LEE CHEE LUNG v. QI YAXUAN AND ANOTHER

HCA1808/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1808 OF 2006

----------------------

----------------------

----------------------

J U D G M E N T

-----------------------

1.  In this action, the plaintiff claims against the defendants for relief on account of breaches of an agreement for the sale and transfer of shares in a private company.  The defendants are unrepresented and are absent at the trial.

The parties

2.  The plaintiff is and was a shareholder and director of a company called Waly International (HK) Limited (“Waly”).  The company was incorporated in Hong Kong on 15 April 2002.  Its share capital is made up of 10,000 fully paid shares of HK$1 each.

3.  The Company had a wholly owned subsidiary called 青海省紫金礦業煤化有限公司 (“the Qinghai subsidiary”), which was incorporated in Qinghai Province in the Mainland.  The plaintiff is and was the authorized representative of the company (法人代表).

4.  Until April 2006, the plaintiff was the registered owner of 9,998 shares of Waly.  The other two shares have been registered in the name of Mr Tsui Man Lee. 

5.  According to the Annual Return filed on 13 October 2005, the directors of Waly were the plaintiff and Mr Tsui.  Subsequently, Mr Tsui resigned from directorship and the plaintiff’s younger brother, Mr Lee Chi Yuen Peter (李似原), became a director in his place.

6.  The 1^st and 2^nd defendants are PRC nationals and reside in Beijing. 

The facts

7.  In September 2003, the Qinghai provincial government granted the Qinghai subsidiary the right to develop a coalmine in Qinghai. 

8.  According to the plaintiff, in order to generate the capital for the development of the coalmine, he entered into agreements with two Mainland companies for the transfer of 49% of the shares in Qinghai subsidiary. The first was two agreements with a company called 陝西金土地 實業有限公司in April and July 2005.  Subsequently, because the company did not honour its payment obligation, the plaintiff entered into another agreement with a company in Qinghai called青海省興青工貿工程集團有限公司 (“Xing Qing”) to sell the 49% shares.  However, disputes arose between the Qinghai subsidiary and Xing Qing.  As a result, the Qinghai subsidiary commenced litigation against Xing Qing in the Court in Qinghai Province.

9.  Then in early 2006, the plaintiff came to know the 1^st and 2^nd defendants through the introduction of his friend.  After some discussions, it was agreed between them that the plaintiff would sell 80% of the shares in Waly to the defendants. 

10.  On 7 April 2006, the plaintiff and the defendants met in Shenzhen.  A number of documents were signed by them on that day.  It is the plaintiff’s case that these documents were prepared by a firm of Hong Kong solicitors and that a lawyer surnamed Lee was present in Shenzhen when the documents were signed.

11.  The first of the documents signed on 7 April 2006 is a Chinese document entitled “股權轉讓承諾書” dated 7 April 2006 (“the Undertaking”), which was signed by the 1^st and 2^nd defendants and evidenced by the Hong Kong lawyer.  The Undertaking recorded the plaintiff’s agreement to transfer to the defendants 80% of the shares in Waly that were registered in his name at the price of HK$1.  The Undertaking forms the subject matter of the plaintiff’s claim herein.

12.  For the present purpose, clauses 4 and 7 of the Undertaking are relevant.  Under clause 4, the defendants agreed to pay the plaintiff RMB 15 million as compensation for the investments he had made.  Out of the sum, RMB 3 million was payable within three days from the signing of the Undertaking with the balance to be paid by instalments before December 2006.  Further under clause 7, the defendants agreed that in the event they failed to make the payments as provided under clause 4, they would unconditionally re-assign to the plaintiff all the shares in Waly that had been transferred to them.

13.  The second set of documents is two assignments of debts in Chinese (“the Assignments of Debt”), with one of them signed by the plaintiff and the 1^st defendant and the other one signed by the plaintiff and the 2^nd defendant.  Under the Assignments of Debt, the plaintiff agreed to assign to each of the defendants 40% of the shareholder’s loan he made to Waly (equivalent to RMB 3,948,000) and each of the defendants agreed to pay to the plaintiff RMB 7,490,000.  Although the Assignments of Debt were stated to be tri-partes agreements and Waly was named as a party, Waly did not execute the documents. 

14.  The third set of documents is two transfer of shares agreement signed by the plaintiff in favour of each of the 1^st and 2^nd defendants.  The fourth set of documents is two Sold and Bought Notes, each for 4,000 shares, executed by the plaintiff and the respective defendants.

15.  The fifth document is a minute of an undated meeting of the Board of Directors of Waly, said to be attended by the plaintiff and his brother.  The plaintiff’s case is that he signed this minute on his own behalf and also on behalf of his brother, with the latter’s authorization.  The minute recorded the Board’s resolutions to approve the transfer of shares from the plaintiff to the defendants and the appointment of the defendants as directors as well as the terms of transfer insofar as they related to the company.

16.  The last document is a minute of the Board of Directors of Waly dated 8 April 2006.  It recorded a meeting held in Beijing attended by the plaintiff, his brother and the 1^st and 2^nd defendants.  It is the plaintiff’s case that he signed this on 7 April 2006 in Shenzhen whereas his brother signed it on the following day in Beijing.  Neither the plaintiff nor his brother, however, is able to say when the defendants signed on this minute.

17.   In the evening of 7 April 2006, the plaintiff was arrested by the public security officers in connection with the disputes between the Qinghai subsidiary and Xin Qing.  On 12 April 2006, the plaintiff was transferred to the detention centre in Xining City (西寧市), Qinghai Province, where he was detained until his release on 18 May 2006.

18.  In the meantime on 8 April 2006, the plaintiff’s brother met the defendants in Beijing.  This was a scheduled meeting, the purpose of which was to receive the first payment of RMB 3 million from the defendants and to deliver the company documents of the Qinghai subsidiary to the defendants as well as to deal with other follow-up matters.

19.  It is the plaintiff’s case that the defendants did not make any payment to his brother at this meeting or at all.  His brother, however, had delivered to the 2^nd defendant the company chop of Waly. 

20.  According to the plaintiff, when he was detained in the detention centre, the defendants had arranged a Mainland lawyer to visit him. This took place towards the end of April 2006.  The lawyer persuaded the plaintiff to sign a Board resolution of Waly dated 27 April 2006, approving the plaintiff’s resignation as a director of Waly and of the Qinghai subsidiary, the appointment of the 1^st defendant as the director of Waly and also the appointment of a Mr Ma Rongfei (馬永飛) as the director of the Qinghai subsidiary.

21.  On 11 May 2006, Waly filed the 2006 Annual Return (made up to 15 April 2006) with the Companies Registry.  It recorded a transfer from the plaintiff to each of the defendants of 4000 shares in Waly.  The 1^st and 2^nd defendants as well as the plaintiff and his brother were recorded as the directors of Waly.  Further on 13 May 2006, Waly filed with the Companies Registry two Consents to Act as Director dated 12 May 2006 signed by the 1^st and 2^nd defendants respectively.   

The action

22.  On 18 August 2006, the plaintiff commenced the present action.  On 13 September 2006, the plaintiff obtained leave to issue a concurrent writ and to serve it on the defendants outside jurisdiction in Beijing.  The defendants entered appearance and also filed a Defence and Counterclaim on 20 March 2007 and at a later stage a List of Documents disclosing certain documents.  The defendants, however, did not proceed to file or exchange any witness statement, despite an Unless Order made against them on 4 December 2007.  With the permission of the Court, the defendants’ solicitors ceased to represent the defendants on 15 February 2008.  Since then, the defendants had taken no step in the proceedings.

The claim

23.  The plaintiff’s claim as pleaded is in breach of agreement in that the 1^st and 2^nd defendants had failed to make payment as agreed under clause 4 of the Undertaking and further failed to re-assign to the plaintiff the shares in Waly that the plaintiff had transferred to them.

24.  In the Statement of Claim, the plaintiff seeks the following relief:

(1)   Rescission of the Undertaking.

(2)   An order that the 1^st and 2^nd defendants forthwith transfer to the plaintiff their respective 4,000 shares in Waly.

(3)   An order that the 1^st and 2^nd defendants be forthwith removed from directorship of Waly.

(4)   An account of all dividends or income or benefit received by the 1^st and/or 2^nd defendants in respect of the shares in Waly since the date of the Undertaking.

(5)   Payment if the amount found due on the taking of the account together with interest.

25.  At the commencement of the trial, Mr Wong who appears for the plaintiff indicated that the plaintiff does not pursue items (1), (3) to (5).  Effectively, all that the plaintiff seeks from this trial is the enforcement of clause 7 of the Undertaking, namely, the re-assignment of the 8,000 shares in Waly from the defendants to the plaintiff.

The defence and counterclaim

26.  In their Defence and Counterclaim, the defendants plead that they had only signed an assignment of director loan agreement dated 7 April 2006.  They state that each of them only agreed to purchase 40% of the director’s loan owed by Waly to the plaintiff, which was in the amount of RMB 3,948,000, at the purchase price of RMB 7,490,000. 

27.  The defendants accept that the plaintiff had transferred to each of them, 4,000 shares in Waly and that they had been made directors of Waly.  They, however, plead that they had on 9 July 2006 paid to the plaintiff RMB 2 million and had also paid on the plaintiff’s behalf “legal and miscellaneous fees” in the sum of RMB 700,000 to enable the plaintiff’s release from custody of the public security authority of Qinghai Province.   

28.  The defendants say they had since 9 July 2006 lost contact with the plaintiff and they could not further deal with him in relation to, inter alia, the balance of the purchase price.  There was also no reasonable opportunity for them to comply with the terms of their agreement.  

29.  By way of counterclaim, the defendants plead that the plaintiff had forged the official chop of the Qinghai subsidiary and had, without the defendants’ knowledge, entered into a settlement agreement with Xing Qing on 7 August 2006 and further received the settlement sum of RMB 7,730,000.  In return, the plaintiff agreed to allow Xing Qing to take coal from the coalmine, the development right of which is owned by the Qinghai subsidiary.  It is said that, in so doing, the plaintiff acted in breach of his fiduciary duty as a director of Waly and further in breach of the agreement between the parties.  The defendants say that they had commenced litigation in Qinghai to stop the performance of the settlement agreement and the litigation is still in progress.

30.  The defendants counterclaim for the return by the plaintiff to Waly of the RMB 7,730,000 settlement sum and for the repayment to themselves of the RMB 700,000 they paid to obtain the plaintiff’s release. The defendants further counterclaim for damages for the loss occasioned by the plaintiff’s agreement to allow Xing Qing to obtain coal from the coalmine.   

31.  Pausing here, it is plain that the right to the relief counterclaimed by the defendants belong to Waly and not to the defendants personally.

The reply and defence to counterclaim

32.  By way of reply, the plaintiff says that the agreement to assign director’s loan was ancillary to the agreement for transfer of shares. The plaintiff denies having received RMB 2 million from the defendants or that he could not be contacted after 9 July 2006. He further does not admit the payment of RMB 700,000 to obtain his release and puts the defendants to strict proof of the same.

33.  As to the Counterclaim, the plaintiff denies forging the official chop of the Qinghai subsidiary and pleads that the settlement agreement with Xing Qing and the payment of settlement sum are irrelevant to the disputes between the parties.  

The trial

34.  At the trial, both the plaintiff and his brother gave evidence. They adopted their witness statements as evidence.  The gist of their evidence is as set out in the preceding part of this Judgment.  Additionally, the plaintiff pointed out that when he signed the Board resolution dated 27 April 2006, he was in custody and did not know that the defendants had failed to make the first instalment payment of RMB 3 million.  He also stated that he did not know the Mr Ma referred to in the resolution. 

35.  In relation to the disputes between the Qinghai subsidiary and Xing Qing, the plaintiff’s evidence is that, through the mediation of the Court in Qinghai (青海省天峻縣人民法院), a settlement was reached on 7 August 2006, which received the Court’s approval on 13 September 2006.  Subsequently, the defendants used the name of the Qinghai subsidiary to apply to the Qinghai Province People’s High Court to challenge the validity of the settlement, but failed.  The settlement sum of RMB 7,730,000 paid by Xing Qing to the Qinghai subsidiary is, however, being held by the Qinghai Court, pending the outcome of the present action. 

36.  As for the plaintiff’s brother, he confirmed he had met the defendants in Beijing on 8 April 2006 and he had signed the Board resolution dated 8 April 2006.  He referred to a Chinese statement entitled “付款説明” signed by the defendants and dated 16 July 2007.  This is a document disclosed by the defendants in their List of Documents.  The plaintiff’s brother denied the allegations in the defendants’ statement that: (i) the 2^nd defendant had given him RMB 1 million in cash; and (ii) it was agreed between them that another RMB 2 million would be used to procure the release of the plaintiff from the detention centre.

Findings

37.  In respect of the claim, the burden is on the plaintiff to make good his claim for breach of agreement and his entitlement to the relief sought.

38.  I accept the evidence of the plaintiff and his brother. 

39.  In respect of the defendants’ pleaded case that they had paid RMB 2 million to the plaintiff, this is in contradiction with their Chinese statement dated 16 July 2007, which stated that only RMB 1 million was given to the defendant’s brother in cash in Beijing.  Similarly, the pleaded defence that the defendants had paid RMB 700,000 to secure the release of the plaintiff differs from the allegation in the Chinese Statement that it was agreed to use RMB 2 million to procure the release of the plaintiff.  As to the rest of the defence that the defendants could not contact the plaintiff or did not have a reasonable opportunity to perform their contractual obligations, it is simply unconvincing, quite apart from the absence of supporting evidence.

40.  On the evidence before the court, I am satisfied that the plaintiff has proved on a balance of probabilities the following:

(1)   The 1^st and 2^nd defendants had each signed the Undertaking in the circumstances described by the plaintiff.

(2)   The parties had agreed to transfer 4,000 of the plaintiff’s shares in Waly to each of the defendants on the terms and conditions as set out in the Undertaking.

(3)   As part of the agreement between the parties, each of the defendants has agreed to pay to the plaintiff a total sum of RMB 15 million, with the first instalment of RMB 3 million to be paid within three days from the signing of the Undertaking and the balance to be paid by December 2006.

(4)   Each of the defendants further agrees that in the event he fails to make the payment as agreed, he will unconditionally re-assign to the plaintiff the 4,000 shares in Waly that the plaintiff had transferred to him.

(5)   Pursuant to the agreement between the parties, the plaintiff had transferred to each of the defendants 4,000 of his shares in Waly and had further procured the appointment of the defendants to the Board of Directors of Waly

(6)   Each of the defendants has, however, failed to make any payment to the plaintiff and has thereby breached the terms of the Undertaking and the agreement between the parties.

(7)   Pursuant to clause 7 of the Undertaking, each of the defendants therefore becomes liable to re-assign to the plaintiff, the 4,000 shares in Waly that had been transferred to them by the plaintiff.

(8)   The defence put forward by the defendants is unsustainable.

41.  Accordingly, the plaintiff is entitled to judgment for an order that each of the defendants shall forthwith transfer to the plaintiff the 4,000 shares in Waly that are registered in his name together with costs of the claim.

42.  As for the counterclaim, the defendants bear the burden of proof.  As they have adduced no evidence and further fail to prosecute it, the counterclaim is not made out and stands to be dismissed with costs.  In any case, as noted above, the defendants do not have a personal right to the relief sought in the Counterclaim.

Conclusions

43.  In the premises, I enter judgment for the plaintiff on the claim for an order that each of the defendants shall forthwith transfer to the plaintiff the 4,000 shares in Waly that are registered in his name together with costs of the claim, to be taxed if not agreed.  I further provide for liberty to apply for the purpose of enforcing the judgment on the claim. 

44.  On the Counterclaim, it is dismissed with costs to the plaintiff to be taxed if not agreed.