AU KAI TO KAREL v. END USER TECHNOLOGY LTD AND OTHERS

HCA 170/2015

[2018] HKCFI 594

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 170 OF 2015

____________

____________

_____________________

D E C I S I O N

_____________________

Introduction

1.  On 28 September 2017, after trial, this court handed down the judgment in this action (“the Judgment”) by which one of the claims of the plaintiff (“Mr Au”) against End User Technology Ltd (“EUT”) and Merdeka Mobile Group Ltd (“MMG”) is allowed with costs. In the Judgment, this court ordered, among other matters, that EUT and MMG be jointly and severally liable to pay damages to Mr Au in the sum of HK$4.4 million (“the Award”). This is a joint application of EUT and MMG for a stay of execution of the Judgment pending their appeal to the Court of Appeal by their summons dated 21 November 2017 (“Summons”).

2.  In this Decision, I shall adopt the abbreviations used in the Judgment, unless otherwise stated. I shall refer to the Judgment for the background facts and shall not make any repetition of the same here.

3.  This court has identified three issues in the Judgment. The appeal of EUT and MMG relates to the second issue only, i.e., the Share Certificate Issue. On the Share Certificate Issue, briefly stated, I made a factual finding that EUT had failed to provide the Share Certificate to Mr Au. I concluded that, by reason of this failure are, EUT breached the Agreement. I further held that both EUT and MMG are jointly and severally liable to Mr Au for their breach of the Agreement given the common ground that EUT entered into the Agreement and holds the Sale Shares on behalf of MMG as its agent/nominee.

Applicable legal principles

4.  Mr Lam, for EUT and MMG in the stead of Mr Chow, the trial counsel, refers to the following principles summarised by Chow J in Lam Mo Chu Susie v Lam Sik Ying Victor, Administrator of the Estate of Lam Tim alias Stan Lam, HCA 1974/2015, 23.1.2018, [2018] HKCFI 97 at §5 on the basis of the judgment of Ma J (as he then was) in Star Play Development Ltd v Bess Fashion Management Co Ltd [2007] 5 HKC 84. There is no dispute about the summary, which is reproduced as follows:

“5. The principles governing an application for a stay of execution of a judgment pending appeal are well established.

(1)   The applicant is required to demonstrate a “good reason” for a stay of execution.

(2)   Generally speaking, the existence of merely an arguable appeal cannot by itself amount to a sufficient reason to justify a stay.  It is the minimum requirement before a court would even begin to consider granting a stay.

(3)   If the court is not convinced that there exist arguable grounds of appeal, no stay will be granted however exceptional the circumstances may otherwise be justifying a stay of execution.

(4)   On the other hand, the existence of a strong appeal or a strong likelihood of success will usually by itself enable a stay to be granted because this would constitute a good reason for a stay.

(5)   In most cases, where the court is faced with simply the existence of an arguable appeal, it becomes necessary for the applicant to provide additional reasons as to why a stay is justified.

(6)   Commonly, this is done by demonstrating that without a stay the appeal would be rendered nugatory, for example, because of an appreciable risk that the respondent to the appeal would not be able to repay in the event of a successful appeal against a money judgment, or because the failure to grant a stay would have a serious deleterious effect on the applicant.     

(7)   In considering an application for a stay pending appeal, it would be impractical and even undesirable for the court to go deeply into the merits or strengths of the appeal, although the court must still form a preliminary view of these aspects.”

5.  Where the appeal is against an award of damages, the long established practice is that a stay will normally be granted only where the appellant satisfies the court that, if the damages are paid, then there will be no reasonable prospect of his recovering them in the event of the appeal succeeding, see Hong Kong Civil Procedure 2018, Vol. 1 p. 1183 and China Citic Bank International Ltd v Durrant Simon Patrick Michael, unreported, CACV 127/2014, 21.7.2014, [2014] HKCA 353.

6.  With these principles in mind, I now turn to the major grounds advanced on behalf of EUT and MMG.

Merits of the appeal

7.  Mr Lam submits that there are strong grounds of appeal and in the main he makes two points.

8.  First, Mr Lam submits that this court erred in law and principle to hold that there was a breach of the Agreement on the evidence of Mr Au and the facts as found by this court. He submits that the Share Certificate had been withheld from Mr Au with his consent and not against his wishes and therefore there was no breach of the Agreement. Mr Lam stresses that there is no attempt to challenge the fact findings of this court in the Judgment.

9.  I see no substance in this ground. I have considered all the circumstances and those matters mentioned in the written submissions of Mr Lam were actually narrated in the Judgment. The Share Certificate was finally returned to Mr Au on 14 July 2014 but Mr Au was asked to return the same to MMG so that the Consideration Shares could be transferred to one Lui Cui. Mr Au had been misled into believing that a new share certificate would be issued to him to replace the Share Certificate to reflect his enhanced shareholding with the addition of rights shares: §57 of the Judgment.

10.  Mr Lam is correct to point out that there is no allegation of fraud or deceit in respect of the Share Certificate Issue. This, nevertheless, does not affect the validity of my conclusion that the said return of the Share Certificate to Mr Au on 14 July 2014 could not be held as an act of fulfilling the obligations under the Agreement on the part of EUT/MMG, as explained in §65(5) the Judgment.

11.  Further, it is not the pleaded case of the defence that the Share Certificate was returned to Mr Au on 14 July 2014 in fulfilment of their obligations under the Agreement. The defence merely relies on the alleged delivery of the Share Certificate to Mr Au on 18 July 2013: see §12(7) of the Defence and Counterclaim.

12.  All in all, this court accepts the evidence of Mr Au on this issue including his allegation that despite repeated demands, Mr Lau refused to return the Share Certificate to him: see §56 of the Judgment. I am unable to discern any error in law that this court has made in the factual conclusion that EUT/MMG failed to deliver the Share Certificate to Mr Au pursuant to the Agreement.

13.  Next, Mr Lam highlights that MMG was never a party to the Agreement and even the pleaded case of Mr Au did not contain such an allegation. Mr Lam refers to §66 of the Judgment that this court mentioned that it was common ground that EUT entered into the Agreement and holds the Sale Shares on behalf of MMG as its agent/nominee. He points out that no such common ground exists whether in the pleadings, witness statements, submissions, oral and written, of the parties at trial. Thus, he submits that this court erred in concluding that MMG should also be held in breach of the Agreement by reason of the breach of EUT.

14.  In the first place, I myself made it clear in the Judgment (§68 of the Judgment) that Mr Au does not claim against MMG for breach of the Agreement in the prayer for relief despite an allegation that EUT and/or MMG breached the Agreement by their refusal or failure to deliver the Share Certificate to Mr Au in §19 of the Amended Statement of Claim (“ASOC”).

15.  I now turn to the submission on the absence of the common ground. At the very outset of the trial, as shown in the transcript, I invited counsel on both sides to have a discussion about their respective cases.  The entire discussion, as shown in the transcript, has to be understood in its context.

16.  First, Mr Chow confirmed to this court that a vendor of shares should deliver the share certificate to his purchasers. Mr Ng, for Mr Au again, explained that in the present case, Mr Au had an allegation that Mr Au was deprived of the Share Certificate, which was in the custody of MMG. Mr Chow confirmed that he did not accept the allegation. I observed that it was a factual dispute and I asked Mr Chow if I ruled against his client on this matter, his client must be in breach. Mr Chow confirmed that they do accept that.

17.  When this court discussed the allegation of breach of contract with Mr Ng, he confirmed that it was his case that both EUT and MMG were in breach. He clarified with the assistance of Mr Chow that EUT was the party to the Agreement. Then this court asked Mr Ng whether it was the case of Mr Au that EUT entered into the Agreement on behalf of MMG. Mr Ng answered in the affirmative and it was the basis why he said both EUT and MMG should be liable.

18.  At this juncture, I should explain why I posed the question to Mr Ng. It was due to the following matters pleaded in the ASOC:

(1)   MMG used EUT as a corporate vehicle for the purpose of the purchase and holding of the Sale Shares (§3 of the ASOC);

(2)   EUT was an alter ego acting entirely on the instructions of MMG (§3 of the ASOC);

(3)   Under the Agreement, the consideration for the Sale Shares was the Consideration Shares to be issued and allotted by MMG to Mr Au. In other words, the consideration was to be provided by MMG (§4 of the ASOC);

(4)   Indeed, the Consideration Shares were issued by MMG for the purpose of the Agreement (§4 of the ASOC).

(5)   There is an allegation that EUT and/or MMG and/or Mr Lau had failed or refused to deliver the Share Certificate to Mr Au (§10(b) of the ASOC);

(6)   It is pleaded that such a failure or refusal on the part of EEU and/or MMG constituted a breach of the Agreement. (§19 of the ASOC).

19.  In the course of further discussion, Mr Ng confirmed that the case of Mr Au was that Mr Lau deliberately withheld the Share Certificate from him and in doing so, he induced a breach of the Agreement by both EUT and MMG.

20.  Mr Chow raised no objection to all these. Nor did he ever submit or suggest that EUT did not enter into the Agreement on behalf of MMG throughout the trial.

21.  Mr Lam fairly agrees that the use of singular form in the course of the discussion could not be indicative of whether only either EUT or MMG was actually referred to.

22.  Moreover, as rightly pointed out by Mr Ng, Mr Chow conducted the trial and cross-examine Mr Au on the basis that MMG was a party to the Agreement.

23.  The only defence witness, Mr Lau, managing director of both EUT and MMG, accepted that there was no dispute that MMG was the true party of the Agreement under cross-examination.

24.  On the basis of the foregoing matters and in light of the pleaded case of Mr Au, I was, and still am, of the view that there is no dispute that EUT in fact entered into the Agreement on behalf of MMG.  I agree that Mr Ng did not say precisely that in doing so, EUT was the agent or nominee of MMG but it is only a reasonable and obvious conclusion to be drawn.

25.  In any event, as fairly accepted by Mr Lam, if EUT entered into the Agreement on behalf of MMG, MMG would also be liable for any breach on the part of EUT.

26.  On the other hand, Mr Lam validly points out that there is no allegation of any agency relationship in the ASOC. Nor is there any allegation that EUT entered into the Agreement on behalf of MMG.

27.  Mr Lam invites my attention to Kwok Chin Wing v 21 Holdings Ltd (2013) 16 HKKCFAR 663 for the importance of pleadings and the general prohibition of unpleaded issues to be canvassed at trial.

28.  I agree that unpleaded issues should not be raised to ensure fairness. But here, given those matters already pleaded, the agreement of the parties or at least the non-objection of the defence and the own evidence of the defence witness, Mr Ng was entitled to ask this court to arrive at the conclusion that EUT entered into the Agreement on behalf of MMG. In a nutshell, the defence took no issue about this at all despite the express confirmation of Mr Ng of Mr Au’s case during the discussion. It is not the case that Mr Au slipped in an unpleaded issue by way of his own evidence and as a result the defence was prejudiced.  

29.  In the premises, I do not think the pleading argument can assist the defence on appeal.

30.  Mr Lam lastly complains that as a matter of law, if EUT only entered into the Agreement on its behalf as its agent or nominee, no contractual liability could attach to EUT and it could not be jointly and severally liable together with MMG. I do not think that this is the correct legal position.

31.  Mr Ng rightly points out, and Mr Lam subsequently agrees, that in law an agent can be held jointly and severally liable for contractual liabilities together with his principal: Bowstead & Reynolds on Agency (21^st ed) at §9-009(2), p.572. I find no substance in this complaint and in any event it does not assist MMG in the winding-up proceedings commenced by EUT against it.

32.  In conclusion, my preliminary view is that the appeal of EUT and MMG is unmeritorious, let alone being supported by strong grounds. With all the factual findings which this court was entitled to make, I do not think EUT and MMG could avoid liabilities for their undeniable breach of the Agreement. The appeal being unarguable, it should be the end of this matter.

33.  Nevertheless, I continue to consider the last ground, which can be disposed of briefly. Mr Lam submits that the appeal would be rendered nugatory because of a real risk that Mr Au cannot return the Award to EUT and MMG in the event of a successful appeal.

34.  In the supporting affirmation of Mr Cheng, the following matters discovered by the investigator engaged by EUT and MMG are relied on:   

(1)   Mr Au does not own any real property in Hong Kong;

(2)   Mr Au is a director of two companies but he has no shareholding interest in either of them;

(3)   Mr Au is a director and shareholder of Wealth Key Holdings Limited (“Wealth Key”). Investigation revealed that it is only a shell company with an issued share capital of HK$1. It holds no property in Hong Kong.

(4)   Mr Au has 6 criminal records and all the convictions relate to his failure to pay business registration fees.

(5)   Mr Au is not found to hold any other assets.

35.  I am not satisfied that a case of Mr Au’s impecuniosity can be made out on such assertions. The criminal convictions of Mr Au, which are more than 10 years old, are of little probate value in particular. I agree with Mr Ng that the reference to such convictions is more for the purpose of prejudice.

36.  I bear in mind that the onus is on the appellant to show by way of credible evidence that there is a real risk and a legitimate fear that any payment to the successful party could not be recovered despite the victory of his appeal. The burden is not on the successful party to make an exhaustive list of his assets to disprove such a risk and to allay such a fear.

37.  For completeness, I turn to the evidence of Mr Au. He discloses that Wealth Key owns a 3/8 share of 3 pieces of land in Cheung Island (collectively “the Land”).

38.  Mr Cheng then came back and avers that the Land falls within the Green Belt zone and should be of limited market value. In the eleventh hour, Mr Au filed a reply affirmation exhibiting thereto a provisional sale and purchase agreement and a formal agreement relating to the sale of the Land.

39.  It transpired that on 16 January 2018, Wealth Key entered into the provisional sale and purchase agreement to sell the land at the price of HK$15 million and the completion date would be on 18 June 2018. On 1 February 2018, the formal agreement was signed.

40.  Mr Lam then makes a submission that Mr Au has already dissipated his own assets and the risk that he will be unable to repay the Award is looming large.

41.  I cannot accept this submission. If EUT and MMG genuinely believe that the Land is of limited value, the fact Mr Au is able to sell the Land can only strengthen his financial position. Furthermore, I also see no reason why Mr Au had to begin dissipation of his assets only after the Summons was taken out. If he had had no conviction in his claim and defence to the counterclaim, he would not have waited until a favourable judgment was obtained to start dissipating his assets to avoid liabilities.

42.  To conclude, I am not satisfied that the financial condition of Mr Au can cause any reasonable concern. I cannot hold that the appeal will be rendered nugatory in the absence of a stay of execution.

43.  Lastly, Mr Lam impresses upon this court that MMG is financially sound and it should not be wound up compulsorily. This court is not dealing with the winding-up petition and the financial position of MMG has no bearing on this application. In passing, I would observe that given its purported financial strength, it should reconsider Mr Au’s suggestion that it should pay into court the entire amount of the Award for a stay of execution in the winding-up proceedings.

Conclusion and disposition

44.  For the reasons given above, I am not convinced that any valid grounds can be made out and there is no reason why I should exercise my discretion to order a stay of execution. Accordingly, I dismiss the Summons.

45.  I fail to see any reason to depart from the general rule of costs following the event.  I make an order nisi that Mr Au’s costs of and occasioned by the Summons should be borne by EUT and MMG, to be taxed if not agreed.

46.  I thank both counsel for their helpful assistance.