INFO ALLIED LTD v. LEUNG TZE CHING AND OTHERS

HCA 774/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 774 OF 2007

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Dates of Hearing:  10-11 April 2008

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J U D G M E N T

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The applications:

1.  The primary application before me is an application by the plaintiff, (IAL), for summary judgment against the 5^th defendant, (Dr H. C. Leung), and the 6^th defendant, (Newide).  The application for summary judgment includes an application to strike out Dr H. C. Leung’s counterclaim against IAL.

2.  Dr H. C. Leung, for his part makes application to strike out a prayer in the Amended Statement of Claim for damages for conversion, and to amend his Defence and Counterclaim.

3.  Newide resists summary judgment

Background:

4.  The history of the matter is accurately set out in paragraphs 4-28 of the judgment of Deputy High Court Judge Gill, delivered on 10 July 2007, in which he dealt with an interlocutory injunction sought by IAL.  I gratefully adopt that formulation of the circumstances.

5.  Since that judgment IAL’s pleadings have been amended.  The primary claim on the part of IAL is now a claim in equity alleging that since 14 October 2006, or at the latest, 16 November 2006, Dr H. C. Leung has, by virtue of an executed agreement for sale and purchase, been a bare trustee of the legal title of his shares in Group Benefit Development Ltd, (GBDL).  A claim of conversion of the title of the shares by Dr H. C. Leung remains, and an additional claim based upon breach of fiduciary duty on the part of Dr H. C. Leung, that duty arising from the allegation of trusteeship of the shares, has been added.

The arguments to resist summary judgment:

6.  In his proposed Amended Defence and Counterclaim, Dr H. C. Leung pleads primarily that he entered into the contract for the sale of his shares in GBDL to IAL in reliance upon two representations made by the chairman of IAL, (Dr John Shum), and his wife, namely:

(a)     that Dr John Shum and his wife believed that the managing director of GBDL, Dr Vincent Leung, (the 1^st defendant), had been discharging his director’s duties dishonestly; and

(b)    that the purpose and intention of IAL in acquiring Dr H. C. Leung’s shares in GBDL were to form a majority group of the GBDL shareholders in order to improve the governance of GBDL;

7.  Dr H C Leung says that both of these representations were misrepresentations, as follows:

(a)     in fact neither Dr John Shum nor his wife honestly held a belief that Dr Vincent Leung was dishonest, and further there was no proper foundation in fact for such a belief; and

(b)    in fact the true purpose of IAL was not to improve governance of GDBL, but to sell on the GBDL shares to a buyer for a profit.

8.  By virtue of the alleged misrepresentations it is contended that Dr H. C. Leung was entitled to rescind any contract there may have been to sell his GBDL shares to IAL, and to sell them to Newide.

9.  The argument made for Dr H. C. Leung is that there are triable issues on these allegations of misrepresentation, and that accordingly there should be no summary judgement.

10.  The argument for Newide first adopts the contention of Dr H. C. Leung, that by virtue of the misrepresentations there was no enforceable contract between IAL and Dr H. C. Leung, and that accordingly Dr H. C. Leung was free to sell his shares in GBDL to Newide.  Second, it is said that Newide was a bona fide purchaser for value of Dr H. C. Leung’s shares in GBDL, without notice of any beneficial interest of IAL in the shares.

Discussion:

11.  As I have concluded that there should be no summary judgment, and that the matter should proceed to trial, I do not propose to comment on the merits of the arguments made by both Dr H. C. Leung and Newide, other than to say that in the circumstances I am unable to say that the contentions fall within the category of “moonshine”, they being, on the face of the papers, at least arguable.

12.  I say that for the following reasons.

13.  Dr John Shum acknowledges in his 3^rd affidavit, (para 13(c)), that:

“…. Eva Shum and I probably told Dr H. C. Leung that we had reasons to suspect that Vincent Leung had acted dishonestly in conversations with him.”

However he then arguably purports to resile, at least in part, from the allegation of dishonesty.  Instead of asserting the basis upon which he alleged dishonesty, he uses somewhat less pejorative language, conceding only to an assertion that Dr Vincent Leung:

“had not been discharging his duties properly and that he has received excessive remuneration without proper authorisation.”

14.  In his 1^st affidavit whilst asserting to “evasion” on the part of the Dr Vincent Leung, and a “lack of proper authorisation”, he does not go so far as to make direct allegations of dishonesty.  In his 5^th affidavit he merely said that Dr Vincent Leung’s management: “lacked transparency and accountability”.

15.  In the light of his concession that the expression “dishonestly” may have been used in the discussions with Dr H. C. Leung, and having regard to the terms of his affidavits, I am satisfied that there is a triable issue as to whether or not such a representation was made, and the terms of any such statement.

16.  In seeking to assert that the true purpose of IAL was to acquire and resell the GBDL shares at a profit, and that there was no intention to improve governance, Dr H. C. Leung takes on a heavy burden for there are significant and extensive documents in support of IAL’s contention that it wished to improve the governance of GBDL.  That said however, there is evidence to substantiate the proposition that prior to the contract between IAL and Dr H. C. Leung for the acquisition of the GBDL shares, GBDL had been in discussion with a prospective purchaser.  There is no direct evidence of IAL communicating that fact to Dr H C Leung.

17.  An issue is raised on the papers as to the precise point in time at which Dr H. C. Leung learned of those discussions.  If Dr H. C. Leung had not learned of that prospective sale prior to entering into the contract to sell his GBDL shares to IAL, I am unable to say that his contention that, in failing to disclose those negotiations or discussions to him, IAL has misrepresented its true position, is unarguable.

18.  I accept too, that, if made in the terms alleged by Dr H C Leung, it must be an issue for trial, as to whether the misrepresentations, if any, were material in the decision of Dr H. C. Leung to sell his GBDL shares to IAL.

19.  For Newide, two points are made.  First, if there is an arguable case that Dr H. C. Leung did not have a specifically enforceable contract with IAL, in relation to the GBDL shares, then it is contended that Dr H. C. Leung was free to sell those shares to Newide.

20.  Having found that Dr H. C. Leung does have an arguable case that he was entitled to rescind the contract with IAL, it follows that there can be no summary judgment against Newide.

21.  A second contention on the part of Newide, that it did not have notice of the transaction between IAL and Dr H. C. Leung is, in the light of the facts, simply incapable of serious argument. 

22.  Dr Vincent Leung admits, (1^st affidavit, paragraph 75), that IAL applied to the board of GBDL, of which he is the chairman, for approval to register the share transfer from Dr H. C. Leung to IAL.  Irrespective of the precise nature of the transaction between IAL and Dr H. C. Leung, whereby Dr H. C. Leung’s GBDL shares were transferred to IAL, in his capacity as chairman of GBDL, Dr Vincent Leung unarguably knew of the fact of the transfer.  What is important as far as notice is concerned is the fact of the transfer, not the means by which the transfer was to be effected.

23.  It is clear that the attempts to register share transfers took place well prior to 27 February 2007, the date upon which Newide and Dr H. C. Leung assert they entered into a contract for the sale of the shares in GBDL.  In all of those circumstances, the assertion by Dr Vincent Leung in paragraph 9 of his 1^st affidavit that he was not aware that Dr H. C. Leung had transferred his shares to IAL prior to 27 February 2007, is plainly untenable. 

24.  Dr Vincent Leung is the sole shareholder and director of Newide, a BVI company.  The knowledge he had in his capacity as chairman of GBDL is not confined that capacity.  He carries that knowledge to his position in Newide, which is vested with that knowledge.  In those circumstances there is simply no foundation whatsoever upon which it might be contended that Newide, in entering into a contract purchase Dr H. C. Leung’s shares in GBDL, was a bona fide purchaser for value without notice, and unaware of the prior transfer to IAL.

25.  Notwithstanding that that secondary argument is destined to failure, Newide is entitled to defend the action upon the basis that Dr H. C. Leung was arguably able, by virtue of the alleged misrepresentations, to rescind his contract with IAL.

26.  Both defendants have managed to succeed in reaching the low threshold required to establish that they have an arguable defence.

The application to strike out the counterclaim:

27.  The application to strike out Dr H. C. Leung’s counterclaim, which seeks, first, rescission or cancellation of the transaction in favour of IAL, and second, damages for malicious falsehood, is not now pressed by Mr Jat.

28.  First, having found there is an arguable case as to misrepresentation, the counterclaim for rescission must be allowed to stand.

29.  Second, Mr Jat acknowledges that the summons to strike out the counterclaim for malicious falsehood was based on a misunderstanding that the claim was for malicious prosecution.  In the circumstances, with the allegation as to whether or not the representation of dishonesty was made by Dr John Shum and his wife, and whether or not they honestly held that belief, being alive and matters for trial, the counterclaim, being based upon the assertion that the representation was made, and was not honestly held, must go to trial.

30.  Accordingly, the application to strike out the counterclaim must fail.

The conversion issue:

31.  This is in reality a mere pleading point.  Mr Chan makes the point that the allegation in the Amended Statement of Claim is an allegation of conversion of “title to shares”.  He refers to the decision of the Court of Final Appeal in China Everbright-IHD Pacific Ltd v Ch’ng Po (2002) 5 HKCFR 630 at 661F, where Millet NPJ said:

“It is trite law that converge and must be conversion of corporeal personal property: choses in action cannot be converted: Clerk & Lindsell on Torts (18^th Ed).”

“Title to Shares” is a chose in action.  The certificate evidencing the right to title to those shares is, on the other hand, corporeal personal property. 

32.  At the time of the transaction between IAL and Dr H. C. Leung, the share certificate representing the shares in GBDL owned by Dr H. C. Leung had been lost.  In order to enable the registration of the transfer application for a new share certificate was made to GBDL.  Although the board of GBDL refused to issue a new share certificate for the purpose of registering that transfer, it did issue a new share certificate to enable registration of the transfer to Newide.

33.  It is clearly arguable that if the transaction between IAL and Dr H. C. Leung was not capable of being rescinded, then upon the issue of the new share certificate, Dr H. C. Leung was obliged to hand it to IAL, to enable IAL to register its transaction.  His act in handing the share certificate to Newide instead is arguably a conversion of the share certificate.

34.  A simple amendment to the statement of claim remedies the matter.  The application to strike out the prayer for damages for conversion is accordingly refused.  IAL must make the appropriate amendment.

Amendment of the Defence and Counterclaim:

35.  It follows, summary judgement having been refused, that Dr H. C. Leung may have leave to make the amendments in accordance with the draft filed.

Costs:

36.  All questions of costs on each of the applications heard by me will be in the cause.  There will be a certificate for two counsel.