LEUNG YUN MING ROGER v. LIU SHING KIN also known as DR. FRANCIS K. LIU AND ANOTHER

HCA 2091/2023

[2025] HKCFI 5218

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2091 OF 2023

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D E C I S I O N

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A.  INTRODUCTION

1.  The Plaintiff and D1 have been friends since March 2018. D2 is the wife of D1. The Defendants together hold 100% shareholding of a company, the transfer of which required approval by the Securities and Futures Commission (“SFC”).

2.  The parties signed a Memorandum of Understanding (“MOU”) and, later, a sale and purchase agreement (“SPA”) for the Plaintiff or his “designated” (“the Designated Person”) to buy all of the Defendants’ shareholding in a company. Under the MOU, the Defendants agreed to assist the Plaintiff with the preparation of all applications to the SFC. The Plaintiff made payments pursuant to the MOU and later put forth one Mr Yu as his Designated Person. SFC rejected Mr Yu’s application. D1 immediately issued a Termination Notice and refused to refund the payments.

3.  The Plaintiff seeks refund of the payments, damages, and recession of the SPA.

4.  D1 denies the claim. Whilst admitting that Mr Yu was to be the buyer, D1 claims that Mr Yu never signed an MOU & SPA with him. D1 told SFC the truth but could not influence SFC to accept Mr Yu’s application.

5.  D2 has breached an unless order and is barred from filing a defence.

6.  This is the hearing of the Plaintiff’s Order 14 summons for refund of monies paid. At this hearing, Mr Ma, counsel for the Plaintiff, limits the grounds for this application to breach of the SPA, total failure of consideration and that forfeiture of the deposits was not justified.

B.  UNDISPUTED FACTS

7.  The company in question is called Guangdong (International) Capital Limited (“GIC”), a company having Type 4 and Type 6 Licences issued by the SFC. D1 was its licensed Responsible Officer. Approval of SFC was required to transfer the substantial shareholding of GIC.

8.  On 4 June 2018, the Plaintiff and the Defendants signed an MOU, for the Plaintiff to acquire 100% shares of GIC, including the Type 4 and 6 Licences (“the Proposed Transaction”) at a consideration of HK$5,700,000. The relevant terms were that:

(1)  Clause 2: The purchase price would be paid as follows:

(a)  A “Deposit” of HK$2,000,000 (35%) would be paid by fund transfer (non-refundable) to the Seller in 2018;

(b)  A “First Payment” of HK$1,850,000 (32.5%) by cashier order to the Seller on the signing date of the SPA;

(c)  A “Second Payment” of HK$1,850,000 (32.5%) in 3 business days after receipt of approval of share transfer of GIC from the SFC for the Proposed Transaction (“Settlement Date”).

The Deposit and First Payment shall not be refundable if the Proposed Transaction did not obtain approval of the SFC due to reasons relating to the Buyer, including Buyer shareholder background and Buyer source of funds.

(2)  Clause 5: the Seller agreed to assist the Buyer with the preparation of all applications and submissions to the SFC, including communications with the SFC, in good faith and to the best of its ability. A copy of the application will be delivered to the Seller.

(3)  Clause 6: during the period following the execution of the SPA and the Settlement Date, GIC will ensure that the current Responsible Officers remain in place “for the MOU signed”. The Plaintiff agreed to pay 50% of a monthly salary of 2 Responsible Officers before SFC’s approval. After SFC approved the licence, the Seller [this is probably a typo for Buyer] will pay a monthly salary of HK$80,000 for D1 for one year and HK$60,000 for D2 for one year.

(4)  Clause 8: the Proposed Transaction shall terminate 6 months from the signing of the MOU, subject to extension as may be mutually agreed upon by the parties. After the Termination Date the Deposit and First Payment would not be refundable and the Parties would have no further obligation.

9.  On 20 July 2018, pursuant to the MOU, the parties executed the SPA, which incorporated the terms of the MOU. The Defendants agreed to sell and the Plaintiff agreed to purchase all the ordinary shares of GIC for a consideration of HK$5,700,000. The Closing Date was to be the date of SFC’s approval of the Buyer’s application to become a substantial shareholder of GIC (“SFC’s Approval”). Additionally there were warranties and undertakings given by the parties:

(1)  Clause 3.2: the Seller undertook that the Purchased Shares shall be freely transferable at all times and that the Purchased Shares were not, in any manner, subject to any transfer restrictions.

(2)  Clause 5: the parties confirmed that the SPA shall be read and interpreted in conjunction with the MOU that together set out the entire agreement and understanding between the parties in relation to the transaction contemplated and that it superseded all previous agreements, arrangements and understandings between them or any of them with regard to such transaction.

10.  Pursuant to the MOU and SPA, the Plaintiff had paid the Deposit and the First Payment. One cheque for HK$1,500,000 paid on 20 July 2018, being part of the First Payment, was rejected. The Plaintiff redeposited HK$1,500,000 plus interest to D1 on 6 August 2018.

11.  The Second Payment was never paid.

12.  In addition, on 17 August and 24 September 2018, the Plaintiff paid a total of HK$210,000, pursuant to Clause 6 of the MOU as salary for the Defendants for 3 months.

13.  In around late August 2018, the Plaintiff found a “buyer” – Yu Kim Ho (“Mr Yu”) to take up the entire shareholding of GIC.

14.  On around 13 September 2018, through one Ms Lydia Ng, Mr Yu submitted an application for SFC’s Approval (“Yu’s Application”).

15.  On 28 September 2018, SFC raised 13 requisitions, amongst others, as to whether Mr Yu would be the true and ultimate owner of GIC, whether the acquisition was wholly funded by Mr Yu, and the reasons for D1’s sale of all his interests in GIC.

16.  On 9 October 2018, upon D1’s suggestion, Ms Lydia Ng and D1 submitted their response to SFC separately. In his email to SFC, D1 stated, amongst others, as follows:

(1)  The Plaintiff signed the MOU and SPA with the Defendants and transferred funds to the Defendants with his name. Thus D1 thought that the Plaintiff was the true and ultimate beneficial owner of GIC.

(2)  After the discussion of the purchase of GIC, the Plaintiff placed the Deposit with the Defendants. The Defendants received 2 cheques from the Plaintiff with a total amount of HK$1,850,000. However, HK$1,500,000 was rejected by the bank for insufficient fund. D1 had not received funding from Mr Yu. It was the Plaintiff who had agreed to buy GIC for his own business. Thus he signed MOU, did due diligence, signed SPA and transferred funding for the purchase. However, during the application, D1 was told by the Plaintiff that the latter had instructed Ms Lydia Ng to submit the application for Mr Yu instead of the Plaintiff. The Plaintiff claimed that he was the “GP” of the fund and most of the investments were using his name as an investor, therefore, he was not suitable to be the substantial shareholder of the company. And Mr Yu was his “LP” of the fund, thus he would like to use his name for the application. D1 had mentioned to the Plaintiff that he signed the SPA with the Plaintiff and not Mr Yu. It would be SFC’s decision to approve the application or not.

17.  On 11 October 2018, SFC refused to give approval to Mr Yu on the grounds, amongst others, that SFC was unable to ascertain whether Mr Yu was in fact the true buyer of GIC and whether upon SFC’s Approval, he would be the true and ultimate beneficial owner of GIC.

18.  On 19 October 2018, D1 gave the Plaintiff the Termination Notice, informing the latter that Mr Yu’s application was rejected; and that pursuant to the MOU, the money paid was not refundable.

19.  On 7 November 2018, the Plaintiff’s then solicitors, Philip K.Y. Lee & Co (“PKYL”) issued a demand letter.

20.  On 13 November 2018, D1 replied to PKYL stating, “We just checked with SFC and she will consider [the Plaintiff] to submit his application as substantial shareholder of GIC” and [SFC] would follow their procedure to process his application.”

21.  By a letter dated 14^th November 2018, PKYL rejected D1’s proposal.

22.  On 28 December 2023, the Plaintiff issued the writ in this action. The causes of action include misrepresentation, breach of Clause 5 of the MOU, breach of the SPA, breach of implied terms that the parties shall cooperate to ensure bringing the SPA to completion, breach of collateral warranties, negligence against D1, total failure of consideration, money had and received, unjust enrichment, and that forfeiture of the deposits was not justified. The Plaintiff also relies on s.108 of the Securities and Futures Ordinance, Cap 571 (civil liability for inducing others to invest by misrepresentation).

23.  D1 has filed a home-made defence which exhibited various documents. In gist, he claims that Mr Yu’s experience was not related to financial and securities business. D1 just told SFC the true story but could not influence SFC to accept Mr Yu’s application. That was not D1’s responsibility; he could not lie to the SFC. As SFC’s rejection was due to reasons relating to the Buyer, the Plaintiff was not entitled to refund.

24.  On 27 June 2025, the Plaintiff issued this Summons, supported by an affirmation. None of the Defendants have filed evidence.

C.  THE PLAINTIFF’S CASE

25.  The Plaintiff had no intention to become the owner of GIC. He had bought the shares to help D1 out of his financial difficulties whilst he would continue to look for an alternative buyer to take up GIC.

26.  D1 was and is the alter ego of GIC, of which he had and has full control. He had full authority to act for and on behalf of D2 and/or to give warranty and to make representations for and on behalf of D2.

27.  D1 made certain representations between 28 and 30 May 2018 (“the Representations”), which amounted to “Collateral Warranties”. In gist:

(1)  Well knowing the Plaintiff’s intention set out in paragraph 25 above, and although the Plaintiff would execute the relevant sale and purchase documentation with D1 for the time being, the Designated Person to be found would be the ultimate buyer for GIC’s shareholding in place of the Plaintiff for SFC’s Approval.

(2)  D1 would “guarantee” SFC’s approval of the Plaintiff’s Designate to be the ultimate and true owner of the entire shareholding of GIC (“Guarantee”) and, in any case, D1 would know how to “package it” for the Plaintiff in order to obtain SFC’s Approval.

28.  Allegedly acting on the Representations, the Plaintiff executed the MOU and SPA; and paid the Deposit, the First Payment and HK$210,000 for salaries of the Defendants, totalling HK$3,850,000 (“the 3 Sums”).

29.  The Plaintiff alleged that Mr Yu had agreed to take up the entire shareholding of GIC on the same terms of the MOU and SPA in place of the Plaintiff. Subject to SFC’s Approval of Mr Yu’s Application, Mr Yu would pay back the Deposit and the First Payment and pay the balance to the Plaintiff directly. The Plaintiff had allegedly told D1 about these in person on 31 August 2018. D1 thus knew and agreed that Mr Yu would be the ultimate owner and that his name would be submitted for SFC’s Approval. D1 and/or D2 had never raised any objection or commented that SFC would not approve at all. By his conduct, D1 had affirmed the Representations and Collateral Warranties.

D.  LEGAL PRINCIPLES

30.  In an Order 14 application, it is for the defendant to raise triable issues. However, it must not be forgotten that, even though a defendant has not filed an affirmation, a plaintiff must be able to show a case that can stand on its own and that he can legitimately say that the defendant has no defence to the claim.

E.  ISSUES

31.  In §9 of his written submission, Mr Ma, submits that the Plaintiff is entitled to claim against the Defendants on the following grounds:

(1)  That the Representations were false and D1’s reply to the SFC was contrary to the Representations;

(2)  Breach of the Collateral Warranties “for failing to guarantee or to package it for SFC’s Approval”;

(3)  Breach of the SPA (which incorporated the MOU), as the Termination Notice amounted to wrongful repudiation, which was accepted by the Plaintiff; (“Termination Ground”);

(4)  Total failure of consideration, money had and received and/or unjust enrichment (collectively, “Total Failure of Consideration Ground”);

(5)  Forfeiture of “deposits” could not be justified in law; the Plaintiff was entitled to return of the 3 Sums (“Forfeiture Ground”).

32.  Mr Ma clarifies that his primary case is in misrepresentation and breach of Collateral Warranties. But, for O.14 purposes, he focuses on Grounds (3) to (5).

33.  It is probably correct for Mr Ma not to rely on the Representations and Collateral Warranties because of the “entire agreement clause” in Clause 5 of the SPA.

34.  I will, however, add a “Damages Ground”.

35.  Although the Defendants have not filed an affirmation in opposition, the documents attached to D1’s defence are not disputed and much of the pleaded contents are in line with the Plaintiff’s case. I shall take D1’s defence into account. Further, although the allegations of wrongdoing are directed against D1 personally, D2 should also be liable if D1’s liability is established because she also failed to transfer her shares as Seller to the Plaintiff.

F.  TERMINATION GROUND

36.  The arrangements between the parties may have prompted skepticism as to what was the true arrangement between them and Mr Yu. However, what was indisputable is that the MOU had a life span of 6 months pursuant to Clause 8, which was to expire on 3 December 2018. That period had not yet expired as of the date of the Termination Notice. Neither D1’s defence nor the Termination Notice itself stated what the ground for termination was.

37.  Even though the SFC rejected Mr Yu’s Application, the Plaintiff could still make use of the remaining 2 months to seek another buyer for SFC’s Approval. Even D1 himself had ascertained from SFC, on 13 November 2018, that the Plaintiff could apply to be the buyer and SFC would process it. The Termination Notice simply left no time for the Plaintiff to purse these courses.

38.  The termination amounted to repudiation of the MOU and SPA. The termination was accepted by the Plaintiff by the demand letter dated 7 November 2018. The Termination Ground is established.

G.  TOTAL FAILURE OF CONSIDERATION GROUND

39.  The assertion of total failure of consideration cannot stand even on the Plaintiff’s own evidence because D1 had at least assisted Mr Yu in responding to SFC’s requisitions.

40.  Mr Ma’s submission on this aspect can be summarized as follows:

(1)  Making false statements to SFC in that:

(a)  Although the HK$1,500,000 cheque for the First Payment had been rejected at first, the Plaintiff had paid D1 again, with interest, well before Mr Yu’s Application.

(b)  Well knowing that Mr Yu would be the ultimate and true owner of GIC, D1 still informed SFC that he thought that the Plaintiff was. That was in breach of Clause 5 of the MOU and the implied duty to cooperate.

(2)  Breach of the Guarantee in failing to get SFC’s Approval for Mr Yu;

(3)  Inability to “package it” to obtain SFC’s Approval despite D1’s clear knowledge that Mr Yu instead of the Plaintiff would be the ultimate and true owner.

(4)  Breach of Clause 3.2 of the SPA in that SFC’s rejection of Mr Yu’s application amounted to “transfer restriction”.

41.  Save for paragraph 40(1)(a), I am unable to agree.

(1)  With regard to paragraphs 40 (1)(b), (2) and (3), I am unable to see how the Plaintiff can establish these without having first established Grounds (1) and (2) (see paragraph 31 above. Grounds (1) and (2) have prima facie been excluded by the entire agreement clause. And what the “packaging” that the Plaintiff expected D1 to have done to Mr Yu’s Application has never been made clear in the evidence. As D1 pleaded, he could not lie to the SFC.

(2)  With regard to paragraph 40 (4), SFC’s reasons for rejecting the transfer was not tied to transfer restriction of the shares but to, amongst others, problems with identity of the beneficial owner and source of purchase money. Clause 2 of the MOU has made clear that the Deposit and First Payment shall not be refundable if the Proposed Transaction does not obtain approval from the SFC due to reasons relating to the Buyer, including Buyer shareholder background and Buyer source of funds.

46.  Accordingly, even if the Termination Notice was wrongfully issued, Clause 2 of the MOU would have barred the Plaintiff from establishing liability for repayment.

47.  In respect of the Deposit and First Payment, if the Plaintiff cannot establish total failure of consideration, his reliance on money had and received and unjust enrichment must fail too. Since D1 had done something for the Plaintiff, the Plaintiff would not be able to establish that the entire payment to D1 was “unjust” or that D1 had no defence.

48.  In respect of the HK$210,000, the Defendants were to ensure that the Responsible Officers were in place pending completion of the transaction. The Plaintiff has not shown what ought to have been but was not done by D1. There was no failure of consideration and D1 is entitled to unconditional leave to defend.

H.  FORFEITURE GROUND

49.  The law on the forfeiture of deposits has been authoritatively laid down in Polyset Ltd v Panhandat Ltd (2002) 5 HKCFAR 234:

“90. In the light of the foregoing authorities, the proper approach to unusually large deposits may be stated as follows.

(a) Where (in the absence of fraud or vitiating factors other than excessiveness) the amount of an agreed deposit matches or is less than the conventional amount, its forfeiture will not attract judicial scrutiny, whether or not the innocent party has suffered any loss as a result of the other party’s breach.

(b) Where the deposit exceeds the conventional amount, that is, 10% in Hong Kong, forfeiture is only permitted if the party seeking to forfeit can show that exceptional circumstances justify the higher amount.

(c) Such exceptional circumstances must relate to a true deposit’s purpose as an earnest of performance and as compensation for the vendor’s withdrawal of his asset from the property market pending completion, providing an objective justification for the higher sum.

(d) If such justification is not forthcoming, the courts will not recognize the amount as a true deposit but will treat it as an advance payment towards what was payable under the contract and recoverable as such, subject to the innocent party’s entitlement to deduct damages for any actual loss suffered as a result of the other party’s breach.”

…

108. …

(a) If a vendor wishes to be certain of being permitted to forfeit a deposit (in the absence of fraud or other factors which vitiate the entire contract), he can achieve this by limiting its amount to the customary 10%.

(b) …

(c) If, as in the present case, the vendor chooses to contract on the basis of a deposit which is several times larger than the conventional sum, he would be well-advised to consider it extremely likely, if not certain, that forfeiture of his deposit is impermissible.

(d) Uncertainty only arises where the vendor requires a deposit which exceeds the conventional 10% by a sum which may or may not be considered reasonable. It becomes a matter for the vendor to decide whether the stipulated additional amount is worth the risk of losing the right to forfeit the deposit. He may decide to accept the risk, ready to put forward grounds for justifying the higher amount. Or he may decide to eliminate the risk by remaining within conventional bounds.” (emphasis added)

50.  In Simply Power Ltd v. Billy Chua and Others [2023] HKCFI 944, Ng J cited §108 of Polyset and held that :-

“291. The implication of that passage is clear. A vendor can take his chances by obtaining a larger deposit than 10% but he runs the risk of losing the right to forfeit the deposit altogether. He cannot have the best of both worlds by obtaining a say 20% deposit and, when that cannot be justified, falls back on 10%.

He thus ordered the 3^rd Defendant to return the 20 Deposits to the Plaintiff in full.

51.  In the present case, the Deposit itself was 3.5 times the conventional 10%. The First Payment, being what it was, was another 32.5%. D1’s responses to the SFC’s requisitions would not have justified those 2 Sums in full, even if SFC’s refusal was due to reasons relating to the Buyer. The Forfeiture Ground is established.

I.  DAMAGES GROUND

52.  The Plaintiff seeks refund of the 3 Sums.

53.  For the Termination Ground, the Plaintiff is entitled to damages for breach of contract to be assessed. For the Forfeiture Ground, he is entitled to refund of the Deposit and the First Payment. Applying the authorities in Section H, D1 cannot even retain 10% of the purchase price. Although I have taken the view that the failure of consideration was not total, D1 has not pleaded any basis to assess the value of his work. Accordingly, for both established Grounds, there should be full refund of the Deposit and the First Payment to the Plaintiff.

54.  D2 as the other Seller is liable jointly and severally with D1 on the same Grounds and for damages.

J.  CONCLUSION AND COSTS

55.  I give judgment to the Plaintiff on the Termination Ground and Forfeiture Ground. D1 should have unconditional leave to defend the rest of the action. I order that the Deposit and the First Payment, totalling HK$ 3,850,000 should be refunded to the Plaintiff.

56.  Costs should follow the event. As the Plaintiff has only established his case on 2 causes of action, costs relating to pleadings (eg part of sections D1, F1-F3 in the costs statement) shall not be awarded at this stage. I only allow costs for preparing the Summons, affirmation and hearings, including costs reserved on this Summons. I summarily assess the same at HK$200,000 and make an order nisi that the Defendants should bear such costs.