NGAN PUI CHI AND ANOTHER v. BAO QUAN

HCA 2262/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2262 OF 2013

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JUDGMENT

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Introduction

1.  The plaintiffs seek from the defendant the return of 4,100,000 shares of a company of which the 1^st plaintiff was a shareholder, Wealth Blooming (Asia Pacific) Bullion Limited (currently known as GBSI Limited)(“the Company”), which shares the 1^st plaintiff had pledged to the defendant as security for loans made by the defendant to the plaintiffs under two loan agreements.  The 1^st plaintiff pledged 2,600,000 shares as security for the First Loan (described below), advanced in August 2012, and 1,500,000 shares as security for the Second Loan (also described below), advanced in October 2012.

2.  The plaintiffs allege that the 4,100,000 shares were transferred to the defendant and one of the defendant’s companies, GBS Bullion Limited (“GBS Bullion”), on 31 January 2013 by the use of bought and sold notes and instruments of transfer which bore forgeries of the plaintiffs’ signatures.

3.  The plaintiffs’ case is that the defendant carried out a fraudulent scheme, without their knowledge, and with the assistance of her husband, Kaiser Chan, and Mr Chung Foo Chor (“Chung”), to take over the Company in order to obtain the Company’s membership of The Chinese Gold and Silver Exchange Society (“the Society”).  The scheme was effected by:

(1)  A number of actions carried out by Kaiser Chan from November 2012 to April 2013 so as to take control of the Company, including appointing directors to the Company, taking custody of the Company’s books and records and changing the Company’s name and registered office;

(2)  The transfer of the 4,100,000 shares from the 1^st plaintiff to the defendant and GBS Bullion using forged documents; and

(3)  Kaiser Chan and the defendant removing the 1^st plaintiff from the Company by obtaining the forfeiture of her remaining shares in the Company (4,700,000 shares) on 25 April 2014.

4.  Should the Court find that the signatures appearing on the disputed documents were not forged, the plaintiffs’ case is:

(1)  As regards the transfer to the defendant of the 2,600,000 shares which were pledged to secure the First Loan, the transfer was wrongful and in breach of the express terms of the First Loan Agreement (also described below) on the ground that the First Loan had not fallen due as at the date of the share transfer, and that the transfer was done without the plaintiffs’ consent, knowledge or approval; and

(2)  Regarding the entire 4,100,000 shares, the defendant has wrongfully refused to accept full repayment of the loans.  Hence, the defendant is not entitled to the shares.

5.  In addition, the plaintiffs ask the Court to re-open the two loan agreements and rescind the loan agreements pursuant to section 25 of the Money Lenders Ordinance, Cap 163 on the ground that the transactions are extortionate. 

6.  The plaintiffs also seek a declaration that the defendant was not entitled to forfeit 4,700,000 Company shares and a declaration that the defendant is barred from recovering any outstanding amounts under the loan agreements.

7.  The plaintiffs seek to set off HK$200,000 against money they owe the defendant.

8.  In the Plaintiffs’ counsel’s closing submissions the plaintiffs seek a declaration that the defendant is estopped from making any claim for damages for the reason that, because the defendant has elected not to counterclaim to recover any money owed under the loan agreements, the defendant has abandoned or waived her right to damages.  This claim is not included in the prayer for relief and I shall not deal with it.

9.  The defendant’s case is that the Company was in poor financial health and in need of money.  The plaintiffs asked the defendant to take over the Company, sold to her 1,500,000 shares for HK$1,000,000 and borrowed money from her by two loans.  The plaintiffs pledged 4,100,000 Company shares held by the 1^st plaintiff to secure the loans and signed bought and sold notes and instruments of transfer in favour of the defendant.  The plaintiffs defaulted on the loans and the defendant was entitled to transfer the pledged shares to her name on 31 January 2013. 

10.  With regard to the forfeiture of 4,700,000 shares in April 2014, the defendant’s case is that the Companies Registry records showed the Company’s paid up capital to be HK$10,000,000 whereas in fact it was only HK$5,300,000.  The plaintiffs refused to pay HK$4,700,000 to increase the paid up capital to the amount shown in the records.  Accordingly, on 25 April 2014, the Company passed a resolution to forfeit the 1^st plaintiff’s 4,700,000 shares, which were duly forfeited.

The plaintiffs’ case

11.  The following paragraphs set out the plaintiffs’ case.

12.  Around June 2010, the 2^nd plaintiff and his partner, Cheung Ho Lun, founded the Company in order to conduct a finance business and to trade gold.  The initial paid-up capital was HK$5,300,000.  The Company acquired membership No 232 of the Society for HK$4,680,000, which enabled the Company to trade on the Society’s exchange.  In 2013, the membership of the Society had an estimated value of around HK$10,000,000 to HK$11,000,000.

13.  In June 2010, Cheung Ho Lun contributed HK$2,650,000 capital and the 2^nd plaintiff contributed HK$3,000,000.  The 2^nd plaintiff contributed a further HK$350,000 which was used partly to pay the Company’s set-up costs.  In October 2010, the 2^nd plaintiff contributed a further HK$207,500 which was paid to the Society as a deposit for the Company’s right to trade on the Society’s electronic trading system.

14.  In April 2011, Legend Star Investment (Group) Company Limited (“Legend Star”) agreed to acquire 3,000,000 shares in the Company for HK$4,000,000 so as to participate in a joint investment proposal with the 2^nd plaintiff.  In return, the 2^nd plaintiff agreed to arrange for the Company to increase its nominal share capital from HK$5,300,000 to HK$10,000,000.

15.  By a cheque, dated 29 April 2011, drawn on the account of a Legend Star shareholder, HK$3,000,000 was paid to the Company. The balance, HK$1,000,000, was paid in cash.

16.  On 11 May 2011, the Company’s authorized share capital was increased from HK$5,300,000 to HK$10,000,000 and 4,700,000 ordinary shares of HK$1 each were allocated to the 2^nd plaintiff. On 12 May 2011, the 2^nd plaintiff transferred 3,000,000 shares to Legend Star.  Around the same time, Cheung Ho Lun, who was then detained in the Mainland in respect of a personal dispute, withdrew from the Wealth Blooming group of companies (a group of companies owned by the 2^nd plaintiff), including the Company, and transferred 2,650,000 Company shares to the 2^nd plaintiff.  The 2^nd plaintiff paid Cheung HK$3,000,000 cash, which was remitted to the Mainland, in return for Cheung withdrawing from the business.  The result of these share transfers was that the 2^nd plaintiff held 7,000,000 shares and Legend Star held 3,000,000 shares in the Company.

17.  Also, in early May 2011, the 2^nd plaintiff contributed RMB‌500,000 to the Company, which was later paid to the Society as a deposit for the Company’s right to trade in Renminbi Kilobar Gold Contracts.

18.  Around April 2011, Chung was appointed a director of the Company.  He was also registered with the Society as manager for the Company.  At all material times, Chung was responsible for keeping the Company’s books and accounts as well as liaising with the auditor in preparing the Company’s audited accounts.

19.  In 2011, the 2^nd plaintiff became acquainted with Kaiser Chan, the defendant’s husband, who was in the business of providing trading software and relevant technical support to companies engaged in commodities trading.

20.  Sometime in late 2011, Chan Mau Nam (“Channing Chan”) joined the Wealth Blooming group to take care of the accounting matters of the Company.  Channing Chan was also appointed as Company secretary.

21.  In early 2012, Kaiser Chan and the 2^nd plaintiff discussed setting up a business to trade in securities.  Although they did not start a business together at that time, the defendant and Kaiser Chan showed great interest in gold trading through the Society with the 2^nd plaintiff. Kaiser Chan and the defendant did not have a Society membership and were not prepared to acquire one.  They simply wanted to join in the business with a less substantial capital investment.

22.  In early 2012, Legend Star withdrew from the business.  As part of a restructuring of the Wealth Blooming group business, on 30 March 2012, the 2^nd plaintiff transferred his interest (7,000,000 shares) to the 1^st plaintiff, who also acquired, at about the same time, the 3,000,000 shares held by Legend Star.  The 1^st plaintiff paid Legend Star HK$4,000,000 for the shares, using her own savings and a loan from her mother. As a result, on 30 March 2012, the 1^st plaintiff became the Company’s sole shareholder, holding 10,000,000 shares.

23.  In August 2012, the Wealth Blooming group was in what the 2^nd plaintiff described as a “tight cashflow” situation.  On 16 August 2012, the 2^nd plaintiff borrowed HK$800,000 from the defendant for a week.  That loan was due on 23 August 2012, with interest, in a total sum of HK$803,150.

24.  A day or two before 23 August 2012, the 2^nd plaintiff contacted the defendant by telephone and asked if she would lend him HK$1,500,000 (“the First Loan”), which could be repaid in six months.  The defendant agreed and asked the 2^nd plaintiff to meet her at her office in Sheung Wan on 23 August 2012.  During the telephone conversation, the defendant did not mention any terms or how much interest she was going to charge for the loan.

25.  Both plaintiffs went to the defendant’s office on 23 August 2012, and upon their arrival the defendant produced a typed agreement.  The terms of the agreement (“the First Loan Agreement”) had not been proposed or discussed beforehand.

26.  At no time did the 2^nd plaintiff make any oral representations to the defendant with regard to the Company’s issued shares or paid-up capital.  The 2^nd plaintiff believed that the defendant had already conducted a search on the Company to gather the necessary information.

27.  By the terms of the First Loan Agreement, the First Loan was repayable on or before 22 February 2013.  The interest rate was 8.25% per annum.  The plaintiffs agreed to pledge 26% of the Company’s shares as security.  The First Loan Agreement also provided that, if the plaintiffs failed to repay “on time”, the defendant was entitled “to dispose of the pledged shares of the Company” and any outstanding balance would incur penalty interest at the rate of 0.16% per day.

28.  Upon reading the First Loan Agreement, the 2^nd plaintiff noted that the value of the shares to be pledged as security would be greater than the amount of the loan together with interest.  However, the 2^nd plaintiff also noted that the agreement was so drafted that the shares pledged would be forfeited only for the purpose of repaying the loan and outstanding interest, meaning that the defendant had no right to retain any extra benefit even in the event of default.

29.  Before the plaintiffs signed the agreement, the defendant produced an undated bought and sold note for 2,600,000 shares and asked the 1^st plaintiff to sign it.  The defendant said it was a security measure and that the bought and sold note would be kept in Chung’s custody and would be returned to them upon full repayment of the loan.  At that time, the plaintiffs were quite confident that they would be able to repay the loan in six months. 

30.  The plaintiffs and the defendant signed two copies of the First Loan Agreement, one copy kept by each party, and the 1^st plaintiff signed one undated bought and sold note in respect of 2,600,000 shares.  The defendant kept the bought and sold note.  The defendant gave the 2^nd plaintiff a cheque for HK$1,500,000 and, on that day, the 2^nd plaintiff repaid the previous loan in the sum of HK$803,150 by cash.

31.  Shortly after the First Loan Agreement and in early September 2012, the defendant and the 2^nd plaintiff began to negotiate a joint venture for, inter alia, investment in London Gold and in securities and futures.  By a joint venture agreement the 1^st plaintiff and GBS Bullion agreed, inter alia:

(1)  GBS Bullion would acquire 15% of the shares of the Company for HK$1,000,000 and a new company would be formed in Hong Kong in which the 1^st plaintiff and GBS Bullion would hold shares in the ratios of 45% and 55% respectively;

(2)  The new company would be authorised to use the Company’s trading licence to trade through the Society and to use “Wealth Blooming” as the new company’s initial name; and

(3)  The initial investment for the new joint venture company would be HK$1,000,000.  The 1^st plaintiff would invest HK$450,000 in cash and GBS Bullion HK$550,000 in cash or other assets.

32.  The defendant signed the joint venture agreement as authorized representative of GBS Bullion.

33.  The plaintiffs allege that the defendant subsequently decided to participate in the joint venture in her personal capacity and not through GBS Bullion, accordingly:

(1)  On 6 September 2012, the defendant formed a company known as Wealth Blooming Global Finance Limited, purportedly to be the new joint venture company, of which she was the sole shareholder; and

(2)  On 20 September 2012, the defendant, instead of GBS Bullion, acquired 1,500,000 shares of the Company from the 1^st plaintiff for consideration of HK$1,000,000.

34.  The plaintiffs allege that the defendant varied the joint venture agreement from an agreement between the 1^st plaintiff and GBS Bullion to an agreement between the 1^st plaintiff and the defendant.

35.  On about 16 October 2012, the 2^nd plaintiff telephoned the defendant and asked for a loan of HK$600,000 (“the Second Loan”).  The 2^nd plaintiff said the loan was for capital injection under the joint venture agreement.  The defendant agreed to lend the money and proposed that the plaintiffs should repay the same by three monthly instalments with post-dated cheques issued for the repayment, to which the 2^nd plaintiff agreed.  During the telephone conversation, the 2^nd plaintiff urged the defendant to allot 45% of the shares in the joint venture company to the 1^st plaintiff as agreed under the joint venture agreement.  It was agreed that the plaintiffs would pay a sum of HK$200,000 being part of the agreed HK$450,000 capital contribution.  As regards the terms for the Second Loan, there was no discussion over the telephone.

36.  Later in the evening at 7:14 pm, the defendant sent an email to the plaintiffs, copied to Kaiser Chan, enclosing the draft Second Loan Agreement and a bought and sold note in respect of 1,500,000 shares to be pledged as security.  The defendant wrote:

“ Attached are the prepared Loan Agreement and the Bought & Sold Notes to be signed in advance …

…

I have already printed out the documents which require to be signed (as attached) and will bring them over tomorrow.”

37.  In the email, the defendant also asked the plaintiffs to prepare four cheques, one for HK$200,000 for Wealth Blooming Global Finance Limited (the joint venture) and three post-dated cheques for repayment of the Second Loan.

38.  The next morning, 17 October 2012, the defendant arrived at the plaintiffs’ office.  When the defendant arrived only the 1^st plaintiff was present because the 2^nd plaintiff was parking his car.  As the defendant was in a hurry to attend a seminar, she did not wait for the 2^nd plaintiff and asked the 1^st plaintiff to sign two copies of the Second Loan Agreement, one to be kept by each party, and a bought and sold note in respect of 1,500,000 shares in terms of the copy enclosed in the email.  After the documents were signed, the defendant told the 1^st plaintiff that she would contact the 2^nd plaintiff later to arrange to collect the cheques in the afternoon.

39.  The Second Loan Agreement provided for a handling fee of HK$10,000.  Repayment was to be by three monthly instalments.  Interest was 0.8% per month.  Penalty interest on default was 0.16% per day.  The plaintiffs pledged 15% of the Company’s shares as security.  The agreement also provided: “(the share certificates and signed instrument of transfer are provided)”.

40.  A further condition of the Second Loan Agreement provided that, if the plaintiffs failed to repay the loan “on time”, the defendant would be entitled “to dispose of the pledged shares of the Company”.

41.  In the afternoon, the 2^nd plaintiff alone went to the defendant’s office in Sheung Wan.  He gave the defendant three post-dated cheques for repayment of the Second Loan as requested, namely one in the sum of HK$214,880, dated 16 November 2012, one in the sum of HK$230,200, dated 16 December 2012, and one in the sum of HK$210,600, dated 16 January 2013, all drawn by Wealth Blooming (HK) Limited, one of the 2^nd plaintiff’s companies.  The 2^nd plaintiff told the defendant that he would deposit HK$200,000 for the joint venture and the defendant said that she would transfer shares in the joint venture company to the 1^st plaintiff.

42.  In return, the defendant gave the 2^nd plaintiff a cash cheque in the sum of HK$600,000.  The 2^nd plaintiff immediately went to the bank to cash the cheque and deposited HK$200,000 out of the HK$600,000 into the defendant’s personal account as the 1^st plaintiff’s partial capital contribution under the joint venture agreement.

43.  From 17 October 2012, the 2^nd plaintiff would call the defendant from time to time to check on the progress of the joint venture but the defendant did not transfer any shares in Wealth Blooming Global Finance Limited to the 1^st plaintiff.  The plaintiffs began to doubt that the defendant was serious about the joint venture and, as they were still experiencing cash flow problems, they did not want to commit HK$200,000 to something that was unlikely to proceed.

44.  It was in those circumstances that the plaintiffs met the defendant and Kaiser Chan on 17 November 2012 at the plaintiffs’ home.  During the meeting, the plaintiffs told the defendant that they would not proceed with the joint venture at that stage and demanded the return of the capital investment of HK$200,000.  The 2^nd plaintiff then told the defendant and Kaiser Chan that if they refused to return the money, it would be treated as part payment of the first instalment of the Second Loan, which was due on 16 November 2012.  The plaintiffs say that neither Kaiser Chan nor the defendant objected at the time. 

45.  The plaintiffs’ case is that, after applying HK$200,000 to repayment of the first instalment, as at 17 November 2012, the outstanding balance of the first instalment of the Second Loan was HK$14,880.

46.  On 31 December 2012, a meeting was held at the office of the plaintiffs’ then solicitors, attended by the 2^nd plaintiff, the defendant and Kaiser Chan.  The 1^st plaintiff was absent.

47.  According to the 2^nd plaintiff, the purpose of the meeting was to discuss possible future cooperation between the parties based on a draft shareholder’s agreement, which he had asked his solicitors to draft in advance.  Under a settlement proposal, the defendant would pay HK$2,500,000 for the acquisition of the pledged shares, in addition to writing off the outstanding loans, because the value of the shares well exceeded the outstanding loans.  The 1^st plaintiff would still hold shares in the Company, which, the plaintiffs submit, indicated that the idea was clearly not to sell the Company to the defendant. 

48.  During the meeting, the plaintiffs’ solicitor explained the settlement proposal to the defendant and Kaiser Chan.  In the course of discussion, the defendant proposed certain amendments to the draft shareholder’s agreement.  At the end, the defendant and Kaiser Chan said they needed time to consider and, so, nothing was agreed or signed.

49.  In January 2013, when he went to withdraw money from the Company’s bank account, the 2^nd plaintiff discovered that the Company’s secretary had been changed to Kaiser Chan.

50.  On 19 February 2013, the 1^st plaintiff sent an email to Kaiser Chan proposing to meet to settle the First Loan.  On 22 February 2013, the defendant sent an email to the plaintiffs advising that the First Loan was due for payment and enquiring as to the plaintiffs’ intended repayment arrangements.  On 24 February 2013, the 1^st plaintiff sent an email to the defendant and Kaiser Chan advising that the plaintiffs were attempting to sell their licence and, once sold, they would settle the loan.

51.  On 25 February 2013, the defendant sent an email to the plaintiffs:

“ Kaiser called me and said that he got a call from [the 2^nd plaintiff] ‌…. [The 2^nd plaintiff] just told Kaiser that he has a buyer offering HK$9.0 Million and he will send us the lawyer agreement right away.

Kaiser did not make any comment.

Please send us the lawyer agreement at once. …”

52.  The next day, 26 February 2013, there was a meeting at the defendant’s office attended by Kaiser Chan and the defendant, the 2^nd plaintiff and a trainee solicitor employed by the plaintiffs’ solicitors.  The 2^nd plaintiff advised that he had found a buyer for the membership for HK$9,000,000 and asked for time to pay the loans.  The 2^nd plaintiff had brought with him a blank cheque, which he was prepared to give to Kaiser Chan to demonstrate his genuine intention to pay.  However, Kaiser Chan informed the plaintiffs that the pledged shares had been transferred to the defendant due to the default in payment of the loans and he refused to accept any repayment proposal, claiming that the shares had been forfeited.  The plaintiffs say that this was the moment when they discovered that the pledged shares had been transferred to the defendant.

53.  By letter, dated 9 April 2013, the plaintiffs’ former solicitors wrote to the defendant, acknowledging the plaintiffs’ default and advising that the plaintiffs were offering to pay the defendant HK$2,110,000 by 30 April 2013 in return for shares.  There was no reply.

54.  By letter, dated 3 May 2013, the Society advised that the Company should suspend all activities by 6 May 2013.

55.  By letter, dated 29 October 2013, through their solicitors, the plaintiffs made an offer to settle the loans on terms, including that the plaintiffs would pay HK$3,000,000 for the return of the shares (the plaintiffs’ position being that, as at 31 January 2013, only HK$2,196,427.32 was owed).  By a second letter, bearing the same date, the plaintiffs offered to buy back the 1,500,000 shares transferred to the defendant for HK$1,000,000 in September 2012 under the joint venture agreement.  There was no reply to either letter.

56.  Under cover of a letter, dated 16 October 2014, the plaintiff’s solicitors sent the defendant’s solicitors copies of three cheques totalling HK$2,435,321.70, proposing a meeting on 23 October 2014 at which the plaintiffs would provide the cheques in exchange for the share certificates in respect of the pledged shares, in total 4,100,000 shares.  The cheques were not drawn on the plaintiffs’ accounts but on the accounts of third party individuals.

57.  The defendant’s solicitors responded on the same date, rejecting the offer for the following reasons:

 (1)  The defendant is not obliged to accept cheques provided by third parties.  Repayment should be made by money order, cashier order or by the plaintiffs’ cheque;

 (2)  After forfeiture for failure to pay for share capital, the 1^st plaintiff only pledged 3,800,000 shares as security for the loans, out of which 600,000 shares were sold to one Chen Peng for HK$600,000.  As a result, there was a reduction of HK$600,000 in the outstanding debts and only 3,200,000 shares are available for return to the 1^st plaintiff;

 (3)  The defendant disagreed with the plaintiffs’ calculation of the outstanding amount of principal and interest (but did not propose a counter offer).

58.  On the 27 October 2014, the plaintiffs’ solicitors sent the defendant’s solicitors a copy of a cashier’s order for HK$2,435,321.70, advising that the plaintiffs were ready to repay the loans in return for the shares and asking for full particulars of outstanding interest.  In the covering letter the solicitors alleged that the defendant had wrongfully disposed of 600,000 shares.

59.  The defendant’s solicitors replied on 1 November 2014, rejecting the offer:

“ There is no point for your clients to show our client a copy of the cashier order …. Your clients are under a contractual obligation to repay the principal of the loans and interest thereon to our client. The fact that your clients have made available a cashier order marked payable to our client, but refused to repay any money to our client indicates that your clients do not intend to perform their contractual obligation. …”

60.  The plaintiffs allege that, after commencement of these proceedings, they saw for the first time the following documents disclosed by the defendant:

 (1)  An instrument of transfer in respect of 2,600,000 Company shares, relating to the transfer of the shares from the 1^st plaintiff to the defendant, apparently signed by the 1^st plaintiff and the 2^nd plaintiff as witness;

 (2)  A bought and sold note apparently signed by the 1^st plaintiff, an instrument of transfer apparently signed by the 1^st plaintiff and the 2^nd plaintiff as witness and minutes of a board meeting apparently signed by the 1^st plaintiff in respect of the transfer of 600,000 Company shares from the 1^st plaintiff to the defendant; and

 (3)  A bought and sold note apparently signed by the 1^st plaintiff, an instrument of transfer apparently signed by the 1^st plaintiff and the 2^nd plaintiff as witness and minutes of a board meeting apparently signed by the 1^st plaintiff in respect of the transfer of 900,000 Company shares from the 1^st plaintiff to the GBS Bullion.

61.  The relevant record kept in the Companies Registry records the date of the above transfers as 31 January 2013.

62.  The plaintiffs allege that the transfer of the 2,600,000 shares was effected by forging the 1^st plaintiff’s signature on the instrument of transfer and the 2^nd plaintiff’s signature as witness to the 1^st plaintiff’s signature.  The transfers of 600,000 shares and 900,000 shares were effected by forging the 1^st plaintiff’s signature on the bought and sold notes and the instruments of transfer, the 2^nd plaintiff’s signature as witness to the instruments of transfer and the 1^st plaintiff’s signature on minutes of directors’ meetings resolving to transfer the shares.

63.  The actions taken by the defendant and Kaiser Chan, with the assistance of Chung, to take over the Company are as follows.  After the defendant had acquired the 1,500,000 shares pursuant to joint venture agreement:

 (1)  On 12 November 2012, GBS Bullion was appointed corporate director of the Company.  The Form D2A appears to have been signed by the defendant and Chung;

 (2)  On 23 November 2012, Kaiser Chan became the sole signatory of the Company’s bank accounts.  The 2^nd plaintiff says that he only found out about this change in January 2013 when he attempted to withdraw money; and

 (3)  On 11 December 2012, Kaiser Chan went to the plaintiffs’ office in Jordan and took from Channing Chan and Chung the Company’s accounting records and documents, stamps, and cheque books.  Subsequently, Kaiser Chan contacted Channing Chan asking for all manner of accounting documents and Company information.

64.  Also, on 3 December 2012 and again on 12 December 2012, by email Kaiser Chan asked Channing Chan to give him the Company’s audited statement, an account statement and other accounting information.  Channing Chan complied with the request.

65.  The plaintiffs also allege that the defendant and Kaiser Chan did the following in order to take over the Company:

 (1)  On 1 March 2013, the Company’s registered office was changed to the defendant’s office;

 (2)  On 12 March 2013 the Company name was changed to North Gold Limited;

 (3)  On 19 March 2013, GBS Bullion transferred 600,000 shares to one Chen Peng, whose address was the same as the Company’s registered address;

 (4)  Kaiser Chan, styling himself as the Company’s Executive President, wrote to the Society, on 21 March 2013, and again on 8 April 2013, advising the Society of the changes in shareholding and directors and of the appointment of the defendant as an additional Responsible Officer;

 (5)  On 12 April 2013, the defendant caused the Company’s name to change to GBSI Limited.

66.  The plaintiffs allege that the above acts indicate that the forgeries were part of the defendant’s fraudulent scheme to take over the Company and with it its Society membership, which was worth much more than the loans and the 1,500,000 shares which the defendant had bought.

67.  The plaintiffs allege that the defendant and Kaiser Chan did the following to remove the 1^st plaintiff from the Company:

 (1)  In August 2013, the Company’s board of directors, Chung and GBS Bullion, resolved to reduce the Company’s share capital from HK$10,000,000 to HK$5,300,000 for the purported reason that the sum of HK$4,700,000 had never been paid as share capital;

 (2)  On 26 August 2013, the Company applied to the Companies Registry to amend the paid up capital from HK$10,000,000 to HK$5,300,000;

 (3)  On 30 September 2013, the Companies Registry’s record was amended to show paid up capital of HK$5,300,000;

 (4)  By letter to the 1^st plaintiff, dated 28 March 2014, the Company alleged that, although the Company’s share capital had been increased from HK$5,300,000 to HK$10,000,000 by resolution of an extraordinary general meeting held on 11 May 2011, the sum of HK$4,700,000 was never paid.  The letter demanded payment of HK$4,700,000;

 (5)  On 25 April 2014, the Company’s board resolved to forfeit the 1^st plaintiff’s shares purportedly because the 1^st plaintiff failed to pay capital contribution for the 4,700,000 shares.

68.  Regarding the Second Loan, the plaintiffs’ case is that HK$200,000 should be applied toward repayment of the first instalment, leaving a balance of HK$14,880 for the reason that the money has been paid directly to the defendant. 

69.  The plaintiffs admit that they did not pay the second and third instalments when they fell due.  However, the plaintiffs argue that, if one assigns a value of HK$1 to each share, then the defendant would be entitled to deal with only 634,553 shares, even assuming that the HK$200,000 is not set-off.  The defendant calculates the amount outstanding as at 31 January 2013 as HK$634,552.32, ie, HK$619,680 (principal and accrued interest) plus HK$14,872.32 (default interest at a daily rate of 0.16%).

70.  Regarding the default interest rate applied to each loan, the effective rate is 58.4% per annum.  The plaintiffs submit this is extortionate for the following reasons:

(1)  It is presumed to be extortionate pursuant to section 25(3) of the Money Lenders Ordinance, Cap 163;

(2)  The penalty interest rate is almost six times higher than the original interest rate;

(3)  The defendant has no substantial risk because the plaintiffs pledged 4,100,000 shares, the value of which exceeded the amount of principal and interest owed;

(4)  With regard to the Second Loan a handling fee of HK$10,000 was charged;

(5)  The plaintiffs have paid HK$200,000 as partial payment;

(6)  The plaintiffs offered to repay in full in April 2013 and October 2014 but the defendant unreasonably refused to accept the offers, thereby deliberately holding the plaintiffs in default; and

(7)  The defendant did not counterclaim for recovery of the loans.

71.  Accordingly, pursuant to section 25 of the Ordinance, the Court should re-open the transactions and order rescission of the loan agreements.

The defendant’s case

72.  The following paragraphs set out the defendant’s case as it appears in the defendant’s pleadings and witness statement.

73.  In mid-2010, the defendant’s husband, Kaiser Chan was introduced to the 2^nd plaintiff, after which his technology company provided the plaintiffs with technical support.

74.  In August 2012, the 2^nd plaintiff asked the defendant for a loan.  On 16 August 2012, she loaned the 2^nd plaintiff HK$800,000 for one week at an interest rate of 9% per annum.  The loan was repaid on 23 August 2012.

75.  Immediately after repayment of the loan on 23 August 2012, the plaintiffs asked her to lend them HK$1,500,000 (the First Loan).  They told her that the 1^st plaintiff was the Company’s sole shareholder and that the capital of the Company consisted of HK$10,000,000 shares at HK$1 each and the paid up capital of the Company was HK$10,000,000. They told her the Company was a member of the Society.  The 1^st plaintiff offered to sell the defendant 1,500,000 shares in the Company and also proposed to pledge 26% of the Company’s issued shares as security for the loan.

76.  The defendant agreed to advance the loan and the 1^st plaintiff signed the First Loan Agreement, bought and sold notes for 2,600,000 shares and an instrument of transfer in the defendant’s favour and she passed these documents to the defendant so as to hold the 2,600,000 shares as security for the First Loan.  The plaintiffs also procured Chung to sign minutes of a meeting of directors, resolving to transfer 2,600,000 shares to the defendant.  The bought and sold notes, instrument of transfer and minutes were undated.  It was agreed that the defendant might transfer the pledged shares to herself at any time but that she would return the shares upon full repayment of the First Loan.

77.  It is the defendant’s case that she discussed the rate of default interest with the plaintiffs before drawing up the First Loan Agreement.

78.  On 20 September 2012, after repeated requests from the plaintiffs, the defendant bought 1,500,000 shares in the Company at a discounted price of HK$1,000,000.  The plaintiffs continued to represent that the total paid up capital was HK$10,000,000.  As she had become a shareholder of the Company, the defendant appointed GBS Bullion as a corporate director on 21 November 2012.

79.  On about 17 October 2012, the plaintiffs asked for another loan of HK$610,000 for a term of three months at a monthly interest rate of 0.8% (the Second Loan).  Initially, the defendant was not prepared to advance another loan but the plaintiffs repeated their representation that the Company had paid up capital of HK$10,000,000, said that they would provide 1,500,000 shares as security and would repay the loan in three monthly instalments.  For this purpose, the 2^nd plaintiff provided three post-dated cheques.

80.  The 1^st plaintiff pledged another 1,500,000 shares and gave the defendant a set of bought and sold notes, an instrument of transfer, each signed by the 1^st plaintiff, and minutes of a directors meeting signed by Chung, resolving to transfer 1,500,000 shares to the defendant.  The bought and sold notes, the instrument of transfer and the minutes were not dated.  It was agreed that the defendant might transfer the pledged shares to herself at any time but that she would return the shares upon full repayment of the Second Loan.

81.  The defendant said that, after advancing the Second Loan, she had an uneasy feeling because the pledge of 1,500,000 shares for a loan of HK$610,000 indicated that the plaintiffs were really short of cash.  Hence, on 25 October 2012, she dated the bought and sold notes, instrument of transfer and board minutes for the 2,600,000 shares, writing “Oct, 25 2012”,intending to transfer the 2,600,000 shares to herself.  She withheld stamping the bought and sold notes and the instrument of transfer pending repayment of the first monthly instalment of the Second Loan, due on 16 November 2012.

82.  On 16 November 2012, the defendant presented the first instalment cheque for HK$214,880 but it was dishonoured.  She called the plaintiffs many times but they did not answer their telephones.  On 17 November 2012, the defendant and Kaiser Chan visited the plaintiffs at their home.  The defendant asked the plaintiffs why they had defaulted on the first instalment. The 2^nd plaintiff advised them that his companies, including the Company, owed creditors about $30,000,000 to $40,000,000 and that he had decided to wind up the Company voluntarily in December 2012. 

83.  Subsequently, all the post-dated cheques were dishonoured.  The defendant suspected that, when the 2^nd plaintiff issued the three cheques, he knew Wealth Blooming (Hong Kong) Limited was insolvent.  She also believed that the plaintiffs would default on both loans.

84.  At that time, the plaintiffs also owed the defendant HK$217,712.50 for technical support.  On 21 December 2012, the plaintiffs paid only HK$70,000 of that debt.

85.  After the meeting on 17 November 2012, the plaintiffs proposed and the defendant agreed to take over the management of the Company as the majority shareholder.  The defendant considered that the Company should be lucrative, even though the plaintiffs and their other companies owed money, because the Company was a member of the Society and had status to trade in various precious metals.  Also, the plaintiffs had kept the Company separate from their other companies and had not used it for any trading or holding any client funds.  On 23 November 2012, Kaiser Chan was authorized as the sole signatory of the Company’s bank accounts.  The 2^nd plaintiff also instructed Channing Chan, the Company’s finance manager, to pass the Company’s accounting records to Kaiser Chan.

86.  On 31 December 2012, the defendant and Kaiser Chan met the 1^st and 2^nd plaintiffs at the plaintiffs’ solicitors’ office.  They asked the plaintiffs for payment of the first two instalments of the Second Loan but the plaintiffs told them that they would not repay either loan.  The 1^st plaintiff reiterated that the defendant might transfer the shares to herself at any time.  The defendant proposed that, of the 1,500,000 shares pledged in respect of the Second Loan, 900,000 should be transferred to GBS Bullion Limited and the 1^st plaintiff agreed.  As a result, the 1^st plaintiff exchanged the original bought and sold notes, instrument of transfer and minutes of directors meeting in respect of a transfer of 1,500,000 shares to the defendant for a new set of bought and sold notes, instruments of transfer and two sets of minutes of directors meetings by which it was resolved that 900,000 shares would be transferred to GBS Bullion and 600,000 shares would be transferred to the defendant.  The two sets of minutes were signed by the 1^st plaintiff and Chung and dated 31 December 2012.

87.  On 8 January 2013, Kaiser Chan went to the 2^nd plaintiff’s office in Temple Street, Kowloon, together with two friends, to collect two boxes of the Company’s financial documents and accounting records.  The purpose of handing over the documents and records was to enable the defendant to take over management of the Company on 31 January 2013 as the majority shareholder.  For this reason, on 31 January 2013, 3,200,000 shares were transferred to the defendant and 900,000 were transferred to GBS Bullion Limited.  As a result, as at that date, the defendant controlled 5,600,000 shares (comprised of 4,100,000 transferred on 31 January and 1,500,000 bought by the defendant) and the 1^st plaintiff held 4,400,000 shares.

88.  In respect of the 2,600,000 shares pledged pursuant to the First Loan Agreement, the defendant changed the dates on the bought and sold note and the instrument of transfer by crossing out the date “Oct 25, 2012” and also an incorrect date, “Feb 1, 2013” and writing “Jan 31, 2013”.  On the minutes of directors meeting, the defendant crossed out a handwritten date “Oct 25, 2012” and wrote “Jan 31, 2013”. 

89.  The 1^st plaintiff agreed with the defendant that the Company’s dividends should be distributed in the proportion of the respective shareholdings, ie, 56:44, until the 4,100,000 shares were returned to the 1^st plaintiff upon repayment of the loans.  However, soon after the defendant had taken possession of the Company’s documents and records, she and Kaiser Chan discovered that the Company’s financial position and Society membership was at risk for the following reasons:

(1)  As at 31 March 2011, contrary to the Society’s requirements, the Company was not able to maintain liquid capital, such as cash deposits, listed securities and gold, of not less than HK$1,500,000 as revealed by the Company’s audited financial statements for the period 2 July 2010 to 31 March 2011;

(2)  The management accounts showed a cash balance of only HK$10,963.06 as at 28 February 2013;

(3)  The Company loaned HK$838,892.90 to a company owned by the 2^nd plaintiff, which was in excess of the Company’s retained earnings of HK$543,311.  The prospect of repayment of this loan was remote and it was likely that it would be written off;

(4)  When the Company was handed over to the defendant on 31 January 2013, it had a serious liquidity problem.

90.  On 22 February 2013, the defendant called the plaintiffs and asked them to contribute funds to the Company.  During the conversation the 1^st plaintiff advised the defendant that they intended to sell the Company’s Society membership in order to repay the loans.  On 24 February 2013, the 2^nd plaintiff told Kaiser Chan that he had found a buyer.  That there was a prospective buyer was confirmed by the 1^st plaintiff in an email, dated 24 February 2013.

91.  The defendant stated that, after she and Kaiser Chan had taken control of the Company from 1 February 2013, they tried very hard to maintain the Society membership, which was the Company’s only valuable asset.  However, they found out that from 11 May 2011 a number of breaches of the Society’s rules had occurred, namely, failures to report changes in the Company’s shareholding involving greater than 10% of the shares. 

92.  The Company made an urgent application to the Society in order to fulfill its requirements so as to maintain membership.  The plaintiffs interfered with the application by writing to and meeting with the Society’s general manager requesting her not to process the application.

93.  The defendant met with the plaintiffs on 2 April 2013 to discuss whether the 1^st plaintiff, as the minority shareholder, could make any financial contribution to the Company.  However, the plaintiffs indicated that they could not do so.  On that day, the defendant issued a notice of shareholders meeting to be held on 19 April 2013 to discuss financial contribution.

94.  On 12 April 2013, the defendant received a letter from the plaintiffs’ solicitors, dated 9 April 2013, offering to pay HK$2,110,000 by 30 April 2013 in full and final settlement of the loans and asking for the return of the 4,100,000 shares.  The offer expired on 11 April 2013 but the letter was post marked 11 April 2013.  The defendant concluded that, as it was not possible for her to receive the letter before 11 April 2013, the offer was not genuine.

95.  A shareholders meeting was held on 19 April 2013.  The plaintiffs refused to discuss issuing new shares, although it was resolved that the Company should raise a loan of up to HK$6,800,000.  At the end of the meeting, the plaintiffs refused to sign the attendance record.

96.  On 28 April 2013, the defendant received two emails from the plaintiffs’ solicitor advising that he had no further instructions to act.

97.  On 3 May 2013, the Society informed the Company that its membership would be suspended from 5 pm, 6 May 2013 until all previous breaches had been rectified.  (As at the date of trial, the membership had not been reinstated.)

98.  The defendant provided funds to the Company so that it could meet financial obligations, including tax payments on 23 May 2013 and 28 June 2013.

99.  Regarding the Company’s paid up capital, the defendant alleges that, after examining the Company’s financial documents and accounting records, she found that the plaintiffs had made fraudulent misrepresentations that the paid up capital was HK$10,000,000.  A Notification of Increase in Nominal Share Capital (Form SC4) and a Return of Allotments (Form SC1) filed with the Companies Registry showed the paid up capital had been increased from HK$5,300,000 to be HK$10,000,000.  However, there was no entry in the Company’s financial documents or accounting records of a payment of HK$4,700,000 to increase the share capital. A certified public accountant, who audited the Company’s accounts on the defendant’s instruction, was of the opinion that the paid up capital was only HK$5,300,000.  The defendant alleged that the plaintiffs knew that the Company’s share capital was only HK$5,300,000 when they asked for the loans and their representations that paid up capital was $10,000,000 were fraudulent and were made to induce her to buy 1,500,000 shares in the Company and to accept shares as security.

100.  The defendant applied to the Companies Registry to amend the record to show the paid up capital as HK$5,300,000.  That application was approved on 19 September 2013.  After the change, the 1^st plaintiff no longer held shares with paid up capital.

101.  On 31 March 2014, the Company asked the 1^st plaintiff to pay capital in the sum of HK$4,700,000.  The 1^st plaintiff did not respond and on 25 April 2014, the Company passed a resolution to forfeit the 4,700,000 shares allotted to the 1^st plaintiff.

102.  With regard to the plaintiffs’ request to set off the HK$200,000 against the Second Loan, the defendant maintains that the 1^st plaintiff has not informed GBS Bullion of her intention to withdraw from the joint venture and the joint venture agreement remains a binding agreement.  The defendant asserts that she has no right apply money paid to GBS Bullion Limited pursuant to the joint venture agreement to pay off a loan owed to her.

103.  With regard to the share transfers on 31 January 2013, the defendant asserts that, in the event of the plaintiffs’ default in payment, she was entitled to deal with the shares pledged (2,600,000 under the First Loan and 1,500,000 under the Second Loan) and the transfers were made with the full consent and knowledge of the 1^st plaintiff. The defendant alleges that the respective bought and sold notes and instruments of transfer were signed by the 1^st plaintiff. 

104.  With regard to the 1^st Loan, in her Defence the defendant pleads that the plaintiffs defaulted on the loan on 22 February 2013.  With regard to the Second Loan, in her Defence the defendant pleads that the plaintiffs defaulted on all three repayment instalments.

The defendant’s case at trial

105.  In respect of a number of significant details the defendant’s case at trial was very different from her case as set out in her witness statement and this difference came through her evidence-in-chief, elaborated in cross-examination.

106.  With regard to the First Loan, contrary to her original case that the 1^st plaintiff signed an instrument of transfer at the same time as she signed the First Loan Agreement, the defendant told the Court that Kaiser Chan gave her the instrument of transfer regarding 2,600,000 shares and board minutes resolving to transfer the shares in November 2012 and they were signed when she received them.  With regard to the bought and sold notes, the defendant said that she was not sure whether they were signed at the same time as the First Loan Agreement was signed but that it was more likely that they were signed subsequently.  Her evidence was that the plaintiffs gave the instrument of transfer and minutes to Kaiser Chan when they met him at the bank to change the Company’s account mandate. She said that she asked for the instrument of transfer because, although she was not worried about the plaintiffs’ ability to repay when the First Loan Agreement was signed, by November 2012 there were reasons for her to be worried about the possibility of repayment problems.  She said the plaintiffs prepared the instrument of transfer and minutes.

107.  Regarding the date “25 Oct, 2012” appearing on the bought and sold notes and instrument of transfer, the defendant’s evidence was that she did not remember clearly why she wrote that date if she received the documents in November 2012 but that she must have made a mistake and wrote the wrong date.  She said she wrote the date before 15 January 2013 but she could not remember exactly when.  The significance of 15 January 2013 was that the due date for the final instalment of the Second Loan was 16 January 2013.

108.  With regard to the Second Loan, the defendant told the Court that the bought and sold note and the Second Loan Agreement were signed at the same time.  She said she prepared the bought and sold note.  Contrary to her original case that the 1^st plaintiff gave her a signed instrument of transfer and minutes of a directors meeting, her evidence was that Kaiser Chan gave her the instrument of transfer regarding 1,500,000 shares and the board minutes resolving to transfer the shares in November 2012 at the same time as he gave her the First Loan documents, he having received the instrument of transfer and minutes from the plaintiffs.  She confirmed that the instrument of transfer was already signed when she received it.  She thought that the plaintiffs had prepared these two documents.  She said that she had asked for the instrument of transfer and the minutes for the same reason as she had asked for the documents in respect of the shares pledged under the First Loan Agreement.

109.  As to the meeting on 31 December 2012, the defendant told the Court that she had no clear recollection as to whether the 1^st plaintiff was present.

The issues

110.  There is no dispute that:

(1)  The two Loan Agreements were entered into and the defendant loaned the plaintiffs HK$1,500,000 and HK$610,000 respectively.

(2)  The 1^st plaintiff pledged a total of 4,100,000 Company shares.

(3)  The loans have not been repaid (save for $200,000, which the plaintiffs assert was a part payment, which the defendant denies).

(4)  4,100,000 shares were transferred from the 1^st plaintiff on 31 January 2013 (there is a dispute as to whom the shares were transferred but it is not necessary for me to resolve that dispute).

(5)  4,700,000 shares were forfeited on 25 April 2014.

111.  The issues are:

(1)  With regard to the transfer of the 4,100,000, were signatures on various documents (“the disputed documents”) used to effect the transfer on 31 January 2013 forged? 

(The disputed documents are: 

(1) the instrument of transfer in respect of the 2,600,000 shares (Exhibit D4);

(2) the bought and sold notes (Exhibit D8), the instrument of transfer (Exhibit D9) and the board minutes (Exhibit D10) in respect of the 600,000 shares purportedly transferred to the defendant; and

(3) the bought and sold notes (Exhibit D11), the instrument of transfer (Exhibit D12) and the board minutes (Exhibit D13) in respect of 900,000 shares purportedly transferred to GBS Bullion.)

(2)  With regard to the 2,600,000 pledged as security for the First Loan, as a matter of construction of the First Loan Agreement, was the defendant entitled to transfer the 2,600,000 to herself before the due date of the loan (23 February 2013)?

(3)  With regard to the Board resolutions, dated 31 December 2012, concerning transfers of 600,000 shares to the defendant and 900,000 shares to GBS Bullion respectively, given that they were purportedly made before the third instalment was due under the Second Loan Agreement, are the resolutions valid?

(4)  Was the defendant entitled to refuse to accept full repayment of the loans?

(5)  Regarding the forfeiture of the 4,700,000 shares in April 2014, was the Company’s paid up capital HK$10,000,000?

(6)  Are the plaintiffs entitled to set off HK$200,000 against the loans?

(7)  Is the default interest rate in respect of each loan extortionate?

Forgery

112.  Each counsel submitted that the other party bore the persuasive burden of proof: the plaintiffs’ counsel submitted that the defendant has the persuasive burden of proving that the subject documents were genuine; the defendant’s counsel submitted that the plaintiffs have the persuasive burden of proving that the documents bear forged signatures.

113.  Both counsel referred to authority for support of their respective submission.  The defendant’s counsel relied on Nina Kung v Wong Din Shin[2005] 8 HKCFAR 387, paragraphs 181–187.  I do not find these passages relevant as they are concerned with the standard of proof required to discharge a persuasive burden borne by a party in respect of allegations of forgery and with drawing inferences of forgery; they are not concerned with the question as to which party bears that burden.

114.  The defendant’s counsel relied also on Ming Shiu Chung & ors v Ming Shiu Sum & ors[2006] 9 HKCFAR 334, paragraphs 51, 56, 78 and 96, which he submitted were relevant to forgery and burden of proof. 

115.  Ming Shiu Chung & ors v Ming Shiu Sum & ors does not help the defendant’s counsel’s submission because the gravamen of the Statement of Claim in that case was an allegation that signatures on certain documents were forged and, because the allegation of forgery was essential to the plaintiff’s case it is clear that the plaintiff had the persuasive burden of proof to make good his case.  In the present case, the plaintiffs’ case is that the shares were transferred without their consent or approval and the defendant produced and relies on the disputed documents, alleging they demonstrate consent, which documents the plaintiffs allege in reply are forged.

116.  The plaintiffs’ counsel referred me to three authorities: Club Deluxe Ltd v Club Metropolitan & ors[1995] 2 HKLR 69; Pacific Electric Wire & Cable Co Ltd v Texan Management Ltd & ors unreported, CACV 90,91,93–96/2012, 17 September 2013; Ming Shiu Chung & ors v Ming Shiu Sum & ors unreported, CACV 180/2004, 20 June 2005.

117.  The case I find most helpful is Pacific Electric Wire & Cable Co Ltd v Texan Management Ltd & ors.  The plaintiff brought an action to recover assets, which it claimed were acquired with its funds.  The plaintiff alleged that certain defendants had defrauded it.  The defence was that there was a Takeover Arrangement made between certain defendants and a third party, for the good of the plaintiff, by which the third party bought out the plaintiff’s interest in the assets.  In reply, the plaintiff asserted that the Takeover Arrangement was a recent fabrication.  The defendants submitted that the trial judge had reversed the burden of proof and, instead of requiring the plaintiff to prove fraud, the trial judge required the defendants to disprove that the Takeover Arrangement was a recent fabrication, when the burden on the defendants should have been merely an evidential burden to establish that prima facie the Takeover Arrangement occurred.

118.  At pages 35R – 37Q, Kwan JA, with whom the other judges agreed, held that there was no merit in the defendants’ submission:

“ 60. The persuasive burden of proving the existence of the Takeover Arrangement clearly lay on [the defendants], as its existence formed an essential part of their defence and they relied on it to justify the retention of the properties as belonging to [the third party] (Phipson on Evidence, 17^th ed, §6-06). I reject [defendants’ counsel’s] contention that the defendants were not required to prove the existence of the Takeover Arrangement which they raised in their defence or that it was for [the plaintiff] to prove that Hu disposed of the assets of [the plaintiff] to [the third party] without the authority of [the plaintiff]. …In our case, [the defendants] did not dispute that [the plaintiff] previously held the ultimate beneficial interest in the PCHL network of companies but that it no longer does so. They asserted that the network of companies have [sic] been fully owned and controlled by [the third party] since February 1999, by virtue of the Takeover Arrangement. ‌…It is clearly for [the defendants] to establish the existence of the Takeover Arrangement. …

61. Further, as [the defendants] were the parties who produced the three letters and asserted their validity as evidencing the Takeover Arrangement, the onus was on them to prove that these letters were genuine. It was not for [the plaintiff] to prove the letters were forgeries ….

…

63. In response to the defence of the Takeover Arrangement, [the plaintiff] raised the issue that this was a fabrication and the three letters were forgeries.  [The plaintiff] bore the evidential burden of adducing evidence sufficiently cogent and probative to raise that issue with a view to defeating the defence (Nina Kung v Wong Din Shin, supra at §§180 and 242). …”

119.  I note also that in the paragraph of Phipson referred to by Kwan JA the editors state:

“ The true meaning of the rule is that where a given allegation, whether affirmative or negative, forms an essential part of a party’s case, the proof of such allegation rests on him.”

120.  Although the Re-Amended Statement of Claim does not allege fraud specifically, the gravamen of the claim is that the 1^st plaintiff has been defrauded but the plaintiffs make no allegations that documents have been forged.  The defendant produced the disputed documents, asserted their validity, and alleges they demonstrate that the 1^st plaintiff consented to the share transfers.  The existence and genuineness of the disputed documents form an essential part of the defence because the defendant relies on them to demonstrate consent.  Although in reply the plaintiffs assert that the disputed documents are forgeries, the above quoted passages lead me to conclude that,as an essential part of the defence, the defendant bears the persuasive burden to prove that the disputed documents are genuine.

121.  In the Re-Amended Statement of Claim, the plaintiffs averred expressly that the 1^st plaintiff did not execute any instruments of transfer but this averment does not put a persuasive burden of proof on the plaintiffs to prove that the disputed documents were forged.  The existence of forged instruments of transfer is not an essential part of the plaintiffs’ case because the plaintiffs could succeed by persuading the Court only that the 1^st plaintiff did not execute instruments of transfer.

The witnesses

122.  This case turns on the credibility of the witnesses.  Neither the plaintiffs nor the defendant impressed me as witnesses.  They were evasive and gave me the impression that they were not reliable.  In my consideration and assessment of the evidence I have been guided by the following observations.

123.  The relevant principles in assessing the creditability of witnesses are summarised by Chu J in Ip Fung Kuen v Sam Kee Frozen Meat Company Limited & ors unreported,HCA 1897/2009, 6 April 2016 at §§65 – 67:

“ 65. The relevant principles in assessing a witness’s evidence have been set out by Poon J (as he then was) in Big Island Construction (HK) Ltd v Wu Yi Development Co Ltd (unreported) HCA 1957/2005, 28 July 2011; and DHCJ Eugene Fung SC in Hui Cheung Fai v Daiwa Development Ltd (unreported) HCA 1734/2009, 8 April 2014.

66. In Big Island Construction (HK) Ltd, the then Poon J had explained as follows:

‘ 24. In assessing credibility, the court takes into account, among other things, the inherent probabilities or improbabilities of one’s testimony, the contemporaneous documents or any evidence, which is undisputed or indisputable, tending to support or contradict one account or the other and the overall impression of the characters and motivations of the witnesses: see In re B (Children), supra, per Baroness Hale at para 31 at p.24, applied by this court in Standard Chartered Bank v Li Wai Ping & others, HCA10587/2000 & HCA3575/2003, 17 February 2011, unreported, at para 19. Where there exists a wealth of contemporaneous documents, credibility is to be tested by reference most particularly to them: see Esquire (Electronics) Ltd v Hong Kong & Shanghai Banking Corp. Ltd [2007] 3 HKLRD 439, per Stock JA (as he then was) at para.158 at p.494’

67. In Hui Cheung Fai, DHCJ Eugene Fung SC has said :-

‘ 76. In making my findings of fact in this case, I am guided by a number of general principles which judges apply as to fact finding and the assessment of credibility.

77. Generally speaking, contemporaneous written documents and documents which came into existence before the problems in question emerged are of the greatest importance in assessing credibility: Onassis v Vergottis [1968] 2 Lloyd’s Rep 403 at 431 (Lord Pearce). …

78. In deciding whether to accept a witness’ account, importance should also be attached to the inherent likelihood or unlikelihood of an event having happened, or the apparent logic of events: eg Lam Rogerio Sou Fung v Tan Soon Gin George (unreported, HCA 2576/2005, 5 May 2011) §39 (Chu J).

79. In determining a witness’s credibility, I have also attached importance to the consistency of the witness’ evidence with undisputed or indisputable evidence, and the internal consistency of the witness’ evidence. The latter type of consistency is often tested by a comparison between the witness’ oral testimony and his or her witness statement.

80. I have cautioned myself against the dangers of too readily drawing conclusions about truthfulness and reliability solely or mainly from the appearance of witnesses (Ting Kwok Keung v Tam Dick Yuen (2002) 5 HKCFAR 336 at §§36–37 (Bokhary PJ)), or from the assessment of the witnesses’ character (Esquire (Electronics) Ltd v HSBC [2007] 3 HKLRD 439 at §135 (Stock JA)).

81. The practical approach to assessing credibility of witnesses in a case such as the present may have best been summarised by the words of Robert Goff LJ, as he then was, in The Ocean Frost [1985] 1 Lloyd’s Rep 1 at 57:

‘ Speaking from my experience, I have found it essential in cases of fraud, when considering the credibility of witnesses, always to test their veracity by reference to the objective facts proved independently of their testimony, in particular by reference to the documents in the case, and also to pay particular regard to their motives and to the overall probabilities. It is frequently very difficult to tell whether a witness is telling the truth or not; and where there is a conflict of evidence such as there was in the present case, reference to the objective facts and documents, to the witnesses’ motives, and to the overall probabilities, can be of very great assistance to a judge in ascertaining the truth.’

82. Whilst these words were spoken in the context of a fraud case, I believe they are applicable to any case where a witness’ credibility features prominently in the court’s determination.  They are particularly apposite in a case like the present where very serious allegations (akin to allegations of fraud) have been made by the Son against the defendants.’”

The disputed documents

124.  I find that the defendant failed to discharge her persuasive burden of proof for the following reasons.

125.  Regarding the instrument of transfer for the 2,600,000 shares (Exhibit D4), in her oral evidence the defendant said that she was not sure whether the 1^st plaintiff signed it when she signed the First Loan Agreement but she did say that it was handed to her by Kaiser Chan and that the plaintiffs had passed the instrument of transfer to Kaiser Chan when he met them at the bank to change the bank mandate.  The defendant is relying on a document given to her by another.  She accepted that it is highly likely that she did not see the plaintiffs sign the instrument of transfer.  She could not give direct evidence of either witnessing the plaintiffs signing the instrument of transfer or of receiving the signed document from the plaintiffs.

126.  Moreover, the person who could give direct evidence of witnessing the plaintiffs signing the instrument of transfer or of receiving the signed document from the plaintiffs is Kaiser Chan but he was not called as a witness.  The reason the defendant gave for this was that, as he is personally related to her, she thought it would affect his credibility as a witness.  I do not accept this reason.  Kaiser Chan would have been an important witness, not only in respect of the issue of forgery but also in respect of other issues, such as whether the plaintiffs wanted to abandon the Company and as to the various meetings (including the meeting on 31 December 2012 during which the defendant alleges the plaintiffs were provided with bought and sold notes and instruments of transfer with respect to share transfers to the defendant and GBS Bullion) and correspondence.  The adverse inference to be drawn is that Kaiser Chan could not support the defendant’s case.

127.  In order to cover the absence of Kaiser Chan, the defendant called Mr Li Ho Fung who stated in his witness statement that, during his employment with the 2^nd plaintiff, he was responsible for preparing and coordinating the execution of the bought and sold notes, the instruments of transfer and the board minutes for the 2,600,000 shares and the 1,500,000 shares.  In his witness statement he did not explain in what manner he was responsible,how the documents were prepared or the manner of coordination of execution.

128.  Under cross-examination, when asked to confirm that he coordinated the relevant party to sign the bought and sold note for 2,600,000 shares, Mr Li said that there was no need for coordination because the bought and sold notes and instrument of transfer for the 2,600,000 shares were signed at an HSBC branch in Mongkok in the latter part of November 2012.  He later said the parties made the arrangements and that he only prepared the documents.  He said he prepared the board minutes but he did not quite recall whether the format was in the form of Exhibit D16 but it was possible that he prepared that document and it was possible that he prepared Exhibits D14 and D15, which are further copies of the minutes.  He said Kaiser Chan, Chung, the plaintiffs and he were present at the bank.

129.  Regarding the bought and sold notes, instruments of transfer and board minutes in respect of the transfer of the 1,500,000 shares, Mr Li said that they were signed at the bank on the same day.  When it was put to him that the plaintiffs case is that the bought and sold notes were signed on 17 October 2012 at the plaintiffs’ office, he was at first evasive and then said that he could not remember whether it was signed at the bank because he prepared two bought and sold notes for 1,500,000 shares.  Mr Li was correct; there were two bought and sold notes, one set in respect of the 1,500,000 shares sold to the defendant for HK$1,000,000 and another in respect of the security for the Second Loan.  However, he specifically distinguished between the two sets in his witness statement and I do not believe he could not remember that distinction when in Court and I consider that he was being evasive.

130.  When Mr Li was asked why he did not mention that the disputed documents were signed at the bank in his witness statement, after accepting that he knew, before he signed his witness statement, that the plaintiffs were alleging forgery, he said that he did not think the meeting was relevant.  I find his answer incredible, given that he knew the plaintiffs were alleging forgery.

131.  At the time of trial, Mr Li was an employee of the defendant.  Neither the defendant nor Mr Li mentioned anything about the disputed documents being signed at an HSBC branch in Mongkok in late November 2012 in their respective witness statements.  For the defendant, this line of evidence first began during the defendant’s “top up” in chief when she said that she was given bought and sold notes and instruments of transfer in November 2012 and elaborated further in cross-examination saying that the plaintiffs passed the documents to Kaiser Chan at the bank.

132.  For Mr Li, he first mentioned the bank when he was asked to confirm that he coordinated the execution of the documents.  He changed his evidence set out in his witness statement, saying that he did not coordinate execution.  He was evasive and claimed that he could not recall matters upon which he had been clear in his witness statement.  I consider the evidence regarding the meeting at the bank to be a recent invention for trial by both the defendant and Mr Li.

133.  Another piece of evidence the defendant relies on is an email, dated 28 December 2012, purportedly from Kaiser Chan to the 2^nd plaintiff and Channing Chan in which Kaiser Chan refers Channing Chan to a conversation he claims he had with the 2^nd plaintiff:

“ In order to avoid the shareholding >=50% and letting us to start negotiating with [the Society], I suggest to him and he said OK to exchange the signed paperwork for the pledged shares of 1.5m. It will be divided into 2 batches of 600,000 and 900,000 for [the defendant] and GBS Bullion Limited, respectively. Please assist and coordinate with [the plaintiffs] for signing and execution. [The 2^nd plaintiff] will then call me to meet for exchanging the share.”

134.  Attached to the email were: (1) unsigned minutes of a meeting of the Company’s directors resolving to transfer 900,000 shares to GBS Bullion; (2) an unsigned instrument of transfer in respect of the 900,000 shares; (3) an unsigned bought and sold note for the 900,000 shares; (4) unsigned minutes of a meeting of the Company’s directors resolving to transfer 600,000 shares to the defendant; (5) an unsigned instrument of transfer in respect of the 600,000 shares; and (6) an unsigned bought and sold note for the 600,000 shares.

135.  In his witness statement, the 2^nd plaintiff said he never received this email and he observes that the addressee is “Patrick Cheung” whereas on other emails in evidence which he received, the addressee is “patrickcheung@wblooming.com”.  Further, he denied discussing with Kaiser Chan dividing the shares into two lots of 900,000 and 600,000.

136.  The purpose of the email as evidence is to show that the 2^nd plaintiff had discussed and agreed with Kaiser Chan to divide the shares into two lots.  The plaintiffs challenge the contents of the email and, in the absence of Kaiser Chan as a witness, I am not prepared to find that there was such a discussion.  Further, notwithstanding the 2^nd plaintiff’s early challenge to the email, Kaiser Chan was not called as a witness and I should draw the adverse inference that his evidence could not assist the defendant.

137.  The defendant called Channing Chan in an attempt to rebut the 2^nd plaintiff’s evidence regarding the email. During “top up” in chief Channing Chan said that he had received the email.  This was the first time he had mentioned the email.  Even if Channing Chan did receive the email, I am not prepared to infer that the 2^nd plaintiff received the email.  More importantly, even if Channing Chan received the email, I cannot infer from that that Kaiser Chan and the 2^nd plaintiff had the discussion referred to in the email. 

138.  Moreover, the 2^nd plaintiff’s evidence regarding the email was not challenged in cross-examination.  The email does not assist the defendant’s case.

139.  An important aspect of the defendant’s case is the meeting on 31 December 2012.  As I have recorded above, in her witness statement, prepared in April 2015, the defendant said she met with the plaintiffs at the plaintiffs’ former solicitors’ office and during the meeting the 1^st plaintiff exchanged the bought and sold notes, instrument of transfer and board minutes in respect of the transfer of the 1,500,000 shares to the defendant for a new set of bought and sold notes, instruments of transfer and board minutes with respect to the transfer of the shares to the defendant and GBS Bullion.  Indeed, in an affirmation affirmed on 31 March 2014, some 15 months after the meeting, the defendant said it was the 1^st plaintiff who exchanged the documents during the meeting. 

140.  After the defendant had signed her witness statement, the plaintiffs’ solicitors wrote to the plaintiffs’ former solicitors enquiring about the meeting.  In reply, the plaintiffs’ former solicitors advised that the 1^st plaintiff did not attend the meeting, which was attended by the 2^nd plaintiff,Kaiser Chan and the defendant.  They also advised that neither the 1^st plaintiff nor the 2^nd plaintiff gave the defendant a new set of bought and sold notes and instruments of transfer for share transfers to the defendant and GBS Bullion and that the purpose of the meeting was to discuss a shareholder’s agreement. They advised also that the defendant did not demand any repayment.  The defendant did not object to the admission of this letter.

141.  During her “top up” in chief, the defendant was asked by her counsel whether the 1^st plaintiff attended the meeting.  The defendant said she was not sure, whereas in her written statement she stated unequivocally that the 1^st plaintiff attended the meeting. 

142.  The exchange of documents on 31 December 2012 is an important aspect of the defendant’s evidence, explaining the provenance of the share transfer documents in respect of transferring shares to the defendant and GBS Bullion.  It is incredible that at trial she was not sure whether the 1^st plaintiff attended the meeting.  And again, Kaiser Chan was not called to provide evidence concerning the meeting and I should draw the adverse inference that his evidence could not help the defendant.  For these reasons, I do not believe the defendant’s evidence that documents were exchanged during the meeting on 31 December 2012.

143.  Before the defendant was taken to the plaintiffs’ former solicitors’ letter in cross-examination, she was asked to confirm that the plaintiffs’ former solicitor was present at the meeting.  Her immediate answer was that she did not think he was present throughout the meeting and that what happened was that, because she came to know that lawyers charge by the hour, there was a time when the parties chatted before the lawyers entered.  I do not believe this answer, which was clearly an attempt to cast doubt on the former solicitors’ letter in anticipation that she would be referred to it.

144.  In conclusion, for the reasons above, the defendant has failed to prove the genuineness of: (1) the instrument of transfer in respect of the 2,600,000 shares (Exhibit D4); (2) the bought and sold notes (Exhibit D8), the instrument of transfer (Exhibit D9) and the board minutes (Exhibit D10) in respect of the 600,000 shares purportedly transferred to the defendant; and (3) the bought and sold notes (Exhibit D11), the instrument of transfer (Exhibit D12) and the board minutes (Exhibit D13) in respect of 900,000 shares purportedly transferred to GBS Bullion.

145.  I find that the only documents signed by the 1^st plaintiff were the bought and sold notes in respect of the 2,600,000 shares pledged under the First Loan Agreement and the bought and sold notes in respect of the 1,500,000 shares pledged under the Second Loan Agreement. 

146.  Accordingly, the said shares were never transferred validly to the defendant and the plaintiffs are entitled to:

(1)  A declaration that the defendant is liable to return the 26% shares of the Company provided by the 1^st plaintiff as security for the First Loan and the 15% shares of the Company provided by the 1^st plaintiff as security for the Second Loan; and

(2)  An order that the defendant do deliver up or cause to be transferred 85% of the Company (equivalent to the said 26% shares provided by the 1^st plaintiff as security for the First Loan and the 15% shares of the Company provided by the 1^st plaintiff as security for the Second Loan) to the 1^st plaintiff.

147.  Further, as the shares were never validly transferred to the defendant, the defendant was not entitled to act as majority shareholder and forfeit the 4,700,000 shares.

148.  The form of the order set out in the Prayer for Relief was for a return of the shares to the “Plaintiffs”.  However, as the 1^st plaintiff was the sole shareholder at the material time, it is appropriate to order a return to the 1^st plaintiff only.

Money Lenders Ordinance, Cap 163

149.  The plaintiffs rely on Section 25 of the Money Lenders Ordinance:

“ 25. Reopening of certain transactions

(1) Subject to section 24(2), where—

(a) proceedings are taken in any court by any person (whether a money lender or not) for the recovery of any money lent or the enforcement of any agreement or security in respect of any loan; and

(b) subject to subsection (3), there is evidence which satisfies the court that the transaction is extortionate,

the court may reopen the transaction so as to do justice between the parties having regard to all the circumstances, and, for that purpose, make such orders and give such directions in respect of the terms of the transaction or the rights of the parties thereunder as the court may think fit.

(2) For the purposes of this section, a transaction is extortionate if—

(a) it requires the debtor or a relative of his to make payments (whether unconditionally or on certain contingencies) which are grossly exorbitant; or

(b) it otherwise grossly contravenes ordinary principles of fair-‌dealing.

(3) Any agreement for the repayment of a loan or for the payment of interest on a loan in respect of which the effective rate of interest exceeds 48 per cent per annum shall, having regard to that fact alone, be presumed for the purposes of this section to be a transaction which is extortionate; but except where such rate exceeds the rate specified in section 24(1), the court may declare that any such agreement is not extortionate for the purposes of this section if, having regard to all the circumstances relating to the agreement, the court is satisfied that such rate is not unreasonable or unfair.

(4) In determining whether a transaction is extortionate for the purposes of this section, regard shall be had to such evidence as is adduced concerning—

(a) interest rate prevailing at the time it was made;

(b) the factors mentioned in subsections (5) and (6); and

(c) any other relevant considerations.

(5) Factors applicable under subsection (4)(b) in relation to the debtor include—

(a) his age, experience, business capacity and state of health; and

(b) the degree to which, at the time of entering into the transaction,he was under financial pressure, and the nature of that pressure.

(6) Factors applicable under subsection (4)(b) in relation to the lender or other person by whom the proceedings are taken include—

(a) the degree of risk accepted by the lender, having regard to the nature and value of any security provided;

(b) his relationship to the debtor;

(c) whether or not a specious cash price was quoted for any goods or services included in the transaction; and

(d) where one or more other transactions are to be taken into account, the question how far any such other transaction was reasonably required for the protection of the debtor or the lender, or was in the interest of the debtor.”

150.  I note section 25(1) applies to proceedings for the recovery of money lent or the enforcement of any agreement or security.  This does not relate to these proceedings because the defendant has not counterclaimed to enforce the Loan Agreements.  Neither counsel addressed me on the applicability of section 25 but I note section 25(7), which provides:

“ Any court in which proceedings might be taken for the recovery of any loan or security in respect of a loan shall have and may at the instance of the debtor or surety exercise the like powers as may be exercised under this section where proceedings are taken for the recovery of a loan; and the court may entertain any application under this subsection by the debtor or surety notwithstanding that the time for repayment of the loan or any instalment thereof has not arrived.”

151.  In my view, section 25(7) enables a court in which proceedings might be taken for the recovery of any loan or security in respect of such loan to exercise its powers under section 25 where a debtor applies for such powers to be exercised notwithstanding that a lender has not taken proceedings for the recovery of any loan or security in respect of such loan.  This I consider to be the proper construction of the first limb of section 25(7), which consideration is supported by the second limb which provides that the court may entertain an application under section 25(7), notwithstanding that time for repayment has not arrived, in which case a lender would not be entitled to bring proceedings for recovery.

152.  This Court is a court in which proceedings might be taken for the recovery of the First and Second Loans.  It is irrelevant that the defendant did not make any counterclaim. The plaintiffs have applied for the Court to exercise its powers under section 25.  I have the jurisdiction to consider the exercise of such powers.

153.  The effective interest rate is 58.4% per annum (0.16% per day × 365 days), which is presumed to be extortionate by section 25(3) as it exceeds 48% per annum.  I turn to consider, notwithstanding the presumption, whether the interest rate is not unreasonable or unfair.

154.  There was no evidence of interest rates prevailing at the time of the loans but I consider the rate to be unreasonable for the following reasons:

(1)  The defendant’s degree of risk was low because the 1^st plaintiff had pledged shares as security.  It was not the defendant’s case that the shares were not good security; and

(2)  A handling fee of $10,000 was charged in respect of the Second Loan.  

155.  The defendant’s counsel submitted that the interest would only be applied if the plaintiffs defaulted but that it is irrelevant. The only consideration is whether the rate is extortionate, which does not require a consideration of the circumstances in which the interest might be applied.

156.  The defendant’s counsel also submitted that the length of default is immaterial.  For example, if the plaintiffs were in default of payment for only one month, the rate would be 4.8% (0.16% per day × 30 days).  However, this is not a correct application of section 25(3).  Whether a rate is extortionate is to be determined by reference to an effective rate of interest exceeding 48% per annum and not be reference to length of any period of default.

157.  Because the default interest is extortionate and unreasonable, it is appropriate and just to reopen each loan agreement and strike out the term providing for default interest in each loan agreement.

HK$200,000—set-off claim

158.  The HK$200,000 was the plaintiffs’ contribution towards the joint venture with GBS Bullion.  The joint venture agreement is still subsisting.  GBS Bullion and the defendant are separate legal entities. It is not appropriate to set-off a sum paid to one legal entity against a debt owed to another.  

Conclusion

159.  Because of the findings and conclusions set out above it is not necessary for me to resolve the issues set out in paragraphs 111(2), 111(3), 111(4) and 111(5) above.

160.  I declare that the defendant is liable to return the said 26% shares of the Company provided by the 1^st plaintiff as security under the First Loan Agreement and the said 15% shares of the Company provided by the 1^st plaintiff as security under the Second Loan Agreement.

161.  I order the defendant to deliver up or cause to be transferred 85% shares of the Company (which is equivalent to the said 26% shares of the Company provided by the 1^st plaintiff as security under the First Loan Agreement and the said 15% shares of the Company provided by the 1^st plaintiff as security under the Second Loan Agreement) to the 1^st plaintiff.

162.  I order that the First Loan Agreement and the Second Loan Agreement be reopened and I order that the term providing for default interest in each loan agreement be struck out.

163.  I declare that the defendant was not entitled to forfeit the said 4,700,000 shares of the Company.

164.  I declare that the defendant is liable to return 44% shares in the Company to the 1^st plaintiff.

165.  I order that the defendant deliver up or cause to be transferred 44% shares of the Company to the 1^st plaintiff.

166.  The plaintiffs asked for a declaration that the First Loan Agreement and the Second Loan Agreement together with any security given in respect thereof are null and void, unenforceable and of no legal effect.  I shall not make such a declaration because the agreements were validly entered into and the security validly given.

167.  Costs should follow the event.  I make an order nisi that the defendant is to pay the plaintiffs’ costs, to be taxed if not agreed.