Case Document

100%Judiciary

HCA 2288/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2288 OF 2007

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BETWEEN	LIANG JUN XIAN (梁俊賢)	Plaintiff

	and

	TSUI HIN CHI (徐憲馳)	Defendant

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Before: Hon Fung J in Chambers

Date of Hearing: 19 February 2008

Date of Judgment: 7 March 2008

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J U D G M E N T

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1.The defendant is applying by:

(1) the 1^st summons dated 8 January 2008 for security for costs;

(2) the 2^nd summons dated 31 January 2008 for:

(a)	summary judgment on the Counterclaim for:
	(i)	a declaration that the defendant has validly transferred the legal and beneficial interest in 3,000 shares in China Investment Group International Finance Limited (“CIGIF”) to Mr. Mok Wah Pui on 24 August 2007;
	(ii)	a declaration that the defendant is the legal and beneficial owner of the remaining 7,000 shares in CIGIF;
	(iii)	an injunction that the plaintiff be restrained from making representations that she is or remains the legal and/or beneficial owner of 10,000 shares in CIGIF;

(b)	alternatively, (as amended at the hearing) an interlocutory injunction that the plaintiff be restrained from:
	(i)	making representations that she is or remains the 100% legal owner of CIGIF; and
	(ii)	making allegation of fraud against the defendant.

2.The defendant is also counterclaiming HK$5 million and damages to be assessed. Mr. Ng, for the defendant, indicated that those claims would be abandoned in the event that summary judgment be entered in terms of para. 2(a)(ii) above.

Background

3.This case is concerned with the land development project of the Finance Tower at 19-49 De Zheng Road South, Guangzhou.

4.The rights in the development project is held by 廣州遠興房產有限公司 (“Land Company”). The shares of Land Company are held by CIGIF (60%), and 廣東中大中鑫投資策劃有限公司 (“China Partner”) (40%).

5.CIGIF is a Hong Kong company with issued capital of 10,000 shares. Prior to the shares transfers, CIGIF was wholly owned by the plaintiff. China Partner was also controlled by the plaintiff.

6.On 6 December 2006, the plaintiff and the defendant signed an agreement in Chinese entitled Co-operation Agreement. The effect of the terms are:

“Party A: [The plaintiff] Party B: [The defendant]

Both party reached the agreement concerning the co-operation in investment in the land project at 19-49 De Zheng Road South, Guangzhou as follows:

	1.	To obtain 100% shareholding of the [Land Company] (herein called the “Project Company”) in order to achieve 100% rights in the said project.
	2.	The details of the subject project are set out in the project materials, about RMB¥0.13 billion has been put into the project at this stage, the expected total development costs are about RMB¥0.23 billion.
	3.	[The plaintiff] is to lead in the investment development, organize and carry out the Finance Tower project.
	4.	[The defendant] invests RMB50¥million in Guangzhou, owning a 40% share in the Project Company, the remaining development capital required is raised by [the plaintiff], owning 60% of the Project Company.
	5.	Both parties agree that upon obtaining the bank loan, part of the invested sums shall be repaid, with preferred treatment for [the defendant], until the realization of the invested sums placed in the co-operation capital in the Project Company by the respective party being 50:50, i.e. each owning half.
	6.	[The plaintiff] promised to additionally pay 2% of the earnings to [the defendant].
	7.	It is expected that sales of the uncompleted units will begin in January 2008, and the investment may be recouped, and both parties agree that the investment will be repaid by 60%:40% between [the plaintiff] and [defendant].
	8.	The whole project is expected to be fully completed before December 2008.
	9.	Both parties agree that in the circumstances of availability of capital flow, to transfer the capital to the Zeng Cheng He Xian Gu Scenic Travel Project, and to take up shareholding in the He Xian Gu Project according to the ratio of capital between the parties, as being the initial shareholders, the preliminary estimated first stage capital is RMB¥0.2 billion, if in excess then to undergo placement at premium, the initial shareholders should enjoy all the earnings of the entire project.
	10.	In the spirit of co-operation, for matters not yet set out in details, both parties will negotiate for the resolution, and any supplemental agreement shall have equal effect.”

7.On 13 February 2007, the plaintiff issued a receipt in Chinese to the defendant for HK$50 million in the following terms:

“Receipt

Up to 13 February 2007, received from [the defendant] investment money of HK$50 million, the said sum being for taking over the assets of [Land Company], i.e. the land project at 19-49 De Zheng Road South, Guangzhou. Hereby acknowledged.”

8.On 26 March 2007, the plaintiff executed the bought and sold notes and instrument of transfer for 4,000 shares (40%) in CIGIF in favour of the defendant. The defendant was also appointed director of CIGIF.

9.On 22 August 2007, the plaintiff executed 2 sets of bought and sold notes and instruments of transfer for 3,000 shares (30%) each in favour of the defendant. One set of the instruments was back dated 26 March 2007, and the other set dated 23 August 2007.

10.On 24 August 2007, the defendant transferred 3,000 shares (30%) to Mok, an independent investor. The defendant alleged that the plaintiff was unable to inject her share of the capital.

11.On 12 September 2007, both the plaintiff and the defendant signed the Declaration in Chinese to the following effect:

“Declaration

Whereas [the defendant] and [the plaintiff] co-operated to take over the development of the [Finance Tower], in which [the defendant] invested the capital of HK$50 million, owning 42% share in the [Finance Tower] project (the other 58% share solely owned by [the plaintiff]), according to the Co-operation Agreement between the parties, the said project was to be run under the sole authority of [the plaintiff], since [CIGIF] originally only had [the plaintiff] as the single shareholder and director, hence [CIGIF] had other investment projects, whereas [CIGIF] owns 60% of [Land Company], therefore [the defendant] in owning 70% shareholding in the Hong Kong company has 42% face value share in the [Land Company], the said Hong Kong company, i.e. [CIGIF’s] effective controlling shareholder is still [the plaintiff], apart from the [Finance Tower], the other projects have nothing to do with [the defendant].”

12.On 28 September 2007, the plaintiff and the defendant attended the 2nd co-ordination meeting held by the Guangzhou Properties Exchange (“Exchange”). The memorandum of meeting signed, inter alia, by the plaintiff and the defendant, recorded that the defendant asserted that he was the controlling shareholder of CIGIF, and at the same time CIGIF was the controlling shareholder of Land Company, hence he relieved all the duties and authority of the plaintiff in Land Company. The memorandum also recorded that the plaintiff disagreed that by the 70% controlling shareholding in CIGIF, the defednant could control Land Company and to remove her as the Managing Director.

13.On 31 October 2007, the plaintiff’s lawyer in Guangzhou issued a letter to the defendant stating that the defendant made a loan of RMB¥50 million and obtained 70% nominal shareholding in CIGIF as security for 42% of the earnings in Land Company, and both parties agreed that the plaintiff had full power and responsibilities in all matters of the land development in Land Company. But in breach of the agreement and without informing the plaintiff, the defendant engraved the company seal and changed the directors of CIGIF, and defrauded the plaintiff of 100% shareholding of CIGIF by deception. As the defendant had committed criminal law in Hong Kong, the matter was reported to the police and upon conviction, the defendant would be imprisoned for 8 to 10 years.

14.The defendant alleged that the plaintiff had made similar untrue representations to the authorities in Guangzhou. As a result the project ground to a halt, exposing Land Company to the idle land penalty.

15.The defendant submitted the relevant returns to the Companies Registry reporting the share transfers. The returns also stated the removal of the plaintiff as director of CIGIF. The plaintiff has raised an objection, but the Registrar of Companies has indicated that he is prepared to register the changes.

Plaintiff’s case

16.The Statement of Claim prayed for:

	(1)	a declaration that the plaintiff is the beneficial owner of all the shares in CIGIF;
	(2)	a declaration that the defendant was in breach of the Co-operation Agreement in submitting the relevant returns to the Companies Registry;
	(3)	an order to vacate the returns from the Companies Registry;
	(4)	damages.

17.The plaintiff’s original case in the Statement of Claim and Reply before filing of her 2^nd Affirmation was as follows:

	(1)	The joint venture was between CIGIF (60%) and China Partner (40%) to acquire the project from Land Company;
	(2)	The RMB¥50 million paid by the defendant is a loan and not investment;
	(3)	The loan shall be repaid first upon CIGIF obtaining banking facilities;
	(4)	Under the Co-operation Agreement, the plaintiff agreed to provide 42% of the net profits from the joint venture received by CIGIF to the defendant and the plaintiff only agreed to appoint the defendant as the other director of CIGIF.
	(5)	The plaintiff has signed various documents believing them only to be appointing the defendant as the director of CIGIF and pledging or charging her 40% shareholding of CIGIF;
	(6)	Later, the plaintiff agreed to provide an additional 30% shareholding in CIGIF as security for the defendant’s entitlement;
	(7)	The plaintiff was misled to sign on two sets of identical documents on 22 August 2007;
	(8)	The plaintiff requested the defendant to sign an undertaking that the shareholder’s rights in CIGIF shall permanently belonged to the plaintiff and the defendant should not interfere or engage in the business of CIGIF but the defendant had not signed it;
	(9)	The Declaration signed by the defendant warranted that the plaintiff is still the person in actual possession of all the shareholder’s rights in CIGIF and the defendant shall not have any connection with matters other than the land development project of the [Finance Tower];
	(10)	After the Declaration on 12 September 2007, the defendant requested the plaintiff to sell all her shareholding in CIGIF to Mok but it was refused.

18.The plaintiff’s 2^nd affirmation is as follows:

	(1)	The plaintiff signed the bought and sold notes and instrument of transfer for the 40% shares in CIGIF but the plaintiff only agreed to transfer 40% of the shares in CIGIF to the defendant as security for his 42% entitlement to the profits at the completion of the project;
	(2)	The plaintiff only agreed to transfer one lot of 30% shares in CIGIF to the plaintiff as an increase in the pledging of the shares as security;
	(3)	The defendant prepared two sets of identical instruments of transfer for 30% shares each in CIGIF and asked the plaintiff to sign both with one copy for stamping and one copy for the plaintiff to keep but the defendant took both sets away;
	(4)	The plaintiff never told the defendant she was unable to inject her share of the agreed investment capital;
	(5)	The Declaration stated that the defendant has 42% interest in the project and the plaintiff has 58% interest and that had never been disputed, but the Declaration also stated that the plaintiff remains the beneficial owner of all shares in CIGIF.

Defence case

19.The defendant’s case is as follows:

	(1)	By the Co-operation Agreement, the defendant was to acquire 42% interest in or derived from the project;
	(2)	The plaintiff’s initial proposal was to transfer 40% in CIGIF and 45% in China Partner;
	(3)	Instead, the defendant suggested the plaintiff to transfer 70% of CIGIF to him, and CIGIF in holding 60% of the Land Company would give the defendant 42% in the Land Company and the project;
	(4)	The Co-operation Agreement is clearly in terms of investment as opposed to loan;
	(5)	The receipt clearly stated the HK$50 million to be investment;
	(6)	The instrument for transfer for the 4,000 shares was prepared by and submitted for stamping by the plaintiff;
	(7)	The Declaration stated the HK$50 million to be investment capital, and the defendant had 42% interest in the project;
	(8)	The reservation at the end of the Declaration that the plaintiff is effectively still the controlling shareholder of CIGIF only refers to the other investments projects of CIGIF which has nothing to do with the defendant for the time being;
	(9)	The memorandum of the 2^nd meeting of the Exchange clearly stated that the defendant had 70% controlling shareholding in CIGIF;
	(10)	The transfer of 30% shareholding to Mok was because the plaintiff was unable to make the investment.

Legal principles

20.The principles in an Order 14 application are well settled: Banque de Paris v Costa de Narray [1984] 1 Lloyd’s Rep 21, 23 per Ackner LJ:

“It is appropriate to be reminded of the principles applicable to an Order 14 application. They are well-known and in fact not disputed by the parties. The Plaintiff (a Defendant to the 2^nd Defendant’s counterclaim) must show that there are triable issues. He has to satisfy the court that he has a ‘real or bona fide defence’”.

21.In Re Safe Rich Industries Ltd [1994] HKLY 183, Bokhary JA (as he then was) said:

“The test at the summary stage is indeed as simple as whether the defendant’s assertions are believable, but it must be recognised – because failure to recognise it would create a debt-dodger’s charter – that whether the defendant’s assertions are believable is a questioned no by taking those assertions in isolation but rather by taking them in the context of so much of the background as either undisputed or beyond reasonable dispute.”

22.In Ng Sui-kei v Chong Mee-mee [1991] 1 HKC 693, 694G-H, Yeung J (as he then was) said:

“It has been well established that mere assertion in an affidavit of a given situation which is to be the base of a defence does not ipso facto provide leave to defend, and a court must look at the whole situation and ask itself whether the defendant has satisfied the court that there is a fair and reasonable probability of the defendant having a real or bona fide defence.”

23.In Manciple Ltd v Chan On Man [1995] 3 HKC 459, 466 Mortimer JA (as he then was) said:

“… there are some cases in which the defendant’s own case, although apparently it raises issue which, if found in his favour, would provide him with a defence, are so incredible or so contradicted by contemporaneous documents or circumstances that it becomes clear that his defence is a sham.”

24.Lastly, I will refer to the caution by Godfrey JA in Ng Shou-chun v Hung Chun San [1994] 1 HKC 155, 158F-G:

“I would sound a note of caution about Murjani, which has come to be cited in almost every case under Order 14 or Order 86 to justify the plaintiff in asking the court to embark upon a mini-trial of the action on affidavit. That is not a proper course for the court to take. It will in future be sufficient for the court to ask itself the simple question: ‘Is what the defendant says credible?’ If so, he must have leave to defend. If not, the plaintiff is entitled to summary judgment. The issue is not whether the defendant’s assertions are to be believable; it is whether those assertions are believable.”

Discussion

25.The plaintiff’s case is that the HK$ 50 million was a loan, and the transfer of the 70% shares in CIGIF to the defendant was no more than security for the defendant’s entitlement to 42% of the profits in the project, and she retained the effective control of all the shares in CIGIF.

26.Ms Lo, for the plaintiff submitted that it is inconceivable that the plaintiff would transfer all her shares in CIGIF beneficially to the defendant before reaping the profits at the completion of the project, or indeed, at any point in time, as stated in the Declaration that the plaintiff was still the effective controlling shareholder of CIGIF’s.

27.Mr. Ng submitted that the plaintiff’s case is unbelievable. He pointed out that the plaintiff’s original case that she was unaware of the nature of instruments of transfer and believed them to be instruments appointing the defendant as director and pledges/charges of shares was flatly contradicted by her 2^nd Affirmation, contemporaneous documents, and her experience as a business woman. The allegation that the HK$50 million was a loan was contradicted by:

	(1)	the Co-operation Agreement;
	(2)	the receipt;
	(3)	the Declaration;
	(4)	the admission in the 2^nd Affirmation of the plaintiff that there has never been in dispute that the defendant has 42% interest in the project and she personally has 58%;
	(5)	the memorandum of the 2^nd meeting stating the defendant had 70% controlling shareholding in CIGIF without mentioning any retention of controlling shareholding by the plaintiff.

28.As I see it, the share transfers should be looked at in two parcels, the 70% transferred to the defendant, and the 30% allegedly transferred to the defendant and then to Mok.

29.The transfer of the 30% to Mok preceded the Declaration dated 12 September 2007. It then begs the question as to why the Declaration would state that the plaintiff owned 58% and the defendant owned 42% of the project. Mr. Ng submitted that since the 30% was owned by Mok, the Declaration was right in stating that the defendant only owned 42%. Be that as it may, the Declaration stated that the plaintiff owned 58% in the development project, which by necessary implication meant that Mok did not own 30% in CIGIF, as the plaintiff’s 58% in the land project comprised the holding of 40% in Land Company via China Partner, and her holding of 30% in CIGIF as equivalent to 18% in Land Company. It calls for some explanation from the defendant as to why he has signed the Declaration as such, and perhaps the Court would like to see what investments the plaintiff had made in the project.

30.Mr. Ng did not strenuously argue for validity of the 30% shares registered in the name of Mok. I find there is a triable issue.

31.As to the 70% shares, the plaintiff’s claim of legal ownership is contradictory to her own case that the shares were transferred as security, given that the defendant’s share 42% profits was not yet realized.

32.The premise of the RMB¥50 million being a loan is contradictory to the terms of all the documents. That a loan secured by a transfer of 70% of shares in CIGIF as equivalent to 42% in Land Company against the 42% interest in the profits from the project as somehow subject to a trust of the shares in favour of the transferor/debtor is inherently difficult to comprehend. And the premise of a loan fails to account for repayment in the event that the profits from the project is below RMB¥50 million, a commercial risk which cannot be overlooked, however remote.

33.The alleged clause in the Declaration reserving the controlling shareholding in CIGIF to the plaintiff is by itself ambiguous and also inconsistent with the recital in the Declaration of the respective interests of the parties in the project. Further, I fail to see why the plaintiff did not raise the point that the defendant was holding the 70% shares in trust for her at the meeting at the Exchange. In any event, so long as the plaintiff retains 58% in Land Company, she will have effective control of the development project. Hence, the reservation of controlling interest could only have been referable to the other projects of CIGIF which have nothing to do with the defendant for the time being.

34.Ms Lo submitted that since the issue of the 30% share is going to trial anyway, and the credibility of the defendant may be contagious on his 70% shareholding. Hence, there is other reason for leave to defend.

35.Notwithstanding any possible outcome on the issue of the 30% shares in Mok’s name, the only reasonable interpretation of the Declaration is that the defendant shall have no interest in the other projects of CIGIF apart from the Finance Tower. The defendant may have to account to the plaintiff for those other projects, but the plaintiff’s assertion of beneficial ownership of the 70% shares is unbelievable, and plainly could not be the intention to be attributed to the Declaration.

Conclusion

36.In the premises, I enter judgment in part on the beneficial ownership of the 70% shares in favour of the defendant, and I dismiss the plaintiff’s claim for legal and beneficial ownership of 100% shares in CIGIF, with leave to defend on the 30% shares (and leave to amend the Statement of Claim, if necessary), and dismiss the counterclaim relating to HK$5 million and damages to be assessed.

37.As to the injunction restraining the plaintiff from making representations of 100% legal and beneficial ownership in CIGIF and fraud on the part of the defendant, I think the impasse arising from the plaintiff’s assertions should be resolved by the judgment on the 70% shareholding. I do not think the injunction is necessary at this stage. I adjourn the permanent injunction to the trial, with liberty to apply for an interlocutory injunction should any future development warrants it.

Security for costs

38.There is no dispute that the plaintiff is ordinarily resident outside the jurisdiction, and there is no suggestion of any stifling effect of the plaintiff’s claim upon the ordering of security.

39.Ms Lo made 2 points:

(1) There are common issues between the claim and the counterclaim;

(2) The plaintiff has a high degree of probability of success.

40.In the exercise of the discretion on security of costs, the Court may take into account the presence of a counterclaim in whether the same issues are going to trial and the plaintiff getting the same relief under the counterclaim even in the event that the claim is stayed upon non payment of the security ordered, and the Court may also consider who is the true attacker in the litigation (see my judgment in Wison (Shanghai) Chemical Engineering Co Ltd v Simmons & Simmons HCMP 629 & 664/2007 dated 18 January 2008 citing BJ Crabtree (Insulations) Ltd v GPT Communication Systems Ltd (1990) 59 BLR 43 and Brand Farrar Buxbaum Llp v Samuel-Rozenbaum Diamond Ltd & Anor [2003] 1 HKLRD 600).

41.Mr. Ng has indicated that if security is ordered and the claim is stayed upon failure to make payment, the defendant shall not proceed with the rest of the counterclaim. Hence, the defendant is not as much as an attacker as the plaintiff. I agree.

42.Notwithstanding leave to defend on the 30% shareholding, the plaintiff cannot be said to have a high degree of probability of success. Hence, I shall order the plaintiff to pay security for costs.

43.As to quantum, the defendant has asked for HK$1.2 million until the end. I take into account the costs to be included for the present applications, and order the giving of security for HK$600,000 up to and before trial. The security should be paid into court within 14 days.

Costs

44.I make an order nisi that the plaintiff do pay the costs of the summons for summary judgment to the defendant forthwith, to be taxed if not agreed.

45.I make an order nisi that the plaintiff do pay the costs of the summons for security for costs to the defendant in any event, to be taxed if not agreed.