informed the other directors that (1) she had replaced Ju as the sole authorised signatory of the WL Account and the same was closed on 16 July 2013; and (2) she retained all the seals of the Company.

31.At the 2^nd board meeting of the Company held on 16 August 2013 attended by Vickki and Chow (Wang, Bun and Rong were absent), it was unanimously resolved that:

(1)  Ju should hand over all the books and accounts of the Company from the date of its incorporation up to 11 October 2012 to 安迪會計師事務所 (“Firm”) and transfer all the power to deal with the financial affairs to Vickki within the next 7 days;

(2)  all shareholders should within the next 7 days declare to the Firm the number of shares issued to them and provide proof of their capital contributions to the Company including relevant bank statements and transfer slips; and

(3)  a general meeting would be held on 5 September 2013 to discuss the affairs of the Company and the Subsidiary listed in the agenda.

32.At the 3^rd board meeting of the Company held on 23 August 2013 attended by Vickki and Chow (Wang, Bun and Rong were absent), it was unanimously resolved that:

(1)  Chow would follow up with Tung on the accounts including the amounts payable and receivables of the Subsidiary and discuss business development issues; and

(2)  The Company would appoint (a) an auditor to review the accounts of the Subsidiary, (b) a staff to handle the financial affairs of the Subsidiary, and (c) a solicitor to deal with its legal issues.

33.The 1^st general meeting held on 5 September 2013 was only attended by Jackpot and was inquorate and adjourned to 12 September 2013.

34.At the 2^nd general meeting held on 12 September 2013 (“2^nd GM”) attended by Vickki (as representative of Jackpot), Ms Chan Kwai Chen (as representative of Liao, Ju, Rong, Dr. Wong and He) and 龍圻溱 (as representative of Bun):

(1)  Vickki (as chairman of the meeting) decided that:

(a)  the proxy produced by 龍圻溱at the meeting was invalid, and he was not allowed to attend the meeting as Bun’s representative;

(b)  only shareholders who had paid up on their shares and provided proof to the Firm were entitled to vote. According to Mr Fan Cheuk Siu Andas (范卓紹), an accountant (“Accountant”) present at the meeting, only Jackpot and Dr. Wong were entitled to vote on their 10,000,960 shares and 900,000 shares respectively (“Entitlement to Vote Decision”);

(c)  the suggestion by Chan Kwai Chen to the effect that all the registered shareholders were entitled to vote was overruled.

(2)  It was resolved by a majority (with Dr. Wong objecting), inter alia that:

(a)  As some shareholders had failed to provide proof of their capital contribution, the matter would be reported to the Court and steps would be taken to strictly enforce the same;

(b)  Upon the Accountant’s verification, it was confirmed that Jackpot had paid up the full amount on its 10,000,960 shares while Dr. Wong had paid up on 900,000 shares;

(c)  It was not possible to prepare any accounts as the accounting records were unclear and the supporting documents were incomplete; and

(d)  Fan and Yang were appointed as directors (“Appointment Resolution”).

35.By letter dated 13 September 2013 Messrs Kelvin Cheung & Co (“KCC”), solicitors for Liao, Ju, He, Rong and Dr. Wong, stated that Vickki had no power to make the Entitlement to Vote Decision as the Company had never made any calls requiring Ps to pay up the amounts payable on their shares. Therefore, all the resolutions passed at the 2^nd GM were void.

36.By a written resolution dated 18 September 2013 passed by Rong, Wang and Bun as majority of the directors in accordance with article 111 of the Company’s AA:

(1)  it was resolved that the Company accepted KCC’s allegations that Vickki had no power to make the Entitlement to Vote Decision and all the resolutions passed at the 2^nd GM were void;

(2)  the proposed resolution to forfeit the shares issued if the shareholders are not able to provide proof of their capital contribution within 14 days was not passed;

(3)  the proposed resolution to appoint Fan and Yang as directors was not passed; and

(4)  the proposed resolution to appoint Chow and Bun as director of the Subsidiary was not passed.

B4.  Summary and Call Notices

37.In September 2013, Vickki prepared a “Summary of Funds Paid-in (excluded those from Jackpot) and cash withdrawals – Jun 26, 2013” (“Summary”) based on the documents she obtained from WL Account[6].

(1)  The Summary shows that between 28 June 2010 and 14 May 2013, a total amount of HK$14,406,306 was paid into WL Account while a total amount of HK$4,748,000 was withdrawn from the same Account, leaving a balance of HK$9,658,306.

(2)  Vickki provided the Summary to Dr. Wong to assist Ps to declare their capital contributions and to provide documentary proofs if they were the payers of the amounts paid into WL Account.

(3)  Nevertheless, Vickki claims that the Summary does not contain any “admission” as she could not verify its accuracy against the books and accounts of the Company which have been withheld by Ju and Woo.

38.Vickki and Chow proceeded to hold the 4^th board meeting on 19 September 2013 (“4^th BM”), which was attended by them alongside with Fan, Yang and Bun (Rong and Wang being absent):

(1)  Bun stated that the meeting should not be held as the directors had already passed a written resolution accepting the allegations made by KCC and left the meeting;

(2)  Thereafter, it was resolved by the other 4 directors, inter alia, that:

(a)  If the shareholders fail to provide proof of their capital contribution to the Firm within 14 days, their shares would be forfeited (“Proof Resolution”); and

(b)  Vickki was appointed as Chairman and Chow as Managing Director of the Company.

39.On the same day the Proof Resolution was passed (i.e. 19 September 2013) Vickki on behalf of the board, issued notices to Liao, Ju, Rong, Bun, He, Wang and Dr. Wong (collectively “Call Notices”) which stated that in accordance with article 41 of the Company’s AA, they were required to pay the outstanding capital together with interest thereon and provide proof of payment to the Firm by 10 October 2013, failing which their shares would be forfeited.

40.Under the Call Notices, the amounts required to be paid by the 7 shareholders were as follows:

Shareholder	Outstanding Capital   (HK$)	Due Date	Interest   (HK$)
Ju	3,500,000	3/8/2011	544,739
Rong	3,800,000	3/8/2011	915,369
He	2,000,000   460,000	3/8/2011   19/4/2012	425,753   65,408
Bun	3,420,000	19/4/2012	485,358
Wang	1,000,000	3/8/2011	212,876
Dr. Wong	617,000	13/4/2012	87,394
Liao	4,500,000	13/4/2013	646,027
Total	19,297,000		3,382,924

41.On 25 September 2013, Vickki issued a notice to convene the 5^th board meeting to be held on 27 September 2013 to discuss (1) KCC’s letter dated 17 September 2013; (2) appointment of Chow and Bun as directors of the Subsidiary; and (3) convene a general meeting to be held on 25 October 2013. At the meeting, only resolution (3) was passed.

42.On the other hand, on 26 September 2013, Rong circulated written resolutions to be passed by the directors on 30 September 2013 resolving that (1) the resolutions passed at the 2^nd GM were invalid; (2) the appointment of Fan and Yang as directors was invalid and, therefore, the resolutions passed at the 4^th BM were invalid; (3) the Proof Resolution be withdrawn. Rong, Wang and Bun voted for, while Vickki, Chow, Fan and Yang voted against all the resolutions.

43.This was followed by a letter from KCC dated 27 September 2013 to the Company complaining about the irregularities in the Appointment Resolution, the Proof Resolution, the Call Notices and stating that Ju, Rong, He, Wu and Bun “were given the privilege to defer payment of their share capital” when they subscribed for shares in the Company as they had contributed their relationship with the JV Partner and the customers to the Company and the Subsidiary. In the same letter, Ps demanded Vickki to repay the Sum to the Company.

44.At the 7^th board meeting held on 2 October 2013 attended by Vickki, Chow, Fan and Yang, it was resolved that (1) the Company would reply to KCC’s letter; (2) as Bun had failed to attend the directors meeting, his appointment as director of the Subsidiary was revoked; and (3) the seal of the Company had been passed by Ju to Vickki and only A&F could act as company secretary.

45.On 11 October 2013, Vickki issued notice to convene the 8^th board meeting to be held on 17 October 2013 for the purpose of passing resolutions (1) to forfeit the shares issued to Rong, Bun, Ju, He and Wang forthwith; and (2) to forfeit the shares issued to Liao and Dr. Wong unless they provide documents to substantial their capital contribution within the next 10 days. However, it was only until 23-24 April 2014 that Ps provided the minutes of this 8^th board meeting to Ps (see §49 below).

B5.  1^st and 2^nd Forfeiture Resolutions

46.On 4 October 2013, Ps commenced Action 1. On 16 and 18 October 2013, Ps obtained interlocutory injunctions in Action 1 restraining Ds from (1) convening a board meeting to pass any resolution to forfeit their shares and (2) convening a general meeting to pass any resolution for retirement and re-election of directors.

47.On 16 April 2014, DHCJ Wilson Chan (as he then was) discharged the injunctions.

48.On 11 March 2014 and 30 April 2014, KCC on behalf of Rong, He and Liao sent payments or documents evidencing payments to the Company as follow:

(1)  By letter dated 11 March 2014 to Messrs. Chan & Cheng (“C&C”), solicitors for Ds, KCC confirmed that He and Liao had paid HK$2,460,000 and HK$4,500,000 in respect of their shares. As for Rong, she had paid at least HK$1,815,600 and only HK$1,984,400 remained unpaid. KCC enclosed 2 cheques in the total amount of HK$1,984,400. However, C&C returned the cheques to KCC on 14 March 2014 on the ground that they did not act for the Company.

(2)  By letter dated 30 April 2014 to the Company, KCC referred to the Call Notice issued to Rong and enclosed a cashier order for HK$3,800,000 as payment of capital for the shares and their cheque for HK$915,369 as interest, and reserved Rong’s right to challenge the demand on the basis that it had not been authorised by any resolution.

(3)  By another letter dated 30 April 2014 to the Company, KCC stated that He had already paid HK$1,837,223 to the Company, and only HK$622,777 remained unpaid. They enclosed a cashier order for HK$622,777 and their cheque for HK$491,161 as interest and reserved He’s right to dispute the liability to pay such interest.

(4)  By another letter to the Company, KCC on behalf of Liao, Rong and He stated that the Company should not shift the burden to the shareholders to prove that they had not paid for the shares, and enclosed a schedule and documents evidencing that Liao, Rong and He had paid HK$6,343,737 into WL Account between 28 July 2011 and 14 May 2013.

49.On 23 and 24 April 2014, Vickki sent 2 versions of minutes of the 8^th board meeting to Ps. The amended version stated that the following resolutions were passed pursuant to article 42 of the Company’s AA (collectively “1^st Forfeiture Resolutions”):

(1)  The shares issued to Ju, Rong, Bun, He and Wang were forfeited for failure to make payment on or before 10 October 2013 as required by the Call Notices; and

(2)  As Liao and Dr. Wong claimed that they had already paid for their 4,500,000 shares and 617,000 shares, a further notice would be issued requiring them to provide “documentary proofs [sic] of the alleged payment” within 10 days of the notice, failing which their shares would be forfeited.

50.On 29 April 2014, Vickki issued a notice to the directors requiring them to vote on the proposed written resolutions to (1) cancel the 1^st Forfeiture Resolutions; (2) allow Liao and Dr. Wong to provide all documents to prove that they had paid for their shares by 5 May 2014; (3) to forfeit the shares issued to Rong, Bun, Ju, He and Wang forthwith and (“2^nd Forfeiture Resolution”). Vickki, Chow, Fan and Yang approved all the resolutions (collectively “29/4/2014 Resolutions”) on the same day.

51.On 30 April 2014, Rong, He, Ju, Bun, Wang received notices from the Company stating that pursuant to the 2^nd Forfeiture Resolution, all their shares had been forfeited.

52.By letter dated 2 May 2014, KCC stated that the 29/4/2014 Resolutions were invalid as no proper notice had been given to Rong, Bun and Wang.

53.On 7 May 2014, the Company returned all the cheques previously sent by KCC to the Company.

54.On 13 May 2014, Liao and Dr. Wong received notices from the Company stating that pursuant to the 2^nd Forfeiture Resolution, all of Liao’s shares and 617,000 shares of Dr. Wong had been forfeited.

55.Thereafter, in June and July 2014, Ps and Ds proceeded to convene and hold general meetings and board meetings of the Company and purported to pass resolutions to invalidate the previous resolutions passed by the other camp.

B6.  Settlement Agreement

56.Prior to the meeting on 2 January 2017, Vickki and Chow had been discussing with Tung on the possibility of buying out the Company’s interest in the Subsidiary including their interest in the Company.

57.On 2 January 2017, a meeting was held at a hotel run by Liao in Shenzhen (“2017 Meeting”). The 2017 Meeting:

(1)  was attended by Liao, He, Mr Huang Guanghui (“Huang”) (Rong’s husband, as representative of Rong, Bun and Dr. Wong), Vickki, Chow, Tung (and his legal representative) and Ms Tian Jie, an employee of the Subsidiary (“Tian”)[7];

(2)  lasted for 11 hours, at around 11:30pm, Jackpot, Vickki and Chow (as Party A) and Rong, Liao, He, Dr. Wong and Bun (as Party B) entered into the SA (in Chinese), which were signed by all parties at or shortly after the 2017 Meeting; and

(3)  Tung, Liao, Vickki, Chow, Tian and Huang also signed the minutes of the 2017 Meeting (“2017 Minutes”).

58.The SA (as translated) provides, inter alia, that:

“1. Both parties agree to confirm the following shareholding structure (paid up capital) of [the Company]:

· [He] HKD1,200,000

· [Dr. Wong] HKD1,100,000

· [Rong] HKD2,099,142

· [Liao] HKD4,506,514

· [Bun] HKD1,001,650

· [Jackpot] ([Vickki / Chow]) HKD10,054,078

2. The two parties agree to settle their dispute, and will no longer pursue any legal liability against the other party, and will withdraw all legal proceedings against the company and shareholders, and will no longer pursue any company-related expenses from the other party.

3. Both parties agree to cooperate in the transfer to external parties of the shares of [the Company] held by the two parties.

Upon receipt of the transfer payment for the shares held by the two parties, transfer 1.32 million Hong Kong dollars of the total transfer amount to Party A’s designated bank account, then divide the transfer amount according to the proportion of shareholding in paragraph 1 of this agreement.

If the share transfer payment arrives in multiple installments [sic], then upon receipt of each installment [sic], transfer [(132/Total Transfer Amount) * the amount of that instalment] Hong Kong Dollars to Party A’s designated Bank Account, thereafter divide the transfer amount according to the proportion of shareholding in paragraph 1 of this agreement.

4. After the share transfer, the receipt of payment method is negotiated by the two parties, it can be handled by a third-party law firm or accounting firm in accordance with the content of this agreement.

5. Party B guarantees all payments made into the Company’s bank account by any party that is not Party A, if at any time the company is being pursued by a payer company to recover money or dispute arises out of the payment, Party B is fully responsible and promises to compensate the related losses.

6. This agreement is made in seven copies, with each signatory holding one copy.”

59.The 2017 Minutes stated, inter alia, that:

(1)  The JV Partner agreed to purchase the Company’s 80% shareholding in the Subsidiary at RMB16 million, to be paid by 1 November 2017 (§1).

(2)  The JV Partner agreed to pay RMB10 million to the Company first, and upon receipt of the receivable payable by the local government to the Subsidiary, the JV Partner would pay 15% thereof to the Company’s shareholders (§2).

B7.  Negotiations with Tung

60.After the 2017 Meeting, Liao continued to negotiate with Tung with a view to sell the Company’s equity in the Subsidiary to the JV Partner.

61.The negotiations with Tung fell through as Liao refused to hand over to Tung the Subsidiary's chops and seal before receiving any payment from him.

62.On 2 May 2017, Tian was appointed as the Company’s representative at the Subsidiary as well as the Subsidiary’s office director and treasurer. In May 2017, Vickki requested Tian to hand over the books of accounts, chops and seal of the Subsidiary but to no avail.

63.On 4 August 2017, Vickki dismissed Tian. In July 2017, Vickki declared that the Subsidiary’s chops and seal had been lost and replaced them with new chops and seal.

64.On 30 May 2018, Ps commenced Action 2 against Main Ds claiming that:

(1)  Main Ds caused the Company to act in breach of the Core SHA by repeatedly attempting to forfeit Ps’ shares and not accepting the payments tendered by Ps[8];

(2)  If, contrary to Ps’ understanding, belief and intention that the 1^st, 2^nd and 3^rd Contributions were made pursuant to the Core SHA, they were made under a mistake and/or that the consideration for such payments wholly failed, and the Company has been unjustly enriched by such Contributions[9];

(3)  Main Ds acted in breach of the SA by sided with and assisted Tung to gain control over the Subsidiary. This adversely affected the value of Ps’ interest in the Company, and they have not been able to sell the same[10]; and

(4)  Main Ds are estopped from denying that Rong, Liao, He, Dr. Wong and Bun has paid for their respective number of shares as stated in the SA[11].

C.  PARTIES’ CASES AND ISSUES

65.At trial, Ms Ling puts Ps’ case in this way:

(1)  Vickki has misappropriated the Sum and should be ordered to repay the same to the Company.

(2)  Prior to the Call Notices, Ps already paid the following amounts to the Company as their capital contributions, evidenced by the bank documents and the Summary (“Table”):

Shareholder	Date of Payment	Amount   (HK$)	Reference
Rong	28/7/2011	599,990	Summary [C4/151/1146];   WL advice [C3/127A/865-4];   Huang WS §20(1)
	3/5/2013	1,374,474	ABC[12] advice [C2/90/646];   WL statement [C2/85/624];   Huang WS §38(1)
	14/5/2013	124,678	WL advice [C2/85/624];   Huang WS §38(2)
	Sub-total:	2,099,142
Bun	12/12/2011	60,000	WL deposit [C2/82/621];   Huang WS §20(2)
	13/12/2011	60,000
	14/5/2013	375,500	WL statement [C2/84/624];   Huang WS §38(3)
	Sub-total:	495,500
He	1/8/2011	1,200,000	WL statement [C2/81/620];   Huang WS §20(3)
Wu (transferred to Dr. Wong)	28/7/2011	200,000	WL slip [C2/80/619];   Huang WS §20(4) [B/3/199]
Liao	30/11/2012	371,277	Summary [C4/151/1146];   Huang WS §33 [B/3/201]
	3/12/2012	2,475,237
	8/1/2013	87,500
		55,000
	9/1/2013	1,517,500
	Sub-total:	4,506,514
Dr. Wong	30/11/2012	600,000	WL slip [C4/155/1163];   Summary [C4/151/1146];   Huang WS §33 [B/3/201]
	13/12/2012	300,000
	Sub-total:	900,000
	TOTAL	9,401,156

(3)  The Core SHA is evidenced by a board resolution dated 3 August 2011 and is binding upon the Company. It was because of the Core SHA that Ps did not pay the capital in full. Ds had no basis to refuse the payments tendered by KCC on 11 March and 30 April 2014.

(4)  Woo remitted the Sum to Vickki’s bank account with the intention that she would transfer the same to the Company, but Vickki failed to do so.

(5)  The Core Shareholders had paid the 1^st Contribution to the Company as initial investment for remittance to the Subsidiary pursuant to the Core SHA. In late December 2012, Liao and Dr. Wong paid the 2^nd and 3^rd Contributions for the shares transferred to them. In addition, although not required to do so under the Core SHA, Ps made 2 attempts to pay the outstanding share capital but were rejected.

(6)  The SA was entered into voluntarily between the parties during the 2017 Meeting.

(7)  Vickki and Chow acted in breach of the SA by replacing the chops and seal of the Subsidiary in August 2017 and siding with and assisting Tung to gain control over the Subsidiary. The chops and seal had been under the possession of Tian, with approval of all the parties including Tung, Vickki and Chow, and there was no basis for Vickki to report their loss.

66.On the other hand, Ms Joyce Chan, counsel for Ds, put their case as follows:

(1)  Ds deny the existence of the Core SHA or that there was a special class of Core Shareholders. Alternatively, the Core SHA was invalid as it was made contrary to the fiduciary duties owed by Ju to the Company and/or superseded by the undertakings contained in the allotment documents.

(2)  Jackpot was formed in the context of and pursuant to an oral agreement made between Woo, Vickki and Chow following a series of discussion in around March 2012 (“JFA”). As part of the JFA, Jackpot was acquired as the vehicle to hold the joint investment in the Company, with 80% shares held by Vickki/Chow and 20% held by Ju, and Woo would pay to Vickki/Chow HK$6,000,000 in 3 tranches of HK$2,000,000 each.

(3)  The Sum was transferred to Vickki pursuant to the JFA, and was not misappropriated from the Company.

(4)  Save for the 3^rd Contribution paid by Dr. Wong, Ds deny that Ps have paid for their shares. The outstanding capital had fallen due long before Ps’ attempts to pay the same to the Company, and it was improper for the Company to receive the payments tendered by KCC in March and April 2014.

(5)  The SA is unenforceable against Main Ds as Vickki and Chow were “induced” to sign the same at the 2017 Meeting[13]; and

(6)  Main Ds deny that they acted in breach of the SA. The negotiations with Tung fell through because Ps refused to hand over to Tung the chops and seal. As Ps had failed to return the chops and seal, Ds had no choice but to report their loss in July 2017 and obtained their replacement in August 2017.

67.In the Agreed List of Issues prepared by counsel, they identified the following 14 issues based on the pleadings:

(1)  Whether Vickki has misappropriated the Sum;

(2)  What is the amount of capital paid by Ps;

(3)  Whether the Core SHA existed and, if so, whether it is valid and enforceable;

(4)  Whether the resolutions passed at the 2^nd GM, the board resolutions passed at the 4^th BM and the 29/4/2014 Resolutions were valid;

(5)  Whether the Company was entitled to forfeit Ps’ shares in light of the Core SHA and Ps’ attempts to make payments to the Company;

(6)  Whether Ds acted in breach of the Core SHA by attempting to forfeit Ps’ shares and not accepting the payments tendered by Ps;

(7)  Whether the Company was unjustly enriched by the amounts paid by Ps;

(8)  Whether the SA is enforceable;

(9)  Whether Main Ds acted in breach of the SA;

(10)  Whether Main Ds are estopped from denying that Ps had paid for their shares as stated in the SA;

(11)  Whether Ps are entitled to declarations that (a) the purported forfeiture of their shares is invalid; (b) Ps are shareholders of the Company as pleaded in §§17, 23-24 of SOC2 (as described in §§20 and 27 above) and upon payment of the outstanding capital, the Company do reinstate their shareholdings; and (c) alternatively, Ps’ shareholdings are those stated in the SA;

(12)  Whether Ps are entitled to repayment of the 1^st, 2^nd and 3^rd Contributions;

(13)  Whether Ps have suffered any loss and damage as a result of (a) the forfeiture of their shares in breach of the Core SHA; and (b) breach of the SA by Main Ds; and

(14)  Whether Ds are entitled to (a) a declaration that Fan and Yang were properly appointed directors by the Appointment Resolution; (b) a declaration that the Company’s board was entitled to forfeit Ps’ shares at any time; and (c) rescission of the Core SHA.

68.Ms Ling opens Ps’ case by submitting that Ps primarily rely on the SA. When questioned by this Court, Ms Ling accepts that if the SA is enforceable, Ps have no right to pursue Action 1. She submits that Ps continued to pursue Action 1 only because Main Ds dispute the validity of the SA.

69.Except Wang and Ju, all of Ps and Main Ds are parties to the SA. Ms Ling confirms in her oral opening that neither Wang nor Ju paid any capital to the Company and they do not dispute the fact that He, Dr. Wong, Rong, Liao, Bun and Jackpot have paid the capital stated in §1 of the SA.

70.While Ps have not sought specific performance of the SA in SOC2, this Court invited the parties to consider if the SA is found to be valid, whether the parties accept that it is appropriate to order specific performance of the SA. This is because in §2 of the SA, the parties agreed to settle all their disputes and will withdraw all legal proceedings against the Company and the shareholders. Both counsel in their written closing submissions confirm that their clients accept that it would be appropriate to order specific performance of the SA, should the Court find that it is enforceable.

71.Accordingly, the main issues which require determination of the Court are whether the SA is enforceable and, if so, whether Main Ds acted in breach of the SA (SA Issue).

72.While the SA, if enforceable, operates as an estoppel to bar the parties’ right to pursue any claim in relation to the disputes covered by the SA, in light of the fact that the parties have adduced evidence and made full submissions on all the issues raised in the pleadings and the Company, Fang and Yang are not parties to the SA, I will address the following issues:

(1)  What is the amount of capital paid by each of Ps to the Company (Capital Contribution Issue);

(2)  Whether the Core SHA existed and what are its terms. If the Core SHA existed, whether it is liable to be “rescinded” (Core SHA Issue);

(3)  Whether the 2^nd GM and the Appointment Resolution are valid (Appointment Issue);

(4)  Whether Ds were entitled to procure the Company to forfeit Ps’ shares specifically, (a) whether the 4^th BM and the Proof Resolutions are valid; and (b) whether the 2^nd Forfeiture Resolution are valid (Forfeiture Issue); and

(5)  Whether Vickki misappropriated the Sum from the Company (Misappropriation Issue).

D.  EVIDENCE

D1.  Applicable Principles

73.The approach of the Court in fact finding and assessment of credibility has been sufficiently stated by DHCJ Eugene Fung SC in Hui Cheung Fai & anor v Daiwa Development Ltd & ors, HCA 1734/2009, 8 April 2014, §§77-81, and may be summarised as follows:

(1)  Generally, contemporaneous written documents and documents which came into existence before the problems in question emerged are of the greatest importance in assessing credibility.

(2)  In deciding whether to accept a witness’ account, importance should also be attached to the inherent likelihood or unlikelihood of an event having happened, or the apparent logic of events.

(3)  In determining a witness’ credibility, it is important to consider the consistency of the witness’ evidence with undisputed or indisputable evidence, and the internal consistency of the witness’ evidence as between his oral testimony and witness statement.

(4)  The Court has to guard against the danger of too readily drawing conclusions about truthfulness and reliability solely or mainly from the appearance of witnesses, or from the assessment of the witnesses’ character.

74.As regards burden of proof, the principles stated in Phipson on Evidence, 20^th ed., §6-06 are relevant:

“So far as the persuasive burden is concerned, the burden of proof lies upon the party who substantially asserts the affirmative of the issue. Where a given allegation, whether affirmative or negative, forms an essential part of a party’s case, the proof of such allegations rests on that party. If, when all the evidence is adduced by all parties, the party who has this burden has not discharged it, the decision must be against him. This is an ancient rule founded on considerations of good sense and should not be departed from without strong reasons.

This rule is adopted principally because it is just that he who invokes the aid of the law should be the first to prove his case; and partly because, in the nature of things, a negative is more difficult to establish than an affirmative. The burden of proof is fixed at the beginning of the trial by the state of the pleadings, and it is settled as a question of law, remaining unchanged throughout the trial exactly where the pleadings place it, and never shifting.

In deciding which party asserts the affirmative, regard must be had to the substance of the issue and not merely to its grammatical form; the latter the pleader can frequently vary at will. Moreover, a negative allegation must not be confused with the mere traverse of an affirmative one. The true meaning of the rule is that where a given allegation, whether affirmative or negative, forms an essential part of a party’s case, the proof of such allegation rests on him. An alternative test, in this connection, is to strike out of the record the particular allegation in question, the onus lying upon the party who would fail if such a course were pursued.” (underlined added)

75.As regards the drawing of adverse inferences from the absence of a witness, the following principles stated in Phipson on Evidence, 20^th ed., §45-35 are relevant:

“The court may be entitled to draw adverse inferences from the absence of a witness who was available to and might have been called by a party. However, the court does not usually do so, not least because there may be all sorts of reasons why a particular witness is not called and one usually cannot be confident to infer what the witness would actually have said. Further, in general it is for a party to choose which witness he wishes to call and there is no property in a witness, and in the case of a witness in the jurisdiction the opposing party can seek to compel a witness’s attendance by means of a witness summons.

It is in a comparatively small number of cases that it would be appropriate to draw an adverse inference, but where it is sought to do so, the party inviting the court to exercise such a discretion must:

(1) Set out clearly (a) the point on which the inference is sought and identifying the inference sought; (b) the reason why it is said that the missing witness would have material evidence to give on that issue; (c) why it is said that the party seeking to have the inference drawn has himself adduced relevant evidence on that issue; and (d) why the party seeking the inference could not himself be expected to call or witness summons the witness.

(2) Explain why such inference is justified on the basis of other evidence that is before the court.

It is then open to the other party to resist such an inference by giving a good reason why the witness is absent or silent. If he is able to do so, then no inference should be drawn. If there is some credible explanation given, even if not wholly satisfactory, the potentially detrimental effect of his absence or silence may be reduced or nullified.”

D2.  Ps’ witnesses

76.Huang and Tian give oral evidence on behalf of Ps.

77.It is clear from the cross-examination of Huang that save for the Core SHA, most of the facts and matters stated in his WS are not really in dispute. These include the fact that:

(1)  Rong holds her shares on behalf of Huang and he directed Rong to act in relation to all matters concerning the Company;

(2)  Huang was invited by Woo to invest in the Company;

(3)  Huang, in turn, invited He to invest in the Company;

(4)  Huang does not know how much each shareholder paid to the Company by way of initial investment or why the number of shares allotted to each shareholder is different, as these were matters decided and handled by Woo;

(5)  Huang was told by Woo (who controlled the Company through Ju) that the shareholders only need to pay the balance of the capital payable on their shares until the end of 2014 which, according to Ps, is the Core SHA;

(6)  Rong paid HK$2.1 million, in 3 tranches, by way of initial investment. These payments are corroborated by the bank documents of the WL Account, the original remittance advices as well as the Summary prepared by Vickki (see Table). Although Ms Chan tries to cast doubt on the first payment (HK$599,990) on the basis that it was remitted by Huang’s friend who does not come forth to give evidence at trial, I do not see why it is necessary to do so when the fact of such payment can readily be seen from the documents;

(7)  The same goes to the other payments described in the Table. As pointed out by Huang, the fact that the originals of the remittance advices and deposit slips are kept by the payers shows that they paid or procured the amounts be paid into WL Account. Other than pointing out that Huang’s WS mistakenly stated WL Account number as the account number of the payers, which Huang readily accepts, Ms Chan is not able to cast doubt on the fact that the payments described in the Table were paid to the Company and that such payments were paid by or on behalf of the shareholders named in the Table; and

(8)  Haung is able to speak for other Ps as he has maintained a close relationship with them.

78.Huang provides his answers in a straightforward manner. He readily accepts that he has no knowledge of events to which he was not privy. He is cross-examined by Ms Chan at some length and his evidence remains consistent with what is stated in his WS as well as contemporaneous documents. I consider that Huang is an honest witness.

79.As for Tian, it is not in dispute that until she was dismissed in August 2017, she was the authorised representative of the Subsidiary and has first-hand knowledge of the matters relating to the chops and seal. She gives clear and candid answers to questions relating to the 2017 Meeting and how she came to be in possession of the chops and seal. Her evidence is consistent with and corroborated by contemporaneous documents.

80.Ms Chan submits that none of Ps comes forth to give evidence and invites the Court to draw adverse inference against them to the effect that if called, their evidence would not be favarouble to Ps’ case. Ms Ling submits that Huang is in the best position to give evidence on behalf of Ps given that (1) he has all along been treated as a shareholder by the other shareholders; (2) he has been the point of contact between Ps and Ds; and (3) he was present at the 2012 Meeting and the 2017 Meeting. Explanations are proffered for the absence of other potential witnesses: He, who made a WS in Action 2, is unable to travel to Hong Kong from Mainland to testify since his pregnant wife is due, while Woo can no longer be contacted.

81.I do not think that this is a case where the Court can or should draw any adverse inference against Ps for the following reasons:

(1)  Ms Chan has not identified any evidence which she contends can only be given by Ps or why such evidence would not assist Ps’ case;

(2)  As can be seen from section B, almost all the factual events relevant to the issues are either not in dispute or can readily be discerned from the documents disclosed by the parties, and are indisputable;

(3)  There is no property in witness. It is open to Ds to call Woo to give evidence but they have not done so. It is not in dispute that Woo has since late 2012 ceased to be involved in the Company, and had no involvement in the events relevant to the issues between the parties other than the Misappropriation Issue;

(4)  In any event, Ps have provided reasons for the absence of He and Woo. It is clear from the cross-examination of Huang that Ds do not really dispute that Huang was intimately involved in the Company’s affairs and has personal knowledge on those events which require oral evidence of the parties, viz., the Core SHA, the 2012 Meeting and the 2017 Meeting. While there are matters on which Huang is unable to give evidence, such as introducing investors and administering the initial capital injection which were handled by Woo, it is not suggested that Ps would be able to give such evidence either; and

(5)  Looking at the matter in the round, only Vickki comes forth to give evidence on behalf of Ds. This is despite the fact that the validity of the resolutions procured to be passed by Ds is very much in issue. No explanation has been provided by Ds to explain the absence of Chow, Fan and Yang.

D3.  Ds’ witness

82.Only Vickki gives evidence on behalf of Ds. At trial, Ms Chan tries to rely on an affirmation of Vickki dated 28 November 2013 made in support of Ds’ application for a discharge of the injunctions in Action 1. No prior application for leave to adduce such affirmation as evidence has been made. I do not think there is any basis to accede to Ms Chan’s belated application made during trial for leave to adduce Vickki’s affirmation as evidence.

83.Vickki in her WS makes extensive references to her affirmation as background and repeatedly accuses Ps for engaging in fraudulent conduct in respect of most of the meetings and resolutions convened or passed by Ps’ camp. However, when it comes to matters which are undisputable such as the fact that she alone was able to obtain all documents relating to WL Account and the Summary shows that substantial amounts were paid into WL Account, which are supportive of Ps’ case, she just gloss over them by asserting that Ju held all the books and accounts of the Company. The assertion cannot be right as Vickki became the sole signatory of the WL Account in place of Ju in as early as November 2012.

84.Under cross-examination, Vickki has a tendency to give very long answers covering matters which have nothing to do with the questions so as to bring into evidence matters which not been dealt with in her WS. Her answers at times are convoluted and argumentative, particularly when she is shown contemporaneous documents which are unfavourable to Ds’ case or contradictory to her evidence. As will be seen in section E1 below, Vickki’s evidence is often inconsistent with contemporaneous documents and is self-contradictory. In particular, I find that the alleged “duress” to be a complete fabrication.

85.Vickki’s evidence on the dispute over the chops and seal is contradicted by contemporaneous documents and does not inspire confidence. I give some obvious examples:

(1)  As regards when Tian began to possess the chops and seal, Vickki asserts in oral evidence that Tian has been in possession since 2013. When she is shown a hand-over list dated 3 November 2014 which included the chops and seals, she says that the hand-over list was merely a paperwork to formalise the arrangement.

(2)  Contrary to Vickki’s allegation that since Tian obtained possession of the chops and seals in 2013, Vickki had been requesting Tian to return the same to the Subsidiary but she refused. This is flatly contradicted by the board resolution dated 2 May 2017 signed by Vickki which authorised Tian to take possession of the Subsidiary’s chops and seals qua the Company’s Hong Kong representative and their WeChat conversations in May 2017.

(3)  When Vickki is asked about the transfers of RMB2 million and RMB22 million out of the Subsidiary’s bank account on 14 and 20 July 2017, she says that the transfers were done by Tung. However, she is unable to explain how Tung was able to make the transfers in July 2017 if Tian (acting under the instructions of Ps) refused to return the chops and seal to Tung as such chops and seal were required to make the transfers.

86.It seems to me that much of Vickki’s evidence in particular what she said in her WS is not credible and cannot be believed. I prefer the evidence of Huang and Tian to the extent that it is inconsistent with the evidence of Vickki.

E.  DISCUSSION

E1.  SA Issue

87.It is well established that persons of full age and understanding are bound by the documents they signed unless they can establish a recognised legal basis to disown such documents. For this purpose, the facts constituting the particular vitiating factor relied on must be pleaded and established by the evidence (Ming Shiu Chung & ors v Ming Shiu Sum & ors (2006) 9 HKCFAR 334 at §§84-87, per Ribeiro PJ).

88.Until Defence2 was filed on 31 August 2018, there was no suggestion by Ds that the SA was not valid or enforceable as against the parties. In Vickki WS, it is alleged, for the first time, that the SA was signed under “duress” (a label she used in the sub-heading before §78)[14]. Ms Chan in her opening submits that the SA “is vitiated by duress and therefore unenforceable”, in reliance on §53(b) of Defence2. However, it is clear that Ds did not plead duress, let alone the facts constituting such duress in Defence2. Instead, the only fact pleaded in §53(b) of Defence2 is this:

“[Ps] then called for the [2017 Meeting] which lasted for at least 7 hours. During the [2017 Meeting], [Ps] continuously pressurized Vickki and Chow to sign the [SA] without taking proper legal advice by inter alia not allowing them to leave. As a result, Vickki and Chow were eventually induced to sign the same at around midnight”

89.Ms Chan in her opening contends that Ds’ case is one of “duress of the person”, relying on Universe Tankships Inc of Monrovia v International Transport Workers Federation [1983] 1 AC 366, 400-401; Enonchong, Duress, Undue Influence and Unconscionable Dealing, 3^rd ed., §§4-002, 5-002 to 5-003; Barton v Armstrong [1976] AC 104, 121G-H.

90.The principles applicable to duress are not in dispute and may be summarised as follows:

(1)  The basis of the defence of duress is that it deprives the victim of any practical choice other than to enter into the contract. There are two questions: first, whether the pressure or threat is legitimate; second, the effect on the victim (H v N, CACV 261/2010, 16 November 2011, §45, per Fok JA (as he then was)).

(2)  The rationale is that the victim’s apparent consent was induced by pressure exercised upon him by that other party which the law does not regard as legitimate, with the consequence that the consent is treated in law as revocable unless approbated either expressly or by implication after the illegitimate pressure has ceased to operate on his mind (Universe Tankships, at 384, per Lord Diplock).

(3)  Duress of the person is a threat to the life, health or liberty of an individual to induce the person threatened to enter into a contract. A threat of physical violence is the most obvious form of pressure. An unlawful detention or an illegitimate threat to imprisonment can constitute duress even though there is no threat to life or limb (Duress, Undue Influence and Unconscionable Dealing, §§5-002 to 5-003). The threat of violence can be directed at the claimant, the claimant’s spouse or near relation (Chitty on Contracts, 34^th ed., §10-017).

(4)  Where duress to the person is asserted, the test for causation is not the “but for” test. Rather, it is sufficient that the threat was a reason for the victim entering the contract: not only it did not have to be the predominant reason, but the victim was entitled to relief even if he had not shown that he would not have entered the contract without the threat (MIR v MIR [2013] 4HKC 213, §51, per Fok JA (as he then was)).

(5)  The burden is on the victim to prove that threats to the person were made for the purpose of inducing the contract. Once proven, the burden of proof is reversed such that it is up to the counterparty who made the threats to prove that the threats were not even “a” reason why the victim entered the contract (MIR v MIR, §51).

(6)  The availability of a reasonable alternative, including the availability of independent advice, will not be relevant in the case of duress to the person where the victim needs only show that the threat was “a” cause of the contract (MIR v MIR, §56).

91.Ms Chan makes 2 points which she says apply to the present case:

(1)  A protest made at the time of entering into an agreement only serves as evidence of the causative effect of the illegitimate pressure, but this is neither sufficient nor necessary for relief (Duress, Undue Influence and Unconscionable Dealing, §4-019).

(2)  Where the complainant did not receive legal advice and did not understand the circumstances before entering into the transaction, the court may infer that the threat had a causative effect on the decision to do as the threatener demanded. (Duress, Undue Influence and Unconscionable Dealing, §4-028).

92.I do not think that Main Ds have pleaded the essential elements to sustain a case on duress:

(1)  It is well settled that serious allegations such as illegitimate conduct must be specifically pleaded and with utmost particularity;

(2)  In Defence2, there was no plea on any illegitimate pressure or threat, let alone with specificity and utmost particularity, having been applied to Vickki and Chow before they signed the SA; and

(3)  Even if (which I do not think is right) one can take the plea “not allowing them to leave” as illegitimate pressure, there was no plea on who applied the alleged pressure. This is fortified by the fact that the only allegation is that Ps “continuously pressurize Vickki and Chow” when it is not in dispute that amongst Ps, only Liao and He were present at the 2017 Meeting.

93.As Main Ds’ pleaded case on duress is demurrable, it is not necessary to consider whether their allegation is established by evidence.

94.Even if, contrary to my view, Main Ds have pleaded the essential elements of duress, I do not think that they have discharged the burden of proving that Vickki and Chow signed the SA under any illegitimate pressure or threats.

95.The following matters concerning the 2017 Meeting are not in dispute:

(1)  In or about May 2016, Tung indicated his interest in acquiring the Company whereupon Liao, Vickki and Chow met and discussed the sale of the Company to Tung several times.

(2)  Prior to the 2017 Meeting, all shareholders thought that there was little hope for the Company and wanted to sell it to a third party.

(3)  Huang on behalf of Ps invited Vickki and Chow to a meeting amongst the shareholders of the Company at a hotel owned and operated by Liao in Shenzhen (“Hotel”). The meeting room is located inside the Hotel and is visible from the outside, as it has glass panels on the side.

(4)  The meeting was attended by Liao, He, Huang, Tian, Vickki and Chow. They met at around 12:30pm. Huang obtained the authorisation of Dr. Wong and Bun to negotiate on their behalf. The first part of the meeting was amongst shareholders only. Owing to the dispute on the shareholdings in the Company, it was necessary for the shareholders to ascertain and agree on the number of shares held by each shareholder.

(5)  During the meeting, the attendees took out their records of payments to the Company including bank statements, remittance advices, deposit and transfers slips. After discussion between the parties, they agreed to (a) the amounts paid up by each of the shareholders, as stated in §1 of the SA; (b) first transfer HK$1.32 million out of the sale proceeds of the Company to Main Ds, as stated in §3. This was to meet the legal costs which Ps were liable to pay to Ds in Action 1; and (c) cooperate in selling the Company’s shares to a third party as stated, in §3 of the SA.

(6)  The SA was drafted by He at the meeting. Chow, He and Vickki signed the SA at the meeting. In the case of Vickki, she signed on behalf of herself and Jackpot and she applied the Company’s seal on the SA.

(7)  Liao only signed the SA the next day. The other parties to the SA who were not present at the meeting, viz., Rong, Dr. Wong and Bun, only signed the SA at a later stage.

(8)  Tung only joined the meeting at around 11pm. After discussion, Tung agreed that the JV Partner would acquire the Company’s 80% equity in the Subsidiary for RMB16 million, to be paid before 1 November 2017. It was further agreed that the JV Partner would pay the Company RMB 10 million and, upon receiving the receivable from the local government, it would pay 15% of the amount to the Company. This is evidenced by the 2017 Minutes.

96.The circumstances under which the SA was signed by Vickki and Chow is hotly disputed.

97.According to Vickki’s WS:

(1)  Liao and the other Ps present expressly said that no one would be allowed to leave until an agreement is concluded. Liao even demanded Tung to contact the investor via telephone immediately. Tung said that he could not confirm with the investor yet.

(2)  Liao then said that he would be willing to buy the shares of Vickki and Chow in the Company at RMB12.5 million and asked Huang to type up an agreement.

(3)  She and Chow said that they had to call a board meeting to consider Liao's proposal and so they must first return to Hong Kong. Liao and the other Ps present said that was irrelevant and repeatedly said that they could only go home after signing (“只要簽好就可以回家去，不簽就不能散會”).

(4)  When they tried to leave the room, Liao and the other Ps present refused to let them leave. The door was locked and there were security guards at the door who also refused to let them leave upon Liao’s instructions. They were at the floor which required an access card to use the lift.

(5)  She and Chow repeatedly said that they would like to seek legal advice but Liao and the other Ps present kept pressurising them to sign.

(6)  Throughout the meeting, she and Chow repeatedly refused to sign any agreement, the other attendees went in and out of the room while they were “stuck in the same room but at least 1-2 of them would leave behind to watch [them])”.

(7)  She and Chow “were too scared to call the police as Liao was a relatively influential political figure in the PRC”.

(8)  She and Chow were “fatigued, hungry and terrified”. They felt like they had no choice but to succumb to Liao's demands. At around 11:30pm, they signed the SA and the 2017 Minutes as they “were desperate to leave the room in fear for [their] safety”.

(9)  It was only after they signed the SA and the 2017 Minutes that they were “finally released”.

(10)  “[She] would like to stress that it was never the intention/will of [her] and [Chow] to sign them and [they] completely disagree with the contents and terms therein (and in fact the contents of the two documents themselves do not exactly correspond with each other). There is no reason for [Chow] and [her] to sign them as that would essentially equate [sic] to us giving up on [their] whole case in [Action 1] and HCCW 120/2014[15] on which [they] had spent a substantial amount of money and [they] already had an upper hand in [Action 1] following the discharge of the [injunctions]. [They] only did so out of fear for [their] safety and the fact that [they] had been detained”

98.In my view, the aforesaid allegations in Vickki’s WS were fabricated by Vickki after she had seen SOC2 where Ps said that Main Ds are estopped from denying that Rong, Liao, He, Dr. Wong and Bun had paid for their shares as stated in the SA. There are 4 main reasons for this.

99.First,the story about Vickki and Chow not being allowed to leave until they signed the SA is shown to be false in that under cross-examination:

(1)  Vickki admits that she and Chow could enter and leave the meeting room freely whenever they wanted to go to the washroom. She no longer says that the meeting room’s door was locked or that there were security guards outside who did not allow them to leave the room.

(2)  Vickki does not dispute that the meeting room is located at 10^th floor, and she and Chow were free to enter and leave that floor and did not require the use of any lift card. Instead, Vickki changes her story and claims that she was accompanied by another person whenever she entered or left the meeting room or the floor. When it is put to her that the person outside the meeting room was there to show her the direction, she admits that she did not move around unaccompanied because she was unfamiliar with the Hotel.

(3)  When it is put to Vickki that the attendees at the meeting were free to and did order food from the Hotel, she does not dispute this. Instead, she says that she did not have appetite for food and was hungry.

(4)  When being questioned as to why she did not call police for help if she was being detained and was terrified as she claims, Vickki comes up with a new story and claims that her mobile phone ran out of battery and the meeting room was Liao’s private office. The answer makes no sense as she could use Chow’s mobile phone to call the police, which she or Chow could do whenever they stepped out of the meeting room or inside the washroom.

(5)  In response to Ms Ling’s question as to why Chow did not call police or seek help by sending messages through Chow’s mobile phone, Vickki comes up with another new allegation claiming that they were trapped in Liao’s office, Liao has “background”, they were worried about their safety and they did not want to antagonise the other attendees.

(6)  When being asked by this Court as to why she did not call the public security bureau when they left the Hotel that evening, Vickki asserts that they could not do so in the Mainland. Her answer defies common sense. When being pressed further on this, Vickki does not maintain that she could not call the public security bureau for help, but claims that Liao is very familiar with public security bureau and has “influence” although she is not able to articulate what such influence is.

(7)  The alleged need to seek legal advice is said to be for 2 reasons. First, Vickki and Chow had no authority to act on behalf of the Company. Second, Ps’ shares were already forfeited and they wanted to hear from the lawyer and accountant on how to deal with such matter. However, the allegation is contradicted by (a) Vickki’s act in putting the Company’s seal on the SA next to her signature; and (b) the fact that all shareholders who have injected capital into the Company were represented at the 2017 Meeting, such that they could discuss and agree on matters concerning the shareholdings of the Company. When it is put to Vickki that the board’s approval on the SA was not necessary as the SA was only an agreement between the shareholders, Vickki is unable to articulate any coherent reason as to why it was necessary to seek legal advice before she and Chow signed the SA.

100.Second, if Vickki and Chow were being forced to sign the SA under such threats and duress and they did not agree with it, there was no reason why they did not make any complaint about the alleged threats and detention after returning to Hong Kong or put on record what had happened and took step to avoid the SA.

(1)  It was plainly open to them to do so as after they left the 2017 Meeting, as by then the SA had not been signed by Liao, Bun and Dr. Wong.

(2)  Putting the complaint on record was also the obvious thing to do on the part of Vickki and Chow, given that according to Vickki, the parties had already been embroiled in many litigations and by agreeing to the contents of the SA, they were in effect giving up their case advanced in those proceedings.

(3)  Although Vickki claims that she did not consider it necessary to record the event in writing, such explanation does not sit well with the way she had dealt with Ps all along. As the documents show, Vickki was very keen in putting everything in writing, in the form of emails, declarations made by her, minutes of meetings and letters prepared by Ds’ solicitors, all of which were sent to Ps.

(4)  Instead, the first time the allegation that Vickki and Chow were “pressurised” to sign the SA was when Main Ds filed Defence2 on 31 August 2018. Even then, there was no mention of the alleged coercion or detention.

101.Third, it is clear that more than 2 months after the 2017 Meeting, Vickki was still content with and relied on the SA without any issue or complaint.

(1)  Vickki signed the director’s resolution dated 14 March 2017 on behalf of the board (“2017 Resolution”), which referred to Liao holding 4,506,514 shares, and upon Liao and the other Ps discontinuing all legal proceedings against the Company and its shareholders, the board would confirm Liao’s shareholding and the fact that he is the second largest shareholder in the Company. The same resolution also authorised Liao to negotiate the terms of sale of the Company’s shares with the JV Partner and to prepare a share transfer agreement for the board’s consideration.

(2)  When the 2017 Resolution is put to Vickki during cross-examination, she says that the 2017 Resolution was drafted by the other side and she was asked to sign. However, even on her own case, no one forced her to sign the 2017 Resolution.

(3)  In seeking to explain away her act in signing the 2017 Resolution without any issue, Vickki claims that she had already signed the SA and the 2017 Resolution was meaningless as Ps still need to prove that they made payments to the Company. When it is put to her that no such requirement was stated in the 2017 Resolution or the SA, she says that the 2017 Resolution is not workable and maintains that Ps need to prove that they have paid for their shares. Her answers fly in the face of the wordings of the SA and the 2017 Resolution: the paid-up capital and shareholding were agreed in §1 of the SA. There was no reference to the alleged requirement to provide further proof on payments. This accords with the fact that the shareholders had during the first part of the 2017 Meeting reviewed the records of payments brought along by the attendees before they agreed to what was stated in §1 of the SA.

102.Even if (which I do not accept) the SA was signed by Vickki and Chow under duress, her act in signing the 2017 Resolution may constitute affirmation of the SA. It is well established that a contract entered into under duress is voidable and may be affirmed after the duress has ceased (Chitty, §10-068). However, as the point has not been raised by the parties and having found that there was no duress, it is unnecessary to decide on the point.

103.Fourth, I accept the evidence of Huang and Tian, who both give a detailed and logical account on what happened during the 2017 Meeting and how the parties came to sign the SA. According to Huang and Tian:

(1)  Vickki and Chow voluntarily signed the SA. They did not say that they need to obtain legal advice.

(2)  Huang says that the 2017 Meeting went peacefully and Ps made concessions by agreeing that HK$1.32 million should be paid to Main Ds out of the sale proceeds to meet their legal costs, which was recorded in §3 of the SA.

(3)  Huang and Tien both say that the meeting room is one of the meeting rooms for use by Hotel guests and could be accessed through the lifts without any access card.

(4)  Tung arrived at the Hotel at around 11 pm. The remaining attendees, viz., Vickki, Chow, Liao, Rong and Huang, told Tung that they agreed to sell the Company to him, and the 2017 Minutes were prepared and signed by the attendees. As it was already late at night, they decided to discuss the issue of purchase on the next day.

(5)  On 3 January 2017, Liao, Rong, Vickki, Chow, and Tung continued to negotiate at the Hotel including pricing and details on transitional arrangements. Tung said that he hoped all shareholders would first hand over the chops and seal of the Subsidiary before he paid the consideration. The shareholders disagreed. It was decided that negotiations would continue at a later stage.

104.For completeness, I note that Ms Chan also invites the Court to take into account the following matters in her written closing, but these do not detract from my conclusions above:

(1)  Ms Chan submits that it makes no commercial sense for Tung to buy out the Company which has been subject to ongoing litigation. However, at the time Tung joined the 2017 Meeting, the parties had signed the SA wherein they agreed (1) to withdraw all ongoing litigations concerning the shareholdings in the Company; and (2) the precise shareholdings of the shareholders. Far from no commercial sense, the proposed sale to Tung reinforces Ps’ case that it was necessary for the shareholders to agree on their precise shareholding before the Company could be sold to Tung.

(2)  The assertion that at the time of the SA, Ds had the “upper hand” in litigation and there was no reason they would settle is a non-point. Under the SA, Vickki would be able to obtain full payment of the costs awarded in favour of Ds in Action1 and avoid the risk of any adverse costs order which may be made against Ds. This has the advantage of putting all litigations to an end, and allowing the parties to sell the Company which was the common goal of all parties.

(3)  That the SA was signed out of jurisdiction and at a “foreign” place, or that the 2017 Meeting lasted for 11 hours are irrelevant to and do not support Main Ds’ case on duress.

105.For the above reasons, I reject the Main Ds’ allegations that the SA was signed by Vickki and Chow under duress. I find that it was only after the shareholders present at the 2017 Meeting had discussed and agreed on the matters stated in the SA that Vickki and Chow signed the SA. It follows that the SA is binding and enforceable against all parties.

106.As stated above, Ps and Ds agree that specific performance of the SA is the appropriate relief, should the Court find that it is binding and enforceable against the parties. The Court can order specific performance even before there has been any breach, and the jurisdiction to order specific performance is based on the existence of a valid and enforceable contract (Chitty, §30-016).

107.It is therefore unnecessary to consider whether Main Ds acted in breach of the SA. Nevertheless, I will set out my findings on Ps’ claim that Main Ds acted in breach of the SA.

108.Ps’ case is that Tung unreasonably insisted that the Subsidiary’s chops and seal be handed over to him before he pays the consideration, and since this was not agreeable to Ps, the negotiations with Tung fell through. By replacing the chops and seal without Ps’ consent in August 2017 and siding with Tung to assist him to gain control over the Subsidiary, Vickki and Chow acted in breach of the SA. Ps’ version of events may be summarised as follows:

(1)  Tian had since 3 November 2014 been entrusted to keep the chops and seal, evidenced by a hand-over list.

(2)  By a board resolution dated 2 May 2017 signed by Vickki, Tian was appointed as the Hong Kong representative of the Subsidiary and entrusted with the responsibility of keeping the chops and seal which she did. Ps also produce some WeChat conversations in May 2017 between Vickki and Tian in which Vickki acknowledged that Tian had possession of the chops and seal and did not ask Tian to return them.

(3)  During the parties’ negotiation from May to July 2017, Vickki began to make excuses not to discuss with Ps.

(4)  In or about July 2017, Vickki telephoned Tian and requested her to bring the chops and seal to Shenzhen for a meeting. When Tian complied with the request a week later, she phoned Vickki but no one answered. Tian then contacted Chow who told her that Vickki was sick and asked Tian to stay and wait in Shenzhen. A week later, Tian was still unable to contact Vickki, and Chow told Tian the same. Ps allege these were excuses to send Tian away from Jinzhou where the Subsidiary’s offices were located.

(5)  In August 2017, Huang found out from the industrial and commercial registration system that Vickki and Chow had replaced the chops and seal in Tian’s absence. After the chops and seal were replaced, Tung refused to discuss with Ps about the sale of the Company.

(6)  In mid-August 2017, Tian received a notice dated 4 August 2017 signed by Vickki as Chairman of the board of the Company which alleged that Tian had offered her resignation and refused to obey the board’s instructions or to produce financial accounts and, on this pretext, Tian was dismissed with immediate effect and ordered to return all the Company’s properties including the chops and seal. Tian denies all such allegations and says that she was not responsible for the financial accounts of the Subsidiary, and had never been asked to return any of the Company’s property.

(7)  Tian returned to Jinzhou in September 2017 and met with Tung who told her that everything was done at the request of Vickki and Chow and, while he disagreed, as a minority shareholder he had little influence over matters including the replacement of the chops and seal.

(8)  Thereafter, Huang and Tian discovered that RMB22 million had been transferred out of the bank account of the Subsidiary on 20 July 2017 but the details thereof could not be retrieved. Another RMB2 million was transferred out of the same account on 14 July 2017.

(9)  Tian kept the chops and seal in the safe next to her seat in the office of the Subsidiary and held the key to the safe at all times. She handed over the key of the safe to the Subsidiary in November 2017.

109.Main Ds do not dispute the fact that the negotiations with Tung fell through after Ps had refused to hand over the Subsidiary’s chops and seal before receiving payment from Tung. Their case is that the chops and seal were only changed in August 2017 and Tian’s possession of the chops and seal was wrongful. Ds’ version of events is as follows:

(1)  The chops and seal were kept at the Subsidiary’s offices in Shenyang and Jinzhou in accordance with the parties’ agreement reached at the 2012 Meeting.

(2)  Ps through Tian took possession of the chops and seal in 2013 and have since failed to return them to the Subsidiary despite repeated requests made by the JV Partner, Vickki and Chow.

(3)  Since then, Vickki, Chow and the JV Partner have been refused access to the books and accounts of the Subsidiary. Therefore, during the negotiations with Tung, Tung demanded Liao to return the chops and seal in his capacity as the ultimate controller of the Subsidiary upon buying out the Company from Ps. Ps refused and the negotiations fell through in or around April to May 2017.

(4)  Vickki repeatedly pressed Tian for the chops and seal as well as the books and accounts of the Subsidiary but in vain. Since Ps have repeatedly refused to return the chops and seal, Vickki had no choice but to report their loss in July 2017 and obtained their replacement in August 2017 on behalf of the Company.

110.In my judgment, Ps fail to discharge the burden of proving that Main Ds acted in breach of the SA. To start with, it has never been identified in SOC2 which term of the SA has been breached by Main Ds.

111.Even assuming Ps’ case is that Main Ds acted in breach of §3 of the SA, which requires the parties to cooperate in selling the Company’s shares to a third party, it has not been demonstrated how the alleged siding with, or assistance rendered to, Tung in controlling the Subsidiary could constitute a breach of the obligation under §3 of the SA. More importantly, both Ps and Main Ds agreed that the chops and seal should not be handed over to Tung before he paid the consideration for acquiring the Company’s shares, and it was for this reason that the negotiations with Tung fell through in April or May 2017. Thus, the inability to sell the Company to Tung had nothing to do with, and could not have been caused by, the subsequent acts carried out by Vickki in July and August 2017 in seeking to take control over the chops and seals.

E2.  Capital Contribution Issue

112.In light of my finding that the SA is binding and enforceable, Main Ds cannot maintain their allegation that He, Dr. Wong, Rong, Liao and Bun did not pay the amounts of capital stated in §1 of the SA. This accords with the principle that a person of full age and understanding is bound by the document he signed (Ming Shiu Chung, §§84-87).

113.Ms Ling submits that Main Ds are estopped from denying that Ps have paid up the capital stated in §1 of the SA by virtue of contractual estoppel. Ms Chan, however, submits that contractual estoppel is almost exclusively applied in the context of entire agreement and non-reliance clauses particularly in mis-selling cases and has no application where the parties are not dealing at arm’s length. In any event, contractual estoppel can only be used as a shield not a sword and cannot constitute a cause of action, relying on NRAM plc v McAdam [2015] Bus LR 443. As such, it cannot be relied upon by Ps to establish the capital paid by them.

114.The doctrine of contractual estoppel is a manifestation of the principle that persons of full age are bound by the documents they signed, so that where the terms of an agreement assume or stipulate a certain state of affairs, the parties to the agreement will be bound to proceed on the basis that this is the position for the purposes of the agreement, whatever the true state of affairs may be as a matter of actual fact. The principle has been applied in Hong Kong (Nokia Corporation v TCT Mobile Ltd [2017] 3 HKC 102, §§23-25, per Barma JA (as he then was); DBS Bank (Hong Kong) Ltd v San-Hot Industrial Company Ltd [2013] 4 HKC 1, §§194-203, per DHCJ Pow SC). The rationale of the doctrine has been expressed as follows:

(1)  In Nokia Corporation v TCT Mobile Ltd, §24, Barma JA (as he then was) said the following:

“there are sound reasons for [the doctrine of contractual estoppel] to be adopted in Hong Kong, as it would promote certainty in contractual relationships, and reduce the scope for disagreement and disputes in the working out of the contract.”

(2)  In Peekay Intermark Ltd v Australia and New Zealand Banking Group Ltd [2006] 2 Lloyd’s Rep 511, §56, Moore-Bick LJ said as follows:

“There is no reason in principle why parties to a contract should not agree that a certain state of affairs should form the basis for the transaction, whether it be the case or not. For example, it may be desirable to settle a disagreement as to an existing state of affairs in order to establish a clear basis for the contract itself and its subsequent performance. Where parties express an agreement of that kind in a contractual document, neither can subsequently deny the existence of the facts and matters upon which they have agreed, at least so far as concerned those aspects of their relationship to which the agreement was directed. The contract itself gives rise to an estoppel.” (underlined added)

115.The doctrine has general application and is not confined to specific types of contracts or parties. Thus, in DBS Bank (Hong Kong) Ltd v San-Hot Industrial Company Ltd, DHCJ Pow SC rejected the submission that the doctrine should be confined to sophisticated parties as there is no rational or juridical basis for such limitation. While Peekay, Springwell and DBS Bank are mis-selling cases in which contractual estoppel was applied to estop investors from alleging, inter alia, that they did not understand the nature and risks of the transactions, the doctrine was not confined to that context. Indeed, Nokia Corporation v TCT Mobile Ltd was not a mis-selling case.

116.I do not think that the application of contractual estoppel is limited to parties dealing on an arm’s length basis as suggested by Ms Chan. No authority has been cited in support of her submission. There is no reason why the parties who had prior dealings with each other cannot agree on certain state of affairs as the basis of their contract. To the contrary, very often, it is because of their prior relationship or dealings that the parties want to agree on a state of affairs as the basis of their contract.

117.As for the contention that contractual estoppel cannot constitute a cause of action, I do not think that Ps rely on contractual estoppel as a cause of action. Rather, they use it as a shield to estop Main Ds from denying the state of affairs as agreed in §1 of the SA.

118.Therefore, whether by reason of contractual estoppel or general contractual principle, Main Ds should not be allowed to dispute the fact that Ps have paid the capital as stated in §1 of the SA.

119.In any event, it is clear from the evidence adduced by the parties that Rong, Bun, He, Liao and Dr. Wong did pay the amounts stated in §1 of SA.

120.First, each of the amounts paid into WL Account is traceable to the Ps concerned and is supported by the relevant bank documents and/or the Summary. This can be seen from the Table.

121.Second, as Vickki belatedly accepts under cross-examination:

(1)  the amounts paid into WL Account and shown in the Summary are the same as the amounts stated in the Table;

(2)  the amounts shown in the Summary are the same as the amounts stated in §1 of the SA save for HK$506,150 paid by Bun; and

(3)  Bun had paid HK$506,150 prior to the date of the first item (28 June 2010) in the Summary, that is why Vickki agreed that Bun had paid HK$1,001,650 in §1 of SA.

122.The above is sufficient to dispose of the Capital Contribution Issue in favour of Ps.

123.Apart from the SA, there is evidence in support of Ps’ contention that Bun has paid capital beyond the amounts shown in the Summary.

(1)  Ms Ling submits that Ps must have paid up at least RMB6 million since the Company injected RMB16 million into the Subsidiary between 3 August 2011 and 24 May 2013, but Jackpot only paid HK$10,000,960 to the Company.

(2)  Under cross-examination, Vickki admits that since November 2012, she has been responsible for injecting money into the Subsidiary to fulfil the capitalisation requirement. Between August 2011 and May 2013, the Company remitted a total sum of RMB16 million into the Subsidiary. The Company was able to do so because there was money in WL Account and Woo had shown Vickki that other investors had already invested RMB6 million into the Company before Jackpot decided to invest in the Company. Although Vickki says that she now has suspicion about the source of the RMB6 million, it is clear that having been in charge of WL Account and the remittance of capital to the Subsidiary for over 9 years, she has never harboured such suspicion.

(3)  Indeed, it can readily be seen from the capital verification report (summarised in §13 above) that on 14 November 2011, the Company already paid HK$6,869,800 into the Subsidiary. This was much more than the amounts then paid into WL Account (being HK$2,005,140). As the Company had no business or source of income at that time, the money paid by the Company into the Subsidiary could only have come from the shareholders at the time. Indeed, the amount said to have been paid by Jackpot must have been paid into the Subsidiary (and never gone through WL Account) to fulfil the capitalisation requirement. This was well known to Vickki, but until she is being cross-examined on this point, she has never alluded to the fact that Ps had paid money to the Company to enable it to remit the same into the Subsidiary.

E3.  Core SHA Issue

124.Ps rely on a board resolution dated 3 August 2011 passed by Ju qua sole director (“2011 Resolution”) as evidence of the Core SHA. The 2011 Resolution states as follows:

“(1) 鑑於現今各前期股東努力引人遼寧省供暖項目、營運公司項目、找尋機構投資人及其他公司運作皆有卓越貢獻及投入，本董事會決議各前期股東所獲派發的股份，毋須全數支付股本，但餘款須於2014年底前支付，屆時預計公司在錦州供暖項目的營利分紅足夠支付。期望各股東能繼續為公司付出，令公司事務蒸蒸日上。

(2) 其他的投資者須全數繳付股本。”

(Agreed English translation)

(1) In view of the current early shareholders’ efforts to attract the heating project in Liaoning Province, operating company’s projects, looking for institutional investors and excellent contribution and devotion to other company’s operations, the board of directors resolved that for the shares allotted to the respective early shareholders, there is no need to pay the full share capital, but the balance must be paid before the end of 2014, by that time, it is expected that the company's profit and dividends from the Jinzhou heating project will be sufficient to pay off the balance. Hope that all shareholders can continue to contribute to the company and make the company’s affairs flourish.

(2) Other investors must pay the full share capital.”

125.Ds deny the existence of the Core SHA on the following grounds:

(1)  All the shares issued by the Company were allotted on the basis that they would be fully paid up upon allotment. This is evidenced by:

(a)the share application forms signed by the shareholders which contain an undertaking to “pay in full for the share(s) upon allotment”;

(b)the board resolutions approving the allotments to Ps (signed by Ju) stated the allottees had applied for allotment of shares “fully paid up at par and to rank in pari passu with all existing issued shares”;

(c)the annual returns described all issued shares as fully paid; and

(d)the return of allotments also stated that the allotted shares are fully paid.

(2)  The first time Ps suggest that there was the Core SHA was in KCC’s letter dated 27 September 2013.  This was despite the fact that Vickki had since 12 August 2013 been requesting proof of payment from some of Ps. The Core SHA was not mentioned in SOC1 despite its professed importance.

(3)  The 2011 Resolution was not found amongst the corporate documents obtained by Ds from Victon Registrations Ltd (“Victon”) which provided company secretarial service to the Company until April 2012.

(4)  All other resolutions signed by Ju were in English and drafted by Victon. Given the importance of the 2011 Resolution, it was all the more important for Ju to ask Victon to prepare such resolution. No explanation has been proffered as to why the 2011 Resolution was in Chinese and drafted by Ju.

(5)  Bun and Wang only became shareholders on 19 April 2012, 8 months after the Core SHA had allegedly been made. It made no sense that they were part of the Core Shareholders but Jackpot was not.

(6)  “Adverse inference” should be drawn from Ps’ attempts to pay the balance of their outstanding capital, which was contradictory to the terms of the Core SHA.

(7)  If Ps had been able to pay their outstanding capital but not required to do so pursuant to the Core SHA, it would not have been necessary to invite Vickki and Chow to invest in the Company.

126.For the reasons explained below, I find that the Core SHA existed.

127.First, the existence of the Core SHA is evidenced by the 2011 Resolution. I do not think that there is a proper basis to doubt its authenticity given that:

(1)  Ds have not challenged the authenticity of the 2011 Resolution in their pleadings. Nor have they filed any notice of non-admission to dispute its authenticity. Ds are deemed to have admitted the authenticity of the 2011 Resolution under Order 27 rule 5 of the Rules of the High Court.

(2)  During cross-examination of Huang, Ms Chan puts to him that the 2011 Resolution was forged in the sense that it was prepared after the event. As Huang rightly pointed out, he does not recall Ds having made such challenge. When questioned by this Court as to where such allegation was raised, Ms Chan points to §26 of Defence2. However, the only plea in §26 is that “the Company and its secretary at the material time, [Victon], did not have any relevant record of the [2011 Resolution]”. There is no plea that the 2011 Resolution was forged as suggested by Ms Chan.

(3)  The completeness of the Company’s records held by Victon is neither here nor there. As pointed out by Ms Ling, Victon was not the company secretary (Woo was) and had not been informed about the agreement that the Core Shareholders could defer full payment of the capital by the end of 2014.

(4)  I do not think that there is anything untoward about the 2011 Resolution being in Chinese or that it was prepared by Ju. The other resolutions in English were concerned with standard corporate actions, including the first written resolution upon the incorporation of the Company and the resolutions for increase of capital, allotments and transfer of shares, and it was not unusual for such documents to be prepared by a service company. By contrast, the Core SHA is peculiar to the Company, and it is unsurprising for it to be prepared in Chinese to reflect their agreement accurately.

(5)  As explained by Huang under cross-examination, Woo told him about the Core SHA before he agreed to take up shares in the Company, and Ju showed him the 2011 Resolution after he had injected capital into the Company, on or around 4 or 5 August 2011. Huang was shown the 2011 Resolution after he chased Woo to implement the same. I accept Huang’s evidence, which is consistent with the timing of the payments he (though Rong) made to the Company.

128.Second, Ds’ reliance on the corporate documents which described the shares allotted fully paid up is misplaced. All that it means is that the allottees owed to the Company the amounts payable on the shares.

(1)  There is no inconsistency between these documents and the existence of a Core SHA which postponed the time for the relevant shareholders to pay the amounts in question.

(2)  Indeed, the same description applied to the corporate documents concerning the allotment of shares to Jackpot. In Jackpot’s share application forms, the board resolution approving allotment, the relevant annual returns and return of allotment, it was stated that Jackpot’s 15,400,960 shares were fully paid. However, there is no dispute that Jackpot did not pay the full amount when the shares were allotted to it on 13 April 2012. It was only until November 2012 that Jackpot voluntarily agreed to surrender 5,400,000 shares on the basis that Woo had not contributed the full amount into Jackpot.

129.Third, there is no merit in Ds’ suggestion that the Core SHA was raised by Ps late.

(1)  While in August 2013 Vickki and Chow began to require Ps to provide proof of their capital contribution, there was no suggestion that Ps were obliged to pay the full amounts on their shares within any time. The fact that no call had been made by the Company was pointed out by KCC in their letter of 13 September 2013.

(2)  It was only at the 4^th BM held on 19 September 2013 that the Proof Resolution was passed. In response, Ps through KCC’s letter of 27 September 2013 mentioned that Ju, Rong, He, Wu and Bun “were given the privilege to defer payment of their share capital”, which is the gist of the Core SHA.

(3)  The particulars of the Core SHA were pleaded in SOC1 filed on 4 October 2013.

130.Fourth, there is no inconsistency between Ps’ attempts to pay in March and April 2014 and the Core SHA. It was made clear in the relevant correspondence that Ps tendered the payments without prejudice to their position on, inter alia, the Core SHA.

131.Fifth, Ms Chan criticises the contents of the 2011 Resolution in that (1) Huang does not explain why the names of the Core Shareholders were not specified; and (2) Huang confirms in oral evidence that at the time of the 2011 Resolution, Ps contemplated that Rong, Ju, Liao, Bun, Wu and Wang would be the only shareholders of the Company. However, when being asked why it is necessary to address “other investors” at §2 of the Resolution, Huang contradicts himself by saying that it was contemplated there would be more shareholders joining in the future. This suggests that §2 was an afterthought designed specifically to exclude Jackpot.

132.I do not think that there is any merit in the criticism. In the first place, it does not undermine the existence of the Core SHA. There is nothing objectionable or inconsistent for the shareholders of a company to agree on certain matters regulating their rights and obligations and those of the shareholders falling within the same class, while also cater for the possibility of admitting other investor with different obligations.

133.Sixth, Ms Chan submits that Huang’s account on the circumstances in which the Core SHA came to be made is contradictory and implausible for the following reasons:

(1)  The lack of discussion on the initial capital to be contributed by, and the shares allotted to, each of the Core Shareholders; the arrangement based on their financial situation and the complete reliance on Woo made no commercial sense. Only RMB6 million was paid to the Subsidiary by November 2011 even though Woo had told them that HK$10 million was required as start-up capital.

(2)  Huang says in his WS that he did not know how the shares were allocated, but under cross-examination, he says that the allocation was based on the capital actually paid.

(3)  Huang also contradicts himself when he says in oral evidence that it was agreed that if no dividend was paid, the outstanding capital would be paid in cash, when such agreement did not form part of Ps’ pleaded case on the Core SHA.

134.I do not think that Huang’s evidence on the Core SHA is implausible. According to Huang:

(1)  In or about July 2011, Woo told Huang and Bun that the Project required approximately HK$10 million as start-up capital and the remaining capital could be paid by the dividends from the Subsidiary after the Project began making profits by the end of 2014. Woo also invited them to find more investors.

(2)  Wang, Wu and He were introduced by Huang or Woo to the Project. Huang arranged a meeting between them and Woo (with He in attendance). During the meeting, Woo repeated what he had told Huang and Bun.

(3)  After the meeting, in or about August 2011, Bun, Wang, He, Wu and Huang (on behalf of Rong) agreed on the Core SHA and invested in the Company on this basis. Under cross-examination, Huang adds that it was also agreed that if no dividend was paid by the Subsidiary by the end of 2014, the Core Shareholders would pay the outstanding capital in cash.

(4)  Woo only told the Core Shareholders that the Company wanted to introduce strategic shareholders to raise further funds by the end of 2011 and Jackpot was introduced as such investor.

(5)  In his WS, Huang says the Core Shareholders did not know the reason for the number of shares allocated to each of them and did not ask Ju or Woo about this. In his oral evidence, Huang says that the Core Shareholders paid the amounts in accordance with Woo’s instructions which had taken into account their respective financial situations and the shareholding of each was calculated “based on the capital actually paid”. The calculation of each shareholders’ shareholding was done by Woo, and Huang did not ask for details as he was satisfied with the allotment of 3.8 million shares to Rong.

135.I do not think Huang’s evidence is inconsistent:

(1)  There is no inconsistency between Huang saying that it was Woo who decided how many shares were allocated and his subjective belief that the allocation was based on the capital actually paid. As he explains under cross-examination, the calculations as to who had to pay how much were done by Woo and he did not ask Woo for details.

(2)  As for Huang’s evidence that if no sufficient dividend was paid by the Subsidiary by the end of 2014, the outstanding capital would be paid in cash, I am unable to see any inconsistency either. As stated in the 2011 Resolution, it was merely an expectation at the time that the Company would receive sufficient dividends by the end of 2014. As the Core Shareholders were obliged to pay the outstanding capital by the end of 2014, if no dividend was forthcoming, the Core Shareholders would have to pay the outstanding capital as required by the Subsidiary.

136.It is irrelevant that there was a lack of clarity on how much capital each Core Shareholder was required to pay initially and how many shares were allotted, as the Core SHA merely dealt with how and when the shares were to be paid up after allotment.

137.Lastly, Ds also relies on Vickki’s evidence that Woo never mentioned the Core SHA to Vickki or Chow before. However, whether Woo mentioned the existence of the Core SHA to Vickki or Chow is irrelevant given that on their case, they decided to invest in the Company pursuant to the JFA, which was an agreement made between them and Woo personally. It had nothing to do with the Company or Ps.

138.I turn to the question of the parties to the Core SHA.

139.On Ps’ case, the Core Shareholders were Ju, Rong, Wang, He, Bun and Wu. Ds contend that Wang and Bun could not have been part of the Core Shareholders since they only became shareholders of the Company on 19 April 2012, after Jackpot had become a shareholder. Ps’ answer, as pleaded in Reply1, is that Wang and Bun were actively involved in the Project at an early stage: Bun was partly responsible for organising and co-ordinating the Project and Wang helped to facilitate the Project through her relationship with the persons-in-charge of the JV Partner.

140.I am satisfied that Ju, Rong, He and Wu were amongst the Core Shareholders, in light of the following facts:

(1)  Except Ju’s one share allotted to her upon the Company’s incorporation, all the shares were allotted to them on the same day as the 2011 Resolution.

(2)  Rong, He and Wu had contributed capital required by the Company by paying them into WL Account (see Table).

141.In the case of Bun and Wang, Ds’ contention is that they could not have been parties to the Core SHA as they only became shareholders 8 months later. I do not think that this undermines Ps’ case on the Core SHA given that:

(1)  in the case of Bun, he had contributed capital by paying the same to the Subsidiary before the Core SHA, as I so find;

(2)  Wang and Bun’s contributions to the Project is not challenged by Ds; and

(3)  in any event, there is nothing objectionable for Bun and Wang being in the same class as the other Core Shareholders pursuant to an agreement already made between the Company and all the shareholders at the time (i.e. Ju, Rong, He and Wu).

142.As for Dr. Wong:

(1)  Ps’ case is that he acquired 617,000 shares from Wu, with the consent of all parties and, therefore, should stand in the same position as Wu insofar as those shares are concerned. Ds do not really dispute this.

(2)  It is well-established that the burden of a contract, unlike its benefit, cannot be assigned without the consent of the other parties, and consent of all parties gives rise to novation (Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85, 103, per Lord Browne-Wilkinson). On Ps’ case, only the rights under the Core SHA was transferred. Even if there was no consent from the other parties to the Core SHA (an issue that may arise in relation to the Company), the rights under the Core SHA could have been validly transferred to Dr. Wong in respect of the 617,000 shares.

143.I turn to the question as to whether the Core SHA was “rescinded”. The suggestion that the Core SHA should be rescinded is misconceived. Even if Ds were able to prove that the Core SHA was made by Ju in breach of her fiduciary duties, it would only make the Core SHA to become voidable, and the appropriate relief would be an order to set aside such agreement from the date of the order to be made by the Court.

144.In D&CC1, Ds pleaded that the Core SHA is invalid or is liable to be set aside. However, at trial, Ms Chan only makes very brief submissions on the point. In essence, she argues that in causing the Company to enter into the Core SHA qua director, Ju acted in breach of her fiduciary duties to the Company.

145.In Reply1, Ps deny that Ju was in breach of any of her fiduciary duties since the Core SHA was made to recognise the Core Shareholders’ efforts in running the Project and without such agreement, the Company would have to pay for their contribution or would have lost the Project.

146.The alleged breach of fiduciary duties is a red herring. Whether characterised as authorisation or ratification, the Company was bound by the Core SHA as it was adopted with the unanimous consent from all shareholders of Company at the material time (Shun Hing Holdings Co Ltd v Li Kwok Po David, CACV 510/2018, 13 May 2020, §§43, 45-46, per Lam VP (as he then was)). The Duomatic principle[16] applies.

147.In any event, in light of my findings that the Core Shareholders had made contributions to the Company and the Project at the relevant time, I do not accept Ds’ case that it was not in the interests of the Company to enter into the Core SHA or that Ju acted in a position of conflict (which was in any event agreed to by all shareholders at the time the Core SHA was made).

148.Ds also contend that the Core SHA was superseded by the “undertakings” in the share application forms signed by the Core Shareholders whereby they undertook to pay up in full upon the allotments. This argument must fail for reasons stated in §128 above.

149.In summary, I find that the Core SHA existed. There is no valid ground to set aside the Core SHA.

E4.  Appointment Issue

150.The basis for disallowing the shares held by Liao, Ju, Rong, Dr. Wong, He and Bun to vote, as stated in the minutes of the 2^nd GM, was:

“主席表明以各股東已被核實的足繳股本作爲點票方式。依據公司章程，每一單位已足繳股本的股份可享有一票的表決權。而應繳末繳，及沒有提供入資單據証明給公司會計師核實的股份，並不享有表決權。(underlined added)

(Agreed English translation)

The chairman said that the votes would be counted based on the verified fully paid-up capital of the shareholders. According to the Articles of Association, each share with fully paid-up capital is entitled to one vote and shares for which the capital is not paid up and no capital contribution certificate is submitted to the Company’s accountant for verification are not entitled to vote.”

151.In my judgment, the Entitlement to Vote Decision was made by Vickki in breach of the Company’s AA and is void for the following reasons.

152.The starting point is article 75 of the Company’s AA which provides as follows:

“No member shall be entitled to vote at any general meeting unless all calls or other sums presently payable by him in respect of shares in the Company have been paid”

153.Article 75 does not say that only fully paid-up share was entitled to vote. It merely disentitles a member against whom a call has been made or that there is any sum presently payable by him from voting at general meeting. Consistent with this:

(1)  article 72 provides that “on a poll every member shall have one vote for each share of which he is the holder”; and

(2)  the Company’s AA allow shares to be issued on the basis that the capital would become payable at a later date. For example, article 21 carves out an exclusion for shares which are “by the conditions of allotment thereof made payable at fixed times”, and article 25 provides that the terms of issue of a share may specify a sum being “payable on allotment or at any fixed date”.

154.The Entitlement to Vote Decision disallowed Rong, Ju, He, Liao, Dr. Wong (617,000 thereof) and Bun from voting on 2 grounds: (1) shares for which capital was payable but not paid (“應繳末繳”) and (2) the shares for which no proof of capital payment had been provided to the Firm (“沒有提供入資單據証明給公司會計師核實的股份”). Neither ground is correct:

(1)  The shares held by Rong, Ju, He, Dr. Wong (617,000 thereof) and Bun were not presently payable as that was not the basis upon which the shares were allotted (no such evidence has been advanced by Ds);

(2)  To the contrary, the Core SHA provided that the Core Shareholders did not have to pay up shares in full until the end of 2014;

(3)  The Company did not make any call requiring Ps to pay up prior to the 2^nd GM;

(4)  The shares held by Liao were paid up in full (see Table); and

(5)  There is nothing in the Company’s AA which requires any shareholders to provide proof of payment to the Firm. Instead, the requirement was only imposed by Vickki at the 2^nd GM, which she has no power to do without the authority of the board or the Company at the general meeting.

155.Even if, contrary to my holding, the Core SHA did not exist, the Entitlement to Vote Decision would still be invalid as it is indisputable that prior to the 2^nd GM, Rong, Bun, He, Dr. Wong (in respect of 200,000 shares acquired from Wu[17]), Liao together had already paid HK$9,401,156 into the WL Account (see Table). There was no basis to disallow them from voting at the 2^nd GM.

156.For completeness, I note that in D&CC1, Ds sought to rely on article 76, which provides that the Chairman’s decision to allow votes at a meeting shall be final and conclusive. At trial, Ms Chan does not pursue the point. In any event, it is clear that the Entitlement to Vote Decision can be impugned on the ground that it is unreasonable or a serious error (Kwok Hiu Kwan v Johnny Chen [2018] 6 HKC 394; WHC Limited trading as Wine High Club & ors v Hong Kong Wine Chamber of Commerce Limited & anor, [2019] HKCFI 2538, 24 October 2019). For the same reasons set out above, I consider that the Entitlement to Vote Decision was wholly without basis and was plainly wrong.

157.As the 2^nd GM was conducted in contravention of the Company’s AA, all the resolutions passed thereat, including the Appointment Resolution, were void and have no legal effect (Clark v Cutland [2003] 2 BCLC 393, §§26-27, per Arden LJ (as she then was)). It follows that the purported appointment of Fan and Yang as directors is invalid and of no legal effect.

E5.  Forfeiture Issue

158.In light of my finding that the Appointment Resolution was invalid, all the resolutions purportedly passed by the board with Fan and Yang as directors including the Proof Resolution and the 1^st and 2^nd Forfeiture Resolutions are invalid. I shall briefly explain why this is the case.

159.The starting point is s.461(1) of the Companies Ordinance (Cap 622) (“CO”) which provides as follows:

“(1) The acts of a person acting as a director are valid despite the fact that it is afterwards discovered—

(a) that there was a defect in the appointment of the person as a director;

…”

160.Similarly, article 110 of the Company’s AA also provides:

“All acts done by any meeting of the directors or of a committee of directors or by any person acting as a director shall, notwithstanding that it be afterwards discovered that there was some defect in the appointment of any such director or person acting as aforesaid, or that they or any of them were disqualified, be as valid as if every such person had been duly appointed and was qualified to be a director.”

161.However, s.461 is only designed to avoid questions as to validity where there is defect in the appointment. It is not the same as, and should be distinguished from, the situation where there was no appointment at all (Butterworths Hong Kong Company Law Handbook, 23^rd ed., §461.02). The principle was explained in Morris v Kanssen [1946] AC 459, at 471, per Lord Simonds:

“There is, as it appears to me, a vital distinction between (a) an appointment in which there is a defect or, in other words, a defective appointment, and (b) no appointment at all. In the first case it is implied that some act is done which purports to be an appointment but is by reason of some defect inadequate for the purpose; in the second case, there is not a defect, there is no act at all. The section does not say that the acts of a person acting as director shall be valid notwithstanding that it is afterwards discovered that he was not appointed a director.”

162.In the absence of any valid resolution passed by the board to approve the issue of the Call Notices and the forfeiture of Ps’ shares, there was simply no basis for Ds to procure the Company to forfeit any of the shares issued to Ps.

163.Even if, contrary to my view, the appointment of Fan and Yang were valid, it is clear that there was no proper basis for Vickki, Chow, Fan and Yang to pass the Proof Resolution and the 1^st and 2^nd Forfeiture Resolutions.

164.The power to make call is governed by article 21 of the Company’s AA, which provides:

“The directors may from time to time make calls upon the members in respect of any moneys unpaid on their shares (whether on account of the nominal value of the shares or by way of premium) and not by the conditions of allotment thereof made payable at fixed times, provided that no call shall exceed one-fourth of the nominal value of the share or be payable at less than 1 month from the date fixed for the payment of the last preceding call, and each member shall (subject to receiving at least 14 days’ notice specifying the time or times and place of payment) pay to the Company at the time or times and place so specified the amount called on his shares. A call may be revoked or postponed as the directors may determine.”

165.The exercise of the power is subject to 4 conditions:

(1)  The power can only be exercised “in respect of any moneys unpaid on their shares”;

(2)  The shares when allotted were not subject to conditions which made them payable at fixed times;

(3)  the call shall not exceed one-fourth of the nominal value of the shares; and

(4)  at least 14 days’ notice specifying the time, and place of payment shall be given to the shareholders.

166.None of the above conditions had been considered, let alone complied with by Vickki, Chow, Fan and Yang when they passed the Proof Resolution. Worse still, the Proof Resolution did not authorise Ds to issue any of the Call Notices. Even if (which I do not think is the case) the Proof Resolution could be treated as the authorisation to issue the Call Notices, the failure to comply with the 4 conditions (or any of one them) is sufficient to invalidate the Proof Resolution and the Call Notices.

167.In particular, it is clear that prior to the Proof Resolution and the Call Notices, Ps had already paid up a significant part of the capital payable on their shares (see Table). There was no basis for Vickki, Chow, Fan and Yang to ignore the fact of payments and proceeded on the (erroneous) basis that the shares issued to P remained unpaid.

168.It is no answer for Vickki, Chow, Fan and Yang to say that Ps were repeatedly requested to prove that they had made payments as I do not consider the requests reasonable or necessary, given that:

(1)  Vickki was the sole signatory of WL Account and hence the only person who had the power to obtain all relevant documents from WL.

(2)  It would have been very easy for Vickki to prepare the Summary at a much earlier stage. If she had any doubt as to the identity of the payers, she could have asked Ps to identify which payments were provided by who. It was only if more than one person claimed to have made the payment that it would have been necessary to ask the persons making the claim to provide supporting documents. Even then, it would be sufficient for the payer to produce the original remittance advice and deposit slip to show that he/she made that payment. This was never done by Vickki.

(3)  Vickki and Chow being intimately involved in the affairs of the Subsidiary, must be aware that the Company had contributed a total amount of HK$19,687,200 (equivalent to RMB16 million) into the Subsidiary. As only HK$10,005,078 was paid by Jackpot, the remaining amount HK$9.6 million must have been provided by Ps.

(4)  Despite the above fact, Vickki (and Chow, Fan and Yang acting at her behest) insisted on Ps providing the so-called supporting documents to prove that they (and no one their behalf) had transferred the amounts from their personal bank accounts to WL Account. Looking at the matter in the round, Vickki herself has never done what she required Ps to do. Had she genuinely believed that it was reasonable or necessary for the shareholders to prove that they (and not anyone on their behalf) had paid the capital into WL Account, she should have done that for Jackpot. The fact that this has never been done speaks volume of the reasonableness of the approach taken by Vickki.

169.Ds also rely on article 25, which provides:

“Any sum which by the terms of issue of a share becomes payable on allotment or at any fixed date, whether on account of the nominal value of the shares or by way of premium, shall for the purposes of these Articles be deemed to be a call duly made and payable on the date on which by the terms of issue the same becomes payable, and in case of non-payment all the relevant provisions of these Articles as to payment of interest and expenses, forfeiture or otherwise shall apply as if such sum had become payable by virtue of a call duly made and notified.”

170.I do not see how Ds can rely on article 25. There is no evidence to suggest that the shares issued to Ps were payable on allotment. In fact, Vickki, Chow, Fan and Yang obviously did not consider that the shares issued to Ps were payable on allotment. They only took steps to pass the Proof Resolution after KCC had in their letter dated 13 September 2013 pointed out that no call had been made by the Company.

171.Having reached this conclusion, it is unnecessary to address Ps’ alternative case that the exercise of power of forfeiture by Vickki, Chow, Fan and Yang was in breach of their directors’ fiduciary duties which would render the forfeiture voidable.

172.For completeness, I shall deal with one other point raised by the parties in relation to the Forfeiture Issue.

173.Ms Ling relies on Ps’ attempts to pay the outstanding capital to the Company on 11 March 2014 and 30 April 2014 which were rejected by Vickki on behalf of the Company. The 1^st attempt was made before the 1^st and 2^nd Forfeiture Resolutions were passed, while the 2^nd attempt was made on the same day that Ps received notices of forfeiture from the Company. She makes 2 points: first, Ps were able and willing to pay but did not do so because of the Core SHA; second, the refusal to accept Ps payments, along with forfeiting Ps’ shares, were in breach of the Core SHA.

174.Ms Chan’s primary response is that the Core SHA did not exist. In light of my finding that the Core SHA existed, it would follow that there was no proper basis for Vickki, Chow, Fan and Yang to forfeit any of the shares issued to Ps which were made on the erroneous basis that the directors were entitled to require Ps to pay up in accordance with the Call Notices.

175.More importantly, it seems to me that there was no basis for Vickki, Chow, Fan and Yang to reject the payments tendered by Ps, had they exercised their power for the proper purpose of collecting capital remained unpaid on the shares issued to Ps. When this is put to Vickki, she is not able to articulate any justification for rejecting the payments tendered by Ps, other than asserting that she had repeatedly requested Ps to prove that they had paid capital to the Company and that C&C only acted for Ds but not the Company. The latter reason is surprising as all the impugned resolutions were procured to be passed by Ds. There was no reason why Ds could not instruct C&C to pass the payments tendered to the board which was under their control.

E6.  Misappropriation Issue

176.Ps’ case, as pleaded in §§41-44 of SOC1, is this:

“41. In or about the end of August 2012, the Subsidiary procured to remit RMBl,600,000.00 to the Company via the personal bank account of Woo at The Agricultural Bank of China.

42. On 27^th August 2012 and 30^th August 2012, Woo respectively remitted RMB500,000.00 and RMBl,000,000.00 to the personal bank account of the 1^st Defendant under her account No. 622846-012-000-868-0118 with The Agricultural Bank of China with the intent that the 1^st Defendant would and should remit the same amount to the Company.

43. In breach of the Directors’ Duties, the 1^st Defendant failed and/or refused to remit the said total sum of RMBl,500,000.00 to the Company.

44. In the circumstances, pending discovery in this action and/or interrogatories, the 1^st Defendant has breached the Directors’ Duties by embezzling the said total sum of RMBl,500,000.00 which were property of the Company.”

177.Ds do not dispute that Woo paid the Sum to Vickki on 27 and 30 August 2012. Their primary defence is that the payment was made pursuant to the JFA[18].

178.In my view, the real issue is whether Ps have proved that the Sum was the Company’s money. If the Sum was the Company’s money, it is no defence for Vickki to say that she received the Sum pursuant to the JFA, which was a private agreement between her (alongside with Chow) and Woo.

179.Ps rely on the following evidence:

(1)  A signed “declaration” from Woo wherein he said that the intention was to transfer the Sum for Vickki to transfer it to the Company as working capital;

(2)  A “statement” dated 19 June 2013 made by “遼寧惠天熱力供暖工程有限公司” (Liaoning Huitian Thermal Heating Engineering Limited), a company said to be owned by Tung, which stated that as entrusted by the Subsidiary, it had remitted a total of RMB1.6 million to Woo’s account to be lent to the Company as working capital;

(3)  the transaction records dated 13 June 2013 issued by the ABC showing transfers of RMB500,000 and RMB 1 million;

(4)  a deposit receipt issued by ABC for RMB500,000 stated to be from Woo to Vickki’s account; and

(5)  a receipt for withdrawal by bank card issued and sealed by the business office of a branch of ABC dated 30 August 2012 for RMB1 million from Woo to Vickki’s account.

180.As stated above, there is no dispute that the Sum was paid through Woo’s personal account to Vickki’s personal account. Ms Chan submits that there is no evidence to show that the Sum has ever passed through the bank accounts of the Company or the Subsidiary. I do not think it is necessary for the Sum to pass through the bank account of the Company or of the Subsidiary if there is evidence to prove that the Sum belonged to the Company. That said, I am not satisfied that Ps have discharged the burden of proving that the Sum belonged to the Company.

181.First, I do not think that any weight should be given to the so-called “declaration” made by Woo. It is not a declaration made in compliance with the requirements stipulated in the Oaths and Declarations Ordinance (Cap. 11) (“ODO”). In any event, it is not fair or appropriate to admit such “declaration” as evidence, having regard to what Huang and Vickki say about the credibility of Woo and the lack of opportunity for Ds to cross-examine him on what he said about the Sum.

182.Second, the “statement” is not signed and its contents have not been confirmed by anyone, still less in accordance with the requirements of the suffers from the ODO. There is no evidence or explanation as to why a loan advanced to the Company had to be remitted to Woo’s personal account when the Company had WL Account which could have been used to receive the Sum.

183.Third, it is clear from Huang’s oral evidence that he has no personal knowledge or involvement in relation to the Sum, which was dealt with by Woo and Vickki without the knowledge or consent of Ps. He accepts that it is only his belief that the Sum was the Company’s money given the proximity in timing between the need for RMB 1.6 million for the Project and the transfer of the Sum to Vickki. I do not think that this assists Ps. If the Sum was required for Project, the obvious thing to do would be for Tung’s company to advance the Sum to the Subsidiary. There was no need for the Sum to be remitted to the Company in such indirect manner, only for the same to be remitted back from the Company to the Subsidiary so that the same could be used for the Project.

F.  DISPOSITION AND COSTS

184.For the reasons set out above, I hold that:

(1)  On the SA Issue: the SA is binding and enforceable between the parties. Main Ds acted in breach of the SA by seeking to deny the fact that Bun, Liao, Rong, Dr. Wong and He are shareholders of the Company and had paid the capital stated in §1 of the SA.

(2)  On the Capital Contribution Issue: Ps contributed capital to the Company in the amounts stated in §1 of the SA, and are shareholders in respect of the shares which have been paid up.

(3)  On the Core SHA Issue: the Core SHA existed and remains binding as between the Core Shareholders and the Company.

(4)  On the Appointment Issue: The 2^nd GM and the Appointment Resolution are invalid and of no legal effect. Fan and Yang were not properly appointed as directors of the Company and all the resolutions purportedly passed by them as directors are invalid.

(5)  On the Forfeiture Issue: The Proof Resolution, the 1^st and 2^nd Forfeiture Resolutions are invalid. There was no basis for Ds to procure the Company to issue the Call Notices or to forfeit any of the shares issued to Ps.

(6)  On the Misappropriation Issue: Ps fail to prove that the Sum was the asset of the Company. There is no basis to claim that the Sum was misappropriated from the Company.

185.As for relief, on the basis that both parties agree that a decree of specific performance of the SA is the appropriate relief, I am prepared to grant such decree.

186.I make the following declarations:

(1)  Bun, Liao, Rong, Dr. Wong and He are shareholders of the Company and they have paid capital in the amounts as stated in §1 of the SA;

(2)  The Decision on Entitlement to Vote is invalid and of no legal effect;

(3)  The 2^nd GM and all the resolutions passed thereat, including the Appointment Resolution, are invalid and of no legal effect; and

(4)  The Proof Resolution, the 1^st and 2^nd Forfeiture Resolutions are invalid and of no legal effect.

187.Ds’ counterclaim in Action 1 is dismissed.

188.The parties are directed to try to agree on the terms of the order to give effect to the findings contained in this Judgment. I envisage that there are ancillary orders which need to be made as a result of the finding that the appointment of Fan and Yang are invalid, such as an order to amend the documents filed at the Companies Registry. For this purpose, the parties shall within 14 days of this Judgment provide a composite draft order setting out the terms of order which the parties agree and those terms which the parties are not able to agree, and the respective contentions raised by the parties. This Court will determine the difference on paper.

189.As for costs, I make a costs order nisi that:

(1)  90% of the costs of and occasioned by Ps’ claim, and 100% of the costs of Ds’ counterclaim in Action 1 be paid by Ds to Ps on a party and party basis, to be taxed if not agreed.

(2)  the costs of and occasioned by Ps’ claim in Action 2 be paid by Main Ds to Ps on an indemnity basis, to be taxed if not agreed.

190.The above costs order reflects the fact that:

(1)  Ps fail on the Misappropriation Issue and should be deprived of the costs occasioned by such issue. The deduction is a broad brush assessment based on what I consider to be a relatively straight forward claim which does not involves much evidence or takes up much time at trial.

(2)  Save for one issue, Ps prevail on all issues. While Ps accept that they are not entitled to pursue Action 1 vis-à-vis Main Ds after the parties entered into the SA, in view of the stance adopted by Main Ds on the enforceability of the SA and their agreement to have the Actions be heard together, it seems to me that there is justification for Ps to pursue the claims in Action 1 and Action 2.

(3)  It is appropriate to order the costs of Action 2 on a higher scale as such Action would not have been necessary had it not been Main Ds’ contention that the SA was vitiated by “duress”, which I consider to have been fabricated by Main Ds.

Ms Ebony Ling, instructed by K.B. Chau & Co., for the 1^st – 5^th Plaintiffs (by original action) and the 1^st – 5^th Defendants (by counterclaim) (in HCA 1886/2013) and the 1^st – 7^th Plaintiffs (in HCA 1246/2018)

Ms Joyce Chan, instructed by Huen & Partners, for the 1^st – 4^th Defendants (by original action) and 1^st – 5^th Plaintiffs (by counterclaim) (in HCA 1886/2013) and the 1^st – 4^th Defendants (in HCA 1246/2018)

The 5^th Defendant (by original action) and the 6^th Defendant (by counterclaim) (in HCA 1886/2013) is absent