Pang Ieng Lun and Another v. Zhang Zhijian
Read the full judgment text of HCA 1224/2022 on BabelCite. This High Court CFI judgment was delivered on 5 May 2026.
2. The Company was at the material times and still is a holding company of NY Global Hong Kong Limited (“ NY Global ”). Its previous name before 3 November 2016 was NBTY Global Hong Kong Limited (“ NBTY ”). NY Global in turn held and holds a company incorporated in the PRC, namely, 奧德美生物科技(中山)有限公司 (the “ PRC Company ”). In the evidence, while it can be seen that Mrs Lou, Mr Lou, Mr Zhang and Mr Ma were described as shareholders of the PRC Company, as a matter of strict law, they were not. But th
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HCA 1224/2022 [2026] HKCFI 2561 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO 1224 OF 2022 ________________
(by original action)
(by counterclaim) ________________
________________________ J U D G M E N T ________________________ I. INTRODUCTION 1.This is a trial of:-
II. BACKGROUND 2.The Company was at the material times and still is a holding company of NY Global Hong Kong Limited (“NY Global”). Its previous name before 3 November 2016 was NBTY Global Hong Kong Limited (“NBTY”). NY Global in turn held and holds a company incorporated in the PRC, namely, 奧德美生物科技(中山)有限公司 (the “PRC Company”). In the evidence, while it can be seen that Mrs Lou, Mr Lou, Mr Zhang and Mr Ma were described as shareholders of the PRC Company, as a matter of strict law, they were not. But they could be understood as such in loose sense, given that they owned the Company, which in turn wholly owned NY Global or NBTY, which in turn wholly owned the PRC Company. 3.Mrs Lou, Mr Lou, Mr Zhang and Mr Ma had been acquaintances. In March 2017, Mrs Lou, Mr Lou, Mr Zhang and Mr Ma signed two documents, namely, “收購NBTY股東支付情況表” and “收購NBTY各股東分攤明細表”. The essence of these documents show that Mrs Lou, Mr Lou, Mr Zhang and Mr Ma made contribution to the acquisition of NBTY. 4.On 7 August 2017, Mrs Lou, Mr Lou and Mr Zhang entered into the SHA in respect of their shares in the Company. It provides that:-
5.On the same day, Mr Lou as trustee and Mr Ma as the beneficial owner entered into a declaration of trust (the “Declaration of Trust”) prepared by Messrs Chan and Cheng in respect of 20,000 out of 30,000 shares in the Company held in the name of Mr Lou. These 20,000 shares in the Company are the very same 20,000 Shares under the counterclaim. 6.On 26 December 2018, a board meeting of the PRC Company was convened. Mrs Lou, Mr Lou and Mr Zhang all attended the meeting. At the meeting, according to its minutes, it was unanimously resolved, among others, that Mr Zhang had to repay a loan of RMB15,720,000 (the “RMB Loan”) to the PRC Company on or before 1 June 2019. The relevant resolution reads as follows:-
7.On 18 February 2019, Mr Zhang made a payment of RMB1,000,000 to the PRC Company. There is a dispute over the nature of this payment. Mrs Lou and Mr Lou allege that this payment was a partial repayment of the RMB Loan. Mr Zhang alleges that this payment was a loan advanced to the PRC Company upon the request of the legal person (法人代表) of the PRC Company, nothing to do with the RMB Loan. 8.No repayment or no further repayment of the RMB Loan was made before 1 June 2019. As a result, in late 2019, the PRC Company commenced a claim in Zhongshan Intermediate People’s Court against Mr Zhang for, among others, the repayment of the RMB Loan. 9.On 24 September 2021, Mr Lou transferred the 20,000 shares in the Company (the “20,000 Shares”) to Mr Ma. On 28 September 2021, Mr Ma transferred the 20,000 Shares to one of his daughters Ms Ma. 10.On 30 September 2020, the PRC Company’s claim in Zhongshan Intermediate People’s Court was dismissed. The PRC Company appealed to the High People’s Court of Guangdong Province (the “High People’s Court”). By a judgment dated 30 December 2021 (the “PRC Judgment”), the High People’s Court allowed the appeal in respect of the claim for repayment of the RMB Loan, ordering Mr Zhang to make full repayment within 10 days. During the hearing, the PRC Company made the allegation that the RMB1,000,000 payment was a partial repayment of the RMB Loan, and so the amount to be repaid should be RMB14,720,000. Mr Zhang’s response was that the RMB1,000,000 payment was not a repayment of any loan but a loan advanced to the PRC Company upon the request of the legal person of the PRC Company. The High People’s Court, taking a pragmatic approach, did not make any finding on this dispute. In the relevant part of the PRC Judgment, it reasoned:-
11.According to Mr Zhang, the PRC Judgment was sent to the parties’ legal representatives on 16 March 2022. No appeal was made. 12.Pending the determination of the appeal in the High People’s Court, upon the PRC Company’s application, the High People’s Court made a seizure order and a freezing order (the “PRC Seizure and Freezing Order”) against Mr Zhang’s assets. 13.On 29 April 2022, Mrs Lou and Mr Lou served on Mr Zhang a notice of termination (the “Notice of Termination”) of the SHA pursuant to Clause 15.5 of the SHA and a notice of transfer of shares pursuant to Clause 15.6 of the SHA (the “Notice of Transfer”) in respect of Mr Zhang’s shares in the Company. As at that point of time, Ms Ma was also a shareholder, but was not a party to the SHA. 14.No transfer of Mr Zhang’s shares ever took place. 15.On 7 May 2022, Mr Zhang wrote to the PRC Company to request confirmation of the calculation of the total amount payable (including interest) under the PRC Judgment. There was, however, no reply. 16.On 25 May 2022, upon the PRC Company’s application, the High People’s Court issued an order of execution (the “PRC Execution Order”). Subsequently, Mr Zhang agreed to repay the RMB Loan by 5 instalments between 26 May 2022 to 27 June 2022 totalling RMB17,139,762.56. 17.By 27 June 2022, all the instalments had been fully made. 18.In July 2022, both the PRC Seizure and Freezing Order and the PRC Execution Order were discharged. III. THE PLAINTIFF’S CLAIM 19.Mrs Lou and Mr Lou’s claim is, in summary:-
IV. MR ZHANG’S DEFENCE 20.Mr Zhang’s defence is, in summary:-
V. MR ZHANG’S COUNTERCLAIM 21.Mr Zhang mounts a counterclaim against Mrs Lou, Mr Lou, Mr Ma and Ms Ma for, among others, an order that the registration of the 20,000 Shares in the name of Ms Ma is null and void in breach of Clauses 2.1, 2.3, 9.1 and 10.1. In particular, Mr Zhang avers that:-
22.Therefore, Mr Zhang claims that the 24 September Shares Transfer and the 28 September Shares Transfer (collectively, the “Share Transfers”) are null and void, and the Register of Members of the Company should be rectified to reflect that. Essentially, the 20,000 Shares should be registered back in the name of Mr Lou. VI. DEFENCE TO COUNTERCLAIM 23.Mrs Lou, Mr Lou, Mr Ma and Ms Ma jointly filed the same Defence to Counterclaim (together with Mrs Lou and Mr Lou’s Reply to Mr Zhang’s Defence). Their Defence to Counterclaim is, in gist:-
VII. ISSUES 24.From the above, the issues in respect of Mrs Lou and Mr Lou’s claim against Mr Zhang are, broadly:-
25.The issues in respect of Mr Zhang’s counterclaim against Mrs Lou and Mr Lou, and Mr Ma and Ms Ma are, broadly:-
VIII. EVIDENCE 26.For Mrs Lou and Mr Lou as well as Mr Ma and Ms Ma, the witnesses are Mrs Lou, Mr Lou, Mr Wai Wing Fai Desmond (“Desmond Wai”) of Smartlink Business Consultants Ltd., the company secretary of the Company and Ms Ma. Mr Ma filed a witness statement, but just the day before the commencement of the trial, Mrs Lou, Mr Lou, Mr Ma and Ms Ma’s solicitors wrote to the Court that Mr Ma would not attend the trial for cross-examination. No reason was proffered as to his non-attendance. Nor did Mr Vincent Chen, leading Ms Jenny Zhang, counsel for Mr Zhang, ask any of the witnesses for a reason. 27.For Mr Zhang, he himself and his wife Madam Wang Xiuling (“Mrs Zhang”) are the witnesses. 28.Although the PRC Judgment is referred to and the effect of the PRC Seizure and Freezing Order are relied upon by Mr Zhang, no expert evidence has ever been sought and filed. I should also say that the PRC Judgment is not relied upon for res judicata or abuse of process, apparently due to a mere plea in §10(3) of Mr Zhang’s defence the by reason of Hollington v F. Hewthorn & Co. Ltd [1943] KB 587, the PRC Judgment is not admissible evidence of the contents thereof. I have serious doubt over whether that case would apply to exclude res judicata or abuse of process in the wider sense when the parties are the same, or when the parties are privies to the same previous parties. Here, the PRC Judgment was between Mr Zhang and the PRC Company, to which Mrs Lou and Mr Lou are arguably privies. In any event, since no res judicata and abuse of process are raised, these are not issues before me. IX. WHETHER MR ZHANG WAS INDEBTED TO THE PRC COMPANY IN RESPECT OF THE PRC LOAN 29.In respect of the issue of whether Mr Zhang was indebted to the PRC Company in respect of the PRC Loan, a substantial part of the evidence in this regard is on how frustrated Mr Zhang felt about how Mrs Lou and Mr Lou treated certain funds initially invested in an investment project in the PRC. He grudged about how Mrs Lou and Mr Lou treated him unfairly (or in his own word, “deceptively” which is not founded on any cogent evidence) so that eventually, the funds or part of the funds were treated as the PRC Loan he owed to the PRC Company. 30.However, even on Mr Zhang’s own evidence, consistent with the minutes of the PRC Company board meeting on 26 December 2018 (the “2018 PRC Board Minutes”) which he himself signed, he accepted (at §54 of his own Witness Statement filed on 5 July 2023) that he had personal liability to repay the PRC Loan to the PRC Company by 1 June 2019. This acceptance is also consistent with the following contemporaneous documents:-
31.I therefore find that by 26 December 2018, Mr Zhang was indeed indebted to the PRC Company in respect of the PRC Loan. 32.On a side note, Mr Chen raised an issue on the payment term of the PRC Loan. He submits that there was no deadline for the repayment of the PRC Loan, and so there was no default of repayment of the PRC Loan. His reasons are that in the 2018 PRC Board Minutes, while Mr Zhang agreed to repay on or before 1 June 2019, the board also resolved that if Mr Zhang failed to repay on or before 1 June 2019, the board would convene a meeting to discuss the matter. He submits, therefore, that there was no deadline, and no default in repayment. 33.With respect, his such submissions are made to be rejected as completely unmeritorious. First, lack of a deadline for repayment is not pleaded. If Mr Zhang would like to say that the PRC Loan was not due, it is a fact that must be pleaded. Second and in any event, that the board resolved that it would convene a meeting to discuss the matter does not mean that 1 June 2019 was not the deadline. Mr Zhang agreed to pay by that date. If he failed to do so, the board may convene a meeting to discuss how to deal with the default, for example, to commence an action, to extend the deadline, and so on. The objective meaning and purpose of stating the date of 1 June 2019 is plain and obvious – it would be the deadline. X. WHETHER MR ZHANG’S PAYMENT OF RMB1,000,000 ON 18 FEBRUARY 2019 WAS A PARTIAL REPAYMENT OF THE PRC LOAN 34.As found above, by 26 December 2018, Mr Zhang was indebted to the PRC Company in respect of the PRC Loan. About one and a half months later, on 18 February 2019, Mr Zhang made a payment of RMB1,000,000 to the PRC Company. Mr Zhang’s evidence is that this payment was not repayment of the PRC Loan. According to his evidence before me, it was the PRC Company’s finance staff who requested Mr Zhang to advance the RMB1,000,000 as capital to the PRC Company for its operation and business. Apparently, Mr Zhang even suggests (as recorded in the PRC Judgment) that this RMB1,000,000 was a loan he advanced to the PRC Company. 35.In support, Mr Chen highlights the following evidence for my consideration. 36.First, in a notice to shareholders (股東告知函) issued by the PRC Company on 22 February 2019 and another on 6 March 2019, it was stated that the PRC Company’s cashflow problem had been alleviated by RMB2,000,000 paid by each of Mrs Lou and Mr Ma described as “提供借款” and the RMB1,000,000 payment by Mr Zhang described as “轉入”. Mr Zhang made no denial and kept silent to this assertion. One would have thought that Mr Zhang would make response if this assertion was not correct. Mr Chen submits that if this RMB1,000,000 payment was meant to be a repayment of the PRC Loan, it would have been described as “還款” or the like. With respect, in my view, such reading is out of context:-
37.Second, in the PRC Judgment, it was stated at page 3 that the PRC Company’s case was that the PRC Company “不清楚張志建於2019年2月18日向其汇付的100萬元的性質和用途、也未與張志建確認。因張志建的利害關係人陳文軒將其記載為張志建對案涉款項的還款，法庭應予支持”. Mr Cheng submits that even the PRC Company itself was not sure about the nature of the RMB1,000,000 payment. In my view, such reading of the PRC Judgment is out of context:-
38.Third, while Mr Zhang’s evidence before me is that the RMB1,000,000 was paid to the Company as capital for its business and operation, his evidence in the PRC litigation was, inconsistently, that it was a loan advanced to the Company. There is no written evidence of Mr Zhang’s allegation that the PRC Company requested him to advance money to the PRC Company for its operation and business. While RMB1,000,000 was not a large sum in the overall scheme of things, it was still a significant sum and one would have expected that certain documents should have been prepared when it was intended to be a loan or capital to the PRC Company. Further, even if the PRC Company did request Mr Zhang to advance money (as loan or as capital) to the PRC Company for its operation and business, in my view, in the light of the PRC Loan which Mr Zhang had been indebted since December 2018, Mr Zhang would have voiced out that the payment requested for the PRC Company’s operation and business should be taken as partial repayment of the PRC Loan. That Mr Zhang himself also regarded this payment as repayment is also consistent with his own lack of traversing the allegation in the notice to shareholders issued on 22 February 2019 that it was a repayment and his lack of explanation for such lack of traversing. 39.Having considered the above evidence and submissions, I find that the RMB1,000,000 payment made by Mr Zhang on 18 February 2019 was a partial repayment of the PRC Loan. XI. WHETHER THE NOTICE OF TERMINATION ISSUED PURSUANT TO CLAUSE 15.5 OF THE SHA SHOULD HAVE BEEN SERVED BY ALL THE OTHER SHAREHOLDERS INCLUDING NON-CONTRACTUAL SHAREHOLDERS 40.For the question of whether the Notice of Termination should have been served by all the other shareholders including Non-contractual Shareholders, it is a question of contractual construction. The legal principles in relation to construction of a commercial contract are well established. The construction is a unitary, iterative, objective exercise to ascertain the parties’ intention with reference to the natural and ordinary meaning of the words in context and bearing in mind the purposes of the provisions and the contract as a whole. The Court should also consider factual matrix know to the contractual parties at the time of contracting, and pay regard to the common and commercial sense especially when the meaning of the provision in question is not clear, but should be cautious against re-writing the contract. In general, pre-contractual negotiation and conduct subsequent to the contract are irrelevant. Further, since it is an objective exercise, what the parties think subjectively are, in general, irrelevant, save and except in mutual mistakes, which is not an issue in the present case. 41.At the time of the issuance of the Notice of Termination, Ms Ma was the only other shareholder and the only shareholder who was not a party to the SHA. Mr Chen submits that according to Clause 15.5 of the SHA, the Notice of Termination should have been served by all the other shareholders including Non-contractual Shareholders, and because the Notice of Termination was served by Mrs Lou and Mr Lou only, it was invalid. In support of his way of construing Clause 15.5, he submits:-
42.With respect, I am unable to agree to such submissions, for the following reasons:-
43.Having considered the above, not only do I disagree with Mr Chen’s submissions, I find, as a matter of contractual construction, that the Notice of Termination may validly be served by all the other contractual shareholders without Non-contractual Shareholders. 44.Before I turn to the next issue, I should mention that Mrs Lou and Mr Lou’s alternative case is that before they issued the Notice of Termination, they did notify Mr Ma and Ms Ma. Given my finding above, this alternative case is unnecessary. If necessary, I would find that neither Mr Ma nor Ms Ma was notified of such Notice of Termination, because there is no documentary evidence of such notification and the contradictory evidence between Mrs Lou and Mr Lou: while Mrs Lou said that she and Mr Lou had yum-cha gatherings with Mr Ma from time to time and such notification was made during such gatherings, Mr Lou said that there was no such yum-cha gathering. XII. WHETHER CESSATION OF REPAYMENT ITSELF WOULD BE SUFFICIENT TO TRIGGER CLAUSE 15.5 45.Mr Chen submits that cessation of repayment would trigger Clause 15.5 only if it is related to his bankruptcy or insolvency. In summary, he submits that Clause 15.5(1), Clause 15.5(2) and Clause 15.5(3) are three distinct categories for triggering Clause 15.5, and Clause 15.5(1) is a category about insolvency. Given that cessation of repayment is put under Clause 15.5(1), it must be understood to be related to insolvency. He also submits that the purpose of Clause 15.5 is to prevent paralysing the Company by the defaulting shareholders, and mere cessation of repayment would not have such effect. Bearing in mind that the purpose of the SHA was for the purpose of long-term development of the Company’s business as stated in Clause 3.1, cessation of repayment must be related to insolvency. 46.It is convenient to quote Clause 15.5 again here:-
47.In my view, it is too general to say that Clause 15.5(1) is in relation to insolvency. It is in my view a category in relation to the defaulting shareholder’s financial position. I take this view for the following reasons:-
48.Thus viewed, Clause 15.5(1) is not a category related only to insolvency, but more broadly to the defaulting shareholder’s financial position. In the premises, I find that a mere cessation of repayment of a loan would fall within Clause 15.5(1) and could be relied upon to invoke Clause 15.5. In any event, in the light of my finding about the lack of security of the PRC Loan below under Part XIII, even on Mr Chen’s construction, Clause 15.5(1) could still be triggered. 49.For the sake of completeness, I should mention that Mr Ryan Law, counsel for Mrs Lou, Mr Lou, Mr Ma and Ms Ma, submits that the original Chinese words “停止” simply means “withholding”, not necessarily implying any cessation or stop of some previous action. His reasoning is that “停止” means “cease” or “stop”, and then he refers to the English dictionary for the meaning of “cease” and “stop”. With respect, I should look at the Chinese Dictionary for the meaning “停止”, which, according to 商務印書館(香港)有限公司 – 現代漢語詞典(修訂版), means “不再進行”. This clearly implies some previous action. XIII. WHETHER THERE WAS ANY CESSATION OF REPAYMENT OR FAILURE TO MAKE PAYMENT IN THE LIGHT OF THE EXISTENCE OF THE PRC SEIZURE AND FREEZING ORDER 50.Mr Zhang made a partial repayment of the PRC Loan on 18 February 2019, and did not make any further repayment after that. So much so that the PRC Company had to commence litigation in the PRC for the repayment of the PRC Loan. Mr Zhang’s evidence that he received the PRC Judgment only on 16 March 2022 is not traversed by any positive evidence, and I find no reason not to accept it. But even accepting it, and upon the parties common ground that the PRC Judgment became effective only upon Mr Zhang’s receipt on 16 March 2022, Mr Zhang still did not make any further payment on 26 March 2022 (the date of expiry of 10 days for payment as ordered by the PRC Judgment) or thereafter until the first instalment made on 26 May 2022. 51.One would have thought that between 18 February 2019 and 26 March 2022, viewed in any sense, there was the cessation of repayment and put to the highest for Mr Zhang, the cessation took place on 26 March 2022. However, Mr Chen submits that there was no cessation of repayment. He relies on the PRC Seizure and Freezing Order to say that given that the repayment by Mr Zhang was secured by these seized and frozen assets, this should be regarded as repayment or regarded as no default of repayment. With respect, I disagree, for the following reasons:-
52.Mr Chen also submits that before the PRC Judgment became effective, Mr Zhang did not make any payment under the PRC Judgment. However, such submissions ignore what led to the PRC Judgment, namely, the PRC Loan, a partial payment thereafter and then cessation of any further payment, necessitating the litigation in the PRC Courts. 53.In the premises, I find that there was the cessation of repayment under Clause 15.5(1) and put to the highest for Mr Zhang, the cessation took place on 26 March 2022. 54.The 21-day period for remedying a breach under Clause 15.5(1) expired on 16 April 2022, and therefore, the Notice of Termination, issued on 29 April 2022, was issued after the expiry of the 21-day period. XIV. CONCLUSION ON MRS LOU AND MR LOU’S CLAIM 55.In the circumstances, by the time of the issuance of the Notice of Termination, there was a cessation of repayment by Mr Zhang as defined under the second limb of Clause 15.5(1). Given that the Notice of Termination would only have to be served by all the other contractual shareholders, that is, Mrs Lou and Mr Lou only, the Notice of Termination was validly served. As a result, Mr Zhang should offer to sell his shares in accordance with Clause 10 of the SHA as obligated by Clause 15.6 of the SHA. 56.Mr Chen submits that the relief sought in the prayer of the Statement of Claim is simply a transfer under Clause 10 within 28 days, and such relief is vague and not something required under Clause 10, because under Clause 10, the transfer of the shares has to be a sale and there is no such time limit as the 28 days sought. He may be right when reading the relief literally. However, it is clear that the relief is a specific performance of Clause 15.5 and Clause 10. So long as the gist of the relief being sought is clear, it is always for the Court ultimately to polish and refine the exact terms of the relief. I do not see any ground to refuse the relief in toto simply because the prayer is drafted as it is in the Statement of Claim. 57.Therefore, I make an order of specific performance that Mr Zhang shall forthwith sell his shares to Mrs Lou and Mr Lou as “其他股東” in accordance with Clause 10. XV. WHETHER ANY SHARE TRANSFER UNDER THE DECLARATION OF TRUST FELL WITHIN THE EXCEPTION UNDER CLAUSE 10.1(8) OF THE SHA 58.Clause 10.1(8) provides that:-
59.The meaning of this clause is clear enough – the restrictions on transfer of shares under Clause 10 does not apply to transfer of shares under any declaration of trust made before the SHA became effective. 60.Both the Declaration of Trust and the SHA were stated to be signed on 7 August 2017. There is no dispute that they were indeed signed on the same day. Mrs Lou and Mr Lou’s evidence is that on 7 August 2017, they, Mr Ma, Mr Zhang and some others attended a meeting in the office of the PRC Company for signing of the two documents. Mrs Lou and Mr Lou’s evidence is that both the Declaration of Trust and the SHA were signed in the presence of Mr Ma and Mr Zhang, and that the Declaration of Trust was signed before the SHA was signed. Mr Zhang’s evidence is that only the SHA was signed in his presence as well as Mrs Lou, Mr Lou and Mr Ma’s presence, and no other documents were signed in his presence. 61.Clause 10(8), in my view, was added because of the parties’ awareness or expectation of existence of some trust arrangement; otherwise, there would be no point in having this clause. There is no evidence or suggestion that there was any other trust arrangement. At least for Mr Lou, he knew that the Declaration of Trust was the only trust arrangement referred to in Clause 10(8), and for the exception provided in Clause 10(8) to be effective, Mr Lou, and thus Mr Ma being the beneficial owner, would have known that the Declaration of Trust had to be effective prior to the SHA becoming effective. Therefore, in my view, it is more likely than not, and thus I find, that the Declaration of Trust was signed before the SHA was signed. 62.In my view, there is no requirement that the trust referred to under Clause 10(8) is a trust known to all the parties to the SHA. If there would be a requirement, it could have been easily set out. In any event, both the Declaration of Trust and the SHA were signed on the same day. While Mr Zhang alleges in his evidence he had no idea of the Declaration of Trust, he did know that Mr Lou would hold the shares on behalf (代持) of Mr Ma. Putting aside the legal terminology of “trust”, clearly he knew that Mr Ma would be the true owner. Therefore, there was nothing to hide from Mr Zhang of any trust arrangement between Mr Lou and Mr Ma. In any event, there was no requirement that the trust arrangement under Clause 10(8) had to be in writing. Given that the two documents were signed on the same day, and that Mr Ma was also present in the meeting for signing the two documents, it is more likely than not, and thus I find, that the Declaration of Trust was signed also in Mr Zhang’s presence and therefore Mr Zhang knew of the Declaration of Trust. 63.In the circumstances, I find that transfer under the Declaration of Trust would fall within the exception under Clause 10(8) of the SHA. 64.The question is, was the 24 September Shares Transfer a transfer under the Declaration of Trust? XVI. WHETHER THE 24 SEPTEMBER SHARES TRANSFER WAS A TRANSFER UNDER THE DECLARATION OF TRUST 65.For this question, I should mention that in Mr Zhang’s witness statements, it was raised that the 20,000 Shares in the Shares Transfers were not made under the Declaration of Trust in any event, because according to Mr Zhang’s evidence, in or around May 2019, Mr Ma sold or transferred all his beneficial interest in the 20,000 Shares to Mr Lou. As a result, the beneficial interest merged with Mr Lou’s legal interest in the 20,000 Shares, and Mr Lou became the absolute owner of the 20,000 Shares, and the Declaration of Trust terminated. There was no application for leave to file a Reply to Defence to Counterclaim, and thus this issue has not been pleaded. The agreed list of issues filed by the parties is, with respect, too broad to have any value of assistance. For example, in respect of the Notice of Termination, the agreed issue is only “Whether the Notice of Termination and the Notice of Transfer served by Ps on D are valid and sufficient in accordance with the SHA”. Nothing was mentioned about the parties’ dispute on which shareholders to serve, about the parties’ dispute over whether there was the PRC Loan in the first place, or about the parties’ dispute over whether the RMB1,000,000 was a repayment of the PRC Loan. 66.At the outset of the trial, I raised a query whether this issue of Mr Ma’s transfer of his interest in the 20,000 Shares to Mr Lou should have been pleaded before Mr Zhang could properly rely on it. In response, Mr Chen submitted that it was Mrs Lou, Mr Lou, Mr Ma and Ms Ma’s case that the 24 September Shares Transfer was carried out under the Declaration of Trust, and thus it was their burden to prove that. Mr Chen effectively submitted that he only raised the evidence to say that their case could not be established. Mr Law did not submit otherwise. He did not hop onto the query I raised, and in fact, during the whole trial, he also engaged in asking questions on whether before the 24 September Shares Transfer, Mr Ma had transferred his beneficial interest in the 20,000 Shares to Mr Lou. Further, his closing submissions take no issue on the pleading issue and engaged in submission on this point. 67.I also note that in the first round of witness statements, Mr Zhang did raise this point at §83 of his Witness Statement filed on 5 July 2023 that the transfer of the interest from Mr Ma to Mr Lou in 2019 extinguished the Declaration of Trust. Mrs Lou, Mr Lou, Mr Ma and Ms Ma had sufficient opportunity to respond, and in fact, Mrs Lou did file a supplemental witness statement on 12 December 2023 in reply to Mr Zhang’s Witness Statement, though she was silent on this point. Therefore, in my view, in considering this question, I should also consider Mr Zhang’s case that Mr Ma transferred his beneficial interest in the 20,000 Shares in May 2019 to Mr Lou such that the Declaration of Trust terminated. 68.There are two preliminary points I need to make. 69.First, I make it clear that the case of Mrs Lou, Mr Lou, Mr Ma and Ms Ma is that there was no transfer of Mr Ma’s beneficial interest in the 20,000 Shares to Mr Lou at all. Their case is not that there was the transfer, but the transfer was not intended to destroy the trust under the Declaration of Trust by the operation of the doctrine of merger. I make this clear because I can see that there might be argument that a transfer of the beneficial interest to the legal owner would not necessarily mean that the two interests are merged if the parties’ intention is that there would be a sub-sub-trust. If Mr Zhang proves his allegation that Mr Ma did transfer his beneficial interest in the 20,000 Shares to Mr Lou in May 2019, then it would be for Mrs Lou, Mr Lou, Mr Ma and Ms Ma to raise such an argument. Since such an argument is not raised, then if Mr Zhang proves his allegation, there would be merger of the legal and beneficial interest in the 20,000 Shares thereby terminating the Declaration of Trust. 70.Second, as mentioned above, Mr Ma prepared a witness statement, but only one day before the trial was to commence, the solicitors acting for Mrs Lou, Mr Lou, Mr Ma and Ms Ma indicated that Mr Ma would not be tendered for oral evidence. No explanation was given. When Mrs Lou, Mr Lou, Ms Ma and Desmond Wai were giving evidence, Mr Chen, for Mr Zhang, did not cross-examine any of them as to why Mr Ma did not come to give oral evidence. Without any cross-examination on the reason, it would not be fair for me to draw adverse inference: see Perpetual Wealth (Hong Kong) Limited v Be Solutions Company Limited and Others [2023] HKCFI 2505 at para 37(b) per Keith Yeung J. I do not agree with Mr Chen that I would still be able to draw adverse inference as a matter of common sense. It is, in my view, a matter of fairness: when absence of a proper explanation is, by common sense, a requirement before any adverse inference could be drawn, as a matter of fairness, the relevant parties should be afforded a chance to explain, or at least be put with a statement like “there is no good reason that Mr Ma cannot come”. Of course, if there is no witness who can be asked of such question, that is another matter. Here, there is evidence that Mr Lou and Mr Ma are acquaintances, if not friends anymore, for a long time, and more importantly, Mr Ma’s daughter, Ms Ma, attended the Court for cross-examination. In my view, in such circumstances, the best Mr Chen can put for Mr Zhang is that Mr Ma himself did not give evidence for his own defence to the counterclaim, although this does not carry Mr Zhang’s counterclaim too far. 71.I now start my analysis. I start with the undisputed evidence, which I accept as facts, that prior to May 2019, there had already been discussions between Mrs Lou, Mr Lou, Mr Zhang and Mr Ma where Mr Ma’s interest in the 20,000 Shares would be transferred to Mrs Lou and Mr Lou and Mr Zhang’s shares would be transferred to Mrs Lou and Mr Lou. In such discussions, one would appreciate that the price must be an important subject matter for discussions. 72.Then the evidence about the indebtedness between Mrs Lou and Mr Lou on the one hand and Mr Ma on the other. Prior to May 2019, there had been lending and borrowing between Mrs Lou and Mr Lou on the one hand and Mr Ma on the other. From Mrs Lou and Mr Lou’s evidence, sometimes they were indebted to Mr Ma and sometimes, Mr Ma was indebted to them. Mrs Lou’s evidence is unclear whether in May 2019, it was Mr Ma being indebted to Mrs Lou and Mr Lou or the other way round. Mr Ma’s evidence is clearer: around mid-2019, Mr Ma was indebted to Mrs Lou and Mr Lou in the magnitude of tens of millions HKD or RMB, although he does not remember the exact figures. In the light of the vagueness of Mrs Lou’s evidence contrasted with the clearer evidence of Mr Ma in this aspect, I accept Mr Ma’s evidence and find that mid-2019, Mr Ma was indebted to Mrs Lou and Mr Lou in the magnitude of tens of millions HKD or RMB. 73.The total sum of the above evidence is that there had been discussions on buying out by Mrs Lou and Mr Lou from Mr Ma’s interest in the 20,000 Shares and Mr Ma was indebted to Mrs Lou and Mr Lou in around mid-2019 in the magnitude of tens of millions HKD or RMB. 74.Then, documentary evidence. Before me, there is no documentary evidence of any sale or transfer of Mr Ma’s interest in the 20,000 Shares to Mr Lou. No text messages, no paper trail of transfer of money, no written agreement of any sort. However, I note that while there is no documentary evidence of any discussion of buy-out or selling-out Mr Zhang’s and/or Mr Ma’s shares, as I mentioned and found above, it is not in dispute that there had been such discussions. 75.Circumstantial documentary evidence may shed light on whether Mr Ma’s interest in the 20,000 Shares had been transferred to Mr Lou by June 2019. 76.First, of the the WeChat group “奧德美董事會溝通群” (the Communication Group for the PRC Company’s directors mentioned in §29(2) above), copies of the messages of this group from June 2019 until August 2019 were produced. While the name of the chatgroup referred to “directors” rather than “shareholders”, Mr Lou would address other members including Mr Ma as “shareholders” in both June and July 2019. Mr Ma remained a member of this chatgroup, when Mr Lou and Mr Zhang were still messaging on the PRC Company’s business. On the other hand, on 26 June 2019, another WeChat chatgroup was set up, as stated in §78 of Mr Zhang’s Witness Statement not under challenge. The name of the chatgroup was “奧德美董事會工作群” (translated as the “Working Group for the PRC Company’s directors”). The members were Mrs Lou, Mr Lou, Mr Zhang and a staff member. Mr Ma was not a member. 77.In cross-examination, Mrs Lou’s explanation is that the new WeChat group was set up for discussing matters not concerning Mr Ma. She also explained that by June 2019, Mr Ma felt not happy about the business, and wanted to avoid any conflict between Mrs Lou and Mr Lou on the one hand and Mr Zhang on the other, and so Mr Ma became inactive. Mrs Lou also mentioned that Mr Ma had had heart surgery and thus due to his health issue, he would like to quit the Company. Ms Ma also confirms in her evidence that Mr Ma did have a heart surgery in around 2018-2019. I do accept that Mr Ma did intend to be less active in the Company and the PRC Company given his health condition. In my view, as he would like to be less active, Mr Ma would be more willing to sell out his interest in the 20,000 Shares rather than still holding the same but get less involved in the business. All the more when he was indebted to Mrs Lou and Mr Lou substantially, as I found above. All the more when he had other family businesses at the same time, as Ms Ma’s evidence confirms. However, in my view, this is not conclusive. There are always investors who would like to be passive investors looking for return on his investments rather than active involvement in the business. 78.Mrs Lou further explained that Mr Ma was not involved in certain work groups for certain projects, but was still involved in some others. In particular, the WeChat conversation from June 2019 to December 2022 between a staff member of the PRC Company and Mr Ma was produced. In the conversation, Mr Ma was actively involved in certain projects. It appears that if Mr Ma had transferred all his interest in the 20,000 Shares to Mr Lou, he would have no interest and reason at all to remain involved in any aspect of the operation of the PRC Company. 79.Second, the accountant of the PRC Company emailed “股東報表” (reports to shareholders) to Mrs Lou, Mr Lou, Mr Zhang and Mr Ma (or their respective representatives) regularly from July 2018 to May 2019 inclusive. However, in June 2019, reports to shareholders were not sent to Mr Ma or his representative. From the evidence, the next available email is an email sent on 28 September 2021 attached therewith a report to shareholders for August 2021, addressing Mrs Lou and Mr Zhang only. The next email available in the evidence is an email sent on 28 October 2021 including Ms Ma. This tends to show that Mr Ma was no longer a shareholder of the Company since June 2019. 80.Third, the minutes of the board meeting of the Company and the PRC Company of 25 November 2020 recorded Mrs Lou and Mr Lou as attendant shareholders and Mr Zhang as absent shareholder. Mr Ma, though absent, was not recorded as any absent shareholder. In fact, his name was not mentioned at all. However, all the board minutes in the past did not specifically name which shareholders attended and which did not. Rather, the minutes in the past were just signed by the shareholders including Mr Ma. Mr Chen draws my attention also to the minutes of a meeting on 28 October 2021, but by that time, Ms Ma was already a shareholder and Mr Ma had no interest, whether beneficial or legal, in the shares. So, that minutes is of little probative value. All in all, the minutes of the board meeting of the Company and the PRC Company of 25 November 2020, though relevant, is not significant in itself. 81.Fourth, the video recording of the shareholder meeting of the PRC Company on 25 December 2020 was produced. Mrs Lou, Mr Lou and Mrs Zhang and Mr Zhang attended that meeting. The video shows Mrs Lou’s face and Mr Lou’s face, and Mrs Zhang’s back. The gist of that meeting was some quarrel between Mrs Lou and Mr Lou on the one hand and Mrs Zhang apparently on how to run the business. During the meeting, there was the following conversation in Putonghua:-
82.What Mr Lou said about asking Mr Ma to come back to get back his shares, in my view, is neutral. This could be taken to mean that Mr Ma’s beneficial interest in the 20,000 Shares had prior to this meeting been transferred to Mr Lou. This could also be taken to mean simply that Mr Lou would like to have Mr Ma to get back the legal title to the 20,000 Shares. Either meaning would be consistent with the context of the conversation, namely, Mr Lou would not like to take the risk associated in the 20,000 Shares. As an absolute shareholder, Mr Lou would have to take the risk. As a trustee of the 20,000 Shares, he would also have to take the risk given that he was a registered shareholder on paper. 83.Fourth, on 4 January 2021, Mr Zhang issued a letter to Mrs Lou and Mr Lou titled “盡快商議股東分家事宜之通知書” (a notification letter for discussing shareholders break-apart as soon as possible). In the letter, Mr Zhang set out various disputes on the business of the PRC Company. In response, Mrs Lou and Mr Lou issued a letter dated 2 March 2021. In this letter, Mrs Lou and Mr Lou, when writing about the arrangement of certain works in the past, referred to Mr Ma as “original shareholder” (原股東) at page 4 of the letter. At page 5 of the letter, in explaining that he had made a lot of efforts in the business of the PRC Company, Mr Lou wrote:-
84.The emphasised part, at first glance, means that Mr Ma had already quit and transferred the shares to Mr Lou. In cross-examination, Mrs Lou and Mr Lou explained that what was written here was Mr Ma’s intention (意向) to quit and his intention to transfer the shares to Mr Lou, but the intention was not realised. In my view, either (1) Mr Ma’s intention to quit and his intention to transfer the shares to Mr Lou or (2) Mr Ma’s intention to quit and having already transferred the shares to Mr Lou can explain Mr Ma’s less involvement in context. Further, in my view, Mrs Lou’s explanation is consistent with the emphasised part, so is Mr Chen’s understanding that there was an intention to quit and therefore, there was the transfer of the shares to Mr Lou. That said, one must remember that Mrs Lou and Mr Lou described Mr Ma as the “original shareholder” (原股東). By the natural and ordinary meaning and usage of the word “original” (原), it tends to suggest more that Mr Ma was no longer a shareholder. Neither Mrs Lou nor Mr Lou gave any explanation directly on why the word “original” (原) was used. Their explanation was focused on “intention” only, and that there was discussion of a possible sale of Mr Ma’s interest in the 20,000 Shares to Mr Lou. 85.Fifth, in response to Mrs Lou and Mr Lou’s letter, Mr Zhang sent a letter dated 9 March 2021. In that letter, Mr Zhang asked whether Mr Ma was still a shareholder of the PRC Company and whether he had completely quit the PRC Company. There has never been a reply. Such documentary evidence is at best neutral in my view. 86.Sixth, Mrs Lou and Mr Lou refer to various documents which suggest that Mr Ma was still a shareholder as at March 2019. This, however, is consistent with Mr Zhang’s case that Mr Ma transferred his interest in the 20,000 Shares to Mr Lou in June 2019. 87.In conclusion on the documentary evidence, most of it is neutral, but the lack of emailed reports to shareholders to Mr Ma from July 2019 and the use of the word “original” (原) to describe the shareholding status of Mr Ma in Mrs Lou and Mr Lous’ letter dated 2 March 2021 do tend to show that Mr Ma was no longer a shareholder since July 2019. 88.Then comes the oral evidence of Mrs Lou and Mr Lou, and Mrs Zhang and Mr Zhang:-
89.In terms of the witnesses’ general credibility, I bear in mind that I have not accepted Mrs Zhang and Mr Zhang’s evidence in relation to whether the RMB1,000,000 payment was a repayment of the PRC Loan. For Mrs Lou and Mr Lou’s, their failure to explain the lack of reports to shareholders emailed to Mr Ma from June 2019 onwards also has a negative impact on their general credibility. I also remind myself not to attach too much weight to the demeanour of the witnesses. Overall, the oral evidence here does not swing the picture either way. 90.Having considered all the above (the undisputed evidence, the documentary evidence and the oral evidence), in particular, (1) the documentary evidence is more suggestive of a transfer of Mr Ma’s interest in the 20,000 Shares to Mr Lou in June 2019 and (2) the discussions on buying out by Mrs Lou and Mr Lou from Mr Ma’s interest in the 20,000 Shares and Mr Ma’s indebtedness to Mrs Lou and Mr Lou in around mid-2019 in the magnitude of tens of millions HKD or RMB being a reason for selling out to reduce the debt, I am satisfied on balance that Mr Ma did transfer his interest in the 20,000 Shares to Mr Lou in around June 2019. 91.As a result of this transfer, the beneficial interest in the 20,000 Shares merged with Mr Lou’s legal title to the 20,000 Shares, and the trust under the Declaration of Trust extinguished. It follows that the 24 September Shares Transfer was not a transfer under the Declaration of Trust. XVII. WHETHER THE 24 SEPTEMBER SHARES TRANSFER WAS EXPRESSLY OR IMPLIEDLY CONSENTED TO BY ALL SHAREHOLDERS 92.From §17 of the Defence to Counterclaim, the consent, whether express or implied, to the 24 September Shares Transfer was based on the premise that it was carried out under the Declaration of Trust, which Mr Zhang knew of. Given my finding above that the 24 September Shares Transfer was not under the Declaration of Trust, there was no such consent as pleaded. 93.For completeness sake, although it has not been pleaded, insofar as there is any suggestion (as apparently now) that Mr Zhang consented, expressly or impliedly, to the 24 September Shares Transfer under Clause 9.1, this must be read together with Clause 10.1(8) which specifically required written consent from all the contractual shareholders for the transfer. The requirement for the consent to be in writing had to be strictly complied with, or else, no consent would be effective: see MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2019] AC 119 at §§10-16 holding effectively that the Court would enforce contractually agreed mode of variation to vary a contract and any other mode would not be effective. I see no difference in respect of the requirement that the consent would have to be in writing. In the present case, there was no such written consent. Therefore, whether Mr Zhang knew of the transfer or not, there was no required consent. XVIII. WHETHER MR MA KNEW THAT THE 24 SEPTEMBER SHARES TRANSFER CONSTITUTED BREACH OF SHA 94.Mr Ma, as the previous beneficial owner of the 20,000 Shares, must have known of the terms of the SHA. In fact, at the meeting on 7 August 2017 as mentioned above, when both the Declaration of Trust and the SHA were explained to the attendants of the meeting, Mr Ma was among them. In the circumstances, Mr Ma knew that the 24 September Shares Transfer constituted breach of Clauses 2.1, 2.3, 9.1 and 10.1 of the SHA. XIX. WHETHER MS MA KNEW (A) THAT MR MA OBTAINED THE 20,000 SHARES FROM THE 24 SEPTEMBER SHARE TRANSFER, AND (B) THAT THE 24 SEPTEMBER SHARE TRANSFER CONSTITUTED BREACH OF THE SHA 95.The plea in relation to Ms Ma’s knowledge of the breach of the SHA by the 24 September Shares Transfer is her relationship with her father Mr Ma (see §24(vi) of the Defence and Counterclaim). No evidence of her knowledge is adduced. In cross-examination, Ms Ma’s answer that she did not know that Mr Lou was holding shares on trust for Mr Ma was not challenged. The overall impression I have obtained from her evidence is that she did what Mr Ma asked her to do without query. 96.In the circumstances, I am not satisfied that she had the knowledge. XX. WHETHER MS MA WAS A BONA FIDE PURCHASER FOR VALUE OF THE 20,000 SHARES 97.In her evidence, Ms Ma said that she paid no consideration for the 28 September Shares Transfer. The 20,000 Shares were transferred to her for free. It is not clear whether the 20,000 Shares were gifted to her, or transferred to her for trust holding. No pleading on this has been made. Therefore, I refrain from making any finding on this. 98.However, what is not in dispute is that the 28 September Shares Transfer was not for value. XXI. CONCLUSION ON THE COUNTERCLAIM 99.In conclusion, on the counterclaim, the 24 September Shares Transfer was not carried out under the Declaration of Trust and was in breach of the SHA. Mr Zhang therefore has a right to enforce the SHA by requiring the 20,000 Shares to be transferred back to Mr Lou, subject to the Court’s discretion taking into account whether it would be inequitable to do so: see Pilot International Investment Limited v Ingredients Plus Holdings (Pte) Limited and Others, HCMP 2454/2015, 10 March 2016 at §§24-29 per DHCJ Le Pichon. Given that Ms Ma was not a purchaser of the 20,000 Shares, it would not be inequitable for the Court to order the return of the 20,000 Shares from Ms Ma back to Mr Lou. XXII. DISPOSITION 100.For the above reasons, on Mrs Lou and Mr Lou’s claim, I make the following order:-
101.For completeness, I refuse to grant the order sought by Mrs Lou and Mr Lou that Mr Zhang shall be removed as a director of the Company pursuant to Clause 10.4 of the SHA. First, there is no evidence showing that upon the sale of his shares, Mr Zhang would insist on being a director; second, it is clear that upon the sale and transfer of the shares, the shareholders would be able to remove Mr Zhang as director; and third, the Company is not a party to the proceedings and therefore, I am not able to make an order against the Company. 102.On the Counterclaim, I make the following order:-
103.For completeness, I refuse to grant the order sought in the Counterclaim for the rectification of the Register of Members of the Company for the reason that the Company is not a party. I have also thought about ordering the parties, being the registered shareholders of the Company, to procure the Company to carry out the rectification. However, this would be complicated by the fact that Mr Zhang is still a registered shareholder of the Company pending the transfer I have ordered on Mrs Lou and Mr Lou’s claim. If necessary, an application may be made properly for rectification of the Register of Members under the Companies Ordinance. 104.Lastly, I thank counsel for their assistance.
Mr Ryan Law, instructed by Zhang Lawyers, for the 1st and 2nd Plaintiffs (by original action) and the 1st to 4th Defendants (by counterclaim) Mr Vincent Chen, leading Ms Jenny Zhang, instructed by C.L. Chow & Macksion Chan, for the Defendant (by original action) and the Plaintiff (by counterclaim) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||