ZHANG YAN YIN v. KORCHINA CULTURE INVESTMENT LTD AND OTHERS

HCA 30/2018

[2018] HKCFI 2764

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 30 OF 2018

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REASONS FOR DECISION

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Background

1.  There is a myriad of claims and legal proceedings involving ownership of the shares once held by the Huang family (“Family”) in a company incorporated in Hong Kong, All Faith Corporation Limited (“AF”).  AF in turn holds all the shares in a Mainland company referred to as Alishan, Alishan holding the beneficial interests in landed properties in Shenzhen (“Land”).

2.  AF is named as the 2^nd Defendant in the present proceedings instituted by the Plaintiff (“Zhang”).  Zhang claims to be a buyer of all the shares in AF (“AF Shares”) and the rights to the Land under and subject to the terms of a preliminary Deposit Agreement dated 25 April 2013 (“Deposit Agreement”), and a sale and purchase agreement dated 24 May 2013 (“SPA”), both of which were made between Zhang on the one part, and AF acting through Huang Wen Tsai (“Father”) on the other part.  The AF Shares were at the material time registered in the names of Huang Pin Ching (“Daughter 1”) and Huang Yi Chen (“Daughter 2”), and Zhang claims that both the Deposit Agreement and the SPA were made by Father on behalf of AF and himself, and that upon Father’s execution of the Deposit Agreement and the SPA, the Daughters held the AF Shares on constructive trust for Zhang, as they were at all material times only nominees of the Father.

3.  After Zhang’s payment of the 10% deposit of the purchase price for the AF Shares pursuant to the Deposit Agreement, no further payment was made.  Zhang claims that Father and Zhang had agreed that the payment of the 2^nd deposit and the transfer of 40% of the AF Shares were to be postponed, but that in breach of the SPA, Father and AF failed to proceed with the sale and purchase.  On its part, AF purported to terminate the SPA on 22 July 2013, on the ground of Zhang’s failure to make payment of the 2^nd deposit within the time agreed. 

4.  As a result of the dispute between Zhang and the Family as to the party in breach of the SPA, Zhang commenced proceedings in August 2014 under HCA 1533/2014 (“2014 Action”), by which AF, Father, the Daughters and Alishan were all joined as defendants.  By then, Father had passed away and it was his personal representatives (“Estate”) who were named as 1^st defendant.  Zhang claimed that the Estate and AF were in breach of the SPA, and that the Daughters had procured the breach of such agreement by the Estate, AF and Alishan.  By way of relief, Zhang claimed in the 2014 Action:

(1)   as against the Estate, the Daughters and AF: specific performance of the SPA and an order for procuring the transfer of the shares in Alishan to Zhang;

(2)   as against the Estate and the Daughters: a declaration that the Estate is the beneficial owner of AF and that the Daughters hold AF for the benefit of the Estate pending completion of the transaction under the SPA;

(3)   as against the Estate, AF and Alishan: damages for breach of contract; and

(4)   as against the Daughters: damages for procurement/inducement of breach of contract.

5.  There were 2 major developments in the 2014 Action.  The first was an ex parte application made in November 2014 for the grant of an injunction, and for leave to amend the Writ to join what is now the 1^st Defendant in these current proceedings (“Korchina”), and two other parties: namely Gu Zhuoheng (“Gu”), and a company controlled by Gu, by the name of China HK and Macao News Media Holdings Limited (“CHKM”). The injunction applied for was to restrain the defendants from dealing with the shares in AF and in Alishan, and any sale proceeds if the Land was to be sold (“2014 Injunction”).  The ex parteapplication was refused by the Court.  It appears that Zhang never made any inter-partes application for the 2014 Injunction sought.

6.  The second major development in the 2014 Action was that in May 2016, Zhang applied for and obtained judgment in default against the Daughters, for damages to be assessed (“Default Judgment”). At the same time, Zhang abandoned his claim for declaratory relief against the Daughters (that they hold AF for the benefit of the Estate), as reflected in the Interlocutory Default Judgment sealed on the 16 May 2016.

7.  During this interim, other proceedings were instituted and progressed, all relating to transfers of the shareholding in AF and Alishan, and disputes over the ownership and control of the AF Shares, and Alishan.  The more pertinent ones are mentioned below.

8.  Korchina’s claims to AF arise out of a transfer of the AF Shares from the Daughters to Korchina in December 2013.  Korchina was then under the control of Wang Xuehua (“Wang”), who was Gu’s assistant.  This transfer was challenged when, in April 2015, HCMP 894/2015 (“2015 MP Proceedings”) was commenced by Chen Mei Lan (“Mother”) and Huang Wei Cheng (“Son”) of the Family against AF, the Registrar of Companies, Wang and Liu Hui (“Liu”) (a director of AF).  Korchina was also joined as defendant.  The relief claimed was for rectification of the share register of AF, and declarations as to (1) Mother being the sole shareholder of AF; (2) the Son being the sole director of AF; and (3) the documents presented by Wang and Liu to the Registrar (as to the status of the directors) being forged documents. Judgment was handed down by Hon Au-Yeung J in the 2015 MP Proceedings in December 2016 (“MP Judgment”), the Court finding that the shares in AF were solely held by Korchina.  An injunction was granted, restraining the Mother and the Son from representing that they were shareholders/directors of AF.

9.  Zhang seeks to rely on the fact that, at the material time of the transfer of the AF Shares from the Daughters to Korchina in December 2013, Wang was the sole shareholder and director of Korchina, and Gu’s assistant.  According to Zhang, the findings and observations made in the MP Judgment support his case that the Daughters were acting in collusion with Wang and Gu in 2013, and that the 2013 transfer of the AF Shares was made in order to defeat Zhang’s right and entitlement to the AF Shares under and by virtue of the SPA.

10.  There were also proceedings on the Mainland relating to transfer of the shares in Alishan, the more relevant development being the Mainland court setting aside a transfer of the Alishan shareholding made by AF to CHKM (Gu’s company) in 2014, with AF being re-instated as the shareholder of Alishan.

11.  In reliance on the MP Judgment (that Korchina was the owner of AF), Wang then transferred the shares in Korchina to Gu in January 2017.  In November 2017, however, Wang purportedly entered into another agreement with the Family (“Settlement Agreement”), whereby the AF Shares were returned to the Family, Wang allegedly acknowledging that he and Gu had defrauded the Family of the AF Shares.  This led to Korchina and Gu instituting HCA 2509/2017 (“HCA 2509”) against the Son, AF, Wang, the Mother and a company owned/controlled by the Family (the 3^rd defendant named in these proceedings (“SC”)). 

12.  Korchina and Gu seek by way of relief in HCA 2509 a declaration that the Settlement Agreement is void, that the interests in Korchina had been validly transferred from Wang to Gu in January 2017, and an injunction to restrain all the defendants from disposing of their interests and ownership in the assets of AF.  On 10 November 2017, an interim injunction was granted by the Court in HCA 2509, whereby all the defendants were effectively restrained from dealing with the AF Shares and the Land, until further order of the Court.  A cross-undertaking was given by Gu and Korchina, that they would not deal with or dispose of the assets of AF, including the shares in Alishan, pending resolution of HCA 2509.

13.  Against such background, Zhang then issued these proceedings on 4 January 2018 against Korchina, AF, SC, the Son and the Estate, and applied by inter partes summons also issued on 4 January 2018 (“Summons”) for an injunction to restrain Korchina, AF and SC from disposing of or dealing with the shares in AF, the interest attached to such shares, the shares in Alishan, and the Land. 

14.  At the hearing of the Summons on 12 January 2018, the application was adjourned and on 13 April 2018, directions were given for the filing of evidence.  The hearing of the Summons was finally fixed, and argued on 22 November 2018, when the application was dismissed.  The following are my reasons for the dismissal, which are brief.

Delay and abuse

15.  There has been inordinate delay in Zhang’s application for the interlocutory injunction sought.

16.  Zhang had knowledge of the transfers of and dealings in the AF Shares, and of the involvement of Korchina and CHKM, long before the application for the injunction sought to restrain these dealings.  As early as the time when the ex parte application was made to the Court in the 2014 Action, Zhang had sought to restrain Father and the Daughters from disposing of the shares in AF and Alishan, and had further sought to join Korchina, CHKM and Gu in the application for the 2014 Injunction.  The ex parte application was refused, but Zhang never resumed the application for injunctive relief even on inter partes basis.

17.  I reject Zhang’s evidence, that he only found out about the role of Korchina, Wang and Gu, and their having acted in collusion with the Daughters, when the Court handed down the MP Judgment in the 2015 MP Proceedings.  He admits that by late 2015, he was aware of the commencement of the 2015 MP Proceedings, but claims that apart from the contents of the Originating Summons issued therein (“Originating Summons”), he did not have access to the affirmations and evidence filed and was not aware of the “underlying dispute” and the claims being made by the Mother and the Son to the AF Shares, until the MP Judgment was handed down in December 2016.

18.  Even on the face of the Originating Summons, it can be seen that the Mother and the Son, as plaintiffs, were claiming that the Mother was the sole shareholder of AF and the Son was the sole director of AF, and that they were claiming that Wang had submitted forged documents to the Companies Registry in Hong Kong.  AF was a party to the MP Proceedings, and it should have been clear to Zhang (who was legally represented at all material times) that the Mother and the Son were making claims as shareholders and directors of AF.  Since Zhang claims in the 2014 Action that he had rights to and beneficial interests in the AF Shares under the Deposit Agreement and the SPA, it was open to him to apply to be joined in the 2015 MP Proceedings to challenge the claims made on behalf of the Mother, and to assert his alleged interests in and claims to the AF Shares.  This he chose not to do, under legal advice.

19.  Even if, as Zhang claims, it was only upon reviewing the MP Judgment (around December 2016) that he realized the claims made by the Mother to the AF Shares, and that the Daughters had acted in collusion with Wang and Gu in 2013,  the transfer of the AF Shares to Korchina having been made in order to defeat Zhang’s interests, he failed to take or pursue any action against Korchina, the Daughters and the Family to pursue his claim under the SPA and to restrain them from dealing in the AF Shares, until the Summons issued in January 2018.

20.  Pertinently, Zhang has never offered any satisfactory explanation as to why, even if he was entitled to any injunctive relief as sought, his application made by the Summons issued in these proceedings could not have been pursued in the 2014 Action, and why these proceedings had to be commenced instead in January 2018.  The 2014 Action and the current proceedings seek, essentially, the same relief against the same parties (AF and the Estate), on the basis of the same facts (namely, the Deposit Agreement and the SPA and Zhang’s interests, rights and claims thereunder to the AF Shares).  There is no reason why Zhang’s claims made against Korchina, the Son and SC (the Family’s company) cannot be made in the 2014 Action (whether for procuring breach of contract, dishonest assistance, knowing receipt of the AF Shares as now asserted, or otherwise) by taking steps to join them in the 2014 Action.  The alleged assistance in and procuring of breach relates to the same Deposit Agreement and SPA which are the subject matter of the 2014 Action.  After the commencement of the 2014 Action and at the time of the ex parte application for the 2014 Injunction, Zhang had indeed applied to join Korchina as a defendant, on the basis of Korchina having acquired the AF Shares. 

21.  As Korchina and SC now seek to highlight, it is obvious that the present proceedings were instituted by Zhang, unnecessarily, for the purpose of enabling a fresh application to be made for interim injunctive relief, in an attempt to avoid the issue of delay from the commencement of and the inactivity in the 2014 Action.

22.  On any view, there was delay on Zhang’s part in seeking the injunctive relief now sought, on the basis of either the Daughters’s transfer of the AF Shares to Korchina in December 2013, or AF’s transfer of the shares in Alishan to CHKM in September 2014, or the Son’s procurement of AF’s transfer of the shares in Alishan to SC in October 2017, or the alleged discovery by Zhang of the facts disclosed in the MP Judgment in December 2016.  As Rogers VP explained in King Fung Vacuum & Ors v Toto Toys Ltd & ors [2006] 2 HKLRD 785, 792- 793:

“Since the American Cyanamid decision the importance of irreparable damage and an application for an interlocutory injunction is paramount. If there is no irreparable damage demonstrated the need for an interlocutory injunction has not been shown. This is important because of the approach the courts take to interlocutory injunctions. They are not the trial of the action and the court is concerned with whether irreparable damage will occur before a trial can take place. It stands to reason that if a party is prepared to allow matters to proceed and takes no action with respect to matters which have been extant for lengthy periods, it lies ill in their mouth to say that there is likely to be irreparable damage and that is the case here.”

23.  In Dorshare Limited v Shun Pong Limited HCA 1823/2012, unreported, 4 January 2013, Anthony Chan J also highlighted the fact that unexplained delay can be fatal to an application for an interlocutory injunction because it can reflect the lack of irreparable damage, cause prejudice to the person who will be affected by the injunction, render it unreasonable or unjust to grant an interlocutory injunction, and in a bad case of unexplained delay, can constitute an abuse of process.

24.  I can add little to what has amply been stated by Rogers VP and Chan J on the effect of delay.  In this case, there has been substantial delay, and no justification can be found from any of the facts alluded to by Zhang and those advising him, as to why the interim injunction sought should now be granted or is required, despite the long lapse of time. 

25.  The alleged difficulty of effecting service of court documents on the Daughters outside Hong Kong, and of identifying the personal representatives of the Estate are no excuses in this case.  The fact remains that AF, Korchina and SC are companies incorporated in Hong Kong.  The Mother and the Son had solicitors named in the Originating Summons as acting on their behalf in the MP Proceedings.  It was only on the prompting of the Master, that Zhang and those advising him wrote to the solicitors in the MP Proceedings to seek information for service of proceedings and documents on the Estate.  Whether it was “meaningful” to continue the 2014 Action and whether there were reasonable prospects of recovery are merely commercial matters, not legal hurdles as to whether proceedings can be pursued.

26.  On all the evidence in this case, I see no necessity and no justification for the institution of the current proceedings, and why the claims being made against Korchina, AF, the Family, SC and the Estate cannot be made in the 2014 Action which remains extant.  These proceedings and the application for injunctive relief are clearly an abuse of process.

No serious question to be tried

27.  It is also pertinent that Zhang’s claims against the Daughters in the 2014 Action have been expressly abandoned, when Zhang elected to enter the Default Judgment against the Daughters, for damages to be assessed.  As Korchina sought to highlight, Zhang has in effect abandoned his claim that the Daughters, who were the registered owners of the AF Shares, were holding such shares for the Estate, pending the transaction under the SPA made between Father and Zhang, and that he was entitled to specific performance of the SPA against the Daughters (as registered owners of the AF Shares).  Zhang’s residual remedies can only be for damages as against both the Estate and the Daughters, and not specific performance of the SPA or any relief on the basis of a claim to the beneficial interest in the AF Shares. 

28.  On behalf of Korchina, it was further argued that the MP Judgment decided and affirmed the validity of the transfer of the AF Shares to Korchina in December 2013.  Despite having acquired knowledge of the claims which were being made by the Mother and the Son to the beneficial ownership of AF, Zhang failed to take part in the 2015 MP Proceedings to assert his alleged beneficial interest, and the Court would not order specific performance of the SPA in favor of Zhang now, when Gu had purchased the shares in Korchina on the basis of and in reliance on the MP Judgment, which declared and confirmed Korchina as the owner of the AF Shares. 

29.  On the evidence available at this stage, I agree that any remedy to which Zhang may be entitled at trial would be for recovery of the deposit he had paid under the SPA, and for damages in respect of any established breach of the SPA, as opposed to any proprietary claim to the AF Shares.  The questions of whether there was breach of the SPA by Father, or by Zhang, and whether Zhang is entitled to the AF Shares when he had not even made payment of the 30% of the purchase price in accordance with the terms of the SPA, are of course disputed and are matters for trial.

Injunctions sought are unnecessary

30.  On 10 November 2017, the Court granted injunctions against the Son, Wang and SC (a company controlled by the Family) in HCA 2509 instituted by Gu and Korchina, whereby they were restrained from disposing of their interests and ownership in the assets of AF including its shareholding in Alishan.  Korchina and Gu have undertaken to give notice to inform Zhang’s solicitors in writing within 48 hours of any change in respect of these injunctions.  There is no risk of further dissipation of or dealings in the shares in AF or Alishan. 

Conclusion

31.  For all the above reasons, I am not satisfied that Zhang has established any irreparable damage to justify the grant of an interim injunction.  There is inordinate and unjustifiable delay in the application for injunction by the Summons issued in this action, as set out in the preceding paragraphs of this Decision.  There is no satisfactory explanation as to why this action has to be instituted, and why the claims made in this action cannot be pursued in the 2014 Action, which remains ongoing as against AF and Alishan.  Nor is the injunction sought by Zhang in respect of dealings in the shares in AF and Alishan necessary, when court injunctions and cross-undertakings are in place in HCA 2509, whereby the Family and Wang have been prohibited from dealing with the AF Shares and the Land. 

32.  The Summons is accordingly dismissed, with costs to be paid by Zhang to the Defendants, with certificate for Counsel.