Hang Heung Cake Shop Company Ltd v. Cheng Hung Kit

HCIP 61/2020

[2024] HKCFI 1982

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

INTELLECTUAL PROPERTY PROCEEDINGS NO. 61 OF 2020

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DECISION

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1.This is an application by the Defendant to stay this action pending the final determination of the Consolidated Actions HCA 1130/2011 and HCA 1137/2011 (“the Consolidation Actions”), or alternatively the action be struck out for want of authority to sue on the part of the Plaintiff.

Background

2.The Plaintiff’s claim is one on trade marks infringement and passing-off.  It is alleged that the Defendant had, in around 2020, set up a new business selling moon cakes under the names of “恒香餅家” and “Hang Heung Cake Shop” with an address in Yuen Long.

3.There is no dispute that the Plaintiff is the registered proprietor of various registered trade marks and goodwill relating to “恒香” and “Hang Heung” (“the Plaintiff’s Names and Marks”) which is a well-known brand for the production and supply of, inter alia, cakes and bakery products.

4.The Defendant was the former director and shareholder of the Plaintiff.  The Defendant and another company controlled by him and his wife, K.T. Holdings Limited (“KT Holdings”), once held about 54% of the shares of the Plaintiff.  In 2001, the Defendant entered into a series of loan agreements (“the Minehead Agreements”) with Minehead Finance Limited (“Minehead”), whereby the Defendant obtained loans in the total amount of $3 million and provided security in the form of a charge over nearly all the Plaintiff’s shares held by the Defendant and his related companies (“the Charged Shares”).

5.It is the Defendant’s case that no security interest in the Charged Shares had been created in favour of Minehead under the Minehead Agreements, as the Minehead Agreements stipulated that the Charged Shares could not be mortgaged or charged as they were subject to prior undischarged encumbrances.

6.On 22 December 2009, Mineheald assigned all their rights under the Mineheald Agreements to Pitt Tak Group Limited (“Pitt Tak”).  The Defendant’s case is that the purported assignment is invalid, void, null or unenforceable since no security interest had been validly created under the Minehead Agreements in the first place and, in the alternative, is liable to be rescinded.

7.Two days later, on 24 December 2009, Pitt Tak exercised its right as chargee and sold the Charged Shares to 3 different BVI companies (“the BVI Companies”), namely Easy Step Global Limited and Wealth Highlight Limited and Get Rich Asia Limited (“the Transfers to BVI Companies”). According to the Defendant, the Transfers to BVI Companies are invalid, null and void because, inter alia, it was a connected transaction and because Pitt Tak did not have the authority to make such transfers.  The BVI Companies were never, and never have been, entered as members in the Plaintiff’s register of members.

8.On 23 April 2010, resolutions were passed to remove all five existing directors including the Defendant from the board of the Plaintiff and to appoint the BVI Companies as directors of the Plaintiff (“the April 2010 Appointments”).  The Defendant challenges the validity of the April 2010 Appointments both on the basis that: (i) the BVI Companies were never at any time prior and up to 23 April 2010 registered members of the Charged Shares, and so had no locus standi to convene an EGM to appoint themselves as the Plaintiff’s directors; and (ii) there was no valid requisition by the BVI Companies to hold an EGM pursuant to s 113 of the former Companies Ordinance and Articles 40 & 41 of the Plaintiff’s Articles of Association.

9.On around 24 February 2011, the BVI Companies sold the Charged Shares to Tasty Catering Group Limited (“Tasty”) and Federal Management Limited (“Federal”) (“the February 2011 Transfers”).  Subsequently, Tasty and Federal were appointed as directors of the Plaintiff in place of the BVI Companies (“the February 2011 Appointments”).  By February 2011, Tasty and Federal held about 54.17% of the total number of the shares of the Plaintiff.

10.It is the Defendant’s case that both the February 2011 Transfers and the February 2011 Appointments are invalid, null and void because the BVI Companies were not directors or shareholders of the Plaintiff to begin with and had never been registered as members.  Accordingly, the BVI Companies had no locus standi to convene or vote at any purported meeting of the Plaintiff’s board.

11.Two shares allotments were then made in 2011:

(i)    At the EGM of the Plaintiff held on 30 April 2011 (“the April EGM”), various resolutions were passed by the then shareholders (Tasty and Federal) to allot 60,000 additional new shares to existing shareholders.  The shares were all taken up by Tasty and it became the majority shareholder holding 64.55% of the issued shares (“the 1^st Shares Allotment”).

(ii)   On or about 3 August 2011, Tasty and Federal resolved at an EGM of the Plaintiff (“the August EGM”) that an additional 60,000 new shares would be allotted and issued in the Plaintiff to all existing current shareholders of the Plaintiff (“the 2^nd Shares Allotment”).

12.It is the Defendant’s case that the 1^st and 2^nd Shares Allotments are invalid, null and void and of no legal effect because Tasty and Federal were not directors or shareholders of the Plaintiff and had no locus standi to convene the April or August EGM or to vote for or pass resolutions for the 1^st and 2^nd Shares Allotments.

13.In July 2011, two actions were commenced, and subsequently consolidated, in which:

(i)    HCA 1130/2011: Tasty and Federal sought a declaration to confirm the validity of the sale and transfer of the Charged Shares to them and their status as shareholders of the Plaintiff;

(ii)   HCA 1137/2011: the Defendant and the other relevant parties sought declarations to impugn the chain of transactions (including the Minehead Agreements, the Transfers to BVI Companies, the April 2010 Appointments, the February 2011 Transfers, the February 2011 Appointments and the 1^st Shares Allotment) which culminated in the transfer of the Charged Shares to Tasty and Federal and their purported status as shareholders and directors of the Plaintiff.

14.By a summons dated 24 January 2020 taken out in the Consolidated Actions, the Defendant sought, inter alia, to introduce a new cause of action to invalidate the 2^nd Shares Allotment.  The proposed amendment was refused by Linda Chan J on the grounds that: (i) the amendment relates to a new cause of action which accrued after the commencement of the counterclaim; (ii) the limitation period for this new claim had expired before the issue of the amendment application; and (iii) the new claim does not arise out of the same facts or substantially the same facts as a cause of action in respect of which relief has already been claimed in the action by the party applying for the amendment.  The Defendant and the related parties lodged an appeal against the said decision.  The appeal was dismissed by the Court of Appeal[1], which, inter alia, affirmed the decision of Linda Chan J on the said proposed amendment.

15.The Plaintiff commenced the present action against the Defendant on 28 October 2020.   At first, the Defendant conducted the proceedings without legal representation.  Trial dates were originally fixed on 10 July 2023 with 4 days reserved.  It was only on 23 March 2023 that the Defendant, with legal representation, made the present application, and consequentially the trial dates were vacated.

16.By his affirmation dated 23 March 2023[2], the Defendant offered an undertaking not to infringe the relevant trade marks or to commit acts of passing-off of the Plaintiff’s bakery products until the determination of this action.

Discussions

17.In support of the present application, Mr Ling, counsel for the Defendant, relies on Kammy Town Limited v Super Glory Corporation[3]  and Foshan Hongda Development v East Legend Investment[4] to argue that, when the court is faced with a complaint of lack of authority to sue, the court should determine the matter at the earliest opportunity.  It should not be raised as a defence, for it is not a defence.  It should not be left to be determined at trial together with the other substantive issues.  As the disputes in the Consolidated Action will affect the standing of the Plaintiff to sue in the present case, this court should stay the present proceedings pending the final determination of the claims in the Consolidated Actions.  Alternatively, the court should make a determination about the Plaintiff’s authority to sue before proceeding with the adjudication of the other substantive issues.

18.Furthermore, Mr Ling submits that the non-granting of the stay would prejudice the Defendant.  Apart from the wasteful duplication of costs in the two proceedings, the Defendant will suffer serious prejudice if the court in the Consolidated Actions subsequently rules the claims in his favour.  It is unfair to the Defendant that he is subject to a permanent injunction, if he were to lose in the present action, as a result of an action which was commenced without proper authority.

19.Despite the able submissions of Mr Ling, I cannot agree with his arguments.

20.Whist there is no dispute about the general principles set out in §17 above, in determining whether to grant a stay of the proceedings, the ultimate consideration is what would serve the ends of justice between the parties to the litigation and the administration of justice generally.[5]

21.The Defendant’s main argument is that, by reason of the Defendant’s complaints in the Consolidated Actions, the Plaintiff does not have the authority to sue in the present case.  If the Defendant succeeds in the Consolidated Actions, it would have 3 consequences:

(i)    each of the transactions, appointments and shares allotments after 2001 would be invalidated or set aside;

(ii)   the shareholding and directorship of the Plaintiff would revert to its original state as at 2001, and the Defendant’s camp would retain a majority on the board and at the shareholders’ level; and

(iii)  the present action, instituted by Tasty and Federal (who were never validly appointed directors) in 2020, could not have been commenced with proper authority.

22.I agree with Ms Leung, counsel for the Plaintiff, that such argument has no merit at all.  It is well-established that the daily operation of a company business (if not subject to challenge), including resolutions passed regarding various matters such as allotment of shares and holding of meetings, are prima facie valid, and the company can run its course of business as usual.

23.The Defendant has not been able to obtain any injunction in the Consolidated Actions to prohibit Tasty and Federal from managing the Plaintiff’s business.  According to the consent order made by the court in HCA 1137/2011 dated 14 December 2011 (“the Consent Order”), what the Defendant got instead was an order which, inter alia, allows him access to the Plaintiff’s computer and accounting system but nothing more.

24.Further, the argument that Tasty and Federal should cease to exercise their rights as shareholders or directors to operate the Plaintiff’s business pending trial of the Consolidated Actions is not right and against the meaning of the Consent Order, which requires the money of and proceeds generated by the Plaintiff be used for its business.^[6]  I agree with Ms Leung that the plain intention and meaning of the Consent Order is that Tasty and Federal would be allowed to continue to exercise their rights as shareholders and directors and manage the Plaintiff’s business. Otherwise, the order requiring Tasty and Federal to use all the money and proceeds only for the purpose of the Plaintiff’s business would be rendered otiose. The Consent Order was made by consent and both parties were legally represented.  It is an affront to the Consent Order if the Defendant is allowed to challenge Tasty and Federal’s right to manage the Plaintiff (which would of course include the Plaintiff’s authority to commence the present action to protect its intellectual property rights), which can be viewed as an attempt to obtain the failed injunction through the backdoor.

25.I agree with Ms Leung that, insofar as the present application is concerned, the question this court has to decide today is whether the Plaintiff’s board has any locus to commence this action.  The result of the Consolidated Actions is a future possible event which is not relevant to the present authority to sue.  As rightly pointed out by Ms Leung, the present case is not a deadlock situation.  Shares have already been transferred and registered in the name of Tasty and Federal and the board has also been reconstituted.  If the Defendant’s argument is right, it would mean that in all cases where a former shareholder or director is challenging the validity of the transfer and without obtaining an injunction to restrain the newly appointed shareholders or directors from exercising their rights, the existence of a pending action would be sufficient to prevent the current board from continuing the business of the company.  It cannot even be authorised to defend an action if the company is sued.  This simply cannot be right.

26.More importantly, the purported challenge on the validity of the 2^nd Shares Allotment does not form part of the claims in the Consolidated Actions.  The Defendant and the related parties did make an attempt to amend the pleadings to include such claim.  In refusing the amendment application in the Consolidated Actions, Linda Chan J had made it clear that, since the limitation period for challenging the 2^nd Shares Allotment or the August EGM has long passed and no other shareholder has challenged its validity, the 2^nd Shares Allotment ought to stand.  Losing the opportunity of commencing an action to challenge the 2^nd Shares Allotment, there is no possibility that the Defendant would be able to restore the position back to 2001.

27.Indeed, even if the Defendant were to succeed in the Consolidated Actions, with the 2^nd Shares Allotment, Tasty and Federal would remain to be the majority shareholders, and any future reinstatement or removal of directors would not take any retrospective effect.  It is thus not open for the Defendant to say he would be able to gain control of the board such that no claim for infringement of intellectual property rights would be pursued against him.  Hence, I agree with Ms Leung that no useful purpose would be served by staying the present proceedings pending the outcome of the Consolidated Actions.

28.There is also another important reason as to why the Defendant’s application must fail.  The issues in the present case and the Consolidated Actions are different and it would be unjust to stay the present proceedings or to allow the Defendant to challenge the Plaintiff’s authority to sue.

29.It is not disputed that the Plaintiff owns the the Plaintiff’s Names and Marks.  Putting the Defendant’s case at the highest and that his complaint relating to the transfer of the Charged Shares is valid, he cannot, without proper authorisation from the Plaintiff (which there is clearly none in the present case), use the Plaintiff’s Names and Marks to run his own  business.  The only issue in this action is simply whether the Defendant has committed any infringing acts.  If he has done so, why should the Plaintiff not be permitted to sue the Defendant?  Even if the Defendant can be reinstated as a director and shareholder retrospectively (which I do not accept by reason of the aforesaid analysis), it would not take away the Plaintiff’s cause of action to sue an alleged wrongdoer for infringement of the Plaintiff’s intellectual property rights.  On the basis of the Plaintiff’s claim, instead of seeking appropriate relief in the Consolidated Actions or any other legal action, the Defendant simply took the law into his own hand by using the Plaintiff’s Names and Marks in running his own business.  Even if the Defendant’s challenge against the transfers of the Charged Shares is successful, there is still no justification for the Defendant to commit the alleged infringing acts.  One must not forget that there are other shareholders of the Plaintiff and the Defendant cannot treat the Plaintiff’s properties as his own.

30.In my judgment, there is no injustice to the Defendant for the Plaintiff to proceed with the trade mark infringement and passing-off claim against him.  Even the offer of an undertaking as mentioned in §16 above cannot remove the prejudice suffered by the Plaintiff in not able to take action to protect its intellectual property rights.

31.In an attempt to confuse the issues, the Defendant says that the intellectual property rights of the Plaintiff had been charged by itself and one Hang Heung Hop Kee Investment Company Limited to Allied Bless Limited and this is a live issue in the Consolidated Actions.^[7]  As pointed out by Ms Leung, this is factually incorrect.  Such charge has already been discharged some time ago and registered in the Companies Registry.^[8]  In any event, the Defendant, presumably upon legal advice, did not set out the existence of such charge as an issue in dispute in the Consolidated Actions.  Hence, the Defendant is only trying to confuse the issues by raising such matter.

32.The Defendant also tries to rely on the allegations in an earlier case, HCMP 823/2018, to challenge the Plaintiff’s standing.  However, after rounds of court procedures, the Defendant still failed to challenge the validity of an EGM of the Plaintiff held on 28 May 2018 (“the 2018 EGM”) and the board of the Plaintiff.  In any event, HCMP 823/2018 had already been discontinued by consent on 30 January 2019, and there is no longer any issue over the validity of the 2018 EGM and the board of the Plaintiff.[9]

33.The Defendant also relies on the dicta of DHCJ Le Pichon’s in Tsoi Chik Sang Lawrence v Tasty Catering[10] and complains about the lack of evidence on the 2^nd Shares Allotment.  Apart from the fact that the Defendant was not a party to that case, the Court of Appeal in Tasty Catering Group Ltd. v Cheng Hung Kit[11] had expressly cautioned about the relevance of such dicta.  Hence, the Defendant’s complaint has no merit at all.

34.It is not necessary for me to deal with the other arguments raised by the Defendant, such as: (i) he was “authorised” to manufacture the bakery products for the Plaintiff as he was the holder of various bakery licences; and (ii) the Plaintiff was in breach of different regulations in manufacturing its products through another factory.  Apart from the fact that these contentions may not be factually correct or may not have any merit, they are not relevant for the purpose of the present application.

35.For the above reasons, I dismiss the Defendant’s summons.  I also make a costs order nisi that the costs of the summons be to the Plaintiff, which shall be made absolute 14 days after the date of the handing down of this Decision.

Ms Joyce Leung and Ms Kelly Cheng, instructed by KCL & Partners, for the Plaintiff

Mr Ling Chun Wai and Mr Kwan Ping Kan, instructed by Robertsons, for the Defendant