WORLD INTERNATIONAL DEVELOPMENT (BVI) LTD v. CHINA RENJI MEDICAL GROUP LTD AND ANOTHER

HCMP 294/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 294 OF 2011

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BETWEEN

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(Heard Together)

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J U D G M E N T

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1.  On 28 February 2011 the Plaintiff issued an originating summons, which was amended on 23 March 2011, for orders that:

(1)   the register of members of the 1^st Defendant be rectified so that:

(a)   the Plaintiff’s name the name of Kingston Securities Limited be removed, struck out or otherwise recorded as to have ceased to be a member of the 1^st Defendant; and

(b)   the name of HKSCC Nominees Limited be entered in place of that of the Plaintiff’s Kingston Securities Limited; and

(2)   the costs of this application be to the Plaintiff.

2.  The originating summons is stated to be in the matter of sections 68 and 69 of the Companies Ordinance (“Ordinance”) and section 100 of the Ordinance.

3.  The matter first came on before me on 23 March 2011.  I made directions for the service of evidence and for the substantive determination of the application.  I also made an order that Li Juewen have leave to take part in the action as Intervener for the purpose of seeking orders that:

(1)   All further proceedings in this action be stayed pending determination of two other High Court Actions, HCA 1482 of 2010 and HCA 330 of 2011;

(2)   Further or alternatively, the Plaintiff’s claim herein be struck out on the ground that it is frivolous, vexatious and/or otherwise amounts to an abuse of process.

4.  The Plaintiff’s application arises in the following circumstances.  As at 13 July 2007, the Intervener was the registered shareholder of 2,710,000,000 controlling shares in the 1^st Defendant.  The Plaintiff says that the ultimate beneficial owner of these shares was Yang Yifei. The Intervener was holding them as his nominee.  This is disputed by the Intervener, who says he was and remains the beneficial owner of these shares. On 19 November 2009 the shares were transferred to Renji Cancer Researching Found of China SA (“Renji SA”).  On 3 December 2009 Renji SA transferred 10% of the shares to the Plaintiff.  It is these shares that are in issue and I shall refer to them as the “Shares”. 

5.  The Plaintiff says that the Shares were transferred to it for the purpose of setting aside shares to be distributed amongst the senior management of the 1^st Defendant’s major asset, namely, a subsidiary in the Mainland, Anping Medical Treatment Technology (Wuhu) Company Limited (“Anping Medical”).  Guo Bao Ping and Wang Hai were appointed to leading posts in both the 1^st Defendant and Anping Medical and were, they say, amongst the potential beneficiaries of the scheme to which I have just referred.  They also became directors of the Plaintiff.  They say that the board of the Plaintiff was given the discretion to decide how to distribute the Shares.  Ms. Winnie Chan, who appeared for the Plaintiff on the 23 March and at the substantive hearing of the application, submitted that the Plaintiff held the shares on discretionary trust for the benefit of Guo, Wang and other members of the management team.

6.  On 23 December 2009 the Plaintiff transferred the Shares to Kingston Securities Limited (“Kingston”) and the transfer was duly registered by the 1^st Defendant and share certificates issued.  Kingston is a securities broker.  On the Plaintiff’s instructions Kingston sold the Shares though The Stock Exchange of Hong Kong Limited (“Exchange”) on 10 and 13 September 2010 for total net proceeds of $12,518,993.  The Intervener, claiming to be the beneficial owner of the Shares, obtained 2 stop orders to prevent the transfer of the Shares to Hong Kong Securities Clearing Company HKSCC Nominees Limited (“HKSCC nominees”).

7.  Kingston submitted duly stamped forms of transfer and stock forms dated 14 September 2010, together the share certificates for the Shares, to Hong Kong Securities Clearing Company Limited (“HKSCC”) for settlement purposes.  Under the clearing system the immediate purchaser of the Shares was HKSCC nominees.  On 16 September 2010 HKSCC lodged with the 2^nd Defendant forms of transfer and stock forms in order that it could be registered as the new shareholder.

8.  The 2^nd Defendant, at the direction of the 1^st Defendant, did not register HKSCC as the new shareholder, because it became aware of the dispute concerning beneficial ownership of the Shares and, from its point of view perhaps more importantly, discrepancies between what the Plaintiff now says about the beneficial ownership of the Shares and the information disclosed to it by Guo and Wang pursuant to their obligations as directors under Part XV of the Securities and Futures Ordinance, Cap. 571.

9.  The immediate adverse consequence of this was to cause problems for Kingston who were required by HKSCC’s rules to deposit shares into the clearing system in order to meet its delivery obligations.  Under Rule 902(iii) of HKSCC’s general rules the trades had to be concluded 2 business days after the trading day.  Immediate settlement was, as I understand it, concluded by an off-set of shares in the 1^st Defendant purchased by Kingston for other clients and deposited by Kingston in its account with CCASS.  This is obviously unsatisfactory.  Kingston’s position is that to the extent that it suffers any loss as a consequence of this it will off-set it against the proceeds of sale of the Shares, which proceeds it still holds.

10.  When the hearing commenced I asked why it had been necessary to bring this application at all. The Shares have been sold and the dispute between the Plaintiff and the Intervener concerns who is entitled to the proceeds of sale.  I could see no reason why the Plaintiff and the Intervener could not agree that the Shares should be registered in HKSCC nominees’ name, tell the 1^st Defendant they had done so and agree how the proceeds of sale were to be held until the dispute as to ownership had been resolved.  Mr. Lawrence Li, who appeared on behalf of the 1^st and 2^nd Defendants, told me that his clients would register the transfer if both the Plaintiff and the Intervener agreed.  I stood the matter down.  The Parties agreed that the Shares should be registered and that Kingston would retain the proceeds of sale until resolution of the dispute over ownership.

11.  Perhaps predictably what could not be agreed were costs.  The Plaintiff says it should have its costs of the originating summons paid by the Defendants and the costs of the Intervener’s application for leave to intervene and the application for an interim injunction in HCA 1482 of 2010, which had been listed for directions at the same time as the originating summons, paid by the Intervener.  The Defendants and the Intervener ask for their costs of the originating summons proceedings.  The Intervener told me it would withdraw its application for an injunction.

12.  In my view the Plaintiff should pay the Defendants costs of the originating summons and the Intervener’s costs of its application to intervene and its costs of the originating summons.  I make no order as to the costs of the injunction application.  My reasons are as follows.

13.  I was shown without prejudice correspondence initiated by the Intervener in the middle of August, which clearly demonstrates that the Intervener and the Defendants offered to resolve the dispute concerning registration of the shares on substantially the same terms that were agreed during the hearing before me.  The reason agreement was not concluded was because the Plaintiff responded unreasonably.  First it asked for the Intervener to procure that the board of the 1^st Defendant would resolve to register the Shares, which was unnecessary and not practical. Secondly, it refused to undertake that it would not remove the proceeds of the sale of the Shares from its account with Kingston pending determination of the dispute as to ownership.  My impression having read the without prejudice correspondence and heard Ms. Winnie Chan was that the originating summons has been issued because of a lack of common sense on the part of the Plaintiff and its advisers when considering what steps should be taken to avoid a claim for damages by Kingston.  It appears that prior to issuing the originating summons no steps had been taken by the Plaintiff to sort the matter out along the lines in which it was resolved before.

14.  Although I have not heard full argument it seems to me that the application would in any event have been unsuccessful.  The application was only to be pursued before me pursuant to section 100 of the Ordinance.  In order to be successful the Plaintiff had to demonstrate both that it was a “person aggrieved” by the failure to register the transfer, and thus had locus to make the application, and that the court should exercise its discretion to make an order.

15.  The Plaintiff was not the legal owner at the time of the sale of the shares.  Legal title was vested in Kingston.  There is a dispute about beneficial ownership of the Shares, which obviously cannot be resolved in a summary application under section 100: see in this regard Re Hoicrest Ltd [2000] 1 WLR 414 (CA) AT 419H-420H.  I accept that there may be cases, albeit rare, in which a person other than one who can readily demonstrate that he had, immediately prior to the transfer or consequential on it, a legal or beneficial interest in shares can show that he is a “person aggrieved”.  A bare trustee who does not have legal title vested in him in circumstances in which the more obvious applicants are unable or unwilling to make the necessary application, would be a possible example.  It is arguable, I put it no higher than this, that there might be cases in which a person who contends, as does the Plaintiff, that he has a disputed interest, can persuade a court that he is a person aggrieved in the sense that on the assumption that he had an interest he is adversely affected by the failure to register a transfer.  However, particularly in the latter type of case, into which the present one falls, it would need strong facts before the court would exercise its discretion to make an order.  Given the fact that the present case was so readily resolvable, it does not fall into that category.

16.  Ms. Chan submitted that the Plaintiff should have its costs of the Intervener’s application because in the Intervener’s submission filed for the present hearing the Intervener adopted the position that it would not separately pursue its application and that its position was that it accepted as correct the 1^st Defendant refusal to register the transfer and its explanation for doing so.  This submission seems to me to betray the lack of common sense that has bedevilled the resolution of what should have been a readily resolvable matter.  What the Intervener was obviously saying is that the Plaintiff’s application should be dismissed for the reasons advanced by the 1^st Defendant, which it adopts.  This does not detract from the fact that it was legitimate for the Intervener, as a party asserting that it was the beneficial owner of the shares, to join the present proceedings and argue that they should be stayed pending determination of the High Court Actions or dismissed.  Those applications simply became unnecessary if the 1^st Defendant’s position was correct.

17.  So far as the application for an injunction was concerned this came about as a result of the Plaintiff’s refusal to give an undertaking not remove the proceeds of sale from the Kingston account.  Ms. Chan submitted that there was no evidence that it intended to do so.  The Intervener argues that it is the beneficial owner of the proceeds of sale.  It is understandable that it would want confirmation that the status quo would be maintained pending determination of the question of ownership.  I would expect this to have been agreed.  I incline to the view that since the claim was proprietary in nature a refusal to give the undertaking probably did justify the application.  However, I did not understand the Intervener to ask for its costs and I make no order as to costs.