LIANG JUN XIAN v. TSUI HIN CHI

CACV 88/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 88 OF 2008

(ON APPEAL FROM HCA NO. 2288 OF 2007)

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JUDGMENT

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Hon Tang VP (giving the judgment of the Court):

Introduction

1.  The plaintiff claims to be the beneficial owner of all the issued shares (10,000 shares) in China Investment Group International Finance Limited (“CIGIF”).  Prior to the transfers referred to in paras. 2 and 3 below, the plaintiff was the legal and beneficial owner of all 10,000 shares in CIGIF.

2.  On 26 March 2007, the plaintiff executed a bought and sold notes and instrument of transfer for 4,000 shares in CIGIF in favour of the defendant. 

3.  On 22 August 2007, the plaintiff executed 2 sets of bought and sold notes and instruments of transfer for 3,000 shares each in favour of the defendant.  One set of these documents was back dated 26 March 2007, and the other was dated 23 August 2007.

4.  On 24 August 2007, the defendant transferred 3,000 shares to one Mok Wah Pui (“Mr Mok”).  

5.  The defendant by counterclaim, claimed inter alia:

“(3)   A declaration that the Defendant has validly transferred the legal and beneficial interest in the said 3,000 shares in the Company to Mr. Mok Wah Pui on 24^th August 2007 in accordance with the laws of Hong Kong;

(4)     A declaration that, as of the date hereof, the Defendant is the legal and beneficial owner of the remaining 7,000 shares in the Company;

(5)     An order that the Plaintiff be restrained, whether by herself or her agents or employees, from making representations, whether verbal or written, to any person, whether in Hong Kong or the PRC, that she is or remains the legal and/or beneficial owner of the said 10,000 shares, or at all, in the Company;” (“the injunction”).

6.  Mr. Lawrence Ng, counsel for the defendant, informed us that the reference in para. (4), to the date of the counterclaim (10 October 2007) was not meant to suggest that the defendant had not become the legal and beneficial owner of the shares by 23 August 2007 at the latest.

7.  By summons dated 31 January 2008, the defendant applied for summary judgment in respect of the counterclaim.  In that summons, the defendant sought the injunction as part of its application for summary judgment and alternatively, under O.29 r. 1.

8.  Earlier, by summons dated 8 January 2008, the defendant applied for security for costs of the trial in the sum of $1,270,500. 

9.  It is to be noted that the plaintiff in her claim had claimed that all the shares of CIGIF “belonged to the plaintiff”.  We take this to mean that she claimed to be the beneficial owner of such shares. 

10.  Fung J held in favour of the defendant.  The sealed order provided for judgment to “be entered in part in favour of the Defendant on the legal and beneficial ownership of the 7,000 shares (in CIGIF)”.  It is further ordered that:

“1.     The Plaintiff’s claim for legal and beneficial ownership of 100% shares in CIGIF be dismissed;

2.      The Defendant’s counterclaim against the Plaintiff for HK$5 million and damages to be assessed be dismissed;

3.      The Plaintiff do have leave to defend on the legal and beneficial ownership of the remaining 3,000 shares in China Investment Group International Finance Limited（中國投資集團國際理財有限公司）and to amend the Statement of Claim, if necessary;

4.      The Plaintiff do within 14 days from the date hereof give security for the Defendant’s costs up to and before trial of this action in the sum of HK$600,000.00 by way of payment into court;”

11.  Fung J’s dismissal of the plaintiff’s claim might be said to have followed from the defendant’s success in respect of the counterclaim, but it is to be noted that the defendant had not applied to have the plaintiff’s claim struck out.

The appeal

12.  The plaintiff appealed on 7 April 2008, and the defendant applied for security for costs of appeal on 21 April 2008 in the sum of $435,500. 

13.  The application for security for costs was heard on 26 June 2008 and dismissed by Cheung JA.  In Cheung JA’s judgment, he said:

“4.     The wording of Fung J’s sealed order is problematic.  First, the plaintiff had never applied for any judgment before Fung J concerning her claim on the ownership of the shares.  Hence (as accepted by Mr. Ng, counsel for the defendant) there should not be an order on this.  Second, the relief sought by the defendant was in the form of a declaration.  Hence (as was also accepted by Mr. Ng) the proper order should be in the form of a declaration.  The order should be amended.”

14.  As a result, the sealed order was amended by Fung J on 2 September 2008.  The amended sealed order where relevant appears as follows:

“IT IS HEREBY DECLARED ORDERED that the Defendant, as of 22 August 2007, was Judgment be entered in part in favour of the Defendant on the legal and beneficial ownership of 70,000 shares in China Investment Group International Finance Limited (‘CIGIF’)（中國投資集團國際理財有限公司）;

AND IT IS FURTHER ORDERED that:-

1.   The Plaintiff’s claim for legal and beneficial ownership of 100% shares in CIGIF be dismissed;

1.    2.    The Defendant’s counterclaim against the Plaintiff for HK$5 million and damages to be assessed be dismissed;

2.    3.   The Plaintiff do have leave to defend on the legal and beneficial ownership of the remaining 3,000 shares in China Investment Group International Finance Limited （中國投資集團國際理財有限公司） and to amend the Statement of Claim, if necessary;”

Background

15.  As the learned judge correctly pointed out, the case is concerned with the land development project of the Finance Tower at 19-49 De Zheng Road South, Guangzhou.  We gratefully adopt the learned judge’s summary of the background facts:

“4.     The rights in the development project is held by 廣州遠興房產有限公司 (“Land Company”).  The shares of Land Company are held by CIGIF (60%), and 廣東中大中鑫投資策劃有限公司 (“China Partner”) (40%). 

5.      CIGIF is a Hong Kong company with issued capital of 10,000 shares.   Prior to the shares transfers, CIGIF was wholly owned by the plaintiff.  China Partner was also controlled by the plaintiff.

6.      On 6 December 2006, the plaintiff and the defendant signed an agreement in Chinese entitled Co-operation Agreement.  The effect of the terms are:

‘Party A: [The plaintiff]    Party B: [The defendant]

Both party reached the agreement concerning the co-operation in investment in the land project at 19-49 De Zheng Road South, Guangzhou as follows:

1.      To obtain 100% shareholding of the [Land Company] (herein called the “Project Company”)  in order to achieve 100% rights in the said project.

2.      The details of the subject project are set out in the project materials, about RMB¥0.13 billion has been put into the project at this stage, the expected total development costs are about RMB¥0.23 billion.

3.      [The plaintiff] is to lead in the investment development, organize and carry out the Finance Tower project.

4.      [The defendant] invests RMB50¥million in Guangzhou, owning a 40% share in the Project Company, the remaining development capital required is raised by [the plaintiff], owning 60% of the Project Company.

5.      Both parties agree that upon obtaining the bank loan, part of the invested sums shall be repaid, with preferred treatment for [the defendant], until the realization of the invested sums placed in the co-operation capital in the Project Company by the respective party being 50:50, i.e. each owning half.

6.      [The plaintiff] promised to additionally pay 2% of the earnings to [the defendant].

7.      It is expected that sales of the uncompleted units will begin in January 2008, and the investment may be recouped, and both parties agree that the investment will be repaid by 60%:40% between [the plaintiff] and [defendant].

8.      The whole project is expected to be fully completed before December 2008.

9.      Both parties agree that in the circumstances of availability of capital flow, to transfer the capital to the Zeng Cheng He Xian Gu Scenic Travel Project, and to take up shareholding in the He Xian Gu Project according to the ratio of capital between the parties, as being the initial shareholders, the preliminary estimated first stage capital is RMB¥0.2 billion, if in excess then to undergo placement at premium, the initial shareholders should enjoy all the earnings of the entire project.

10.    In the spirit of co-operation, for matters not yet set out in details, both parties will negotiate for the resolution, and any supplemental agreement shall have equal effect.’

7.      On 13 February 2007, the plaintiff issued a receipt in Chinese to the defendant for HK$50 million in the following terms:

‘Receipt

Up to 13 February 2007, received from [the defendant] investment money of HK$50 million, the said sum being for taking over the assets of [Land Company], i.e. the land project at 19-49 De Zheng Road South, Guangzhou. Hereby acknowledged.’”

11.    On 12 September 2007, both the plaintiff and the defendant signed the Declaration in Chinese to the following effect:

‘Declaration

Whereas [the defendant] and [the plaintiff] co-operated to take over the development of the [Finance Tower], in which [the defendant] invested the capital of HK$50 million, owning 42% share in the [Finance Tower] project (the other 58% share solely owned by [the plaintiff]), according to the Co-operation Agreement between the parties, the said project was to be run under the sole authority of [the plaintiff], since [CIGIF] originally only had [the plaintiff] as the single shareholder and director, hence [CIGIF] had other investment projects, whereas [CIGIF] owns 60% of [Land Company], therefore [the defendant] in owning 70% shareholding in the Hong Kong company has 42% face value share in the [Land Company], the said Hong Kong company, i.e. [CIGIF’s] effective controlling shareholder is still [the plaintiff], apart from the [Finance Tower], the other projects have nothing to do with [the defendant].’

12.    On 28 September 2007, the plaintiff and the defendant attended the 2nd co-ordination meeting held by the Guangzhou Properties Exchange (“Exchange”).  The memorandum of meeting signed, inter alia, by the plaintiff and the defendant, recorded that the defendant asserted that he was the controlling shareholder of CIGIF, and at the same time CIGIF was the controlling shareholder of Land Company, hence he relieved all the duties and authority of the plaintiff in Land Company.  The memorandum also recorded that the plaintiff disagreed that by the 70% controlling shareholding in CIGIF, the defednant could control Land Company and to remove her as the Managing Director.

13.    On 31 October 2007, the plaintiff’s lawyer in Guangzhou issued a letter to the defendant stating that the defendant made a loan of RMB¥50 million and obtained 70% nominal shareholding in CIGIF as security for 42% of the earnings in Land Company, and both parties agreed that the plaintiff had full power and responsibilities in all matters of the land development in Land Company.  But in breach of the agreement and without informing the plaintiff, the defendant engraved the company seal and changed the directors of CIGIF, and defrauded the plaintiff of 100% shareholding of CIGIF by deception.  As the defendant had committed criminal law in Hong Kong, the matter was reported to the police and upon conviction, the defendant would be imprisoned for 8 to 10 years.”

16.  As the learned judge correctly pointed out:

“25.   The plaintiff’s case is that the HK$ 50 million was a loan, and the transfer of the 70% shares in CIGIF to the defendant was no more than security for the defendant’s entitlement to 42% of the profits in the project, and she retained the effective control of all the shares in CIGIF.”

17.  The learned judge agreed, however, with the submission made by Mr. Lawrence Ng, who had also appeared before him, that the plaintiff’s claim that the RMB 50 million was a loan was contradictory to the terms of all the documents.  The learned judge said:

“32.   The premise of the RMB¥50 million being a loan is contradictory to the terms of all the documents.   That a loan secured by a transfer of 70% of shares in CIGIF as equivalent to 42% in Land Company against the 42% interest in the profits from the project as somehow subject to a trust of the shares in favour of the transferor/debtor is inherently difficult to comprehend.   And the premise of a loan fails to account for repayment in the event that the profits from the project is below RMB¥50 million, a commercial risk which cannot be overlooked, however remote.”

18.  The learned judge concluded that the plaintiff’s assertion of beneficial ownership of the 70% of the shares was unbelievable.  However, in relation to the 3,000 shares, he held that there was a triable issue.  Therefore, he granted leave to defence in relation to them.

19.  With respect to Fung J, we agree that the plaintiff’s assertion that the RMB¥50 million was a loan was problematic, because of the “commercial risk of having to repay it, should the project fail”, though it is not entirely clear who is liable to repay, the plaintiff, CIGIF or the Land Company?  The learned judge was of the view that the RMB 50 million was an investment. 

20.  But an investment can take the form of capital or a loan.  It is not uncommon for shareholders to fund an investment by shareholders’ loan, which may not be repaid in the event the investment is unsuccessful.  In this case, there are indications that this is what the parties might have chosen to do.  For example, the cooperation agreement, provided that:

“5.     Both parties agree that upon obtaining the bank loan, part of the invested sums shall be repaid, with preferred treatment for [the defendant] ...

……

7.      … sales of the uncompleted units will begin in January 2008, and the investment may be recouped, and both parties agree that the investment will be repaid by 60%:40% between [the plaintiff] and [defendant].”

21.  These provisions are consistent with the investment taking the form of a loan.  Moreover, we are concerned with the shares of CIGIF which is a company registered in Hong Kong.  It is clear that normally, only profits could be paid out to the shareholders by way of dividend.  Normally, capital may not be repaid.  Loans, of course, could be repaid.

22.  Mr Ng referred to the bought and sold notes and the instruments of transfer in support of his submission that the shares were sold to the defendant.  With respect, the bought and sold notes and the instruments of transfer only give superficial support to the defendant’s case.  It is to be noted that the consideration for the shares were stated to be $1 each.  If the shares were sold to the defendant by the plaintiff for RMB 50 million, the true consideration for the shares would have been RMB 50 million.  So these documents rather suggest that the RMB 50 million was not the consideration for the shares, and that is consistent with the plaintiff’s case.  It is trite law that beneficial interest would not necessarily pass on the executions of these documents. 

23.  Moreover, when one looks at the declaration of 12 September 2001, which was signed both by the plaintiff and the defendant, it is noted that this document contained the statement in Chinese that CIGIF’s“實際控股人依然是”the plaintiff.  It has been translated as:

“… [CIGIF’s] effective controlling shareholder is still [the plaintiff] …”.

24.  This is inconsistent with the defendant’s case that by 23 August 2007 at the latest, he was the beneficial owner of 10,000 shares.  Also, although it was the defendant’s case that he had transferred 3,000 shares to Mr Mok on 24 August 2007, it could not be said that as of the date of the declaration, which was 12 September 2007, the plaintiff was still the “effective controlling shareholder” of CIGIF.

25.  Moreover, the same declaration shows that CIGIF also owned other projects apart from the Finance Tower project, and that these projects had nothing to do with the defendant.  That is inconsistent with the transfer of the entire beneficial interest of the shares in CIGIF to the defendant.  So, with respect, we cannot agree that the plaintiff’s assertion of beneficial ownership is unbelievable.  As the learned judge has correctly pointed out, the issue is not whether the plaintiff’s assertions are to be believed, it is whether those assertions are believable.  We have come to the clear conclusion that the plaintiff’s assertions are believable.  For the above reasons, we would allow the appeal.

Security for costs

26.  Mr Ng, in anticipation of the possibility that we might allow the appeal, has informed us that the defendant wanted leave to withdraw its counterclaim.  It is obvious that the defendant wanted to withdraw the counterclaim in order to avoid argument over whether security for costs should be ordered against the plaintiff.  As Fung J has pointed out in his judgment:

“40.   In the exercise of the discretion on security of costs, the Court may take into account the presence of a counterclaim in whether the same issues are going to trial and the plaintiff getting the same relief under the counterclaim even in the event that the claim is stayed upon non payment of the security ordered, and the Court may also consider who is the true attacker in the litigation (see my judgment in Wison (Shanghai) Chemical Engineering Co Ltd v Simmons & Simmons HCMP 629 & 664/2007 dated 18 January 2008 citing BJ Crabtree (Insulations) Ltd v GPT Communication Systems Ltd (1990) 59 BLR 43 and Brand Farrar Buxbaum Llp v Samuel-Rozenbaum Diamond Ltd & Anor [2003] 1 HKLRD 600).

41.    Mr. Ng has indicated that if security is ordered and the claim is stayed upon failure to make payment, the defendant shall not proceed with the rest of the counterclaim.  Hence, the defendant is not as much as an attacker as the plaintiff.  I agree.”

27.  Mr Ng also asked that in the event that we allowed the appeal, we should order a speedy trial.  That was not opposed by the plaintiff.  We are not sympathetic to an application for a speedy trial by the party who has spent a year on unfruitful interlocutory applications.  But, with reluctance, we have decided to order a speedy trial. 

28.  The plaintiff is resident out of the jurisdiction and normally security for costs would be ordered. 

29.  The defendant submitted that the amount ordered by the learned judge of $600,000 is more than reasonable, since when he ordered $600,000, he had in mind that the only dispute to the parties would be over 3,000 shares.  That may be so, but it is clear to us that the trial is likely to take as much time over 3,000 shares as over all the shares.  Since we have allowed the appeal, the costs order below would have to be adjusted.  Obviously, the plaintiff must have the costs of the application for summary judgment below, and as well as in the appeal.  That is a matter that we should take into consideration when we come to consider how much security should be ordered.

30.  We are, however, troubled by the fact that the claim by the plaintiff which was brought as long ago as 30 October 2007 has been bogged down by the defendant who has chosen to apply for summary judgment on his counterclaim.  Now that the defendant has failed to obtain summary judgment on the counterclaim, and in order to obtain security for costs, the defendant wishes to abandon his counterclaim. 

31.  We are troubled by the defendant’s tactics.  They have applied not just for judgment on the counterclaim, but also for an injunction under O. 29 which the defendant in his affirmation of 30 January 2008 (para. 65) claimed to be necessary because the plaintiff’s:

“… untrue representations have also obstructed the further progress of the Project, which has practically come to as halt.  There is also a risk that the land will be classified as idle land （“閒置土地”） upon which penalty can be levied by the Guangzhou Government.  If the penalty is not paid, the land can be forfeited.”

32.  Yet it appears now, though without any explanation from the defendant, he is willing to forego the chance of such an injunction which would not have depended on his obtaining summary judgment.

33.  The plaintiff has told us that she will have difficulty raising the security.  She has not produced evidence to satisfy us as to that.  She has asked for 3 months to provide the security if we order security in the range of $300,000 – $600,000.

34.  However, the willingness of the defendant to abandon his counterclaim, especially the interlocutory injunction, suggests to us that the defendant must believe the plaintiff is likely to be unable to provide the security or that she would only be able to so with great difficulty.  We are reluctant to encourage tactical maneuvoures.  This is a highly unusual case and in all the circumstances, including the fact that we believe the plaintiffs has a good case on the beneficial interest of the shares and that any order for security will delay the speedy trial, we will not order any security for costs. 

35.  So the appeal is allowed.  Leave is granted to the defendant to withdraw his counterclaim on condition that the defendant will not commence a new claim or counterclaim in respect of the same subject matter.  We acknowledge Mr Ng’s submission that this should not preclude the defendant from seeking an injunction to restrain the plaintiff from claiming any interest in the shares should the plaintiff’s claim eventually be dismissed.  Costs here and below in respect of the applications for summary judgments and security for costs be to the plaintiff in any event.