Zhang Xiuhong v. Liu Wenchen and Others

HCA2118/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 2118 OF 2012

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REASONS FOR DECISION

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Introduction

1.There were three summonses before this court:

(i) Under HCA2118 of 2012 (“Main Action”),

(a) The summons of the plaintiff (“Zhang”) issued on 14 November 2012 for, among other things, injunctive relief against the 2^nd defendant (“Han”), 3^rd defendant (“Qiang”), and 4^th defendant (“Company”), and the appointment of receivers in respect of 40,000 shares in the Company (“Receivership Summons”);

(b)   The summons issued by Han, Qiang, and the Company on 28 December 2012 (“Setting Aside Summons”) to set aside the order made on 7 December 2012 (“Ex Parte Order”), which also contained an alternative application for a stay of the Main Action.

(ii) Under HCA133 of 2013 (“the Privilege Action”),

(a) The Summons of Han, Qiang, and the Company against Zhang issued on 4 March 2013 (“Privilege Summons”), for certain declaratory and injunctive reliefs and delivery up orders against Zhang and his solicitors (“HWCO”) in respect of an affirmation filed by the former solicitor acting for the Company on the ground that the same was subject to legal professional privilege.

2.So far as the Privilege Summons is concerned, at the hearing before this court on 20 June 2013 (“Hearing”), the parties were able to reach an agreement on certain undertakings of Zhang and/or HWCO. The Privilege Summons was then adjourned sine die with liberty to restore. Costs were reserved.

3.As for the alternative stay application in the Setting Aside Summons, Han had said in his 1^st affirmation that he had been advised that Hong Kong Courts were not the convenient forum to deal with the disputed issues between Zhang and the 1^st defendant (“Liu”). Liu has not stepped forward so far to make this application.  There were no submissions made in relation to this part of the Setting Aside Summons at the Hearing, and in any event, there were no sufficient reasons put forward to support this application on behalf of Han, Qiang and/or the Company. This application was dismissed as part of the Setting Aside Summons.

4.There was an oral application made on behalf of Zhang at the Hearing for leave to file a further affirmation in relation to the requirement of attestation of a company’s appointment of a lawyer.  I did not grant leave.

5.In relation to the Receivership Summons, at the end of submissions, I gave an order (“Order”) at the Hearing granting receivership with reasons for decision to be handed down.  In summary, the Setting Aside Summons, including the stay application, was dismissed and the Order was granted upon Zhang providing a bank guarantee to the extent of HK$5m within 28 days as fortification of his undertaking as to damages.  Receivers were appointed for the 40,000 shares in the Company, with powers as set out in the Order.

6.The reasons are now set out hereafter.

Brief background

7.The dispute arises out of a sino-foreign joint venture through a company Hebei Chengjin Real Estate Development Co Ltd (“Chengjin RED”) established in Mainland China (“PRC”) on 29 March 1996 with a registered capital of US$2.8m.  Chengjin RED was involved in the development of a piece of land (“Land”) into a commercial complex thereon in Shijiazhuang city in Hebei.  The current market value of the Land is said to be not less than RMB100m.

8.The original shareholders of Chengjin RED were a Hong Kong company China System Group Company Limited (“China System GCL”) on the foreign side owning 45% and a PRC company Shijiazhuang City Economic Development Company (“Shijiazhuang EDC”) on the sino side owning 55%.  China System GCL contributed capital of US$1.26m and Shijiazhuang EDC contributed capital of US$1.54m.

9.The Company was incorporated in Hong Kong on 9 May 1996 with an authorized share capital of HK$40,000 divided into 40,000 shares of HK$1.00 each (“Shares”).  On about 5 October 1998, the Shijiazhuang Foreign Trade and Economic Co-operation Bureau approved that the foreign side of the above joint venture be changed to the Company’s name.  The validity of such change is now subject of litigation in PRC mentioned later herein.

10.In November 2002, the Certificate of Approval for Enterprises with Foreign Investment and also the Business Licence of Chengjin RED were revoked apparently due to the fact that the annual audit for 2001 had not been undertaken. 

11.Liu became a shareholder of the Company in 2004.

12.On 19 March 2007, a new PRC company was established called Hebei Chengjin Asset Management Services Co Ltd (“Chengjin AMS”) for the purpose of managing the assets and operations of Chengjin RED. The registered capital of Chengjin AMS is RMB1m.  At the time of establishment, the shareholders were a Mr Zhang Pingjie (“ZPJ”), holding 55% of the registered share capital and contributing RMB550,000, and Liu holding 45% and contributing RMB450,000. ZPJ was appointed the “Legal Representative” (法人代表) of Chengjin AMS.

13.It was not disputed that the two shareholders were not holding the shares in their respective personal capacity, but ZPJ was in fact representing and holding his 55% interest for the sino party Shijiazhuang EDC, and Liu was representing and holding his 45% for the foreign party, the Company.

14.By 2010, Liu was the sole registered owner of the Shares.  On 19 December 2010, Liu entered into an agreement with Zhang and a guarantor Wang Jianwei (“Guarantor”) for the transfer of the Shares in the Company and other interest held by him in Chengjin RED and  Chengjin AMS, for a total of RMB45m payable in the manner stated therein (“December 2010 Agreement”)[1]. Thus, Liu was to transfer or caused to be transferred to Zhang the following:

(i) The entire shareholding of the Company, namely the Shares;

(ii) 45% interest in Chengjin RED held through the Company;

(iii) 45% interest in Chengjin AMS held by Liu on behalf of the Company.

15.In late December 2010, according to Zhang, Liu represented to him that all the procedures for transferring the 45% held by him for the Company in Chengjin AMS had been completed and that registration records had been changed.

16.On 5 January 2011, pursuant to the terms of December 2010 Agreement, Zhang paid a sum of RMB15m to Liu through the Guarantor.

17.Pursuant to the terms of the December 2010 Agreement, on 11 January 2011, Liu transferred 14,000 of the Shares to Zhang. He further transferred 3,200 of the Shares and 12,800 of the Shares respectively to Zhang’s nominees.  These were subsequently all transferred to Zhang’s name by his nominees on 18 March 2011, and as of that date, Zhang became the sole registered shareholder of all the Shares in the Company.

18.Shortly before Zhang was to pay the balance of RMB30m to Liu, according to Zhang, he was told by ZPJ that ZPJ had never signed any documents approving or otherwise relating to the purported transfer of the 45% shareholding in Changjin AMS by Liu to Zhang.

19.Zhang said he then met Liu in about mid January 2011 together with Zhang’s lawyers, and confronted Liu with what he was told by ZPJ, and Liu admitted to Zhang that ZPJ did not sign the documents relating to the transfer of Chengjin AMS.  This meant the purported signatures of ZPJ on behalf of Chengjin AMS in relation to such transfer documents were not in fact ZPJ’s, but Liu promised he would replace the relevant documents with those bearing the true signatures of ZPJ for filing with the relevant Industry and Commerce Bureau (“Bureau”).

20.According to Zhang, thereafter despite his repeated demands, Liu failed to obtain the proper signatures of ZPJ approving the transfer of the 45% interest in Chengjin AMS.  It was Zhang’s case that Liu had therefore been in breach in failing to perform the Chengjin AMS portion of the December 2010 Agreement, and Zhang withheld the payment of the balance of RMB30m under the December 2010 Agreement. 

21.The effect of all this is that although Zhang has become the sole registered shareholder of the Company, and through the Company held 45% in Chengjin RED, the name of the shareholder holding the 45% interest in Chengjin AMS remained to be Liu at that time, although Liu was holding it on behalf of the Company.  Notwithstanding this, it seems Zhang and his people took over the operations of Chengjin AMS until the incident on 16 February 2011.

22.To put it simply, on 16 February 2011, Zhang’s people were evicted from the premises of Chengjin AMS by what Zhang called a gang, and a company called Heibei Bo Shi Investment Company Limited took over the operations of Chengjin AMS, and this new company caused to be made new company chop, receipt chop and invoice shop of Chengjin AMS.

23.Zhang subsequently obtained the documents purportedly signed by ZPJ from the Bureau.  These documents included:

(i) shareholders’ resolutions of Chengjin AMS dated 20 December 2010[2] bearing Liu’s signature and ZPJ’s signature, approving, among other things,  the transfer of Liu’s 45% shareholding to Zhang, for Liu to be removed as supervisor and Zhang elected as such, and for consequential amendments of the articles of association;

(ii) The amendments to the articles of association bearing ZPJ’s signature as Legal Representative[3];

(iii) an application form dated 27 December 2010 bearing ZPJ’s signature applying for change of the shareholders of Chenjin AMS from Liu and ZPJ to Zhang and ZPJ[4]

24.The purported signatures of ZPJ on the above documents (“ ZPJ Documents”) were stated to be forged in a written report[5] from the Forensic Examination Office of the Shijiazhuang Police Bureau (“Examination Office”) produced by Zhang.

25.In the meantime, Shijiazhuang EDC applied to liquidate Chengjin RED, and on 10 June 2011, a civil judgment was issued by the Intermediate People’s Court of Shijiazhuang EDC and the compulsory liquidation of Chengjin RED was ordered (“Liquidation Action”), and a liquidation group was appointed (“Liquidation Group”).

26.Then, on 24 August 2011, Zhang discovered that a sum of RMB45,013,218 was seized from the bank account of Chengjin AMS by the Enforcement Bureau of the Xinhua District Court under a payment order issued by that Court, without notice to Zhang or the Company, whereby Chengjin AMS was required to pay the sum to the Liquidation Group.

27.Further, on 12 September 2011, the Liquidation Group, acting on behalf of Chengjin RED, commenced a civil action against the Company challenging the validity of the change from China System GLC to the Company as the foreign party of Chengjin RED, alleging this change failed to comply with the Articles of Association of Chengjin RED, and the PRC Court was asked to confirm that the Company is in fact not the foreign party (“1^st PRC Litigation”) in the joint venture.

28.It would appear if the Company were to lose in the 1^st PRC Action, the foreign party in the joint venture would then remain China System GCL but this company had already been dissolved on 4 September 1998.  In any event, it was not disputed at the Hearing that if the Company lost the 1^st PRC Action, the Company’s 45% interest in Chengjin RED would be extinguished and it would lose any entitlement to dividend/distribution in the Chengjin RED’s liquidation.  Zhang would have lost at least the amount of RMB15m he had paid Liu.

29.On 5 December 2011, Zhang appointed his lawyer in Shijiazhuang (“Ms Lu”) to contest the 1^st PRC Litigation on behalf of the Company.  Ms Lu represented the Company until June 2012, when she was suddenly informed by the PRC Court that her authority to act for the Company had been revoked.

30.Ms Lu was provided 2 board minutes of the Company by the PRC Court as evidence of the cessation of her authority to act on behalf of the Company:

(i) Board Minutes dated 26 March 2012[6] (“March2012 Minutes”)

(ii) Board Minutes dated 18 June 2012[7] (“June 2012 Minutes”)

31.It then transpired that:

(i) On 1 March 2012, the Shares in the Company held by Zhang were transferred to Liu, and Zhang and his nominee were removed as directors of the Company, and Liu appointed in their place;

(ii) On 5 April 2012, 14,000 of the Shares were then transferred by Liu to Han;

(iii) On 8 May 2012, 26,000 of the Shares were transferred by Liu to Qiang;

(iv) On 30 April 2012, Liu ceased to be a director of the Company, leaving Han and Qiang as sole directors.

32.It is Zhang’s case that the transfer documents relating to the transfer of his shares to Liu on 1 March 2012 (“Zhang Documents”) were forged and this was subsequently stated in a report from the Examination Office[8] produced by Zhang.

33.Under the March 2012 Minutes signed by Liu, and others, as directors, it was resolved:

(i) The Company was to withdraw from the 1^st PRC Action (“Withdrawal Resolution”);

(ii) To discharge the representation of Ms Lu, and also Zhang’s personal assistant, who at that time was the deputy general manager of the Company;

(iii) New seals and chops be adopted as the Company had accidentally lost all its seals and chops.

34.Under the June 2012 Minutes signed by Han and Qiang, as directors, it was resolved:

(i) Liu be appointed as the agent of the Company with full rights to represent the Company to deal with the Liquidation Action, and the operation and supervision and management of the assets belonging to Chengjin RED and other matters concerning the joint venture company;

(ii) To authorize Kang Da as representative of the Company to participate the Company in the Liquidation Action.

35.Apart from the above two minutes, Ms Lu was also provided notarial certificates issued by Mr Augustine Tong (“Tong”), a China-Appointed Attesting Officer in Hong Kong, and the sole proprietor/partner of the 5^th defendant (“ACYT”) certifying the two board minutes and resolutions passed pursuant thereto.

36.Upon the above discovery, Zhang said he then tried to contact the 7^th defendant (“Li”), a law clerk and office manager of ACYT, and finally on 5 July 2012, Li responded by sending to Zhang a copy of a “Witnessing Certificate” dated 1 March 2012 issued by one Jue Ce Law office in Shijiazhuang[9] certifying the attached Zhang Documents and some other documents (“Witnessing Certificate”).  A copy of the Witnessing Certificate was sent by Li to Zhang as evidence that Zhang no longer held any of the Shares.  Among the other documents attached to the Witnessing Certificate were documents each bearing a thumbprint purported to be that of Zhang’s.  According to another report from the Examination Office, these thumbprints were not Zhang’s.[10]

37.The share transfers from Liu to Zhang under the December 2010 Agreement were handled by Li and ACYT.  The 6^th defendant (“Fine Happy”), of which Li was the sole director and registered shareholder, provides company secretaries services. From the Company’s annual returns, ACYT and/or Fine Happy had provided company secretarial services to the Company since about 2000 until 10 August 2012.  It is Zhang’s case that ACYT/Fine Happy/Li failed to exercise due care, skill and diligence by failing to verify and confirm direct with him in relation to the authenticity of the Zhang Documents and other documents attached to the Witnessing Certificate.

38.Anyway, upon being sent a copy of the Witnessing Certificate, Zhang came to Hong Kong immediately with his team including PRC lawyers and held a meeting with Li on 13 July 2012, during which he required Li to give him the original of the Witnessing Certificate, but this was refused by Li.  The meeting was tape recorded by one of Zhang’s team.  Suffice to say at this stage, Zhang was eventually only allowed to take a photograph of the Witnessing Certificate.

39.It is the case of Han and Qiang that they were bona fide purchasers of the Shares, in that they entered into a share transfer agreement with Liu on 3 April 2012 (“April 2012 Agreement”) under which Liu was to transfer the Shares to Han and Qiang at a consideration of RMB15m.  Han and Qiang paid RMB12m to Liu on 5 April 2012, and the Shares were then duly transferred to them respectively on separate dates.  Further, they said after their acquisition, they had actively sought to defend the 1^st PRC Litigation and to participate in the Liquidation Action.

40.Zhang alleged that Liu, Han, Qiang, Li, ACYT, and Fine Happy all acted in concert and that Han and Qiang were not bona fide purchasers.

41.Zhang issued the writ on 13 November 2012 in the Main Action against Liu, Han, Qiang, the Company, ACYT, Fine Happy and Li, and on the same day issued the Receivership Summons against Han, Qiang and the Company.

42.On 26 November 2012, a firm of solicitors ECTW filed an acknowledgment of service on behalf of the Company indicating it would contest the Main Action.  On 25 December 2012, Zhang obtained leave for service out of jurisdiction, on Liu and Han on the Mainland and Qiang in Australia. 

43.On 7 December 2012 (“Ex Parte Hearing”), Zhang obtained an order against Han and Qiang, and the Company.  The hearing was treated as ex parte on notice for Liu, Han and Qiang and as for the Company inter partes, because although its then solicitors ECTW were granted an order to cease to act earlier that same day, ECTW were still on record and a solicitor of ECTW was present throughout that hearing.  Under the Ex Parte Order, amongst other things, receivers were appointed in respect of the Shares (“Receivers”) with powers specified therein and security to be provided by them, Han and Qiang were restrained from dealing with the Shares and the Company was restrained from registering any transfer/issuing any new share certificates.

44.On 17 December 2012, Liu’s action in PRC against Zhang and the Guarantor was formally issued (“2^nd PRC Action”)[11].  In the 2^nd PRC Action, Liu alleged breach of the December 2010 Agreement by Zhang for failing to pay the balance of RMB30m.  Liu sought an order for Zhang to return the Shares to him and for him to retain the deposit of RMB9m, plus damages for breach of contract and other losses, totaling RMB6m, which in effect seems to mean that Liu wants to retain the RMB15m paid by Zhang and the Shares be returned to him.

45.On 28 December 2012, Han, Qiang, and the Company issued the Setting Aside Summons to set aside the Ex Parte Order.

46.On 29 January 2013, an order was obtained by the Company, Han and Qiang for certain powers of the Receivers to be suspended upon certain undertakings by Han, Qiang and the Company pending the determination of the Receivership Summons (“Inter Partes Order”).  The main effect of the Inter Partes Order was that Han, Qiang and the Company could continue to instruct their solicitors Beijing Kang Da Law Firm (“Kang Da”) to represent the Company in the Liquidation Action and the 1^st PRC Action, in lieu of Ms Lu, and that Kang Da was to make a tri-weekly report to the Receivers.

47.Prior to issuing the writ in the Main Action, Zhang’s solicitors had sent a letter before action respectively to Liu, Han, and Qiang on 2 August 2012[12] which were all sent on an urgent basis by courier to 3 addresses of Liu in Shijiazhuang, to Han’s address in Shijiazhuang, and Qiang’s address in Australia (“Pre-Action Letter”).  Liu was the only one who responded by sending a explanation of the situation[13] (“Liu’s Explanation”).  Neither Han nor Qiang replied although the waybill was signed by Han and the one for Qiang was signed also receipt by a person[14].

48.So far, Liu has not participated in the Main Action at all.

Material non disclosure

49.Mr Leong, Leading Counsel, for Han, Qiang and the Company, submitted that there had been material non-disclosure by Zhang at the Ex Parte Hearing, as follows:

(i) Liu had been pursuing Zhang for the unpaid balance payment of RMB30m;

(ii) Han, Qiang and the Company had taken steps to defend the Liquidation Action and the 1^st PRC Action;

50.As for (i) above, Zhang had already set out the details in paragraphs 16-20 of his 1^st affirmation[15] as to the reasons why he had withheld the payment of the balance of RMB30m.  Although the 2^nd PRC Action was first lodged by Liu on 29 November 2012, in paragraph 45 of Han’s 1^st affirmation, Han himself stated that the case was not accepted by the PRC Court formally until 17 December 2012, which was some 10 days after the Ex Parte Hearing.  There was no evidence that Zhang was aware of the 2^nd PRC Action at the time of the Ex Parte Hearing.  According to Zhang’s 2^nd affirmation, he was only served with the 2^nd PRC Action in January 2013.

51.As to whether Zhang ought to have mentioned in his 1^st affirmation that Han and Qiang had since June 2012 filed “multiple” submissions and applications in the PRC Court in respect of the Liquidation Action and the 1^st PRC Action. There was no sufficient evidence that documents filed in the PRC Court would be generally available for open inspection by the public.  Mr Leong submitted that Zhang/Ms Lu could have gained access of the files in the PRC Court in light of the fact that certain other documents were provided to her by the PRC Court.

52.Zhang had disclosed in his 1^st affirmation all the documents obtained by/given to Ms Lu at that time.  Whether Ms Lu could have obtained access to other documents in the Liquidation Action and the 1^st PRC Action is at this stage only speculative, since so far I could see there was no sufficient evidence that such other documents were known to Zhang at the Ex Parte Hearing.

53.Mr Leong also submitted that Zhang had misled the court at the Ex Parte Hearing in that the court was told that the PRC Court could not wait any further, and that no further adjournment would be allowed and that the trial was imminent.  There was no evidence that Zhang/Ms Lu could have known at the Ex Parte Hearing that the PRC judge would later decide to cancel that PRC hearing in December 2012 due to the judge’s personal reason that he was on training elsewhere.

54.In the above circumstances, I do not find that there had been material non-disclosure on the part of Zhang in obtaining the Ex Parte Order.

Injunctions against Han, Qiang and the Company

55.So far as the injunctions against Han, Qiang and the Company are concerned, they offered undertakings to the Court in terms of the Order, which this Court accepted at the Hearing.

Receivership

56.Mr Leong has pointed out to this court the appointment of receivers and managers is an extremely serious matter for a company and the court have always recognized the need for great circumspection in granting such relief.  It is not to be granted without a proper consideration of the position of the company and unless the court is “convinced of its necessity”[16]. It has also been said by Yuen JA in the case of Macau First Universal International Ltd v Ding Xiaohung and others[17] that it is well-established law that the appointment of receivers is a remedy of last resort.

57.Unlike the companies involved in the above two cases, the Company is not a trading company.  It is a holding company, holding 45% in Chengjin RED and 45% in Chengjin AMS through originally Liu.  I understand that the main asset of the Company to be its 45% interest in Chengjin RED and through Chengjin RED,  45% interest in the Land .

58.In the present case, there have been serious allegations of fraud and forgery by Zhang in the Main Action.

59.It has been said a forged transfer is in law no transfer, and gives the alleged transferee no rights, not even if the company issues to him a certificate stating that he is the holder of the shares which the transfer purports to assign, and if the company, acting upon a forged transfer, removes the true owner from the register and substitutes the supposed transferee, it can be compelled to reinstate the true owner and replace or restore his shares[18].

60.It is also a well-established principle that nemo dat quod non habet, one cannot give or assign in law what one does not have[19].  There are exceptions to this principle, but they are quite restricted in their operation and broadly speaking there are 4 types of cases in which a purchaser in good faith can retain the goods (“Exceptions”)[20].

61.It was stated in the Pre-Action Letter that Zhang was alleging the Zhang Documents and other documents attached to the Witnessing Certificate were procured by fraud and forgery without Zhang’s knowledge or approval, and that the purported transfer from Zhang to Liu on 1 March 2012 was null and void, and that Liu was liable to Zhang for damages for fraud.  Further, it was also made clear in the Pre-Action Letter that Zhang’s case was that Han and Qiang were not bona fide purchasers and that they were holding the Shares upon constructive trust for Zhang. 

62.In Liu’s Explanation, he only tried to explain that up until end of February 2012, he had discussed with Zhang on several occasions in relation to non payment of the balance of RMB30m, and that Liu had no alternative but to “take back” on 1 March 2012 the Shares which originally belonged to him and then to transfer to other person.  He claimed that his “take back” was lawful, as it had Zhang’s lawful authorization and also Zhang’s undertaking to relinquish the Shares.  Further, Liu said the legal dispute should be dealt with in Shijiazhuang and not in Hong Kong.

63.Notwithstanding what was stated in Liu’s Explanation, no documentary evidence was attached as evidence of the alleged lawful authorization and undertaking of Zhang. None was referred to by Liu in the 2^nd PRC Action either[21].  In fact, as I have mentioned earlier, in the 2^nd PRC, Liu was seeking the return of the Shares from Zhang, which seemed to indicate he accepted the Shares were at that time in the possession of Zhang.

64.What is clear is in Liu’s Explanation that he did not deny Zhang’s allegation of forgery.  Liu was merely explaining why he said he was entitled to “take back” the Shares.

65.Han filed two affirmations on behalf of himself, Qiang and the Company.  It is their case that Liu did not inform them of the dispute between him and Zhang, and that they did not know who Zhang was when they received the Pre-Action Letter, and they did not see the need to reply thereto, as they had no interests and there was no need for them to become involved in the dispute between Liu and Zhang.  Han said the purchase of the Shares was completely bona fide, and he provided evidence of the payment on 5 April 2012.

66.Thus, so far, there was no contradictory evidence to Zhang’s alleged forgery, and I have said during the Hearing before this court that at this stage, there is very strong evidence that the purported signatures of Zhang on the Zhang Documents was not his, and that they were forged, based on the reports from the Examination Office which so far have not been challenged. 

67.Mr Leong did not dispute the general principles, but submitted that it was wrong in law to accept Ms Eu’s submission that the forgery was undisputed, and that the case might not be as clear a case of Nemo Dat as submitted by Ms Eu.  He further posed the question “what if there was an arrangement between Zhang and Liu for some sort of ‘claw back’”.  I understood him to mean that what if there was some sort of arrangement between Zhang and Liu for Liu to “take-back” the Shares in view of Zhang’s withholding the payment of the balance of RMB30m.  As I have mentioned earlier, so far as I can see, apart from what was alleged in Liu’s Explanation, there had been no other evidence of the alleged arrangement, nor was such referred to in the 2^nd PRC Action.  Zhang’s case was clearly there was no such arrangement and that the transfer was without his knowledge and approval.

68.Mr Leong pointed out that Han and Qiang had acted on a notarial certificate issued by Tong, and that they were in possession of the bought and sold notes, and that one of the Exceptions applied, namely that goods were in the hands of the transferee.  My understanding of this of the Exceptions is that this generally involves cases where the possessor is in possession of the owner’s goods with the owner’s consent in relation to a contract for the sale of goods and where the possessor is acting in a particular capacity[22].

69.Liu has not entered into the picture yet so far as the Main Action is concerned.  As I have mentioned earlier, Liu received the Pre-Action Letter and responded with Liu’s Explanation.  He then managed to retrieve the original Witnessing Certificate through Qiang from Tong/ACYT/Li in October 2012 and proceeded to launch the 2^nd PRC Action in November 2012 to seek the return of the Shares.  I am of the view that he should have had notice of the Main Action by now, notwithstanding he has not yet been properly served.

70.So far as the evidence before the court at this interlocutory stage, I accept Ms Eu’s submissions that none of the Exceptions apply in this case and further that being bona fide purchasers is not a defence in this case.

71.Although Han and Qiang did not admit to the forgery, no other expert or forensic evidence had been adduced by them or by the Company to rebut, or at least to cast doubt upon the reports from the Examination Office.

72.It seems that Han and Qiang had been in close contact with Liu and that after their purported purchase of the Shares, they in fact appointed Liu to handle the Liquidation Action on behalf of the Company as seen from the June 2012 Minutes, and further it was Qiang who returned the original Witnessing Certificate and attached documents to Liu, and it further seems that Han was aware of the 2^nd PRC Action even before Zhang was served.

73.It is Zhang’s case that there are cogent reasons to doubt the bona fides of Han and Qiang.  As set out earlier, in the March 2012 Minutes, there was the Withdrawal Resolution that the Company would withdraw from the 1^st PRC Action.  The March 2012 Minutes were filed in the PRC Court in the 1^st PRC Action.  After the purported purchase of the Shares by Han and Qiang, it seems nothing was done, or at least no evidence to show that any steps were taken to inform the PRC Court formally that the Company would not withdraw from the 1^st PRC Action and that the Company would be defending the 1^st PRC Action.  No further resolution was passed by the new directors of the Company after the purported purchase to cancel or withdraw the Withdrawal Resolution. The Withdrawal Resolution in my view must prejudice the Company’s position in the 1^st PRC Action.  There were no explanations so far from any one as to why that Withdrawal Resolution was passed in the first place.  So far as I can see, there had been no defence filed by the Company in the 1^st PRC Action notwithstanding Mr Leong submitting that Zhang should have filed a defence in the 2^nd PRC Action by the time of the Hearing and not disclosing it. 

74.The other matter which has caused Zhang concern is the return of the original of  the Witnessing Certificate and the attached documents, by Tong/ACYT/Li, to Liu through Qiang on about 11 October 2012[23].  Qiang was said to be residing in Australia, and it is not quite clear how the return was effected, as Qiang had filed no affirmation in this matter.  Anyway, this has been described by Ms Eu as “bizarre”, as by then all of the defendants knew of Zhang’s allegation of fraud and forgery. The explanation given by Han was to me not convincing.

75.Ms Eu has further submitted that where no arguable defence is advanced, there is no need to consider ‘balance of convenience’, and has referred this court to the judgment of Chung J in Yeko Trading Ltd v Chow Sai Cheong Tony & Ors[24], which has in turn relied on Official Custodian for Charities v Mackey[25](a post American Cyanamid Co Ethicom Ltd [26]decision).  Based on the evidence so far, I consider the present case is such a case, and that there is therefore no need to consider the ‘balance of convenience’.

76.Even if there is an arguable defence and I had to consider the principles set out in the American Cyanamid case and the ‘balance of convenience’, I would have still have concluded in Zhang’s favour for the following reasons:

(i) There is a serious question to be tried, and on Zhang has a real prospect of success, and it is common ground that the Company will be seriously affected unless it succeeds in the 1^st PRC Action;

(ii) The 1^st report from Kang Da to the Receivers was the one dated 31 January 2013[27].  This first of all stated that they were under no duty to communicate with a third party any matter concerning the litigation, and only reluctantly do so in accordance with instructions from the Company.  Kang Da then stated that they were instructed towards the end of May 2012 and listed the documents they filed on behalf of the Company in the 1^st PRC Action up until the date of their report, and according to them, they could only wait for the next step which was for the exchange of evidence, and that the hearing date originally fixed on 5 December 2012 was cancelled by the judge in charge who was on training elsewhere and was not able to return for the hearing.  The documents filed were (1) documents filed in the Liquidation Action; (2) a letter of authorization dated 14 October 2012; (3) an explanation of situation, explaining that Zhang was no longer a shareholder and that he had no right to participate in the litigation; (4) the evidence to be exchanged which consist of only 2 relevant certificates/licenses issued for the joint venture.

(iii) Save for one report of 2 April 2013 in which Kang Da apparently went to the judge in charge to make a request to protect the shareholder’s rights and to participate in the Liquidation Case, as far as the 1^st PRC Action was concerned, all the tri-weekly reports under the Inter Partes Order showed that there had been no further progress.  According to Kang Da, Ms Lu had applied to cease the 1^st PRC Action and she further had cast doubts on the capacity of Kang Da to represent the Company, and this had caused interference to the matter.  Although Kang Da claimed to have taken steps to defend the 1^st PRC Action, according to the Receiver’s letter containing a situation report from Ms Lu[28], up to date Kang Da had not submitted to the PRC Court a duly attested letter of authorisation or a power of attorney from the Company.

(iv) No credible explanation has been given by Han and Qiang for not withdrawing or cancelling the Withdrawal Resolution, nor did it seem Kang Da was instructed to take any action to apply for the withdrawal of the March 2012 Minutes from the PRC Court.

(v) Han did not explain why Kang Da had not been instructed to apply to stop the 1^st PRC Action as Ms Lu had attempted to do and what Kang Da had done to counter Ms Lu’s challenge of its authority to act on behalf of the Company.  More importantly, none of the documents Kang Da filed so far as I can see were in relation to defending the actual claim by the Liquidation Group in the 1^st PRC Action or in relation to the merits of that claim.

(vi) There was no sufficient evidence as to why the Liquidation Action should take priority over the 1^st PRC Action as alleged by Han.  The Liquidation Group had already been appointed and so far, there has not even been a confirmation from the PRC Court that the Company’s request to participate in the Liquidation Action has been accepted.

(vii) Based on the above, I am not satisfied that the Company’s interests in the joint venture had been adequately protected and I am satisfied that there is risk of dissipation, in that the Company might lose its interests in Chengjin RED and in turn its interests in the Land.  Having considered all the circumstances, including what is further set out hereinafter, I am satisfied that the balance of convenience is in favour of granting the Order.

77.I have considered whether there are alternatives to appointing receivers.  In asking for the discharge of the Ex Parte Order as varied by the Inter Partes Order and the discharge of the Receivers, the only undertaking offered by Han and Qiang, other than the undertaking not to deal with or otherwise dispose of the Shares, was to continue to instruct Kang Da to participate in and to defend all the rights, interests and assets of and/or belonging to the Company in the Liquidation Action and the 1st PRC Action and all related PRC disputes, including but not limited to the application of any interim protection order (s) if so advised.

78.No other proposals were put forward at the Hearing.  Both Han and Qiang are outside jurisdiction and in light of the events in this case, I do not consider the above undertaking would be sufficient to protect the assets of the Company, and I am of the view that it is necessary to continue the appointment of the Receivers for the Shares.

79.The whole purpose of the application by Zhang is to preserve the assets of the Company pending a court’s final decision on the merits of his case in the Main Action.  The preservation of the assets of the Company could only be in the interests of the Company and its shareholders, whoever they may be ultimately.  Han had said that the Receivers are new to the case and they would incur much professional costs and/or time in reading-in and familiarizing themselves with the matter and there will be additional costs to instruct new PRC legal advisers to handle the matter.  The Receivers have been in place since the Ex Parte Order, although so far their hands have been somewhat tied.  I understand that Ms Lu will continue to be appointed to act on behalf of the Company and she has been involved since December 2011.  If it is found that there are additional costs and damage to Han, Qiang and the Company in the event they succeed in the Main Action, these can be covered under Zhang’s undertaking as to damages as set out in the Order.

80.Mr Leong submitted that if I were to grant Zhang’s application, there should be security of costs and that Zhang’s undertaking in the Ex Parte Order should be fortified.  No application has been made for security of costs.  As for Zhang’s undertaking in the Ex Parte Order, Zhang has produced a “certificate of creditworthiness” issued by the Bank of Communications[29] and I understand that a production of this certificate was accepted by L Chan J at the Ex Parte Hearing.  Having considered the circumstances of the case, although no formal application has been made for fortification, I have ordered fortification of Zhang’s undertaking as to damages, as set out in the Order.

81.Ms Eu has produced a draft order prior to the Hearing setting out the powers of the Receivers.  Apart from the fortification of Zhang’s undertaking, there were no other submissions from Mr Leong on the draft.

82.For all the reasons set out above, I made an order in terms of the Order.

83.Lastly, I would like to thank all Counsel for their  submissions and assistance in this matter.

Ms Audrey Eu SC and Mr Douglas Lam, instructed by Henry Wai & Co, for the plaintiff

The 1^st defendant, in person, absent

Mr Alan Leong SC and Mr Dennis Kwok, instructed by Ma Tang & Co,  for the 2^nd, 3^rd and 4^th defendants