SHI JIU XING v. HONG KONG A-SUN GROUP CO LTD AND OTHERS

HCMP 44/2020 and HCMP 178/2020

(Heard Together)

[2023] HKCFI 1852

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 44 OF 2020

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IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 178 OF 2020

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J U D G M E N T

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A.  THE APPLICATIONS

1.  There are two Originating Summonses (“the Applications”) before this court both taken out by Shi Jiu Xing (“Shi”), the Applicant. The 1^st Respondent in both Applications, Hong Kong A-Sun Group Co. Ltd., is the company the shares of which are in dispute (“the Company”). The 2^nd to 6^th Respondents in HCMP 44/2020 are shareholders alongside Shi on the register of the Company at the time of the Applications.

2.  The Company in both Applications and the 4^th and 5^th Respondents in HCMP 44 of 2020 are represented at the hearing. Other respondents are absent. Where the contentions of these respondents are referred to, they will, for convenience, be referred to generally as the “Respondents’ contentions”. The counsel or solicitors instructed by these respondents will, for convenience be referred to as the “Respondents’ counsel”, mutatis mutandis.

3.  In HCMP 44/2020 (“the Rectification Application”), Shi seeks a rectification of the register of members of the Company by cancelling –

(1)  the allotment of 980,000 share of the Company to D2 to D5 on 7 November 2015; and

(2)  the allotment of 1,337,541 shares of the Company to R6 on 12 August 2019.

4.  In HCMP 178/2020 (“the AGM Application”), Shi seeks the convening of an annual general meeting (“AGM”) of the Company with consequential directions on the laying of accounts for the years ending 31 December 2019.

5.  In response to the Applications, two Summonses (“the Stay Summonses”) were taken out on 6 May 2020, under which –

(1)  the Company applies to, inter alia, stay the Rectification OS “pending the determination of the appeal in the case number “(2018) 沪0115民初84789 号” in the Shanghai First Intermediate People’s Court”[1]; and

(2)  the Company, R4 and R5 (who shall collectively be referred to as “the Respondents”) seek a stay of the AGM OS, likewise pending the determination of the PRC Shares Proceedings.

6.  By Order of Linda Chan J dated 10 June 2020 the substantive hearings of the Rectification OS, the AGM OS and the Stay Summonses were heard together before me.

7.  On 3 June 2021, after the conclusion of the scheduled hearing, Shi through his solicitors brought to the attention of the Court that the appeal in the proceedings (“the PRC Shares Proceedings”) referred to in the Stay Summonses (as amended) had been concluded and determined in his favour, annexing a copy of the judgment of the Shanghai appellate court (“the Shares Appeal Judgment”). The Company and R4 and R5 filed supplemental written submissions dated 2 July 2021 in answer. With leave of the court, responsive submissions were filed on behalf of Shi on 16 July 2021.

8.  By letter dated 25 February 2022, the court was informed by the Respondents’ Solicitors that following the Shares Appeal Judgment the Company had applied to the Shanghai High People’s Court for a retrial, which application was dismissed in a decision dated 27 December 2021 (“the Share Retrial Judgment”). Submissions were received from both sides on the effect of the Share Retrial Judgment on the Applications between February to March 2022.

9.  By further directions made on 11 April 2022 pursuant to Order 28 rule 4 of the RHC, the court directed a further hearing to be scheduled for the two Originating Summonses for Shi and Gu to be tendered for cross-examination on their affirmations filed herein on the confined issue of the circumstances in which Shi came to have acquired the 6,000 shares in the Company. The further hearing took place on 24 to 25 November 2022. Shi and Gu both attended and were cross-examined on their respective affirmations. Written submissions were filed before and after the further hearing.

B.  MATERIAL BACKGROUND AND PARTIES’ POSITIONS

10.  The Company is the parent company of a PRC-registered company, 亚芯电子科技（上海）有限公司 (“Ya Xin”) which carries on business in property development in Shanghai. One of the developments Ya Xin was involved in related to certain pieces of land in Shanghai known as 上海市张江集成电路产业区B2-2A地块 (the “Project”). The contractor 东亚联合控股（集团）有限公司 (“Dong Ya”) was engaged in the project to developing real properties (“the Properties”) for a contract sum of over RMB 300 Million.

11.  Shi was the representative of Dong Ya and was responsible for liaising between Dong Ya and Ya Xin in relation to the Project. The person in de facto control over Ya Xin was a Mr Feng.

B1.  Agreements between the Related Parties

12.  In order to finance the Project and pay Dong Ya’s outstanding project cost that had by then run up to RMB 214 Million, the parties entered into negotiation on the financing of the Project and concluded a series of agreements –

(1)  A memorandum dated 8 September 2011[2] (“Memorandum”) between Ya Xin and Dong Ya, inter alia, –

(a)  recording the outstanding project fees as standing at RMB 214 Million, out of which RMB 146.85 Million will be paid to Dong Ya by a third party on behalf of Ya Xin as provided for in Cl.6; and

(b)  Ya Xin agreed to transfer Blocks B and J of the Properties to Shi or his nominee in return for payment from Shi or his nominee to Dong Ya of RMB 146.85 Million: Cl.6.

(2)  A supplemental memorandum dated 31 December 2011 (“1^st Supplemental Memorandum”) between Ya Xin and Dong Ya providing, inter alia, –

(a)  that apart from RMB 26 Million to be paid within a few days of the 1^st Supplemental Memorandum, the outstanding balance out of the confirmed balance of RMB 214 Million to be settled by Ya Xin was RMB187,730,000, to be paid in accordance with Cl.3: Cl.2.

(b)  that for a consideration of RMB 187,739,000 the properties to be assigned will include Blocks E and G in addition to Blocks B and J of the Properties: Cl.3.

(3)  Another supplemental memorandum also dated 31 December 2011 (“2^nd Supplemental Memorandum”) between Ya Xin and Shi, inter alia, –

(a)  Confirming the total floor area (18,773 sq. m.) of the 4 Blocks referred to the 1^st Supplemental Memorandum executed with Dong Ya: Cl.1;

(b)  Agreeing to the purchase price to be paid by Shi, which is roughly equivalent to the floor area multiplied by RMB 10,000 per square meter, for the Earmarked Properties to be transferred to Shi or a party to be nominated by Shi: Cl.2;

(c)  Agreeing that upon the verified completion of the construction of the subject project, Shi would make pre-payment of the purchase price (RMB 187,730,000) of the Earmarked Properties to Ya Xin by making the payment to Dong Ya on behalf of Ya Xin: Cl.5.

(d)  That the payment to be made by Shi directly to Dong Ya in discharge of contracting sums due from Ya Xin to Dong Ya is the consideration for the transfer of the Earmarked Properties: Cl.5 “乙方确认，乙方代甲方向东亚联合控股（集团）有限公司支付上述工程款RMB187,730,000 是甲方愿意转让预约房屋的唯一前提条件”; and

(e)  That in order to ensure the ownership right of Shi in the Earmarked Properties, the proportion of the shareholding in Ya Xin equivalent to the proportion of the Earmarked Properties within the Properties, which is 30%, will be transferred by the Company’s current shareholders to Shi or his nominee. Upon the completion of the transfer of property rights in the Earmarked Properties, Shi agreed to transfer the said shares back to the current shareholders of the Company: Cl.7. “在双方签署本补充备忘录后、之预约房屋产权完全办理到乙方或乙方指定第三方名下的期间内，为保证乙方对预约房屋的合法所有权，在本补充备忘录签署后30日内，甲方内部现有各股东将其持有甲方相应的股份（… 基于前述预约房屋占本项目的比例而对应股权比例，即30%的股份），分别转让给乙方或乙方指定的第三方。在预约房屋产权完全办理到一方或一方指定的第三方名下后的30日内，乙方应及时将前述股权转让给甲方现有股东。” (emphasis added)

(f)  That the rights of a shareholder pending transfer back to the Company’s existing shareholders would be limited to any decision relating to the management and receipts of the Earmarked Properties: Cl.7.

(4)  An agreement for the assignment of the Earmarked Properties executed between Ya Xin, Shi and Jiu Wei as his nominee on 20 January 2012 (“Assignment Agreement”) providing, inter alia, that –

(a)  The transfer of the 30% shareholding as agreed under the 2^nd Supplemental Memorandum shall, instead of Ya Xin’s shareholding, be the shareholding of Ya Xin’s parent company (i.e. the Company). The agreed transfer is confirmed to be a transitional arrangement for managing the risks pertaining to the transfer of title of the Earmarked Properties: Cl.3.5.1 (“考虑到预约房屋转让中可能存在的政策风险和法律风险，双方确认, 如果项目建成后, 甲方无法将预约房屋的产权从本项目中分割办理独立的产权证并转让给乙方，将使乙方遭受严重的经济损失。…乙方的该等权利，按备忘录及补充(…)备忘录的相关约定, 由乙方受让甲方现有股东持有甲方相应股份…,即30%的股份等相关安排来实现)and Cl. 3.5.2 (“甲乙双方确认, 此项股权转让安排, …仅为预约房屋产权转让过户给乙方或乙方指定第三方的登记手续办理完毕之前的过度安排。”) (emphasis added).

(b)  If Ya Xin were unable to transfer the right to the Earmarked Properties within 3 years of the date of the agreement, Jiu Wei as the third party designated by Shi is entitled to transfer the shares received to any third party: Cl. 3.5.3.

(c)  Jiu Wei would rely on the transfer of the debt owed by Ya Xin to Dong Ya in the sum of RMB 187,730,000 as pre-payment for the Earmarked Properties: Cl.4.3 “乙方[Jiu Wei] 将以 [Dong Ya’s]转让给其的甲方[Ya Xin]应付[Dong Ya’s] RMB187,730,000 债权,作为支付给甲方的预约房屋转让的预付价款。”

(5)  A Supplemental Agreement No.4 (“4^th Supplemental Agreement”) executed on 27 April 2013 between Ya Xin and Dong Ya, inter alia,

(a)  Confirming the parties’ agreement that the total contract sum be RMB 330 Million (Cl. 1.2) and that the balance of project fees to be paid to Dong Ya was RMB 211 Million (Cl. 2.2);

(b)  Stating that out of the RMB 211 Million, RMB 187,730,000　was to be repaid by Ya Xin to Dong Ya with the purchase price of the Earmarked Properties: Cl.2.4;

(c)  Providing that Ya Xin agreed to pay Dong Ya the remaining balance of RMB 23,385,992 by the end of October 2013: Cl.2.3; and

(d)  Stating that the remaining balance of RMB 187,730,000 would be paid by the third party designated by Shi before the end of December 2013.

(6)  An agreement on the settlement process of payments for outstanding contract sums dated 28 February 2014 (“Settlement Process Agreement”) between Ya Xin, Shi/Jiu Wei and Dong Ya, confirming their agreement to a payment process to implement the 4^th Supplemental Agreement. Shi/Jiu Wei affirmed their obligation to pay to Ya Xin for the purchase of the Earmarked Properties.

B2.  Status of Performance of the Agreements

13.  Between 2011 and 2012, Ya Xin transferred a total of RMB 23,385,992 to Jiu Wei for Jiu Wei to settle outstanding contracting sums to Dong Ya on behalf of Ya Xin. Jiu Wei has apparently acknowledged receipt and promised to transfer the same to Dong Ya to discharge Ya Xin’s outstanding contracting sums by 31 October 2013, but did not do so whether by that date or at all.[3]

14.  Shi has since 12 March 2012 been holding 6,000 shares (“the Shares”) as a registered shareholder of the Company, representing 30% of the Company’s shareholding. The result of the allotments which Shi seeks under the Applications to cancel had resulted in the dilution of his shareholding in the Company to 0.6% in 2015, which was further reduced to 0.26% in 2019[4].

15.  On 3 November 2014, Ya Xin issued a notice to Shi and Jiu Wei to terminate the Assignment Agreement (“Notice of Termination”) on the ground of alleged breach, requesting Shi to return the shares to the Company.

16.  The Respondents contend that Shi acquired title to the Shares by way of security pending the assignment of certain properties in Shanghai, pursuant to the 2^nd Supplemental Memorandum and the Assignment Agreement. They contend that after it became impossible to transfer the properties to Shi’s nominee, Jiu Wei Co. Ltd. (“Jiu Wei”), the transitional security arrangement lapsed, and Shi became a bare trustee holding the Shares on constructive trust for the Company.

17.  It is not disputed that Shi was allotted the Shares on 12 March 2012 upon new shares issued by the Company, and was appointed a director of Ya Xin and the Company on 25 January 2013. Shi alleges that he was allotted the Shares pursuant to a separate agreement he made with Feng Zhengxin, the controlling shareholder of Ya Xin, and has participated in the day-to-day management of the operation of Ya Xin and the Company. The evidence relied on consists of three corporate documents bearing Shi’s signature, including a board resolution, an opinion approving the qualifications of Gu Wenxiong as the Legal Representative of the Company, and the Amended Articles of Association of Ya Xin.[5] The only other two documents relied on by Shi are two opinions bearing his signature[6], both relating to the one topic that was agreed Jiu Wei as his nominee could participate in the decision of, pursuant to Cl. 3.5(4) of the Assignment Agreement: “甲方保证乙方有权决定与预约房屋有关的各项交易、安排或其他有关事项”.

18.  On 30 July 2013, Shi was removed as a director by the Board of the Company pursuant to a shareholders’ resolution passed on 30 July 2013.[7] Shi contends the removal was a wrongful attempt to marginalise him on account of his objection to Ya Xin proposing to use the Earmarked Property as security for a bank loan the use of which exceeded the normal scope of business of Ya Xin, and in any event contrary to Cl. 3.5(4) referred to above.[8]

19.  The 2015 Allotment was reflected in the 1 December 2015 Return of Allotment. It had the direct effect of diluting the Shares held by Shi from a 30% shareholding in the Company to 0.6%. While the notice purportedly issued to shareholders of the AGM scheduled for 7 November was dated 14 October 2015, Shi claims not to have received it until 15 November 2015. The evidence suggests the meeting took place without prior notice on the part of Shi.

20.  Another Return of Allotment of the Company filed on 12 August 2019 shows that more shares were issued, further diluting Shi’s shareholding in the Company from 0.6% to 0.26%. Shi was not notified.

21.  Shi’s requests made in January 2020 through his solicitors for various corporate records including AGM notices, minutes, and reporting documents were ignored.

22.  Shi filed two affirmations each in the two Applications that mirror each other. His evidence is that he acquired the Shares for the price HK$6,000 through a separate arrangement by reason of his dealings with Feng Zhengxin (“Feng”), the de facto controller of the Company. He postulates that his acquisition of the Shares in his own name was a transaction independent of the 2^nd Supplemental Memorandum and the Assignment Agreement, which was between Jiu Wei and Ya Xin.

23.  Shi is therefore asserting that he is the legal and beneficial owner of the Shares, and the shares were transferred to him without reference to the series of agreements between Ya Xin and Dong Ya, and Ya Xin and himself with Jiu Wei named as his nominee. In making the Applications, he is also taking the position that his rights as a shareholder and director of the Company (prior to his removal as director) was subject to no limitation whether under the Assignment Agreement or otherwise. It is Shi’s evidence in the Applications that the transitional arrangement under the Assignment Agreement was never implemented.

C.  THE PRC PROCEEDINGS

24.  The dispute between the parties had led to three sets of proceedings commenced in the courts of Mainland China. There can be no dispute that the proceedings involving Jiu Wei were pursued or defended under the direction of Shi as the controlling shareholder of Jiu Wei, as is apparent from the various judgments referred to below.

C1.  THE PRC ASSIGNMENT PROCEEDINGS

25.  In December 2014 an action was commenced by Jiu Wei against Ya Xin to enforce their obligation to assign the Earmarked Properties (“the PRC Assignment Proceedings”). After Jiu Wei’s initial success[9] in the first instance Court, the appellate Court overturned the judgement of the first instance Court[10] and found that due to a law that took effect from 1 April 2014, it was no longer possible for Ya Xin to obtain individual licences for the Earmarked Properties in order to complete the transfer of their title as promised under the Assignment Agreement. Jiu Wei’s claim was dismissed.

C2.  THE PRC COMPENSATION PROCEEDINGS

26.  After Jiu Wei lost the appeal in the PRC Assignment Proceedings, it commenced another set of proceedings to seek compensation for losses arising from Ya Xin’s inability to assign the Earmarked Properties to Jiu Wei (“the PRC Compensation Proceedings”)[11]. Jiu Wei claimed compensation in the sum of the purchase price of the properties, RMB 187,730,000, plus compensation for loss estimated at RMB 189,131,400, and interest at a punitive rate of double the bank lending rate for the relevant period, commencing January 2012.

27.  After hearing the appeal, the First Intermediate People’s Court ordered Ya Xin to return RMB 187,730,000 to Jiu Wei with interest at the normal bank lending rate commencing January 2014 only. Other claims of Jiu Wei were dismissed.[12] The same Court pronounced that the Assignment Agreement was terminated by reason of its being incapable of performance due to a government policy change in 2014[13].

28.  After several rounds of appeals and retrial, the Supreme People’s Court confirmed that Ya Xin would have to repay the price of the Earmarked Properties (RMB 187,730,000), but at the normal interest rate, and only for the period starting from 1 January 2014[14]. That judgment sum had been paid by Ya Xin to Jiu Wei.

29.  While Jiu Wei maintained that the Assignment Agreement was not incapable of performance and continued to be in force and that Ya Xin was liable for its breach, the contrary conclusion in the judgment of the First Intermediate People’s Court[15] on the status of the Assignment Agreement was repeatedly affirmed by the Supreme People’s Court.[16]

C3.  THE PRC SHARES PROCEEDINGS

30.  The Company issued the PRC Shares Proceedings in the Shanghai Pudong People’s Court[17] against Jiu Wei and Shi, claiming the return of the Shares to the Company according to the transfer price of HK$6,000, and for damages for breach of contract to be paid by Jiu Wei. The first instance decision of the Shanghai Pudong People’s Court dated 17 July 2020 (the “1^st Instance Shares Judgment”)[18] found in favour of Ya Xin, and held that Shi was to transfer the Shares back to the Company in return for its transfer price of HK$6,000, but dismissing Ya Xin’s claim for damages.[19]

31.  The 1^st Instance Shares Judgment includes the following findings of the Court -

(1)  According to the evidence, it is indisputable that Shi had, according to the agreements between the parties, acquired the shares of the Company (the Hong Kong Parent of Ya Xin) based on the terms of the Assignment Agreement (“史久兴是根据各方的合意安排, 基于《转让预约协议》中设定的股权转让条款持有亚新公司母公司香港亚新集团股权, 对此双方不应存在争议”);[20]

(2)  As agreed in the 2^nd Supplemental Memorandum and the Assignment Agreement, the transfer of the shares of Ya Xin or Ya Xin’s parent company to Shi or his nominee was a transitional arrangement to guarantee the ultimate transfer of the legal ownership and the title documents of the Earmarked Properties to Jiu Wei or his nominee (“《补充备忘录2》与《转让预约协议》先后约定,由史久兴或指定第三方受让亚信公司或其母公司股权,该股权转让是为了保证久玮公司对预约房屋的合法所有权以及预约房屋产权转让过户给久玮公司或其指定第三方的登记手续办理完毕之前的过渡性安排”);[21]

(3)  Therefore, Shi, as a nominal holder of the shares, was not entitled to the full rights of a shareholder, but was limited in many ways by reason of the purpose of the holding of the shares by way of a guarantee (“史久兴 作为名义上的股权证持有人，其权利范围也不是完整意义上的股东权利，受担保目的等诸多限制” );[22]

(4)  Objectively speaking, the Assignment Agreement can no longer be performed on the basis of the current Shanghai municipal land management regulatory rules, and has been confirmed by a court judgment to be terminated. Shi therefore can no longer continue to hold the shares of the Company on the basis of the terminated agreement (“《转让协议》基于上海市现行土地管理规定在客观上不能继续履行经法院确认解除,史久兴基于该协议再行持有香港亚新集团股权已无合同依据,…”).

32.  On the basis of the findings of the Pudong Court, it was the Respondents’ submissions that Shi was estopped from claiming that he is the legal and beneficial owner of the Shares. As both the Rectification Application and the AGM Application are founded on Shi’s beneficial ownership of the shares, the Respondents submit they must fail, unless the first instance decision is overturned on appeal. The Respondents also contended that the balance of convenience tilted against granting the reliefs until the appeal was decided, and that the Court should decline to exercise its discretionary jurisdiction in favour of Shi until resolution of the PRC Shares Proceedings. [23]

33.  Shi appealed against the 1^st Instance Shares Judgment to the Shanghai Intermediate People’s Court[24]. On appeal, Shi contended that he acquired the Shares through a separate agreement with Feng rather than as Jiu Wei’s nominee pursuant to the Assignment Agreement. The appellate court delivered its Judgment on 27 May 2021 (“Shares Appeal Judgment”), reversing the 1^st Instance Shares Judgment and holding that the relief claimed by the Company for the return of the 6,000 shares in exchange for the payment of HK$6,000 lacked legal basis. The appeal decision was based on the following findings[25] –

(1)  the fact that the 6,000 shares no longer constituted 30% of the shareholding of the Company due to changes in the shareholding structure since the issue of the Shares to Shi, and disputes between Shi and the other shareholders are still pending in the Hong Kong Courts; and

(2)  the Court’s view that there was no basis for a request for a direct return to the Company of Shi’s shareholding which was acquired through the Company issuing new shares to him at the time and not through transfer between shareholders.

34.  Shi relied on the outcome of the Shares Appeal Judgment, and claims that it has now been “resolved” that he is a shareholder of the Company, and therefore had locus standi in the PRC Shares Proceedings[26], and the foundation of the Respondents’ opposition to the Applications have therefore been removed.

35.  In his supplemental submissions filed herein on behalf of the Respondents in July 2021, the Respondents invites the Court to decline to exercise its discretion in favour of ordering rectification and the convening of an AGM, by reason of the strong evidence as affirmed by the PRC appeal Court in the Shares Appeal Judgment that Shi is not the beneficial owner of the Shares but holds the Shares on trust for the Company.

36.  At page 29 of the Shares Appeal Judgment, the Shanghai Intermediate People’s Court stated its findings as follows –

“鉴于2011年9月8日《备忘录》和2011年12月31日《补充备忘录1》。。。且2011年12月31日【补充备忘录】亦由亚芯公司与史久兴签署，并约定由史久兴或其指定的第三方受让亚芯公司或其母公司香港亚新公司30%股权。因此，《转让预约协议》签署后，虽然系由史久兴通过增发新股的方式实际获得了香港亚新公司30%股权， 但结合上述协议，以及史久兴取得股权的时间、持股比例，史久兴原系久玮公司的股东、法定代表人等事实，一审法院据此认定史久兴系根据各方的合意安排，基于《转让预约协议》中设定的股权转让条款持有亚芯公司母公司香港亚新公司的股权，当属正确。史久兴上诉认为其持有的香港亚新公司的股权独立于《转让预约协议》，依据不足，本院不予采纳。现《转让预约协议》已经法院生效判决书确认解除。。。” (Emphasis added)

37.  It is worth noting that in the Shares Appeal Judgment quoted in the preceding paragraph, the court has expressly rejected Shi’s contention that his shareholding in the Company was independent from the arrangement envisaged in the Assignment Agreement. This was after considering arguments and evidence from Shi and considering the jurisdictional challenges raised by him. [27]

38.  Ya Xin took the Shares Proceedings one step further to the Shanghai High People’s Court, requesting for a retrial. The Company was likewise named a Third Party. The judgment of the Shanghai High People’s Court was delivered on 27 December 2021 (“Shares Retrial Judgment”) [28]. The focus of the arguments before the Shanghai High People’s Court was whether there was legal basis for ordering Shi “to transfer the shares back to the Company at the original transfer price” (“按受让价格转回香港亚新公司”). At the retrial, the court was likewise of the view that since Shi did not acquire the shares through transfer between shareholders, but through the company issuing new shares, Ya Xin’s claim for Shi to transfer the 6,000 shares back to the Company lacks legal basis in respect of the identity of the rightful recipient and the proper manner of the proposed transfer (“但是史久兴实际并非通过股东之间股权转让的形式获得该股权，而系通过增发新股的方式取得，现亚芯公司要求史久兴直接将增发新股所得的股份转回香港亚新公司，该诉求中股权转回的对象与股权转回的方式缺乏法律依据”). [29] On the above basis, the decision of the Shares Appeal Judgment of the lower court was upheld and Ya Xin’s request for retrial was refused.

39.  In the same judgment, the Shanghai High People’s Court also affirmed some of the factual findings of the Shanghai Intermediate People’s Court in the Shares Appeal Judgment[30], namely, Shi is holding the Shares pursuant to the Assignment Agreement between Ya Xin and Jiu Wei, as a transitional agreement to guarantee the ultimate transfer of the legal title of the Earmarked Properties (“本院经审查认为…..本案中，史久兴持有香港亚新公司股权的原因基于亚芯公司与久玮公司的《转让预约协议》，系属股权转让与担保性质”), (see §31(1) and (2) above).

40.  The Shanghai High People’s Court specifically pointed out that the appeal court in the Shares Appeal Judgment had merely dismissed the application of Ya Xin on the basis of the requested relief being inappropriate, which did not imply any recognition of the legality of Shi’s shareholding in the Shares The Court also added that the question relating to the return of the Shares to the Company should be determined according to Hong Kong law. (“但本院注意到, 二审判决针对的是亚新的诉讼请求本身, 并不意味着对史久兴现持有香港亚新公司股权的合法性予以认可, 关于史久兴的股权的返还问题应当依据香港地区关于公司股权的相关规定予以处理。”).

41.  Based on the above, the Respondents stood by their earlier supplemental submissions on the presence of strong evidence pointing to Shi as a constructive trustee of the Shares.

42.  In response to the Respondents’ submissions, Shi relies on the Respondents’ earlier position before delivery of the Shares Appeal Judgment that Shi is estopped from claiming he is the beneficial owner of the Shares unless and until the First Instance Shares Judgment is overturned. Shi submitted that the basis for opposing the Applications have fallen away since the appeal has been decided in his favour, and there is no other effective ground of opposition mounted.

43.  Shi submits that the Court should not go behind or try to extrapolate the findings in the Shares Retrial Judgment. Rather, the Court should decide the Applications according to Hong Kong company law alone. Adopting that approach, the Court should conclude that he, as a “member” of the Company, is entitled to the reliefs claimed under both Applications.

44.  In their Closing Submissions filed at the conclusion of the oral evidence, the Respondents continue to maintain that Shi is estopped by findings consistently made by the PRC courts from contending that he received the Shares other than as security pursuant to the Assignment Agreement. [31]

45.  With the delivery of the Shares Appeal Judgment, and subsequently the Shares Retrial Judgment, the Stay Applications fell away. It remains for me to consider the Applications substantively.

D.  DISCUSSION

D1.  RECTIFCATION APPLICATION

46.  The Rectification Application is based on the jurisdiction under s.633(1) of the Companies Ordinance (“CO”), and on the basis that the allottees in the 2015 and 2019 allotments were entered onto the register of members without sufficient cause. It is said that Shi as a “member” was not given proper prior notice, despite he was entitled to such notice pursuant to s.574(a) of the CO.

47.  Until the Shares Appeal Judgment was issued, the submissions advanced on behalf of Shi had been to invite the Court to pay no attention to the 1^st Instance Judgment as it is “irrelevant”, in that regardless of the outcome of the PRC Shares Proceedings, the Respondents cannot as a matter of fact or law, argue against the fact that -

(1)  Shi’s name was entered into the Company’s register of members as a “member” within the meaning of ss.2(a) and 112 of the CO, and

(2)  no proper notice was given to Shi in respect of the shareholders meetings that decided on the 2015 Allotment and the 2019 Allotment, and that

(3)  these constitute “sufficient cause” for the court to make a rectification order.[32]

48.  A number of authorities have been cited by Counsel for Shi, Mr Lawrence Li SC, to suggest that courts do not look behind the shareholding of a company into the beneficial ownership of the shares, including Re Universal Horizon Investment Ltd [2000] 3 HKC 627 at 630C-F, and Dong Chengtian & Anor v Chog Hwa & Ors [2018] HKCFI 1184 at §10(3).

49.  Mr Li submits, on the authority of Yan Kwok Kin Julian v Yan Kwok Kee Gay & Ors [1997] HKLRD 1199 at §13 that the members register is the only evidence by which the right of members to vote at a general meeting could be ascertained, and there was no reason for the Company not to give notice to Shi of the shareholders’ meetings which led to the 2015 and 2019 allotments. Mr Li also relies on Societe Generale de Paris v Walker (1885) 11 App Cas 20 at 30 for the proposition that a notice of trust, even if given, would be inoperative.

50.  However, the court must not lose sight of the fact that the remedy is discretionary, not automatic.[33] To exercise its discretion properly the court is required to take into account all the relevant circumstances. I find support for this approach in the judgment of Marlene Ng J in King Wong Development Ltd v Yat Fat (Unrep., HCMP 658/2013, 9 January 2014), which refers to Re Hoicrest Ltd [2000] 1 WLR 414 at §419D-421A.

51.  Order 28 rule 4(4) of RHC enables the court to give directions for the attendance of deponents of affidavits/affirmations for cross-examination. This affords the opportunity to the deponents of affidavits to be tested on factual disputes arising from the affirmation evidence. That said, it is well-established that if the dispute on beneficial ownership of the applicant is one of complication and difficulty which ought properly to be tried by writ, it should not be decided by a summary procedure.[34] The onus remains squarely on the applicant to show it will be just and convenient to make the order.[35]

52.  In Closing Submissions, Shi relies on Nilon Ltd v Royal Westminster Investments SA [2015] UKPC 2; [2015] B.C.C. 521 where the Privy Council declined to follow Hoicrest after examining a number of authorities on the rectification of register.

53.  However, it is apparent that Nilon was decided on the basis that the applicant for rectification merely had a prospective right, which remained to be vindicated by the conversion of an equitable right to a legal right if specific performance on a contract were to be ordered.[36] I am not persuaded that the decision should be applied to “dictate” the exclusion from the considerations of facts and circumstances that may affect the exercise of discretion on whether to order rectification.

54.  The Respondents point out that Nilon has in fact been considered by the Hong Kong court in an application to strike out a rectification application and not followed. In Pilot International Investment Ltd v Ingredients Plus Holdings (Unrep., HCMP 2454/2015, 10 March 2016 at §§14-26), Le Pichon J declined to follow Nilon, pointing out that it was interlocutory in nature,[37] and did not consider relevant previous decisions on the position of a shareholder whose pre-emptive right had been infringed. It follows that in Hong Kong, the court continues not to treat the shareholders’ register as conclusive, and would be prepared to take into account other factors that impact on the status of ownership of the shares of the applicant.[38]

55.  The fact that Shi was the transferee of 6,000 shares of the Company is not in dispute. But the question does not stop at a superficial or technical examination on whether Shi is therefore “a member of the Company”. As the relief of rectification is not automatic, it does not follow that once it is shown a registered shareholder did not receive notices of allotment of new shares, he is ex debito justitiae entitled to have the allotments cancelled by rectification of the register.

56.  None of the authorities relied on by the Respondents decides that where entry onto the register without “sufficient cause” is made out, an order for rectification applied for by a member of the company must follow, or that consideration of any circumstances that may put the beneficial ownership of the applicant/member’s shares in doubt ought to be excluded.

57.  Unlike in cases where the applicant for rectification is not even registered as a member of the company, the court is not called upon in these applications to make any orders in respect of transfer of the Shares, or decide on the terms for any transfer of the Shares currently registered in the name of Shi.

58.  On the other hand, in considering the Rectification Applications the court cannot shy away from exercising its discretion by taking into account the surrounding facts and evidence, including the positions taken by the parties in the PRC proceedings, and findings made by the PRC courts on identical issues. It remains for this court to consider whether in all the circumstances, there is compelling evidence, pointing one way or the other, that Shi holds the Shares on trust for the Company as a transitional security under the 2^nd Supplemental Memorandum Assignment Agreement, the secured obligation under which has been discharged, or as Shi asserts, there was a separate and independent agreement between him and Feng forming the basis of the acquisition of the Shares, if Shi is entitled to put forward these arguments at all.

59.  The court must also consider whether any issue estoppel arises in respect of the circumstances under which he came to have acquired the Shares.

D1(a).  Issue Estoppel

60.  The elements required to establish issue estoppel is well-established: [39]

(1)  There is an earlier judicial decision which was pronounced;

(2)  The tribunal had jurisdiction over the parties and the subject matter in the earlier decision;

(3)  The tribunal determined a question raised in the later litigation;

(4)  The earlier decision was final and on the merits; and

(5)  The parties are the same or their privies.

61.  PRC courts including the courts giving the decisions referred to above are judicial tribunals with jurisdiction over the parties or their privies. They were well able to decide on the issue of the capacity and circumstances in which Shi came to be allotted the Shares: First Laser Ltd v Fujian Enterprises (Holdings) Co Ltd [2011] 2 HKLRD 45 at §§40-42. Indeed, Shi’s attempts to challenge the jurisdiction of the PRC courts failed at both first instance and on appeal.

62.  I accept the submissions of the Respondents that in considering issues decided by the PRC courts pursuant to arguments advanced by Jiu Wei, Jiu Wei should be treated as Shi’s privy[40]. This is in view of him being the legal representative of Jiu Wei, and his ownership of 90% of its shares, even though Shi was not himself a party to the PRC Assignment Proceedings and the PRC Compensation Proceedings. Shi admitted to being closely involved in the PRC Shares Proceedings throughout and had given instructions on behalf of Jiu Wei[41]. He was found by the courts of different levels to be representative of the interest of Jiu Wei and himself whenever Jiu Wei was a party in those proceedings. [42]

63.  As it is apparent from the analysis set out in §§31-40 above, despite the reversal of the outcome of the 1^st Instance Shares Judgment, none of the factual findings made by the 1^st Instance Court set out in §31(1) and (2) above on the circumstances in which Shi came to have acquired the Shares was overturned. Rather, both the Shares Appeal Judgment and Shares Retrial Judgment affirm those findings.

64.  I do not accept that Shi can simply rely on the submissions of the Respondents made before the Shares Appeal Judgment was issued that the overturn of the 1^st Instance Shares Judgment would determine whether Shi is estopped from claiming that he is the beneficial owner of the Shares. When the basis of the Shares Appeal Judgment and the Shares Retrial Judgment are carefully considered, it becomes clear that the findings relevant to the circumstances of his acquisition of the Shares and the nature of the arrangement under which he holds the Shares have been affirmed, as it is affirmed in judgments in the PRC Assignment Proceedings (§25 above) and the PRC Compensation Proceedings (see §29 above). These judgments are final and on the merits.

65.  Conversely, the question of whether Shi’s acquisition of the Shares were pursuant to a separate and distinct agreement between him and Feng has also been decided against Shi in the Shanghai Intermediate People’s Court in the Shares Appeal Judgment.

66.  I hold that the Respondents succeed in their argument that Shi is estopped from contending that -

(1)  he holds the Shares other than pursuant to the arrangement under the Assignment Agreement;

(2)  the Shares were intended to be held by Shi as a transitional arrangement to guarantee the ultimate transfer of legal ownership and the title documents of the Earmarked Properties to Jiu Wei;

(3)  that the obligation relevant to the Shares as a temporary security has lapsed due to impossibility of performance.

67.  It follows that there is no basis left for Shi to retain legal or beneficial title to the Shares.

D1(b).  Evidence on Circumstances in which Shares were allotted

68.  Having come to the conclusion above on issue estoppel, and Shi having been excluded from putting forward any contention contrary to those set out in §66 above, it is strictly unnecessary for me to decide on the veracity of the witnesses’ evidence.

69.  Had it been necessary to do so, I would still refuse the Rectification Applications. Had it been necessary to consider the evidence on the case now advanced by Shi, I would have found that the following facts weigh heavily against the merits of Shi’s case and cast serious doubts in whether it would be just and convenient for the court to grant an order for rectification –

(1)  As found by the court in the Shares Appeal Judgment[43] the timing and number of the shares allotted to Shi is consistent with that stipulated under Clause 7 of the 2^nd Supplemental Memorandum and the Assignment Agreement;[44]

(2)  On Shi’s oral evidence, he also accepted that the consideration for the allotment to him of the Shares was his investment of RMB 210 Million in return for transfer of the Earmarked Properties upon completion – which aligns with the purport of the series of agreements set out in §12(1) to (4) herein.

(3)  Jiu Wei’s position as advanced by Shi as its legal representative in the PRC Assignment Proceedings and the PRC Compensation Proceedings has consistently been that the Shares were allotted to him as part of a transitional security arrangement pursuant to the Assignment Agreement.[45] Shi’s assertion that the position taken by Jiu Wei is unrelated to and does not impact on his own position on the acquisition and ownership of the Shares is plainly unsustainable.

(4)  In the PRC Compensation Proceedings, it has never been suggested on behalf of Jiu Wei that the said transitional arrangement whereby Shi was hold the Shares for security was never implemented, as Shi now asserts in these proceedings. Shi accepts under cross-examination that it was never so suggested in the PRC proceedings.[46]

(5)  The assertion by Shi that the Shares were allotted to him under a separate and independent agreement with Feng is unsupported by any documentary evidence, and never alluded to in any piece of documentary evidence disclosed.

70.  On the other hand, the alleged participation by Shi in the management of the Company is not inconsistent with the arrangement provided for in the 2^nd Supplemental Memorandum and the Assignment Agreement, and as asserted by Shi in the PRC Assignment Proceedings and PRC Compensation Proceedings, pursuant to the Assignment Agreement. Neither the signing of documents that are required to be signed by all directors nor the objection taken by him to the loan to be borrowed in return for mortgage of properties including the Earmarked Properties are all consistent with the transitional security arrangement, and do not take Shi’s argument any further.

71.  It follows that had it been necessary to make findings on the nature of the ownership of the Shares held in Shi’s name, I would have found, on a balance of probabilities, that he holds the Shares as a bare trustee.

72.  Whether on the basis of issue estoppel or on findings on a balance of probabilities that Shi lacks of any beneficial interest of the shares, I would exercise my discretion not to grant the relief prayed for in the Rectification Application.

73.  The court notes the Respondents’ counsel’s submission that the Company intends to take back the Shares from Shi and has already taken steps to direct him to transfer the Shares to a third party nominated by the Company, and to take out proceedings to enforce its rights in the event of non-compliance.

D2.  AGM APPLICATION

74.  In view of the court’s decision in the Rectification Application, and the steps taken by the Company to take back the Shares, the court’s discretion should be exercised against granting any relief under the AGM Application to prevent potential injustice to the other members, especially where convening an AGM is not the only manner in which the Company’s obligations can be complied with under the Companies Ordinance.

E.  CONCLUSION

75.  The Originating Summonses are dismissed.

76.  As accepted by the Respondents, the Stay Summonses have been overtaken by events and should be dismissed. The Respondents submit that they ought to be awarded costs of the two summonses as it was entirely reasonable for a stay to be ordered pending the final determination of the PRC Shares Proceedings.

77.  Costs of the Originating Summonses should follow the event. I make a costs order nisi i) for the costs of the Stay Summonses should be in the cause of the Originating Summonses, and ii) for costs of the respective Respondents in the two Originating Summonses to be paid by Shi to be taxed if not agreed, with certificate for 2 counsel.

78.  Any submissions in opposition to the costs order nisi (if any) may be within 14 days, with length of submissions limited to 2 pages.

79.  It remains for me to thank counsel on either side for their able assistance throughout.