LEO INNOTECH (HOLDING) LTD v. LEE SHUNG CHI

HCA 474/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 474 OF 2015

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J U D G M E N T

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1.  This is an appeal by the defendant against the summary judgment entered by Master J Wong against him on 5 February 2016. The defendant also appeals against the dismissal by the Master of three summonses issued by him on 1 December 2015 which I will explain further below. I hear this appeal by way of re-hearing.

This action leading to the Master’s decision

2.  The defendant graduated in mathematics from the Chinese University of Hong Kong in 1986.  He claims to be a pioneer in radio-frequency identification system (“RFID”).

3.  The plaintiff commenced this action against the defendant on 6 March 2015 for repayment of loans.  The plaintiff’s case in the statement of claim dated 31 March 2015 is simple.  It pleaded that it had advanced money to the defendant under two loan agreements both dated 28 February 2014.  The particulars of the indebtedness are as follows:

Date	Proposed Loan Amount	Sum due on 10.2.2015
28.2.2014	HK$8,515,263.63	HK$8,942,478.82
28.2.2014	HK$1,000,000.00	HK$640,530.56
		HK$9,583,009.38
		=============

It further pleaded that the plaintiff’s solicitors had on 10 February 2015 demanded the defendant to repay the indebtedness and that a further sum of interest at HK$66,958.99 had accrued at the rate of 5.25% pa from 11 February 2015 to 6 March 2015 when the writ was issued.

4.  The defendant, who was then represented by solicitors, filed a short defence dated 26 May 2015 denying the indebtedness. 

5.  The gist of the defence is in §3 which reads:

“3. The Defendant further avers that:

(a) The Plaintiff, through its representatives, made false, fraudulent and dishonest representations to the Defendant in about early 2014 to induce the Defendant to endorse on documents (“Plaintiff’s Misrepresentations”);

(b) Pending further discovery and interrogatories, the above are the best particulars the Defendant can rely on in respect of the Plaintiff’s Misrepresentations;

(c) Hence, the commencement of this action is collectively part of the conspiracy of the Plaintiff to defraud the Defendant for its own financial benefit (“Plaintiff’s Conspiracy to defraud/injure”).

There is no particular of the alleged misrepresentation and/or conspiracy to defraud/injure.

6.  The plaintiff put in a short reply dated 19 June 2015 denying any misrepresentation or conspiracy to default/injure.

7.  The plaintiff issued a summons on 23 June 2015 for summary judgment.  It also filed the 1st affidavit of Mr Lai King Lung (“Mr Lai”) in support the summons. 

8.  Mr Lai exhibited the two loan agreements in his affidavit. Regarding the agreement that said to have advanced HK$8,515,263.63 to the defendant (“the Replacement Loan Agreement”), Mr Lai said that it was to replace an earlier loan agreement dated 1 January 2010 (pp 78-84).  Regarding the other agreement, it provided a standby facility of HK$1 million for the defendant (“the Standby Loan Agreement”) (pp 85-90).  The defendant had drawn the following sums under this agreement:

(i) HK$250,000 on 14 February 2014;

(ii) HK$220,000 on 6 March 2014;

(iii) HK$93,350 on 7 March 2014; and

(iv) HK$47,100 on 10 March 2014

9.  Mr Kong Ping To, a partner of the defendant’s then solicitors filed a short affirmation on 8 July 2015 to oppose the application. Mr Kong merely said in his affirmation that the defendant was misrepresented by the plaintiff’s representative in early 2014 into signing the two loan agreements exhibited by Mr Lai and that the defendant believed that the commencement of this action was the conspiracy of the plaintiff to defraud the defendant for the plaintiff’s financial benefit.  It was a mere repetition of the simple defence.

10.  Master Lo at a call-over hearing on 13 July 2015 gave the defendant leave to file a further affirmation in opposition within 21 days. But the defendant did not file any further affirmation.

11.  Mr Lai then filed his 2nd affidavit on 17 August 2015.  He pointed out the defendant’s failure to provide any particulars of the alleged misrepresentation and conspiracy to defraud in the pleadings or in Mr Kong’s affirmation.

12.  The defendant then issued a summons on 4 September 2015 for leave to file a further affirmation in opposition.  The summons was allowed on 16 September 2015 and the defendant filed the affirmation on 30 September 2015 (“the Opposing Affirmation”). 

13.  The plaintiff then filed Mr Lai’s 3rd affidavit on 14 October 2015 (“3rd Affidavit”) to reply to the defendant’s Opposing Affirmation.

14.  On 26 November 2015, the defendant filed a notice to act in person.  On 1 December 2015, he issued a summons for leave to adduce further evidence contained in a Chinese Supplemental Affirmation affirmed on 26 November 2015 (“the Supplemental Affirmation”). 

15.  He also issued a summons for consolidation of this action with HCA 1555/2014 and another summons in HCA 1555/2014 for the same purpose. HCA 1555/2014 was issued by him against Leung Chun Wah also known as Samuel Leung (“Mr Leung”), Fung Kwong Yuen and Mr Lai.  They were the persons who control and operate Leo Paper Group (Hong Kong) Ltd (“LPG”) and the companies under it.

16.  Master Wong did not allow the summons for further evidence but admitted the Supplemental Affirmation on a de bene esse basis.

17.  Master Wong dismissed all three summonses of the defendant and gave judgment to the plaintiff in his decision of 15 February 2016.

The plaintiff’s case

18.  Mr Lai spelt out in the 3rd Affidavit the background leading to the making of the two loan agreements.  It is more convenient to deal with the plaintiff’s case as set out in the 3rd Affidavit before dealing with the defendant’s case as set out in the earlier Opposing Affirmation.

19.  The defendant used to own all the shares of Avanti Innovation Technology Group Ltd (“Avanti”).  Avanti was in the business of developing the RFID system. 

20.  In early 2008, LPG, the plaintiff’s holding company, was interested in acquiring Avanti.  The parties later agreed that the plaintiff would acquire from the defendant all Avanti shares for HK$5,656,976.45.  Mr Lai exhibited the bought and sold notes and instrument of transfer of the deal (pp 98-99) which are dated 24 June 2008.  After the takeover, Avanti was changed to Leo InnoTech (Hong Kong) Ltd (“LIT HK”).

21.  However, the relationship between the defendant and LPG might have been formed before June 2008 as the defendant has produced in LSC-17 in the Supplement Affirmation an employment agreement issued by the plaintiff and accepted by the defendant and dated 12 September 2007.  The plaintiff then was known as Leo InnoTech Ltd.  It later changed to the present name of Leo InnoTech (Holding) Ltd.

22.  The plaintiff and defendant then entered into a loan agreement dated 1 January 2010 under which the plaintiff agreed to advance no more than HK$8 million to the defendant for his use in the restructuring of the plaintiff’s capital and related matters (“the Share Capital Facility Agreement”).  Mr Lai exhibited this agreement in his 3rd Affidavit (pp. 111-113).  The loan in this agreement was interest bearing and the principal and interest should be repaid by 31 December 2014.

23.  The defendant then used the facility in this agreement to make four subscriptions for a total of 300 of the plaintiff’s shares as shown in a schedule exhibited in LKL-7 in Mr Lai’s 3rd Affidavit (p. 115).  From 10 July 2012 to 13 July 2012, he held 25% of the plaintiff’s shares.  He obtained a total of 300 shares on 17 July 2012, but his holding was diluted to 10% on that day by subscriptions of LPG.  All the subscriptions of the plaintiff’s shares by both the defendant and LPG as stated in the schedule in LKL-7 are fully corroborated by the returns of allotments filed by the plaintiff at the Companies Registry and exhibited by the defendant in LSC-18 of his Supplemental Affirmation.

24.  The co-operation between LPG and the defendant lasted until early February 2014 when the parties decided to part their ways by a separation agreement dated 14 February 2014 (“the Separation Agreement”).  Mr Lai exhibited the agreement in his 3rd Affidavit (pp 101-109).  It was made between the defendant, the plaintiff and a Leo Paper Group Enterprises Ltd (a BVI Company) (“LPE”).

25.  The terms of the Separation Agreement material to the defendant’s allegations are:

Clause II

(1) The defendant would transfer on or before 15 March 2014 his 10% shares of the plaintiff to a nominee of LPE in consideration of HK$100.

(2) The defendant would purchase from the plaintiff 100% of the shares of 利奧傳感科技 (廣州) 有限公司 (“LIT GZ”) at HK$100.  The defendant undertook to submit the application for change of shareholders of LIT GZ to the relevant authority of the Mainland government no later than 28 February 2014.  The defendant would be solely responsible for all the debts of LIT GZ upon the completion of transfer of shares.

(4) The defendant would purchase from the plaintiff 100% of the shares of LIT HK (formerly known as Avanti) at HK$100. The defendant undertook to co-ordinate with LPE and complete the transfer of shares on the date as directed by LPE (LIT HK owned the patent of the RFID).

(12) From the effective date of this agreement (14 February 2014 – (33)) to the completion of transfer of the 100% LIT GZ shares to the defendant, the defendant would be the legal representative and managing director of LIT GZ.

(15) The defendant would borrow from LPE and/or the plaintiff HK$1 million which sum would be deposited into the bank account of LIT HK and/or the defendant and/or ....  This loan and the details of its implementation would be governed by another loan agreement to be made between the defendant and LPE and/or the plaintiff no later than 28 February 2014.

(16)(h). However, subject to the defendant signing the documents for transfer of the 10% shares in the plaintiff to LPE and the fulfilment by the defendant of some other obligations, LPE and/or the plaintiff would advance HK$250,000 of the HK$1 million loan to the defendant leaving HK$750,000 to be dealt with between the parties.

(17) The loan in the Share Capital Facility Agreement was due on 31 December 2014.  The defendant wished to extend this loan agreement and agreed that:

(a) the loan be extended to 28 February 2017;

(b) the loan be provided by LPE and/or the plaintiff;

...

(e) the defendant had to enter into another loan agreement with LPE and/or the plaintiff no later than 28 February 2014.

(18) For the loans to be advanced under (15) and (17), the defendant agreed to provide a property in Shatin, the 100% shares in LIT HK and LIT GZ (and another LIT company) and all his other real and personal properties to LPE and/or the plaintiff as security of repayment.

(19) The defendant must disclose the details of his assets.

(23) From the effective date of this agreement, the defendant had to disclose to LPE and/or the plaintiff his business and financial information including the financial statements, audited reports, bank statements, share allotments, lists of directors and employees, details of products and sales and business information of LIT HK, LIT GZ and a number of other companies owned by the defendant.

26.  Pursuant to the Separation Agreement, the plaintiff and defendant made the Replacement Loan Agreement and Standby Loan Agreement both dated 28 February 2014.

27.  The Replacement Loan Agreement stated that it was for superseding the Share Capital Facility Agreement.  It recorded that up to 28 February 2014, the loan and interest outstanding under the Share Capital Facility Agreement was HK$8,515,263.63.  This sum was treated as the loan advanced under the Replacement Loan Agreement which, together with interest, had to be repaid on or before 28 February 2018.  However, clause 11 provided that the plaintiff could demand repayment of the loan and interest accrued by giving the defendant a five-day notice.  It also required the defendant to provide the same real and personal properties as security of repayment as in the Separation Agreement.

28.  The Standby Loan Agreement was to provide a standby facility of HK$1 million to the defendant.  The HK$1 million included the HK$250,000 that had already been advanced to the defendant under the Separation Agreement. It also provided that the loan and interest accrued would be repayable on 31 August 2015.  However, clause 12 also provided that the plaintiff had the right to demand full repayment of the loan and interest accrued by giving the defendant a five-day notice.

29.  There is no dispute that the defendant had transferred the 10% shares of the plaintiff he owned to LPE by bought and sold notes and other documents all dated 25 June 2014 (pp 117-120).  The plaintiff says that this was done pursuant to the Separation Agreement.  The defendant merely said that he was told to do so by LPG.

30.  Having dealt with the plaintiff’s case on the background leading to the making of the two loan agreements dated 28 February 2014 and his transfer of the 10% of shares of the plaintiff to LPE, I now turn to the defendant’s case as set out in the Opposing Affirmation filed on 30 September 2015 by his solicitors on his behalf.

The defendant’s case

31.  The defendant filed his Opposing Affirmation before Mr Lai’s 3^rd Affidavit.  At the start of his Opposing Affirmation, he said that he had sold the Avanti shares to the plaintiff for only HK$500,000. He also complained that he had to assign a short term patent for a display system called video glass to one Leo Paper Bags (1982) Ltd (“Leo Paper Bags”) in about January 2014 at the demand of Mr Leung, the chairman of LPG. 

32.  He also complained about the assignment of the video glass patent in HCA 1555/2014 (“HCA 1555”) in which he sued as the plaintiff. But Mr Lai exhibited in LKL-7 in an affidavit in HCA 1555 a letter dated 28 February 2014 by his solicitors which showed that he was legally advised in executing the assignment of this patent.  The solicitors who advised him on the assignment were the same solicitors who represented him in this action up to 26 November 2015.

33.  In any event, I cannot see any relevance between the assignment of the video glass patent and the two loan agreements herein. 

34.  The defendant then alleged that he was asked in about February 2014 to take up a managerial position with LIT GZ.  But I note that it is a term of the Separation Agreement (which was only exhibited later by Mr Lai in his 3rd Affidavit) that from 14 February 2014, he would be the legal representative and managing director of LIT GZ and that he should submit to the relevant authority in the Mainland his application to become the 100% shareholder of LIT GZ no later than 28 February 2014.  Hence, his evidence that he was asked to take up a managerial position in LIT GZ, a subsidiary in LPG is contradicted by the Separation Agreement. 

35.  However, this allegation is again not relevant to his liability under the two loan agreements in this action.

36.  The defendant then alleged in §16 of the Opposing Affirmation that in about January 2014, LPG had a plan to restructure its business. The plan was to transfer to him at no cost all the shares of the plaintiff (which wholly owned LIT HK) and LIT GZ and give him HK$1 million so that he could help LPG pay the salaries to the staff of LIT HK and LIT GZ.  He referred to this alleged plan of the plaintiff as “the 2014 Agreement”, but did not produce anything in writing to prove its existence.

37.  I note that the terms of this alleged 2014 Agreement are not the same as those in the Separation Agreement dated 14 February 2014.  The defendant further alleged that the 2014 Agreement had eventually fallen through as LIT HK was in huge debt and he, being a 10% shareholder of the plaintiff (holding company of LIT HK), was only willing to bear 10% of such debt leaving the remaining 90% to LPG.  The further reason for the falling through was because LPG’s refusal to transfer the RFID patent from LIT HK to him and the Video Glass patent from Leo Paper Bags to LIT HK as previously agreed.

38.  The defendant also produced an e-mail that he sent Mr Leung on 25 June 2014 in LSC-5 as evidence that he was unhappy about the terms of the 2014 Agreement and that the agreement had fallen through (pp 216-217).  But the e-mail was did not refer to the 2014 Agreement.  It had the same date as the documents that effected the transfer of his 10% shares in the plaintiff to LPE (pp 117-120).  This e-mail is not evidence that any alleged 2014 Agreement had fallen through. 

39.  The defendant also queried in this e-mail why he had to report to Mr Leung if he had already purchased a company (that he did not name).  But I note again that the reporting requirement was a term of the Separation Agreement which I have already mentioned above. 

40.  The defendant also suggested in the e-mail that he and LPG were still operating the company together and thus LPG should discharge its obligations as a shareholder.  But if he has transferred his 10% shares of the plaintiff to LPE, he was no longer a fellow shareholder of LPG or LPE in so far as the plaintiff was concerned.  He did not explain why he could regard he himself and LPG were still operating the company together.

41.  He also alleged in the e-mail that the plaintiff was still keeping the private and public seals/chops and bank documents of the company. He said this demonstrated that he and LPG were still operating the company together. Thus both sides should perform the obligations of a shareholder. 

42.  I cannot tell if the plaintiff or LPG was still keeping the seals/chops and bank documents of one of those LIT companies which should have been transferred to the defendant.  If so, the keeping could have been rightful if the company in question had not been transferred to the defendant and the separation not yet completed.  But the keeping could have been wrongful and, in that case, the defendant could sue the plaintiff or LPG for their return.  In any case, the mere keeping of these things by the plaintiff or LPG does not suggest that there was no Separation Agreement or that the Separation Agreement was not valid or binding.

43.  Reading this e-mail together with the Separation Agreement, the two loan agreements dated 28 February 2014, and the defendant’s transfer of his 10% shares of the plaintiff to LPE, I am of the view that the e-mail merely contains the defendant’s expression of reluctance to complete the all the terms of the Separation Agreement and his grievance that the companies he acquired had no funds for further operation.

44.  In fact, the defendant’s allegation that the alleged 2014 Agreement (or the Separation Agreement) had fallen through cannot stand together with his admission of having transferred his 10% shares of the plaintiff to LPE.  He also supplied the proof of the transfer by exhibiting the annual return of the plaintiff dated 25 August 2014 (pp 218-226).  There was no reason why he should have effected the transfer if the alleged 2014 Agreement (or the Separation Agreement) had fallen through.

45.  Regarding the two loan agreements of 28 February 2014, he alleged that they were invalid because they were never intended to be legally binding.  Alternatively, he argued that they were entered into by the fraud or misrepresentation of the plaintiff on him.  In his written submissions filed for this appeal, he also alleged that Mr Leung had practised undue influence on him.

46.  Regarding the Standby Facility Agreement, he alleged that while the parties were discussing the terms of the 2014 Agreement and before the parties would realize that this agreement would eventually fall through, LPG still regarded that he would become the sole shareholder of LIT HK and LIT GZ. LIT HK and LIT GZ were then in financial problems and unable to pay salaries to their staff.  Mr Leung thus told him that he had to be responsible for some of the paper work for the salary payment arrangement for LIT HK and LIT GZ in that he had to sign an agreement to facilitate the process.  He always found Mr Leung reliable and trustworthy and hence immediately agreed to do so.  The Standby Facility Agreement was thus prepared. 

47.  Mr Leung then allegedly assured him that:

“(i) The entire sum of $1m for the purposes of salary payment would solely be made available by Leo Paper Group;

(ii) The signing of the $1m Loan Agreement (the Standby Facility Agreement) was just a matter of formality and just to go through the motions (in Mr. Leung’s words, ‘只係門面工夫’), and the contents of the agreement did not matter and would not be enforced; and

(iii) He (Mr Leung) could be trusted in the matter (in Mr. Leung’s words, ‘你信我梁鎭華’”

48.  The defendant said that he had no reason to doubt Mr Leung’s words as Mr Leung always appeared to be respectable and trustworthy to him.  He further said that when the agreement was given to him for his signature, he saw Mr Leung’s initials on each page.  He was then further convinced that if Mr Leung would sign it, it must mean that there was no risk in signing and initialling it.  He had also been repeatedly told that the agreement would not be enforced. He therefore did not envisage any problem in signing it.  He only realized much later that the plaintiff and/or LPG had misrepresented to him the circumstances, arrangements and intentions about the agreement.

49.  He also alleged that after the parties had realized that the 2014 Agreement would fall through, he still assisted LPG in paying salaries to the staff of LIT HK and LIT GZ by allowing funds to go into his personal account and then distributing the same to the staff of the two companies. 

50.  From what he said in his affirmation, this mode of payment of salaries to the staff through his bank account was only adopted after he had signed the Standby Facility Agreement.  He explained that he assisted in this because he was still an employee of LIT HK and LIT GZ and he operated the two companies according to the instructions of the parent company (LPG).  He further said that the patents of RFID and Video Glass were still held by LIT HK and Leo Paper Bags respectively.  He had to ensure the survival of LIT HK and LIT GZ financially so that the products and technology could be further developed.

51.  He also pointed out that part of the funds that went through his personal account (on 6th March 2014 – p 239) was for paying his salary (for December 2014 and January to February 2015).  He complained that it was unfair for the plaintiff to now say that the fund for paying his salary was part of the loan advanced to him. 

52.  I think the defendant may feel aggrieved that he had to pay his own salary with money advanced to him.  But LPG and/or the plaintiff could not be forced to pay even if there were no Separation Agreement or that the plaintiff were still a shareholder of LIT HK and/or LIT GZ.  If the defendant and plaintiff should agree that the plaintiff would lend money to the defendant to pay salaries to the employees of the two companies including the defendant himself, such agreement is valid and enforceable.

53.  The defendant, in oral submissions and a 14-point statement submitted on the day of hearing, further suggested that if the money was advanced to him under the Standby Facility Agreement, there was no reason why LPG or the plaintiff could have prescribed the use of such loan to be for payment of salaries to the staff of the two companies. 

54.  I disagree with this submission.  They Standby Facility Agreement was made as part of the steps in the Separation Agreement to effect the parting of ways of the parties.  The agreement was obviously to assist the defendant in continuing the operation of LIT HK and LIT GZ which would be transferred to him. It would thus be reasonable for LPG or the plaintiff to agree with the defendant that the money advanced to him should be used to pay the salaries of the two companies.  Otherwise, the money could have been spent for purposes unrelated to the two companies.

55.  Regarding the Replacement Loan Agreement, the defendant alleged in §38 of his Opposing Affirmation that in early 2014, LIT HK and LIT GZ were in financial difficulties and did not have capital for research and development of the RFID, Video Glass and other systems and products.  LPG thus decided that it would solely inject HK$85 million capital to the two companies to facilitate their operation, research and development.

56.  I cannot see how this allegation can sit together with his earlier allegation in §16 that in January 2014, LPG intended to transfer the plaintiff and LIT GZ to him at no costs and gave him HK$1 million for paying salaries to the staff of the two companies.  If LPG had intended to give the two companies to him, there was no reason why LPG would still want to solely inject share capital of HK$85 million into LIT HK (then wholly owned by the plaintiff) and LIT GZ.  This allegation is simply incredible.  I further note that it is LPG’s case that the capital injection was in 2010 and the defendant obtained funds for injection of his share of capital from the Capital Loan Facility Agreement made on 1 January 2010 and that the share allotments were formally effected in July 2012.

57.  Despite LPG’s alleged decision that it was to solely inject the HK$85 million capital, the defendant further alleged that Mr Leung told him to be responsible for some of the paperwork for the injection and he had to sign an agreement to facilitate the arrangement.  Since he was a 10% shareholder of the plaintiff, it would be better to state on paper that he was to shoulder 10% of the capital injection.  He again agreed to sign the agreement as he found Mr Leung reliable and trustworthy.

58.  He then alleged that Mr Leung had given him the same assurances and his same reasons for signing the Standby Facility Agreement as the assurances and reasons for his signing the Replacement Loan Agreement.  He also alleged that he did not know why the terms of this agreement were drafted as they were.  

59.  He made no attempt to explain why this agreement would mention that there was the Share Capital Facility Agreement made on 1 January 2010 under which HK$8,515,263.63 was due from him and that this agreement was to replace that earlier one.  He simply ignored this.

60.  He then made the serious allegations that the HK$8.5 million loan in the Replacement Loan Agreement was never made to him and no money had flown into LIT HK or LIT GZ pursuant to the two loan agreements.  He said he suspected that he was asked to sign the two agreements to mislead the financial institutions of LIT HK and LIT GZ and/or to defraud the relevant banks or authorities.

61.  If the defendant’s allegations about the two loan agreements are true and nothing had been advanced to him under the Replacement Loan Agreement and no money had flown into LIT HK or LIT GZ under the Standby Facility Agreement, then the plaintiff in commencing this action against him is trying to extract over HK$9 million from him in return for nothing.  This is nothing but blatant fraud.  But he gave no reason on why the plaintiff or LPG, an established business group in the paper trade, would want to engage in such fraudulent activity against him.

62.  The defendant, in order to show that LPG had a history of using false instrument to defraud banks, referred to an incident in late 2009 to 2010 where those who run LPG had in the name of Avanti applied for a low interest loan of HK$12 million from the “SME Loan Guarantee Scheme” (“the SME Scheme”) (with repayment of 85% guarantee by the government) but later channelled the loan to another company in the group for purposes other than those of Avanti (which is LIT HK now).

The plaintiff’s response to the Opposing Affirmation

63.  The defendant’s allegations in his Opposing Affirmation were refuted by Mr Lai in his 3rd Affidavit.  I have already mentioned that Mr Lai had produced the Share Capital Facility Agreement made on 1 January 2010 and the Separation Agreement dated 14 February 2014 in his 3rd Affidavit to present a fuller background picture.  Mr Lai also said that the Separation Agreement had been performed substantially but the defendant had failed to provide the security for repayment of loan required by the agreement. He also said that the defendant had obtained all the shares in LIT HK and LIT GZ and transferred his shares in the plaintiff to LPE.

64.  Mr Lai also admitted that the HK$12 million loan under the SME Scheme had been transferred to another entity, but this loan and interest accrued had been fully repaid to the bank.

The defendant’s Supplemental Affirmation

65.  I have referred to above the three summonses issued by the defendant on 1 December 2015 when he was acting in person.  One of the summonses sought leave to put in the Supplemental Affirmation.  But the defendant did not explained why he did not include in his first affirmation or Opposing Affirmation the matters deposed to in the Supplemental Affirmation.  Master Wong only admitted the Supplemental Affirmation on a de bene esse basis at the hearing.  Since the Supplemental Affirmation was not formally admitted, the plaintiff was not required to respond to it.

66.  The defendant, having read Mr Lai’s 3rd Affidavit and exhibits, corrected himself on the price for his shares in Avanti.  He originally said in his Opposing Affirmation that he was paid HK$500,000.  The bought and sold note and instrument of transfer exhibited by Mr Lai showed a price of HK$5,656,976.45 (pp 98-99).  He thus said in his Supplemental Affirmation that the price was about HK$5.6 million. 

67.  The defendant then alleged that of this HK$5.6 million, he had invested HK$2 million for 25% of the plaintiff’s shares.  However, according to Mr Lai’s schedule of allotments of the plaintiff’s shares (LKL-7), which were corroborated by the returns of allotments he produced in LSC-18, this statement was only true up to 10 July 2012 when HK$2 million was debited from him to pay for 100 of the 400 allotted shares of the plaintiff.  There were further allotments and he eventually obtained 300 out of 3,000 or 10% of the plaintiff’s shares for a total price of HK$9,707,103 on 17 July 2012.

68.  The allotments as shown in the returns of allotments were made in July 2012.  But he exhibited an e-mail dated 31 March 2010 (three months after the Share Capital Facility Agreement) (LSC-29) which showed that he was then a 25% shareholder of the plaintiff. 

69.  The e-mail further shows that there was an agreement to have a restructuring whereby LPG as the 75% shareholder would absorb 100% of a HK$5.7 million loss and that the capital restructuring would reduce the defendant’s holding from 25% to 10%.  As a result, the defendant would only be required to inject HK$2,980,500 or 10% of the HK$29,805,000 fresh shareholders’ capital.  According to the agreed proposal (proposal B) of restructuring stated in the e-mail, the total shareholder’s fund to be contributed by the defendant would be HK$7,980,500.  This sum had become HK$9,707,103 as at 17 July 2012 when the allotments of shares were formally completed.

70.  The bought and sold note, instrument of transfer and resolutions of directors and shareholders of the plaintiff all dated 25 June 2014 also showed that the defendant had subsequent to July 2012 transferred 300 shares of the plaintiff to LPE pp 117-120 and 226).  The defendant also said in §21 of his Opposing Affirmation that he had in about June 2014 at the direction of LPG transferred his 300 or 10% shares of the plaintiff to LPE.  He also produced the annual return of the plaintiff as proof of this transfer (pp 226).  Thus his assertion in the Supplemental Affirmation that he had invested HK$2 million for 25% of the plaintiff’s shares was true only up to 10 July 2012.  Thereafter, it was and is a misstatement as it is contrary to his case in his Opposing Affirmation and the contents of contemporaneous documents produced by him and Mr Lai.

71.  The defendant in §3 of his Supplemental Affirmation further alleged that he had never received from the plaintiff the 25% (should be 10% or 300) shares of the plaintiff.  He further said that Mr Lai and the plaintiff had channelled his patent and 25% share interests to a different company or companies. But he did not refer to which or what patent or what company or companies to which his patent and share interests had been transferred.

72.  Regarding the patent in RFID, it was vested with LIT HK.  Regarding the patent in the Video Glass, he had the benefit of legal advice when he transferred it to Leo Paper Bags.  Regarding his 300 shares in the plaintiff, they had all been allotted to him in July 2012 and he eventually transferred them to LPE through documents dated 25 June 2014.

73.  Hence, his allegation that his patent and share interests in the plaintiff had been transferred by Mr Lai and the plaintiff to certain unnamed company or companies is unfounded.

74.  He then described at length about the channelling of the HK$12 million low interest loan borrowed from the SME Scheme from LIT HK to LPG.  But Mr Lai had already said in his 3rd Affidavit that this loan and interest accrued had been fully repaid to the bank.  The defendant did not take issue with this in his Supplemental Affirmation.  I think he raised this matter repeatedly just to smear LPG and Mr Leung.

75.  The defendant had denied in his Opposing Affirmation that the loan of HK$8.5 million had been advanced to him under the Replacement Loan Agreement.  He made the denial despite the fact that this agreement had stated that it was to replace the loan and interest due under the Share Capital Facility Agreement dated 1 January 2010. 

76.  He further alleged in §12 of the Supplemental Affirmation that the plaintiff had HK$12 million capital (the SME Scheme Loan) and there was no reason for any injection of capital into the plaintiff. 

77.  He also asserted that he was not a shareholder of the plaintiff in 2010 and 2011 and had no reason to inject capital into the plaintiff at that time.  He further said that the e-mail he produced at LSC-29 and dated 31 March 2010 on the restructuring of the shareholding of the plaintiff was a fraud on him.  However, he did not explain why there were four returns of allotments of a total of 10% of the plaintiff’s shares to him in July 2012 or how much had he paid for these shares.

78.  Though there is no explanation from either side on why the allotments of the plaintiff’s shares were all done from 9 to 17 July 2012 and not in early 2010 as per the agreed proposal contained in the e-mail in LSC-29, all the contemporaneous documents do show that the plaintiff had eventually been allotted 300 or 10% of the plaintiff’s shares which he transferred to LPE through documents dated 25 June 2014.

79.  Regarding his assertion that there was the capital of HK$12 million (the SME Scheme Loan) and hence no need to raise capital, the e-mail he produced in LSC-29 dated 31 March 2010 did include this HK$12 million in the two proposals of restructuring.  Furthermore, Mr Leung in his e-mail dated 8 June 2010 (LSC-27) also made it clear that the HK$12 million would remain with LIT HK and that additional capital would be injected by LPG and the defendant according to their ratio of shareholding.  This is a confirmation of the agreed proposal in the e-mail of 31 March 2010.  The defendant’s argument that there was no need for fresh capital because there was this HK$12 million available is not correct.  The defendant made this point just to show that there was in early 2010 no need to inject capital into the plaintiff and hence no basis for the Share Capital Facility Agreement to come into existence.  But he has not explained how and why he had signed this agreement.  It seems that his explanation would be that he signed it because Mr Leung had told him to do so.

Document sought to be produced by the defendant at the hearing

80.  The defendant at the hearing sought to produce a contract made between Leo Paper Bags and a mainland law firm dated 11 March 2014. He said that Leo Paper Bags had by this contract engaged the law firm to deal with a labour dispute in LIT GZ.  He further said that this contract was later than the Separation Agreement of 14 February 2014.  Hence, LPG was still managing LIT GZ and there was no separation or transfer of LIT GZ to him. 

81.  Since the defendant only sought to produce the document at the hearing, the plaintiff was not able to deal with it.  Mr Leung, counsel for the plaintiff, then took some instructions at my request and told me that the change of shareholders of LIT GZ had not been completed by the date of this contract.  Hence, LPG dealt with the problem for the defendant.  In any case, I would not admit this contract as it has come too late.

The defendant’s further statement on his faith in Mr Leung

82.  The defendant in his written submissions for the appeal also stated that he wished to explain to the court through this appeal why he had an absolute faith in Mr Leung and would not dare to refuse any request from Mr Leung.  He further said that he had a lot of evidence that proved the undue influence of Mr Leung on him, but he would leave such evidence to the stage of witness statement.

83.  I then directed him on 7 July 2016 to state all his reasons and evidence in writing and apply for leave to adduce them for the appeal.

84.  He then submitted a 14-point statement on 12 July 2016 to show why he had an absolute trust in Mr Leung.

85.  He said he started his business in 1998 but encountered financial problems from 2001 to 2003.  His company then had a deal with LPG in 2006. In 2007, Mr Leung suggested to have a joint venture with him.  Mr Leung told him of an intention to list LPG.  Mr Leung also gave him a proposal dated 4 September 2007 to purchase 35% shares of Avanti at HK$5.25 million.  Mr Leung further offered to employ him and he accepted it on 12 September 2007.  Hence, he regarded Mr Leung as his benefactor.  Owing to Mr Leung’s encouragement, be believed that Mr Leung would bring him to a higher level of success.  He had so much trust in Mr Leung that he gave up the control of Avanti’s bank account to LPG before the commencement of the joint venture (But one wonders whether there was any significant sum in the account that belonged to Avanti).

86.  He in the joint venture with LPG was free to conduct his research, but Mr Leung controlled the management of the company.  Regarding the shareholding restructuring and injection of capital, Mr Leung told him not to worry but just trust Mr Leung.

87.  Hence, whenever there was any document to sign, he would consult Mr Leung on what document it was and whether he could sign it.  Mr Leung always told him that he should focus on the interests of the LPG group as a whole and not his personal interests.  Mr Leung also told him that the documents were for showing to investors and auditors.  Their implementation or otherwise would be for Mr Leung to decide.

88.  I do not admit this 14-point statement as it does not add anything significant to what he has said in his Opposing Affirmation.

Further analyses and decision

89.  In addition to what I have opined above, I also observe the following.  The defendant has repeatedly alleged that he had been misled by Mr Leung as to the purposes of the Replacement Loan Agreement and Standby Facility Agreement and he had signed them in the belief that the misrepresentations were true.  He wants to portray a story that Mr Leung, Mr Lai and those who control and run LPG had since early 2010 been perpetrating a plot against him.  They did so by cheating him that he was a shareholder of the plaintiff when he was not, sending him e-mails on injection of additional share capital which were false, inducing him to sign loan agreements by misrepresentations; advancing no loan to him under the agreements and ultimately suing him for huge sums in this action.

90.  The defendant also wants the court to believe that he had an immeasurably great faith and trust in Mr Leung so much so that he would have signed anything at Mr Leung’s request.  Any query that he might have raised would be extinguished by Mr Leung’s exhortation that he should have the interests of LPG at heart.

91.  However, in the light of all the documents produced by both sides and the nature of his allegations, I find that his story as a whole is farfetched and unrealistic.  The defendant is too intelligent and sophisticated to be gullible to such alleged plot that had allegedly commenced and continued since early 2010.

92.  In fact, the defendant himself has also produced evidence showing that he could have acted contrary to the will of Mr Leung and cornered Mr Leung.  I have already referred to the HK$12 million low interest loan obtained by LIT HK (in the name of Avanti) from the SME Scheme.  Mr Leung wanted to use it for the purposes of LPG and for LPG to bear the interest.  But the defendant wanted the loan to be used by LIT HK.  He in an e-mail dated 7 June 2010 warned Mr Leung about the legal risk of channelling the loan away from LIT HK.  He also told Mr Leung that he was taking legal advice on the channelling away of the loan (LSC-26). Mr Leung eventually backed down and agreed to keep the HK$12 million loan in LIT HK (LSC-27).  This incident shows that the defendant would not and did not just act as directed by Mr Leung.

93.  I also find the defendant’s allegations about the alleged misrepresentations that Mr Leung had practised on him unbelievable.  It is really beyond belief that he would have signed the Replacement Loan Agreement to acknowledge an indebtedness of HK$8.5 million to the plaintiff if he should have owed the plaintiff nothing.  His allegation that he was told by Mr Leung that he, as a 10% shareholder, should be responsible for some paper work regarding 10% of the HK$85 million capital injection is also unbelievable.  There are several reasons for this.

94.  I have pointed out above his inconsistency that he had said on the one hand in §16 of his Opposing Affirmation that LPG intended in early 2014 to transfer the plaintiff and LIT GZ to him at no costs, but further said on the other hand in §38 that LPG wanted to inject HK$85 million into LIT HK and LIT GZ also in early 2014. 

95.  Secondly, if LPG was to come up with the HK$85 million all by itself, then there was no reason whatsoever for Mr Leung to have asked him to sign the Replacement Loan Agreement to acknowledge his owing the plaintiff HK$8.5 million.  He said Mr Leung had assured him that his signing of the agreement was a mere formality.  I cannot see what formality it was or the basis for it. 

96.  Thirdly, the Replacement Loan Agreement stated that it was to replace the Share Capital Facility Agreement made on 1 January 2010. It does not say that it had anything to do with or was for any capital injection into the plaintiff in early 2014.  I do not think Mr Leung would have told him that the Replacement Loan Agreement was to facilitate the capital injection of HK$85 million in early 2014 as such is contrary to its contents.  Even if Mr Leung would have said so, the defendant would have asked why there was the mention of the 2010 Share Capital Facility Agreement to which Mr Leung would have no answer.  

97.  The defendant may say that he would have accepted whatever excuse that Mr Leung might have told him and would have proceeded to sign the document on the basis of such excuse.  But he does not say that he would just sign without reading or knowing what the document says.  His case is not that he would sign any document at Mr Leung’s request without reading or knowing the contents.

98.  I find that the defendant’s allegation of having signed the Replacement Loan Agreement because of Mr Leung’s misrepresentation is just a wild allegation.

99.  His allegations regarding the signing of the Standby Facility Agreement are similar to those for the Replacement Loan Agreement and I reject them likewise.

100.  The defendant has tried to confuse matters by making all sorts of wild allegations which are contradicted by contemporary documents including those he produced.  He tried to create a complexity which is not there.

101.  I warn myself against conducting a mini-trial in this appeal.  But it is not necessary to conduct a mini-trial to see that the defendant is trying to misappropriate the leave to defend by creating an artificial complexity in the case.

Effect of s. 47A of the Companies Ordinance; Cap. 32

102.  I have also asked Mr Leung, counsel for the plaintiff, to address me on the effect of section 47A of the repealed Companies Ordinance, Cap 32, on the recoverability of the loan in the Share Capital Facility Agreement. Section 47A prohibited a company from providing financial assistance for the purchase of its own shares.

103.  Mr Leung accepted that the loan advanced in the Share Capital Facility Agreement and renewed in the Replacement Loan Agreement was contrary to section 47A and not saved by the exceptions in section 47C as it was provided by the plaintiff to the defendant for him to subscribe for the plaintiff’s shares. However, Mr Leung further submitted that section 47A was for protecting the company’s assets from misuse.  Hence, the loan, though advanced illegally, should be recoverable from the borrower.  I agree with Mr Leung (see Wallersteiner v Moir [1974] 1 WLR 991 at 1014H-1015B and 1033F-H).  The breach by the plaintiff of section 47A of Cap 32 does not affect the liability of the defendant (or the directors of the plaintiff) to repay the loan under the Replacement Loan Agreement.

Decision

104.  I have found the defendant’s allegations on how and why he had signed the Replacement Loan Agreement and Standby Loan Agreement unbelievable. I also find that the defendant has no defence to this action.  I also hold that there is no basis for consolidating this action with HCA 1555/2014.  I therefore dismiss this appeal. 

105.  I also make a costs order nisi that the defendant do pay the plaintiff the costs of this appeal to be assessed summarily by me.  The plaintiff should file and serve a bill of costs for summary assessment within 14 days from today.  The defendant should file and serve his objections, if any, within 7 days thereafter.  The plaintiff should file and serve its reply, if any, within 7 days thereafter.