ZOU GEBING v. HONG KONG XINXIN INFORMATION LTD

HCA 1905/2024

[2025] HKCFI 380

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1905 OF 2024

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D E C I S I O N

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A.  INTRODUCTION

1.  This is the substantive hearing of the Plaintiff (“P”)’s summons filed on 24 September 2024 (“P’s Summons”)  for an interim proprietary injunction (“the Injunction”)  against the Defendant (“D”), restraining D, whether by  itself, or by whomsever acting for it or otherwise howsoever, including but not limited to through Tricor Investor Services Limited (“Tricor”, the shares registrar of the Listed Co as defined below), be restrained from selling, trading, transferring, assigning, conveying, or otherwise disposing of the 110,000,000 shares (“the Shares”)  of Regal Partners Holdings Limited (皇庭智家控股有限公司)  (formerly known as Morris Home Holdings Limited, 慕容家居控股有限公司)  (“the Listed Co”)  or any part thereof.  The shares of the Listed Co are listed for trading on the Main Board of the Hong Kong Stock Exchange (stock code: 1575).

2.  In this hearing, P is represented by Mr Patrick Chong (together with Mr Edward KH Ng), and D is represented by Mr Kwan Ping Kan (together with Mr Jason PH Wong).

B.  BACKGROUND FACTS

3.  The dispute in this case stems from a loan agreement signed by P as lender and D as borrower on 1 November 2022 (“the Loan Agreement”).  Pursuant to the Loan Agreement, D agreed to provide a loan of HK$23 million (“the Loan”)  to P, and P agreed to repay the Loan and the interests accrued thereon in accordance with the terms of the Loan Agreement.

4.  Under the Loan Agreement, P has provided the Shares as security for the Loan.  As stipulated in Clause 2.2(a)  of the Loan Agreement, the security arrangement is as follows:

“2.2 借款方應僅將貸款用於：

（a）爲借款方的債務清還用途，由借款方安排將慕容家居股份以1.1億實物股票形式存放於借款方的託管人鄭文翰（香港身份證號碼 ……（持有人）保管；借款方同意及向貸款方承諾（i）貸款及其利息未完全償還之前借款方不得以任何名義或方式處置此1.1億慕容家居股份；及（ii）如出現任何違約事件，托管人可利用借款方及Morris Capital Limited[1]不可撒销地授予的全權授權將此1.1億慕容家居股份作其認爲合適的處置或處理；及

（b）爲借款方個人財務用途提供資金。”

5.  P’s case, in gist, is that notwithstanding the Loan Agreement and the provision of the Shares as security for the Loan, the Loan was never drawn down or paid to P.  In the circumstances, D is not entitled to exercise the power to sell the security, ie the Shares.

6.  According to P:

(1)  At all material times, he is the ultimate owner of 666,500,000 shares of the Listed Co.  The Listed Co was found by him in 2014.  He was the Chairman of the Listed Co until 17 October 2022 and an Executive Director of the Listed Co until 8 January 2024.

(2)  In mid-2022, Mr Tse Kam Pang (謝錦鵬)  (“Mr Tse”)  through his nominee companies subscribe 1,300,000,000 shares of the Listed Co to provide financial support to the Listed Co.  After the subscription, Mr Tse was appointed as an Executive Director and the Chairman of the Board of the Listed Co on 17 October 2022.

(3)  P also asked Mr Tse to provide him a personal loan to ease his own financial difficulties.  Mr Tse then through D agreed to lend a sum of HK$23 million to him.  As such, the Loan Agreement was signed by P and D on 1 November 2022.

(4)  However, notwithstanding the signing of the Loan Agreement, no loan was provided by D to P.  In around 2023, P inquired with Mr Tse as to the status of the granting of the Loan under the Loan Agreement.  Mr Tse assured P not to worry, and Mr Tse said that he would handle the internal matters of the Listed Co first.

(5)  Since P was on good terms with Mr Tse and they were both on the Board of the Listed Co, P refrained from pressing Mr Tse further about the provision of the Loan.  However, in January 2024, Mr Tse attempted to seize complete control of the Listed Co by making P resign from his directorship in the Listed Co. Further, P’s wife was removed from directorship in the Listed Co on 21 June 2024.  Mr Tse’s failure to keep his promise to run the Listed Co with P as business partners prompting P to reconsider his legal situation regarding the Loan and the Shares under the Loan Agreement.

7.  P’s case as pleaded in the Statement of Claim is as follows:

“B. The Loan Agreement

2. By a loan agreement (貸款協議)  dated 1 November 2022 (“Loan Agreement”), [D] (as lender)  agreed to lend a sum of HK$23,000,000 to [P] (as borrower)  at an interest rate of 10% per annum. Under the Loan Agreement:

2.1. [P] shall cause Morris Capital Ltd [a company owned and controlled by P] to pledge [the Shares] as security to be held by a custodian Mr Cheng Man Hon (鄭文翰)  (“Mr Cheng”), who is and was at all material times an employee of [the Listed Co].

2.2. Under clause 2.2(a), it is expressly agreed, or implied by reason of business efficacy or common intention of the parties, that [D] is entitled to instruct Mr Cheng to dispose of or deal with [the Shares] only upon an event of default by the Plaintiff.

3. Pursuant to the Loan Agreement, an authorisation letter dated 1 November 2022 was signed between [P] on behalf of himself and Morris Capital Limited and Mr Cheng, whereby [the Shares] were transferred to Mr Cheng as custodian, who may only dispose of or deal with [the Shares] upon an event of default by [P] under the Loan Agreement. By reason of the matter aforesaid, Mr Cheng was a trustee holding [the Shares] on behalf of [P].

4. In accordance with the Loan Agreement, [the Shares], consisting of 11 share certificates (numbered 002604 to 002614)  (“the Share Certificates”), were delivered to Mr Cheng as custodian and [P]’s trustee.

5. As of the date hereof, no loan has been advanced to [P] pursuant to the terms of the Loan Agreement. [D] was/is therefore not entitled to give any instruction to Mr Cheng to dispose of or deal with [the Shares] under Loan Agreement.

6. By letter dated 1 August 2024, [P]’s solicitors requested [D] to return [the Shares] to [P] and not to dispose of or deal with [the Shares].

C. Breach of the Loan Agreement and Trust

7. In breach of the Loan Agreement, in around mid-August 2024, [D] instructed Mr Cheng to deliver [the Shares] to [the Listed Co]’s shares registrar, Tricor Investor Services Limited (“Tricor”), to be registered in the name of [D] or its nominee.

8. By letter dated 15 August 2024, [P]’s solicitors requested Tricor not to permit or register any transfer of [the Shares]. On 2 September 2024, Tricor would not accede to the request of [P]’s solicitors in the absence of a court order.

9. Upon [P]’s application for an inter partes interlocutory injunction, [D] has given an undertaking to this Honourable Court that it (and it[2] agents)  will not dispose of [the Shares].

10. Further or alternatively, by reason of the matters aforesaid, [D] was aware of Mr Cheng’s breach of trust and has knowingly received [the Shares] and/or dishonestly assisted Mr Cheng in acting in breach of trust.

11.   By reason of the matters aforesaid, [D] is therefore liable to forthwith return the Shares to Morris Capital Limited or a nominee to be designated by [P].”

8.  P’s case is denied by D.  D’s case is as follows:

(1)  D is beneficially onwed by Mr Chan Yiu Kwai (陳耀桂, “Mr Chan”)  and Ms Yeung Lai Na (楊麗娜 “Ms Yeung”).  Ms Yeung is also a director of D.

(2)  From 2021 to 2022, P’s companies, including the Listed Co, ran into financial difficulties. The Mainland government intervened and coordinated a debt restructuring.

(3)  In late October 2022, P was introduced to D through Mr Tse.  Mr Tse is a friend of Mr Chan and Ms Yeung.

(4)  P was in need of HK$23 million to settle the debts owed by his companies.

(5)  On 1 November 2022, D as lender and P as borrower signed the Loan Agreement.  At the same time, P and 3 companies[3] also signed a 代收代付協議, the contents of which are as follows:

“《代收代付协议》

甲方：邹格兵先生（香港身分证号……）

乙方：Morris Zou Limited（慕容家居控股有限公司香港全资子公司）

丙方：浙江慕容时尚家居有限公司（慕容家居控股有限公司中国全资子公司）

丁方：海宁嘉宸贸易有限公司

各方根据中华人民共和国相关法律，在平等地，自愿的基本基础上，经友好协议，就代收代付相关事宜，达成以下协议条敷。

由于丁方直接收取甲方款项需要换汇和备案，为方便推进甲方与丁方业务进程，甲方现委托乙方根据此协议替甲方支付丁方款项。

一. 甲方于2022年11月01号支付乙方二千三百万港元；

二．乙方通过丙方向丁方支付二千三百万港元折合之人民币，汇率以当天中国银行的牌价

三．本协议自四方签字之日生效

四. 本协议一式两份，甲乙双方各执一份

此次代收款项，乙方不能扣除任何金额，甲方及其公司欠慕容家居控股有限公司之款项将按原还款计划，按时归还。

特此协议”

(6)  In performance of the Loan Agreement, D made a HK$23 million cheque payment (“the HK$23m Cheque”)  to Morris Zou Limited in accordance with P’s instruction, on the same day the Loan Agreement was signed.

(7)  From February 2023 to April 2024, P made periodic partial repayments to D.  The repayments made by P to D are as follows:

	Date	Amount (HK$)	Purpose
(1)	7 February 2023	500,000	Interest for November 2022 to January 2023 (originally due on 28 January 2023)
(2)	9 February 2023	75,000
(3)	11 May 2023	500,000	Interest for February 2023 to April 2023 (originally due on 28 April 2023)
(4)	12 May 2023	75,000
(5)	2 August 2023	3,000,000	Partial payment for the principal
(6)	3 August 2023	500,000	Interest for May 2023 to July 2023 (originally due on 28 July 2023)
(7)	4 August 2023	75,000
(8)	13 December 2023	500,000	Interest for August 2023 to October 2023 (originally due on 28 October 2023)
(9)	1 February 2024	50,000	Interest for November 2023 to January 2024 (originally due on 28 January 2024)
(10)	29 April 2024	50,000	Interest for February 2024 to April 2024 (originally due on 28 April 2024)

(8)  During the aforesaid period, no complaint was received from P about the Loan Agreement.  No request was made for the return of the Shares. 

(9)  Since 28 July 2024, P began to default on his repayment obligations under the Loan Agreement.  As a result, in August 2024, the Custodian (ie Mr Cheng)  arranged to exercise his right to enforce against the Shares.

9.  On 24 September 2024, P filed and served P’s Summons and the supporting affirmations.  On 27 September 2024, in the hearing (“the 1^st hearing”)  before DHCJ Jonathan Wong, upon the undertaking given by D (“the Undertaking”)  in terms of the injunction sought by P in P’s Summons until the substantive determination of P’s Summons or a further order made by this Court, P’s Summons was adjourned for substantive arguments.

C.  DISCUSSION

10.  For the purpose of granting a proprietary injunction, the applicant has to satisfy the Court that[4]:

(1)  there is a serious issue to be tried on the merits;

(2)  the balance of convenience is in favour of granting an injunction; and

(3)  it is just and convenient to grant the injunction.

I would examine whether P has satisfied these requirements in turn in the paragraphs below.

C1.  Serious issue to be tried

11.  It is well established that “a serious question to be tried” is not a steep hurdle.  All that has to be shown is that the claimant has prospects of success which in substance and reality exist, and odds against success do not defeat him.  As long as there is a serious question, it matters not whether the Court thinks that the chances of success at trial is 90% or 20%[5]. The existence of a good arguable defence does not necessarily negate a good arguable case[6]. If the opposing party seeks to show that there is no serious issue to be tried, the threshold is high, as it would be necessary to demonstrate that the claim should be struck out[7].

12.  Mr Kwan for D submits that there is no serious issue to be tried for the following reasons:

(1)  The Court has no jurisdiction to grant a proprietary injunction as the Shares are not in D’s possession or control.

(2)  There is no serious issue to be tried on the causes of action advanced against D, namely (a)  knowing receipt and (b)  dishonest assistance.

(3)  There is no serious issue to be tried on the facts.

C1.1 – Shares not in D’s possession or control?

13.  It is trite that a proprietary injunction must relate to a specific asset held by or under the control of the defendant, or its traceable proceeds, in respect of which a proprietary claim is raised by the plaintiff.[8]

14.  Mr Kwan submits that the Shares are not in D’s possession or control at all material times, as it is the Custodian who possesses and/or controls the Shares. The Shares were transferred by P to the Custodian pursuant to the Loan Agreement.  Further, as per Clause 2.2 of the Loan Agreement, the Custodian is also appointed as an agent for P, not an agent for D.

15.  With respect, for the purpose of considering whether there is a serious issue to be tried, bearing the principles set out in [11] above in mind, I am unable to agree with Mr Kwan on this point.  In my view, it is reasonably arguable that:

(1)  The construction of the Loan Agreement as pleaded by P in [2.2] of the Statement of Claim, ie D would be entitled to instruct the Custodian to dispose of or deal with the Shares upon an event of default committed by P under the Loan Agreement, is correct.

(2)  Since P is bound by the Loan Agreement and the Custodian is P’s agent, the Custodian has to observe all the terms of the Loan Agreement (such terms are binding upon P). The Custodian has to hold and to keep the Shares as security for the Loan and must not return the same to P until P has fully repaid the Loan and interests under the Loan Agreement, and the Custodian has to comply with the instruction given by D concerning the Shares when an event of default occurred.

(3)  Applying common and commercial sense, it is arguable that D is having some control over the Shares.  

16.  It is clear that the Shares are intended to be the security for the Loan under the Loan Agreement.  In the circumstances, it is reasonably arguable that D has control over the Shares under the Loan Agreement.

C1.2 - No serious issue to be tried on the causes of action advanced against D

17.  Having examined the Statement of Claim, I agree with Mr Kwan that the causes of action pleaded against D are (1)  knowing receipt and (2)  dishonest assistance.  No other cause of action has been pleaded by P.  I also agree with Mr Kwan that P has not shown a serious issue to be tried on the causes of action pleaded in P’s pleading.

C1.2.1 - Knowing receipt

18.  The requirements of liability for knowing receipt are as follows[9]:

(1)  There is a property subject to a trust.

(2)  The property is transferred in breach of trust, and the property (or traceable proceeds)  is received by the defendant.

(3)  The receipt is for the defendant’s own benefit, and he received it with knowledge that the property is trust property and has been transferred in breach of trust.

19.  Mr Kwan submits that it would not be correct to characterise the Shares as “trust property”. In the Loan Agreement, what is intended is a security package, in which the Shares would stand as security for the Loan.  The duties owed by the Custodian and/or D to P would be in the nature of the duties owed by a chargee or mortgagee to a chargor or mortgagor.[10]

20.  On the other hand, Mr Chong for P submits that it is at least arguable that the Shares in the context of this case are trust property.  The Custodian does not have any beneficial interest in the Shares, which can only be held for the ultimate beneficial owners and in accordance with the Loan Agreement – either P or D.  It is arguable that the Shares are all along held in trust for P from the inception of the Loan Agreement, with the Custodian having a power to dispose of the Shares for the benefit of D upon an event of default declared by D.  Alternatively, the Shares are not at the free disposal of the Custodian who is holding the same for the specific purpose of creating and giving effect to a security interest created in favour of D.  As no loan was advanced, no valid security interest could be created.  Upon the failure of the purpose of the intended trust under the Loan Agreement, the Shares would be held by the Custodian in resulting trust for P.[11]

21.  Having considered the parties’ respective submissions, I cannot say that Mr Chong’s point is unarguable.  Accordingly, as submitted by Mr Chong, there is a serious issue to be tried as to whether the Shares can be characterised as “trust property” in the context of this case.

22.  Mr Kwan submits that the second problem in the claim based upon “knowing receipt” is that there is no receipt of the Shares by D in P’s in pleaded case.  Mr Kwan submits that:

(1)  Receipt is the “gist of the action” for knowing receipt.[12] It does not suffice for liability that the defendant has benefited in the abstract.  The defendant must have received the property for which he can be held accountable as constructive trustee.[13]

(2)  There is no receipt of the Shares by D.  D does not hold the Shares. There is also no transfer of the Shares. The only time any “transfer” took place was the delivery of the Share Certificates by P to the Custodian. Such delivery is not a “transfer” for purposes of the knowing receipt claim, because the delivery was the act setting up the alleged trust.  The same delivery cannot both constitute the alleged trust and simultaneously be in breach of the alleged trust.

23.  I agree with Mr Kwan that in P’s pleaded case, there is no receipt of the Shares by D.  Accordingly, there cannot be a serious issue to be tried on the claim of “knowing receipt” as pleaded in the Statement of Claim.

C1.2.2 – Dishonest assistance

24.  For dishonest assistance, the plaintiff must plead and prove: (1)  that there has been a breach of trust or fiduciary obligation owed to the plaintiff; (2)  in which the defendant has assisted or to which the defendant has procured; (3)  the defendant acted dishonestly; and (4)  resulting in loss to the plaintiff.[14]

25.  In my view, there has not been any proper plea of “dishonesty” in the Statement of Claim.  The requirements for plea of “dishonesty” are as follows[15]:

(1)  Dishonesty has both a subject and objective element.  The subjective element is concerned with all the circumstances known to the defendant, his personal attributes and the reason why he acted as he did.  The objective element is concerned with an objective assessment of the defendant’s mental state as established by the subjective element.  If by ordinary standards the defendant’s mental state would be characterised as dishonest, it is irrelevant that the defendant judges by different standards.

(2)  A plaintiff who alleges dishonesty must plead and establish facts to show that the defendant was dishonest and not merely negligent.  The Court will not infer dishonesty from facts which have not been pleaded, or from facts which have been pleaded but are consistent with innocence.

(3)  Fraud or dishonesty must be distinctly alleged and as distinctly proved, and must be sufficiently particularised.  It is not sufficiently particularised if the facts pleaded are consistent with innocence.

(4)  An allegation that the defendant “knew or ought to have known” is not a clear and unequivocal allegation of actual knowledge and will not support a finding of fraud.

(5)  A rolled-up plea that the defendant “knew or ought to have known” is, in itself, insufficient to meet the pleading requirements for fraud/dishonesty and would be struck out.

(6)  So far as the subjective and objective elements are concerned, the facts upon which the allegation of the subjective element of dishonesty is founded, and the facts upon which reliance is placed as demonstrating the objective element is satisfied, should be pleaded.

26.  With respect, there is no proper plea of “dishonesty” in the Statement of Claim.  There is no plea as to what material facts are being relied upon in support of the subjective element of dishonesty, and there is no plea as to what material facts are being relied upon in support of the objective element. Bearing in mind that an allegation of “dishonesty” must be pleaded distinctly and must be sufficiently particularized, plainly P has failed to meet the requirements for a plea of “dishonesty”.

27.  Since there is no proper plea of “dishonesty” in the Statement of Claim, there is no serious issue to be tried on “dishonest assistance”.

C1.3 – No serious issue to be tried on the facts

28.  Mr Kwan submits that there is no serious issue to be tried on the facts.  Without prejudice to the conclusion in section C1.2 above, bearing in mind the principles set out in [11] above, and bearing in mind that it would not be wise to conduct a mini-trial on affidavit evidence, I would not say that there is no serious issue to be tried on the facts in this case.  However, the relative strength of each party’s case is a factor which can be taken into account in considering the balance of convenience and whether it is just and convenient to grant the injunction.[16] I will briefly discuss the merits of the parties’ respective cases in [37] below.

C1.4 – Conclusion on serious issue to be tried

29.  As set out in section C1.2 above, there is no serious question to be tried on the causes of action pleaded by P in the Statement of Claim. Accordingly, P has failed to show a serious issue to be tried in this case.

30.  Since P has failed to show a serious issue to be tried, P’s Summons must be dismissed.

C2 – Balance of convenience/whether it is just and convenient to grant the Injunction?

31.  Even if I were wrong and P in fact has shown a serious issue to be tried, I would still exercise my discretion to refuse to grant the Injunction sought by P in P’s Summons.  In my view, the balance of convenience is in favour of refusing the Injunction, and it would not be just and convenient to grant the Injunction.

32.  Mr Chong for P relies upon Pacific Rainbow International Inc v Shenzhen Wolverine Tech Ltd & Ors[17] and submits that in an application for a proprietary injunction, the threshold in terms of the substantive merits of the claim is lower than that in an application for a Mareva injunction, as the applicant would only need to show a serious question to be tried.  Irremediable damage need not necessarily be shown and the Court will readily find that the balance of convenience favours the preservation of the trust property pending trial.

33.  As said in [10] above, in an application for a proprietary injunction, the applicant would still be required to demonstrate that the balance of convenience is in favour of granting the injunction, and it would be just and convenient to grant the injunction.  This point has been made clear by the Court of Appeal in Wason Holdings Ltd v BHP International Markets Ltd[18], in which Barma JA said:

“37. …… [counsel] further submitted, and I accept, that as the injunction sought was proprietary, it was also unnecessary to show that damages would not be an adequate remedy. However, it remains necessary to demonstrate that the balance of convenience favours the granting of the injunction, and that it would be just and convenient to do so.” (Emphasis added)

34.  There is no principle of general application that in an application for a proprietary injunction, once there is a serious issue to be tried, the Court should readily find that the balance of convenience favours the preservation of the trust property until the conclusion of the trial.  Each case depends upon its own facts.  See the Court of Appeal’s decision in 李明實, 方壘 and史洪源 (suing on behalf of themselves and the other employees employed by or by the Group of Companies under和利時科技集團有限公司)  (translated and known as Hollysys Group Limited)  and Ors v Ace Lead Profits Limited and Another[19], in which Anthony Chan J (giving the judgment of the Court of Appeal)  said:

“15. The Plaintiffs do not dispute the need to satisfy the balance of convenience test for the purpose of obtaining a proprietary injunction. However, they contend that the court should readily find that the balance of convenience favours the preservation of trust property pending trial. They rely on 3 cases: Heitkamp & Thumann KG v Living Profit Trading Development Ltd & Ors [2018] HKCFI 1006, [55]-[58]; A v C [1981] QB 956, 959B-D; and Pacific Rainbow International Inc v Shenzhen Wolverine Tech Ltd & Ors, HCA 3023/2016, 2 May 2017, [37].

16. The two Hong Kong cases involved email fraud in which foreign plaintiffs were defrauded into transferring large sums of money to the defendants. A v C was about the exercise of the court’s ancillary power to order discovery in aid of mareva injunction granted to protect trust property. We do not believe that these cases had established any principle of general application that in an application for proprietary injunction the court should readily find the balance of convenience in favour of the applicant after a serious issue to be tried is made out. We agree with the Judge that it depends on the facts of the case ……”[20] (Emphasis added)

35.  Based upon the evidence before me, there is a real risk that neither P or D would be able to obtain adequate compensation from the other side if at the end of the trial it is held that the Injunction sought by P has been wrongfully granted or refused at the interlocutory stage.

(1)  If the Injunction is granted but D is the successful party in the trial, there is a real risk that D would not be able to obtain adequate damages from P.

(a)  The price of the Shares is in decline and has already dropped by 30% since August 2024.  The present value of the Shares is insufficient to cover P’s indebtedness.

(b)  The total of the due and unrepaid amounts under the Loan Agreement is now in excess of HK$20 million.  Further, it is indisputable that P’s financial position is unsatisfactory:

(i)  There is a judgment against P in Mainland China, under which P is required to pay a sum of RMB 14,449,541 to the judgment creditor.

(ii)  A litigation search done by D reveals that P is a judgment debtor in another case in Mainland China, and the judgment debt owed by P in that case is over RMB 34 million.

(iii)  The companies controlled by P owes the Listed Co around HK$130 million, and P has failed to repay the same.  In March 2024, the Listed Co announced that it was in the process of enforcing a share charge to recover the same.

(c)  Mr Chong submits that short-term declines in the price of the Shares should not be a factor leading to the refusal of the Injunction, bearing in mind that the share prices of listed companies are inherently volatile.  The price of the Shares can go up at any time.  Mr Chong also emphasizes that the total number of shares of the Listed Co is 666,500,000, and those shares are valuable assets.

(d)  I have not lost sight of the inherent volatility of the stock market.  However, notwithstanding his interest in a portion of the shares of the Listed Co, in view of P’s indebtedness as set out in the above, there is a risk that D would not be able to obtain adequate compensation from P if the Injunction is granted but D succeeds in the trial.  The risk is not fanciful but real.

(2)  On the other hand, if the Injunction is refused but P succeeds in the trial, there is also a real risk that P may not be able to obtain adequate compensation from D.

(a)  The paid up capital of D is only HK$100,000.  If the Injunction is refused but P is the ultimate successful party in the trial, there is no evidence showing that D would be financially able to pay adequate damages to P.

(b)  The Shares are a significant portion of the issued shares of the Listed Co.  There is no evidence showing that if the Injunction is refused but P succeeds in the trial, D would be able to readily obtain the same portion of shares and return the same to P.  Further, the voting right attached to the Shares is valuable.  Losses caused by the losing of that voting right may not be adequately compensated by damages.

36.  While the extent of the uncompensatable disadvantage to each party would not differ widely, it may not be improper to take into account in tipping the balance the relative strength of each party’s case as revealed by the affidavit evidence adduced on the hearing of the application.  However, this should be done only where it is apparent that there is no credible dispute that the strength of one party’s case is disproportionate to that of the other party.[21]

37.  In my view, this is a case in which the relative strength of each party’s case tips the balance.  While I am not prepared to conduct a mini-trial on affidavit evidence, I am of the view that D’s case is supported by contemporaneous documents, in particular the 代收代付協議. On the other hand, P’s case is problematic on various aspects.  With these problematic features in P’s case, it is unlikely that P would succeed in the trial.

(1)  According to P, D was and is controlled by Mr Tse.[22]

(2)  In P’s 2^nd Affirmation, P said:

“13. On the same day when I entered into the Loan Agreement, I also signed the 代收代付协议. It is also clear from the said agreement that I would transfer the money to 海宁嘉宸贸易有限公司 via the listed companies’ Hong Kong subsidiaries. Therefore, it was always the intention that the HK$23,000,000 loan would be drawdown and paid into my bank account first.

14. I have knowledge as to the role of 海宁嘉宸贸易有限公司. …… I specifically deny that this 海宁嘉宸贸易有限公司 is a company that is controlled by me.

15. I should add that if the liability is truly owed by me personally, there would not be a need to sign 代收代付协议 and have this convoluted method of repayment. I could simply have received the loan amount and paid my creditors directly.

16. However, I signed the 代收代付协议 because I thought that I would retain control of how the loan funds were used. I specifically deny that I directed that the said HK23,000,000 to be transferred directly to Morris Zou Limited…… It would be quite extraordinary that for a lender to have no documentary proof for such important instruction.

17. In any event, I verily believe that even Mr Tse did not abide by his self-invented mechanism under the 代收代付协议 since:

17.1. By Mr Tse’s own admission, the monies were never transferred to me.

17.2. I had never transferred any money to Morris Zou Limited under the 代收代付协议 or at all; and

17.3 Part of the money was apparently transferred to a company called MStar International Trading (HK)  Limited (“Mstar”), which is not even a party in the 代收代付协议.

18. Since [D] did not deposit the money to me first, I bear no personal responsibility for repaying the purported Loan. Therefore, no loans were ever advanced by [D] to me. Mr Tse also assured me that I did not have to worry about the Loan Agreement. Throughout our dealings, all parties involved – Mr Tse, [D], and myself - have consistently treated the Listed Group, in particular Mstar, as the party responsible for the purported Loan and that my 110 million shares were no longer used as security of the loan.

19. As the Listed Group became the borrower of the HK$23,000,000 loan, this explains why there was a partial repayment of HK$3,000,000 made by Morris Zou Limited[23], who paid the said sum on behalf of Mstar, and such payment was made to Chen Zhiyong instead of [D][24].

20.   There is a separate arrangement with Mr Tse on behalf of the Listed Group (to which [D] was not privy), I had agreed to contribute to certain interest payments and assume responsibility upon the maturity date for the portion of debt specifically related to 慕容集团有限公司 and 浙江慕容世家地产有限公司, amounting to approximately RMB4,466,207.15. After all, I was still on good terms with Mr Tse and that part of the loan was used to repay the outstanding debts owed by the aforesaid companies under my control. Initially, I took the initiative to pay the interests until I took the view that I have paid more than my share of the interest payments and that it was time that the Listed Group should take up the responsibility given I was forced to resign as a director of the listed company, I therefore told Mr Tse that I would stop paying the interests after April 2024. This is a matter between myself and the Listed Group and it would not affect the fact that the Listed Group (Mstar)  was the actual borrower of the loan.”

(3)  It is an incontrovertible fact that on 1 November 2022, when the Loan Agreement was signed, D drew the HK$23m Cheque (which is a crossed cheque)  in favour of Morris Zou Limited, and the cheque was presented to the bank and honoured on the same date.  In accordance with the 代收代付協議, P has to pay HK$23m to Morris Zou Limited on 1 November 2022.  In the circumstances, as to why D would make the HK$23m Cheque payable to Morris Zou Limited on 1 November 2022, the most natural explanation is that the HK$23m Cheque was prepared in accordance with P’s instruction to D. The denial in P’s 2^nd Affirmation [16] is unconvincing.

(4)  P’s case is that he needed fund to ease his own financial difficulties and hence the Loan Agreement was signed on 1 November 2022.[25] However, according to P, no loan was provided to him notwithstanding the signing the Loan Agreement.  There is not a word from P as to what was the solution to his own financial problems in late 2022 in these circumstances.

(5)  In P’s 2^nd Affirmation [18] and [19], P said that throughout their dealings, Mr Tse, D and P have consistently treated the Listed Group, in particular Mstar, as the party responsible for the Loan and the Shares were no longer used as security of the Loan.  P also said that the Listed Group in fact became the borrower of the Loan.

(a)  Bearing in mind that the shares of the Listed Co are listed for trading on the Main Board of the Hong Kong Stock Exchange, if the Loan has become a liability of a company inside the Listed Group, the Listed Co has the obligation to disclose this liability to the public through its annual reports and audited accounts.  Until 8 January 2024, P was an Executive Director of the Listed Co.  Being an Executive Director, P had the duty to ensure that the Listed Co had complied with all the disclosure requirements.  As to whether P had made any attempt to ensure that the liability of repaying the Loan had been properly disclosed in the Listed Co’s documents, there is not a word from P.

(b)  The Listed Co has public shareholders and many other directors in the Board[26]. A subsidiary of the Listed Co would have its own board of directors.  Mr Tse and P certainly would not have the authority to require the Listed Co to assume the liability to repay the HK$23 million to D without the approval from the Board of the Listed Co.  Mr Tse and P also could not require Mstar or any other subsidiary in the Listed Group to assume that liability without the consent of the board of that subsidiary.

(6)  Regarding the “separate arrangement with Mr Tse on behalf of the Listed Group” as alleged by P in P’s 2^nd Affirmation [20], P is vague as to the details of this agreement.  There is not a word touching upon when and how this agreement was made.  There is also not a word explaining why in making this agreement with P, Mr Tse was acting on behalf of the Listed Group but not on behalf of D.  There is also no documentary evidence in support of this alleged “separate arrangement”.  It is difficult to imagine that all the exchanges between Mr Tse and P regarding this alleged “separate arrangement” are oral, and none of the exchanges is in written form, for example, in the form of email exchanges or some instant message exchanges in mobile phones.  It is also difficult to imagine why Mr Tse would agree to the arrangement that although the benefit of having the RMB 4.4 million was taken up by P’s companies, the obligation to repay the same to D would be borne by the Listed Group.

38.  By reason of the aforesaid, in my judgment, the balance of convenience is in favour of refusing the Injunction.  Also, it would not be just and convenient to grant the Injunction.

39.  Mr Kwan submits that the Injunction should also be refused because P’s application suffers from serious material non-disclosure.  Mr Kwan submits that P has knowingly withheld the following material evidence in the 1^st hearing of P’s Summons:

(1)  matters concerning the loan drawdown of HK$23 million to Morris Zou Limited;

(2)  P’s demands to D asking for repayments; and

(3)  the repayments made by P.

40.  There are different views regarding whether the duty to make full and frank disclosure applies at the inter partes stage.[27] However, it is clear that a party is under an obligation to present his case fairly and not to mislead the Court at any stage in a litigation.[28]

41.  In the 1^st hearing, P’s case as presented in P’s 1^st Affirmation is that D never paid HK$23 million as agreed under the Loan Agreement.  In P’s 1^st Affirmation, P said:

“26. However, as of the date of this Affirmation, the Loan Agreement has not been performed, as no loan funds under the Loan Agreement have been provided to me. I did, in around early 2023, inquire with Mr Tse as to the status of the granting of the loan……”

42.  When P first made the application for a proprietary injunction, P’s case was that the Loan Agreement had never been performed.  P had to enquire with Mr Tse as to when the HK$23 million loan would be advanced to him. 

43.  The matters as set out in [39] above must be matters within P’s personal knowledge.  However, P chose to mention none of these matters in P’s 1^st Affirmation.  When these matters were revealed in the evidence filed by D, P tried to give a response to these matters in P’s 2^nd Affirmation.  In P’s 2^nd Affirmation, P accepted that the Loan had been drawn down, but P alleged that the Listed Group became the borrower of the Loan as a result of the dealings among Mr Tse, D and himself.  One can see that the picture painted by P in P’s 1^st Affirmation (the Loan Agreement had not been performed, as no loan under the Loan Agreement had been provided to P to D)  is radically different from the picture in P’s 2^nd Affirmation (although the Loan of HK$23 million had been provided by D, the Listed Group became the borrower of the Loan).

44.  One way of performing the Loan Agreement by D would be providing the Loan to P himself, but this is not the only way of performance.  If D provides the Loan to an entity as directed by P, D would have also performed the Loan Agreement.  The matters concerning the drawdown of the Loan as set out in [37(3)] above are material matters which would affect the consideration of the core issue alleged by P, ie the Loan Agreement has never been performed by D.

45.  Mr Chong submits that the 1^st hearing is an inter partes hearing, and D had an opportunity to present anything to opposing P’s Summons in that hearing.  It was D itself chose to offer the Undertaking in the 1^st hearing.  Further, the case as presented in P’s 1^st Affirmation is true, ie D has not provided the Loan to P notwithstanding the signing of the Loan Agreement.  D has never changed his case.

46.  With respect, the point here is whether P has discharged his duty of presenting his case fairly and not to mislead the Court in the 1^st hearing. The fact that the 1^st hearing is an inter partes hearing would not absolve P from this duty.  As said in the above, that duty exists at any stage in a litigation.  The fact that D offered the Undertaking in the 1^st hearing does not mean that P had properly discharged this duty.  Mr Kwan submits, and I accept, that D was only given a 2 clear-day notice of P’s application before the 1^st hearing, and D would not have sufficient time to gather the evidence in opposition to P’s Summons at that time.  In my view, the matters mentioned in [39] above are material and would have an impact on P’s case.  Had those matters been disclosed in P’s 1^st Affirmation, the outcome of the 1^st hearing might be different.

47.  There is no satisfactory explanation from P as to why he did not disclose the aforesaid matters in P’s 1^st Affirmation.  In the circumstances, I am driven to the conclusion that the omission of these matters in P’s 1^st Affirmation is a deliberate choice of P, with an intent trying to mislead the Court.  Litigation conduct of this kind is not acceptable.[29] This conclusion is a further reason why it would not be just and convenient to grant the Injunction.

DISPOSITION

48.  In my judgment, P has failed to show a serious issue to be tried on the causes of action pleaded by P.  Further or alternatively, the balance of convenience is in favour of refusing the Injunction, and it is also not just and convenient to grant the Injunction.  I therefore dismiss P’s Summons.

49.  Since P’s Summons has been dismissed, D should be released from the Undertaking.  I appreciate that P would need time to consider this decision and whether an application for leave to appeal should be made.  I would give P some leeway.  Taking the coming Chinese New Year Holidays into account, I direct that D be released from the Undertaking upon the expiry of a 28-day period immediately after the handing down of this decision.  I would also allow P to have time to make an application for leave to appeal within 21 days after the handing down of this decision.

50.  Subject to one matter, counsel have agreed that costs should follow the event, with a certificate for 2 counsel.  The only difference between the parties is whether costs should be awarded to D on an indemnity basis.  Since I have ruled that P had deliberately tried to mislead the Court by omitting the matters set out in the above in P’s 1^st Affirmation, indemnity costs are warranted.  I order that costs of P’s Summons (including costs reserved)  be to D forthwith, with a certificate for two counsel, to be summarily assessed on paper on an indemnity basis if not agreed.  There be leave to D lodge a Bill of Costs (limited to 3 pages)  and serve the same on P within 7 days, and there be leave to P to lodge a List of Objections (limited to 3 pages)  and serve the same on D within 7 days thereafter.

51.  Lastly, it remains for me to thank all counsel for the helpful assistance rendered to the Court.