HUA NING INDUSTRIES LTD v. BEST LEADER ENGINEERING LTD

HCA 1801/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1801 OF 2008

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BETWEEN

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JUDGMENT

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A. Introduction

1.  This is the hearing of the application by the Defendant (“Best Leader”) to strike out the claim brought by the Plaintiff (“Hua Ning”) for want of authority.    The claim is brought by Hua Ning against Best Leader for the sum of HK$28 million odd as rental arrears for Best Leader’s renting of 8 vessels (collectively “the Vessels”) from Hua Ning.

2.  Best Leader’s present basis of the application can be summarized as follows:

(1)   Mr Sze Kung Yee (“Mr Sze”) was the founder and shareholder of Hua Ning when it was set up in 1990.  

(2)   Mr Sze is also the majority shareholder and a director of Best Leader.

(3)   By January 2008, Mr Sze had caused the transfer of 88% of the issued shareholding of Hua Ning to one Mr Chan Ka Ming (“Mr Chan”) as a form of security for the repayment of a HK$12 million loan made by Mr Chan to Hua Ning.

(4)   It is Best Leader’s case that:

(a)   When the shareholding was transferred to Mr Chan, there were two oral agreements (collectively “the Alleged Non-Participation Agreements”) entered into between Mr Chan and Mr Sze that Mr Chan would not have any power, capacity and/or authority to participate in or interfere with the business and management of Hua Ning.

(b)   In breach of the Alleged Non-Participation Agreements, (i) Mr Chan transferred some of the shares to his wife, Ms Lam, and (b) he together with Ms Lam in a shareholders’ meeting wrongfully removed Mr Sze and one Mr Sze Kung Yuk (“Yuk”) as directors of Hua Ning, and appointed Ms Lam as a director.

(c)   In further breach of the Alleged Non-Participation Agreements, Mr Chan and Ms Lam then as directors of Hua Ning further caused Hua Ning to bring a claim against Best Leader.

(5)   In light of the Alleged Non-Participation Agreements, Mr Chan and Ms Lam do not have any authority to manage Hua Ning, and thus their purported control of its board of directors and instruction to cause Hua Ning to bring the present claim against Best Leader are made without proper authority. 

(6)   The claim should therefore be struck out for want of authority.

3.  Best Leader’s counsel Mr To fairly accepts that as a matter of law, absent an otherwise agreement, a mortgagee of shares in a company can exercise all the voting rights freely[1].  Thus, the fundamental and only basis of Best Leader’s striking out application is on proving the existence of the Alleged Non-Participation Agreements.

4.  Hua Ning through Mr Chan that there were the Alleged Non-Participation Agreements. 

5.  In light of the above, the central and fundamental issue in this hearing is on whether Mr Chan and Mr Sze had entered into the Alleged Non-Participation Agreements when the shares of Hua Ning were transferred to Mr Chan.  This is a question of fact.

6.  However, there is also a separate issue as to whether Best Leader is now prevented from raising this question under the doctrine of res judicata by reason of its earlier application for an interim injunction in another action between Mr Chan and Mr Sze.   I will elaborate on this later in this judgment.

7.  Before I could properly deal with these two issues, I would first need to set out below what I regard as the relevant uncontroversial background to the present dispute.   This is largely taken from Mr To’s closing submissions, which has not been challenged by Mr Tsoi (counsel for Hua Ning).

B.      Background

8.  Mr Sze and Mr Chan have known each other since the 1970s in the Mainland.

9.  In 1990, Mr Sze founded Hua Ning.  He and his wife were the first subscribers of Hua Ning.

10.  In or about 1996, Mr Sze started to borrow money from Mr Chan for business ventures. 

11.  In or around 2000, Mr Sze rented Flat 526, 5/F, Myloft, 9 Hoi Wing Road, Tuen Mun (“the 526 Office”) from Mr Chan as an office for at least Hua Ning.  Mr Sze later also rented Flat 719 of the same building (“the 719 Office”) as his own office.

12.  Mr Chan had occupied a desk at the 526 Office long before he and Mr Sze entered into the Loan Agreement (as referred to below).  

13.  On 16 April 2003, Mr Sze founded Best Leader in preparation for bidding as subcontractor for the reclamation works to be carried out in Central.  These would include seawall and marine fill, dredging and demolition works (“the Central Reclamation Works”).

14.  On 24 May 2003, the principal contractor, Leighton-China State-Van Oord Joint Venture, engaged Best Leader as a sub-contractor for the Central Reclamation Works.

15.  On 12 September 2003, Hua Ning and Best Leader entered into a cooperation agreement (“the Cooperation Agreement”), where they agreed, inter alia, that:-

(1)   The Cooperation Agreement was signed for the purpose of the Central Reclamation Works;

(2)   Best Leader shall be responsible for the execution of the construction work, the management of its financing and the deployment of the Vessels for the carrying the works at the harbour;

(3)   Hua Ning shall be responsible for the investment of the Vessels and shall follow the instruction of Best Leader as to their deployment;

(4)   Hua Ning shall be responsible for providing security to Best Leader’s investors, such as Mr Chan;

(5)   Hua Ning shall assist Best Leader in obtaining financing;

(6)   Best Leader and Hua Ning shall cooperate closely for the purpose of the successful completion of the Central Reclamation Works.

16.  By a loan agreement (“the Loan Agreement”) dated 8 February 2005 between Hua Ning and Mr Chan, Mr Chan agreed to lend HK$12 million (“the Loan”) to Hua Ning.  It provides, amongst others,  that:-

(1)   The Loan shall be for the exclusive use of the Central Reclamation Works;

(2)   The Loan shall last for one year, and shall be repaid on 31 December 2005;

(3)   Hua Ning shall provide the Vessels as security for the repayment of the Loan in favour of Mr Chan.

17.  In 2005, Mr Sze transferred 5,100 shares of Hua Ning to one Wu Shen Shen (“Mr Wu”) as security for an intended loan from Mr Wu.

18.  In the period from September 2005 to October 2006, the Central Reclamation Works had been suspended due to a set of legal proceedings brought for the purpose of harbour protection.  This put Hua Ning and Best Leader in serious financial difficulty.  As a result, Hua Ning was unable to repay the Loan. 

19.  By an extension agreement dated 29 December 2005 made between Mr Sze and Mr Chan (“the 1^st Extension Agreement”), it is agreed, inter alia, that:-

(1)   The Loan shall be for the exclusive use of the Central Reclamation Works;

(2)   The due date of the Loan shall be extended to December 2006;

(3)   Mr Chan shall be provided with the custody of the Vessels’ licence books (“the Vessels Books’ Custodial Rights”) , but Mr Chan shall have to ensure the normal operation and deployment of the Vessels;

(4)   Mr Chan shall have the rights to monitor and supervise the Vessels, including their whereabouts, expenses, rental periods and rentals (“the Vessels’ Supervisory Rights”);

(5)   Mr Chan shall have control over the Vessels’ rentals (“the Vessels’ Rental Control Rights”);

(6)   In addition to the Vessels, Hua Ning also provides its property at Room 2313, Tower 1, Tak Fung Industrial Central (“the Tak Fung Property”) as security for the Loan.

20.  On or about 1 March 2006, Mr Sze and Mr Sze Chung Yuk  (“Yuk”) orally agreed to appoint Mr Chan as a director of Hua Ning. Yuk is Mr Sze’s nephew and was then a director of Hua Ning.

21.  On 9March 2006, 4,000 shares of Hua Ning (representing 40% of its issued shares) were transferred from Mr Sze to Mr Chan as a further security for the Loan.

22.  Later in 2006, Mr Chan became one of the signatories of Hua Ning’s bank account.  Mr Chan’s signature is required as an additional signature for money to be withdrawn from Hua Ning’s bank account, and for cheques drawn from this account to be valid. 

23.  By a set of extension agreements dated 18 September 2007 and 6 October 2007, respectively, between Mr Sze and Mr Chan (“the 2^nd Extension Agreement”), it is further agreed, inter alia, that:-

(1)   The Loan shall be for the exclusive use of the Central Reclamation Works;

(2)   The due date of the Loan shall be extended to May 2008;

(3)   Hua Ning shall provide the Vessels and the Tak Fung Property as security for the Loan;

(4)   Mr Chan shall be provided with the Vessels Books’ Custodial Rights, but Mr Chan would have to ensure the normal operation and deployment of the Vessels;

(5)  Mr Chan shall have the Vessels’ Supervisory Rights and the Vessels’ Rental Control Rights.

24.  Hua Ning was still unable to meet the extended due date for repaying the Loan.  As a result, by another extension agreement dated 28 December 2007 made between Mr Sze and Mr Chan (“the 3^rd Extension Agreement”), it is agreed, inter alia, that:-

(1)   The Loan shall be for the exclusive use of the Central Reclamation Works;

(2)   The due date of the Loan shall be extended to June 2008 but not beyond December 2008 (the completion date of the Central Reclamation Works);

(3)   Mr Sze shall transfer 90% of Hua Ning’s shares to Mr Chan as security for the Loan.  Mr Chan shall keep the shares until Mr Sze fully repays the Loan, and by then, the shares shall become automatically void;

(4)   Hua Ning shall provide the Vessels and the Tak Fung Property as security for the Loan;

(5)   Mr Chan shall be provided with the Vessels Books’ Custodial Rights, but Mr Chan shall have to ensure the normal operation and deployment of the Vessels;

(6)   Mr Chan shall have the Vessels’ Supervisory Rights and the Vessels’ Rental Control Rights.

25.  On 25 January 2008, Mr Sze procured Mr Wu to transfer 5,100 shares of Hua Ning to Mr Chan.  On the same day, Mr. Chan transferred 300 shares of Hua Ning to Mr Sze.  As a result, Mr Chan has held a total of 8,800 shares of Hua Ning (representing 88% of its issued shares) as security, and was satisfied that such percentage of shares provided enough security to him for the purpose of the 3^rd Extension Agreement.

26.  In the early second half of 2008, Mr Chan requested to sell the Vessels to repay the Loan before its last repayment date under the 3^rd Extension Agreement. 

27.  On 16 July 2008, Mr Chan transferred 8,000 shares of Hua Ning to his wife, Ms Lam.

28.  Then, on 26 August 2008, an EGM of Hua Ning was held and attended by Mr Chan and Ms Lam (as shareholders), whereby it was resolved to remove Mr Sze and Yuk as Hua Ning’s directors and to appoint Ms Lam as a director.  

29.  On 29 August 2008, Mr Sze brought an action under HCA 1620/2008 (“the Injunction Action”) against Ms Lam and Mr Chan, claiming, inter alia, for:-

(1)   A declaration that Mr Chan and Ms Lam have no power, capacity and/or authority to participate in or interfere with the business and internal management of Hua Ning;

(2)   A declaration that Mr Chan and Ms Lam have no power, capacity and/or authority to remove Mr Sze and Yuk as directors of Hua Ning;

(3)   A declaration that Mr Chan has no power, capacity, and/or authority to transfer 8,000 shares of Hua Ning to Ms Lam; and

(4)   An injunction to restrain Mr Chan and Ms Lam from doing anything in connection with the internal management of Hua Ning without the consent of Mr Sze and Yuk.

30.  On the same date (i.e., 29 August 2008), Mr Sze obtained an ex parte injunction under the Injunction Action to restrain Mr Chan and Ms Lam from selling any of Hua Ning’s assets. 

31.  In support of the Injunction Action and the ex parte injunction was Mr Sze’s then allegation that in transferring the Hua Ning’s shares to Mr Chan as security for the repayment of the Loan, there was a “common intention” between them that Mr Chan would have no power, capacity and authority to participate in or interfere with the business and internal management of Hua Ning.

32.  In early September 2008, Mr Sze and all of Hua Ning’s staff moved away from the 526 Office and the 719 Office to another premises at Flat 03, 11/F, Foo Yik Commercial Building, No.2 San On Street, Tuen Mun (“the 1103 Office”).  Mr Chan did not move together to the 1103 Office.

33.  A few weeks after, on 22 September 2008, Mr Chan and Ms Lam as directors caused Hua Ning to commence the present action (HCA 1801/2008) against Best Leader claiming for rentals for the Vessels due from Best Leader for the period between 2003 and 2008, in the total sum of HK$28,537,236.

34.  On 7 January 2009, in the name of Hua Ning, Mr Chan auctioned off 7 of the 8 vessels owned by Hua Ning.

35.  On 23January 2009, Mr Chan commenced HCA 215/2009 (“the Loan Action”) to claim for the outstanding balance of the Loan and its interests in the amount of HK$6,315,159.25, after the deduction from the sale proceeds of the 7 vessels of Hua Ning in the sum of HK$10,500,000 and the Tak Fung Property in the amount of HK$610,000.

36.  On 16 July 2009, Mr Sze further applied by Summons under the Injunction Action for an interim injunction to restrain Mr Chan and Ms Lam from doing anything in connection with the internal management of Hua Ning including giving instructions on its behalf to proceed with the present action. 

37.  This interim injunction application was eventually heard substantively before Deputy High Court Judge Mayo on 22 February 2010.   The learned judge dismissed the application as he concluded, inter alia, that there was no serious issue to be tried on the question of whether Mr Chan was restricted in exercising the voting rights attached to the transferred shares in Hua Ning.  The learned judge pointed out that, as there was no plea of any such agreement in the Injunction Action before him, and Mr Sze only relied on (both in his pleading and affirmations) what he described as “the intention of the parties” to support his application, this (even if true) was “insufficient” as a matter of law to restrict Mr Chan as a mortgagee of the shares to exercise freely his rights under the shares[2]. 

38.  After the dismissal of the interim injunction application, Mr Sze did not pursue any further in the Injunction Action. Instead, he has caused Best Leader in the present case to apply by Summons dated 13 May 2010 to strike out the claim for want of authority.

39.  I would now proceed to consider this striking out application.

C.      The present application to strike out

C1.    Res judicata

40.  Before dealing with the substantive question of whether there are the Alleged Non-Participation Agreements, Mr Tsoi for Hua Ning raises the first objection to this application on the basis of res judiciata.  Mr Tsoi submits that the issue of lack of authority on the part of Hua Ning’s board to bring the present action has been raised in the interim injunction application under the Injunction Action before Deputy High Court Judge Mayo.  As the learned judge has dismissed that application on the basis of no serious question to be tried, the present application to strike out is (says Mr Tsoi) an attempt on the part of Best Leader to re-open the issue of lack of authority and thus an abuse of process under the extended principle of res judicata: Yat Tung Investment Co Ltd v Dao Heng Bank [1975] AC 581 at 590; Ngai Few Fung v Cheung Kwai Heung [2008] 2 HKC 111 at 115B-C per Cheung JA. 

41.  With respect, I disagree.

42.  For the doctrine of res judicata (including under the Yat Tung principle) to operate, the earlier judicial decision must be one which is final but not interlocutory in nature.  Although the test of what amounts to finality for the purpose of res judicata is not a simple one, orders granting (or not granting) an interlocutory injunction are not generally regarded as ones which decide any question finally and therefore do not generally support a claim of res judicata. See:  Spencer Bower, Turner and Hadley, Res Judicata (4^th ed), paras 5.02 and 5.31 (at page 86); and also Hong Kong White Book 2011, para 18/19/11 at p 410 citing Chu Hung Ching v Chan Kam Ming [2001] HKC 396 at 400-1.

43.  In my view, the determination of Deputy High Court Judge Mayo in dismissing the interim injunction application under the Injunction Action is clearly not final in nature for the present purpose. In particular, his Lordship was not making any factual determination or conclusion on the question of authority based on the affirmation evidence then made available before him.

44.  In the premises, I would not dismiss the striking out application on the basis of res judicata[3].  

C2.    Were there the Alleged Non-Participation Agreements

45.  This is entirely a factual question.  

46.  Best Leader’s latest pleaded case on the Alleged Non-Participation Agreements are that Mr Chan and Mr Sze entered into the two oral agreements respectively in March 2007 and December 2008.  The particulars are as follows:

(1)   Mr Sze and Mr Chan first entered into an oral agreement on or before 9 March 2006 that, in order to transfer 4,000 shares of Hua Ning to Mr Chan from Mr Sze as further security provided to the former, Mr Chan would have no power, capacity and/or authority to participate in or interfere with the business and internal management of Hua Ning[4].

(2)   By another oral agreement entered into between Mr Sze and Mr Chan on or before 28 December 2007, in order to transfer a total of 90% shares of Hua Ning to Mr Chan, Mr Chan would have no power, capacity and/or authority to participate in or interfere with the business and internal management of Hua Ning[5].

47.  The burden is on Best Leader to prove these two oral agreements (i.e., the Alleged Non-Participation Agreements).  In this regard, Best Leader has called four witnesses[6] to give evidence at the present hearing.  They are Mr Sze, Yuk, one Mr Lin Cheong Lung and one Ms Wong Ka Chun. 

48.  Hua Ning has called Mr Chan as a witness to deny the Alleged Non-Participation Agreements.

49.  It has to be noted that the witness statements filed by these witnesses are intended for the trial of the whole action.  They therefore do not relate solely to the question of the Alleged Non-Participation Agreements, but contain evidence related to other aspects of the claim and defences raised.

50.  But for the present purpose, I should and need only consider the evidence relevant to the issue of whether there were the Alleged Non-Participation Agreements.

C2.1  Discussion

C2.1.1         Mr Sze’s evidence

51.  Given that Best Leader’s case is that the Alleged Non-Participation Agreements were entered orally between Mr Sze and Mr Chan personally, it is Mr Sze’s evidence which is most fundamental and crucial to proving its case.

52.  In essence, Mr Sze’s evidence on the Alleged Non-Participation Agreements can be summarised as follows:

(1)   When he caused the transfer of the 4,000 shares to Mr Chan as security for the repayment of the Loan in March 2006, he insisted and Mr Chan orally agreed that he (Mr Chan) would not use the shares to interfere with or participate in the internal management of Hua Ning. The shares were transferred only for the purpose of providing security for the repayment and not otherwise.

(2)   Similarly, when he entered into the 3^rd Extension Agreement with Mr Chan to further extend the time for the repayment of the Loan, in agreeing (as set out in this written agreement) to transfer 90% of Hua Ning’s shares to Mr Chan as security, he insisted and Mr Chan again orally agreed not to use these shares to interfere with or participate in the internal management of Hua Ning.

(3)   Although (a) he orally agreed in early March 2006 to appoint Mr Chan as director of Hua Ning, and (b) Mr Chan also became one of the signatories of Hua Ning’s bank account in late 2006, these were done solely for the purpose of giving Mr Chan a right to overlook Hua Ning’s assets so that they would not be disposed of without Mr Chan’s knowledge but not otherwise. 

(4)   However, in breach of the above oral non-participation agreements, Mr Chan purported to (a) transfer 8,000 shares of Hua Ning to Ms Lam on 16 July 2008, and (b) pass a special resolution together with Ms Lam at an EGM (“the EGM”) of Hua Ning held on 26 August 2008 to remove Mr Sze and Yuk as directors and appoint Ms Lam as a director of Hua Ning. 

(5)   He had never agreed to be removed as a director of Hua Ning. He noted that Hua Ning was relying on a signed board minutes dated 26 July 2008 (“the July Board Minutes”) to suggest that he had consented to the holding of the EGM to consider the passing of the said special resolution.  In relation to the July Board Minutes, he said could not be sure whether he was the one who had signed the minutes.  However, if he had in fact signed it, he was “deceived” into doing so as he did not understand its contents as it was drafted in English.  He insisted that he could not have been so foolish to have agreed to remove himself (and Yuk) as directors of Hua Ning when this was a company founded by him.  

53.  After hearing Mr Sze, I reject his evidence insofar as it purports to support the Alleged Non-Participation Agreements.  My reasons are as follows.

54.  First, Mr Sze’s allegations that there were these two oral agreements entered into with Mr Chan respectively in March 2006 and December 2007 (at the time of the 3^rd Extension Agreement) are unreliable and bear the hallmarks of an afterthought:

(1)   The allegations and evidence of there being these two oral agreements are, for no good reasons (and none is given), not even contained in the three witness statements he has filed in this case[7]. 

(2)   The only reference to any alleged restriction on Mr Chan to participate in the internal management of Hua Ning is contained at paragraph 11 of Mr Sze’s first witness statement dated 30 July 2009, which reads as follows:

“11. After signing of the 1^st Extension Agreement upon Chan’s repeatedly requested I transferred to him 4,000 shares (equal to 40% of the issued shares) of Hua Ning on or about 13 March 2006 as a further security for extension of the Loan. It was common intention between both parties that Chan, in holding the shares as security of the Loan, would have no power, capacity and/or authority to participate or interfere the business and internal management of Hua Ning.” (emphasis added)

(3)   A reference to a “common intention” is very different and a far cry from there being an oral agreement as Mr Sze now seeks to assert.

(4)   Further, there is also absolutely nothing mentioned in all of Mr Sze’s witness statements in relation to the alleged second oral agreement reached at the time of the 3^rd Extension Agreement in relation to the transfer of the 90% shares of Hua Ning.

(5)   Moreover, the plea of the Alleged Non-Participation Agreements (i.e., the two alleged oral agreements) was only introduced at the third amendments of the Defence[8] in July 2010.

(6)   In my view, if there is any truth in Mr Sze’s evidence of the two oral agreements, it is difficult to understand why (a) it is not included in any of his witness statements in this case and in all the affirmations filed in support of the earlier interim injunction application under the Injunction Action, and (b) it was not pleaded in the Defence until almost two years later[9]. It must be noted that Best Leader (and Mr Sze) have all along been legally represented, and these (the oral agreements), if true, are fundamental to Best Leader’s defence of want for authority.   I therefore find this evidence unreliable and unbelievable.

55.  Secondly, the allegation of 2^nd oral agreement is also inherently incredible:

(1)   It is Mr Sze’s evidence that the 2^nd oral agreement that Mr Chan would not to participate in or interfere with the internal management of Hua Ning in receiving the 90% shares of Hua Ning as security was entered into at the time of the 3^rd Extension Agreement. He also said this oral agreement was very important to his agreeing to transfer the said shareholding to Hua Ning. 

(2)   However, this very important term or agreement was not set out expressly in the written 3^rd Extension Agreement (which provided expressly for the transfer of the 90% shares in Hua Ning to Mr Chan as security).  The 3^rd Extension Agreement is an elaborate document containing detailed express terms of the agreement to extend the due date for the repayment of the Loan and the provision of security for this purpose.    The absence of any reference in the 3^rd Extension Agreement to this alleged oral agreement or term of non-participation shows that it is very unlikely that there was such an oral agreement.

(3)   When he was asked by the Court as to why this alleged oral agreement was not included in the written agreement, Mr Sze sought to explain that he had in fact repeatedly asked Mr Chan to include this in the written agreement, but Mr Chan refused to do so. 

(4)   I do not accept this explanation.  This important part of the evidence that Mr Chan somehow refused to incorporate the alleged oral agreement or term in the 3^rd Extension Agreement despite Mr Sze’s repeated requests is not contained in any of Mr Sze’s three witness statements.  This shows to me that the explanation is again an afterthought and Mr Sze only made it up when giving oral evidence.  Further, I see also no logic in why Mr Sze would have just simply accepted Mr Chan’s refusal to include this alleged oral agreement or term in the 3^rd Extension Agreement, when he (Mr Sze) regarded this as a very important term. 

(5)   In the circumstances, I find it incredible that there had in fact been this oral agreement.   

56.  Finally, I have also found Mr Sze as an unreliable witness as:

(1)   There are major notable inconsistencies in the material parts of his evidence:

(a)   At paragraphs 21 and 22 of his witness statement dated 30 July 2009, it is Mr Sze’s evidence that the “wrongful acts” of Mr Chan in transferring 8,000 shares to his wife and to remove Mr Sze and Yuk as directors were made in breach of the 3^rd Extension Agreement (but not any oral agreements not to interfere).  It must be reminded that in the witness statement, there was never any mentioning of the alleged oral agreements in relation to the 3^rd Extension Agreement.  Mr Sze’s said evidence in his witness statement is clearly inconsistent with his present assertions of there being the oral agreements on non-participation.

(b)   It is common ground that Mr Sze agreed to appoint Mr Chan as a director in March 2006.  Notwithstanding this, Mr Sze under cross-examination still tried to deny that Mr Chan had been formally so appointed and that he had consented to it.   His said denial is also contradictory to (i) Hua Ning’s annual return dated 10 August 2007,which was signed by Mr Sze, where Mr Chan was listed as a director, and (b) Hua Ning’s board minutes dated  1 March 2006 where it was recorded that Mr Chan was appointed as a director.  Mr Sze when asked of this again denied he had signed the minutes.  This is again unbelievable as the authenticity of this minutes has not been disputed before this denial.

(c)   Mr Sze denied under cross-examination having signed the board minutes dated 28 June 2008 (“the June Board Minutes”) concerning the approval of the transfer of 8,000 Hua Ning shares from Mr Chan to Ms Lam and Ms Lam’s appointment as a director. This denial however is in direct contradiction to his affirmation[10] filed in support of the interim injunction application under the Injunction Action where he (on oath) admitted that he had signed it.   It is also noteworthy that this board minutes was prepared both in English and Chinese.

(d)   Mr Sze’s allegations of the existence of the Alleged Non-Participation Agreements are also inconsistent with the signed July Minutes whereby it was recorded that Mr Sze and Yuk (as directors) agreed to hold the EGM to consider the special resolution to remove him and Yuk as directors of Hua Ning.  When asked of the July Board Minutes under cross-examination, Mr Sze first denied he had signed it, but later qualified it by saying that he had to look at the original copy first to see if he had in fact signed it.  He further said, if he had signed it, he did not understand its contents as it was drafted in English.  I reject his wavering evidence on whether he had in fact signed this minutes.  None of these is mentioned in any of his witness statements.  He through his solicitors has also never asked for the production of the original copy of the minutes for inspection.  The authenticity of the July Board Minutes has also not been disputed before he claimed he had not signed it at the hearing.  If any of these allegations are true, which are serious one, it is beyond me as to why he has never mentioned them in his witness statements and has not asked for the production of the original copy of the minutes.

(2)   He gave evidence in an evasive manner and often tried to answer simple questions with long and convoluted answers.

57.  Mr To for Best Leader submits that, given that it is common ground that the Hua Ning’s shares were transferred to Mr Chan as security for the repayment of the Loan, and that Hua Ning was founded by Mr Sze, it would make every commercial sense, and is therefore inherently credible, for them to have entered into the Alleged Non-Participation Agreements.  

58.  I do not agree with Mr To’s submission: 

(1)   This is contrary to the observations and the legal principle that, in general a mortgagee of shares is expected to be able to freely exercise all the rights under such shares unless the parties have by agreement limited the same[11].  Whether there is such an agreement would depend on the facts of each case.  

(2)   The mere fact that Mr Sze has founded Hua Ning in my view does not in any way affect my above bases in disbelieving Mr Sze. 

59.  For all the above reasons, I reject Mr Sze’s evidence insofar as it seeks to support the Alleged Non-Participation Agreements and is in conflict with Mr Chan’s evidence.

C2.1.2  The evidence of Ms Wong, Mr Lin and Yuk

60.  Yuk, Mr Lin Cheong Lung and Ms Wong Ka Chun were not in any way directly involved in the entering of the Alleged Non-Participation Agreements, which was allegedly made orally and personally between Mr Chan and Mr Sze.  Their evidence on this question is thus at best only indirectly relevant, if any.

61.  Ms Wong was at the material time engaged as the site agent of Best Leader in relation to the Central Reclamation Works.  She was also involved in assisting Hua Ning in the purchase of the Vessels.  Her evidence relevant to this application is to the effect that (a) insofar as she was concerned, Mr Sze was the only boss, and (b) she understood that there was an agreement between Mr Chan and Mr Sze to use Hua Ning’s assets as security for the repayment of the Loan.

62.  Ms Wong’s above evidence in my view has no material effect on the question of whether there were the Alleged Non-Participation Agreements.  Taking it even to the highest, it is at most neutral to this question.  I therefore do not find her evidence relevant at all and it does not affect in any way my above conclusion in rejecting Mr Sze’s evidence on the Alleged Non-Participation Agreements.

63.  Mr Lin was a shareholder and director of Hua Ning.  He knew both Mr Sze and Mr Chan.   His evidence relevant to this application is in gist that, when Mr Sze had difficulty in repaying the Loan, Mr Chan had repeatedly demanded Mr Sze to provide Hua Ning’s assets and shares as security for the repayment of Loan.  Mr Sze eventually agreed to do so under financial pressure but Mr Chan expressly promised that he would not interfere with Hua Ning’s management.  As a matter of fact, Mr Chan had also not been involved in Hua Ning’s management.  Mr Lin said he had been involved in the board meetings and decisions concerning the transfer of Hua Ning’s shares and assets to Mr Chan for providing security.

64.  Yuk was also a shareholder and director of Hua Ning.  He said he was also involved in the management of the company and responsible for the purchase and management of the Vessels.  His relevant evidence is in effect similar to that of Mr Lin summarised above.

65.  I would reject Mr Lin’s and Yuk’s evidence insofar as it purports to support the existence of the Alleged Non-Participation Agreements as being inherently incredible and unreliable for similar reasons set out in paragraphs 55 to 58 above in rejecting Mr Sze’s evidence.   In this regard, it must be reminded that they have no personal knowledge (and they have also not claimed to have such knowledge) as to whether Mr Chan and Mr Sze had in fact entered into the Alleged Non-Participation Agreements.

66.  Moreover:

(1)   I also find Yuk an unreliable witness:

(a)   He would change his evidence during the course of the hearing to suit his case without any good reason.  For example, he was asked under cross-examination about a minutes dated 1 March 2006 which he had on the face of it signed concerning (i) the approval of the transfer of 100 shares from Mr Lin to him and 4,000 shares from Mr Sze to Mr Chan, and (ii) the resolution of Mr Lin resigning as director and the appointment of Mr Chan as director.  He initially said he had never signed it although he said what was stated in the document was correct. He however did not say he had never seen the document before.  On the next day when the cross-examination resumed, he then changed his evidence and said he had never seen the document before, and he was only told by Mr Sze about the transfer of shares and that Mr Lin resigned as director. In my view, his change of evidence was clearly made to try to explain away the ill-logic as to why he would not have signed the minutes even though he agreed (in the previous day) that everything that was stated in it was correct.  Further, Yuk also denied at the hearing that he had signed the board minutes dated 28 January 2008, the June Board Minutes and the July Board Minutes.  This again is unbelievable given the authenticity of these board minutes have not be disputed before and he has never challenged them in his witness statement.

(b)   He was evasive in giving evidence.

(2)   I similarly find Mr Lin an unreliable witness as he was prepared to give evidence which is clearly incorrect:  under cross-examination, he denied having transferred 100 shares in Hua Ning to Yuk as recorded in the signed board minutes dated 1 March 2006.  This is unbelievable as (i) he has never denied in his witness statement signing this minutes nor has its authenticity been disputed before, (ii) this is even contrary to Mr Sze’s own evidence that he had asked Mr Lin to transfer the shares to Yuk and Yuk’s own evidence that he had been transferred these shares. 

C2.1.3         Mr Chan’s evidence

67.  Mr Chan denies having made any of the alleged oral agreements (i.e., the Alleged Non-Participation Agreements) and any assurances before Yuk and Mr Lin that he would not participate in or interfere with Hua Ning’s management. 

68.  I accept his evidence.  I find him to be a reliable and honest witness.  He gave evidence in a consistent and straightforward manner.  He is materially unshaken under cross-examination, and his evidence (for the same reasons I have rejected Mr Sze’s evidence) is also consistent with the contemporaneous documents. 

C2.1.4  Further documents relied on by Best Leader

69.  At the hearing, Best Leader also sought to rely on the following documents to support the finding of the Alleged Non-Participation Agreements:

(1)   A letter purportedly dated 30 July 2008 and addressed to Mr Chan, written on Hua Ning’s letterhead and signed by Mr Sze for Hua Ning and Best Leader. 

(2)   A letter written by Mr Sze purportedly dated 19 August 2008 and addressed to Mr Chan.

(3)   Another letter written by Mr Sze purportedly dated 21 August 2008 and addressed to Mr Chan.

(4)   A letter purportedly dated 7 September 2008 addressed to Mr Chan and written on Best Leader’s letterhead and signed by Mr Sze for Best Leader and Hua Ning.

(5)   A letter purportedly dated 20 September 2008 and addressed to Mr Chan written on Hua Ning’s letterhead, and signed by Mr Sze for Best Leader and Hua Ning.

(6)   A board minutes purportedly dated 7 February 2005 and signed by Mr Sze, Mr Lin and Yuk.

(7)   A board minutes purportedly dated 10 January 2006 and signed by Mr Sze and Yuk.

(8)   A board minutes purportedly dated 10 July 2008 and signed by Mr Sze and Yuk.

(9)   A board minutes purportedly dated 27 August 2008 and signed by Mr Sze, Yuk and one 林維仁 (who has not been called to give evidence).

(10)  A board minutes purportedly dated 7 September 2008 and signed by Mr Sze, Yuk and Mr Lin.

(11)  A board minutes purportedly dated 18 December 2008 and signed by Mr Sze, Yuk and Mr Lin.

70.  In relation to these documents, Best Leader has failed to satisfy me on the balance of probabilities that they were created at the time of their respective dates and sent to Mr Chan as alleged:

(1)   Copies of the above documents (other than the purported board minutes dated 10 January 2006) were only produced by Mr Sze in his 6^th Affirmation dated 23 July 2010 and filed on 2 August 2010 in support of this application.    It is however noted that Mr Sze first successfully obtained an ex parte interim injunction on 29 August 2008 and Mr Chan filed his first affirmation in opposition for the continuation of that injunction on 5 September 2008.  Mr Chan had made it clear in his opposition that the denied there was any common intention or understanding that he would not interfere with or participate in the management of Hua Ning.  If any of these documents were authentic and created at the time as they were dated, it is very difficult for me to understand why they were only produced as late as in July 2010.  Mr Sze tried to explain in the affirmation that as he has to handle the litigation partly by himself (due to the financial constraint), it has taken him a long time to find these supporting documents.  I do not accept this explanation.   Most of these documents are dated close to or just after the dispute relating to the EMG held on 26 August 2008.  In fact, Mr Sze immediately issued the Injunction Action on 29 August 2008.  There is no reason why he would have any difficulty in remembering or “finding” these documents (or at least most of them) if they were in fact made and sent at the time as dated. 

(2)   In relation to the alleged board minutes dated 10 January 2006, it purports to have recorded that, in transferring 40% of the shareholding of Hua Ning to Mr Chan as security, Mr Chan would not participate in or interfere with company’s business and management[12]. It further recorded that this minutes was copied to Mr Chan and Best Leader[13].   In my view, the authenticity of this document is similarly questionable.  First, there is no good reason (and none has been given) as to why this particular board minutes had to be copied to Mr Chan,  when none of all the other board minutes (including the other ones set out in paragraph 69 above) were so said to be copied to Mr Chan.  This bears the hallmark of tailor-making it to support Best Leader’s case on the “common intention” of non-participation.  Secondly, if there was in fact a written record (as shown on this document) of Mr Chan’s indication that he would not participate in Hua Ning’s management via the 40% shares transferred to him as security and the document had been copied to Mr Chan, it would a fortiori make no sense at all as to why such an important term was not included in 3^rd Extension Agreement when allegedly the 2^nd oral agreement of non-participation was entered into between Mr Chan and Mr Sze for the transfer of 90% shares of Hua Ning to Mr Chan. 

71.  I would therefore place no weight on these documents produced and relied upon by Best Leader.

C2.2  Findings

72.  On this issue, I have no hesitation in preferring Mr Chan’s evidence to that of Mr Sze, Mr Lin, Ms Wong and Yuk when there is any conflict.   

73.  I would also make the following findings:

(1)   There were no Alleged Non-Participation Agreements. 

(2)   Mr Chan was entitled to exercise all the rights attached to the 88% shareholding in Hua Ning as a shareholder without any restriction.

(3)   It was lawful for Mr Chan to transfer 8,000 shares in Hua Ning to Ms Lam.

(4)   The EGM was properly held to remove Mr Sze and Yuk as directors of Hua Ning and to appoint Ms Lam as director.

(5)   The board minutes dated 1 March 2006, 28 January 2008, the June Board Minutes and the July Board Minutes of Hua Ning have all been signed by the attending directors as appeared on the documents respectively.

D.  Conclusion

74.  For the above reasons, I dismiss Best Leader’s application to strike out the present claim for want of authority. 

75.  I further make an order nisi that costs of this application be to Hua Ning to be taxed if not agreed.  Unless any of the parties applies to vary it by Summons, the order nisi shall become absolute 14 days from today.

76.  Given that all the evidence has been filed in the proceedings for its proper trial, the parties shall proceed to agree upon estimated length of trial for the remaining issues and have it set down as soon as practicable.