WANG FANG FANG v. CHINA ASIA GROUP (HK) LTD AND ANOTHER

HCA 1339/2020

[2022] HKCFI 2109

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1339 OF 2020

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BETWEEN

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D E C I S I O N

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Introduction

1.  The Plaintiff claims against D1 for (i) the unpaid price of HK$60 million for 60 million shares (“Shares”) in a Hong Kong company (“Target Company”) which the Plaintiff sold to D1 pursuant to an alleged oral agreement entered into in April 2019 (“Alleged Agreement”); and (ii) a declaration that the Plaintiff is entitled to exercise an equitable lien over 24,600,000 of the Shares still in D1’s possession.

2.  The Plaintiff seeks summary judgment, alternatively interim payment, against D1, but the application was dismissed by a Master.

3.  This is the Plaintiff’s appeal against the Master’s decision. The Plaintiff submits that this is a straightforward claim for unpaid price and the contemporaneous documents recorded the agreed price. D1 claims that the Shares were sold to D1 for free, to enable D1 to buy shares in a listed company. There was no Alleged Agreement.

4.  The core dispute lies in whether the Alleged Agreement existed, such that the transfer of the Shares was for a consideration of HK$60 million or for free. The appeal operates by way of re-hearing. After hearing counsel on both sides, I have no hesitation in upholding the Master’s decision.

Background

5.  The primary facts are not in dispute and I adopt the summary of Mr Man SC and Mr Danny Tang, counsel for the Plaintiff.

6.  Huang Binghuang (黃炳煌) (“Huang”) was the ultimate majority owner of a group of companies with the prefix “China Asia” (中 亞) (“China Asia Group”). It is a conglomerate with investments in many industries.

7.  The China Asia Group consisted of, amongst others, the following companies:

(1) China Asia Group (HK) Ltd, ie D1, which was a Hong Kong Company. At all material times, its director was Wang Lijiao (王麗姣) (“Wang”). Its registered shareholder was Wang between January 2010 and May 2019, and thereafter, Shenzhen China Asia Industrial Development Co Ltd深圳中亞實業控股集團有限公司 (“China Asia Shenzhen”) which was 90% owned by Huang.

(2) 中亞置業集團有限公司 (“China Asia PRC”) which was a PRC company with Huang as its Chairman and legal representative. Wang had been its CFO since 2008.

(3) 深圳中亞置業控股集團有限公司 (“China Asia Property”) which was a PRC company.

8.  The Target Company was a Hong Kong company. In 2019, it had share capital of HK$60 million, comprising 60 million shares of HK$1 each.

9.  Since 26 August 2016, the Plaintiff has become the registered shareholder of the entire 60 million issued shares in the Target Company, ie the Shares.

10.  There is no dispute that the Shares were held on trust. On the Plaintiff’s case, she held the Shares on trust for the Hong Kong subsidiary of Lioyds TSB Financial Group Ltd (“Lioyds”). The Third Party (“Tong”), the director of Lioyds, was appointed a director of the Target Company and had authority to deal with the Shares. On D1’s case, the Shares were held on trust for Tong. This dispute has no bearing on the core dispute.

11.  On 11 October 2014, Zhonghan International Finance Leasing Group Limited 中翰國際融資租赁集團股份有限公司 (“Zhonghan Finance”), a PRC company carrying on financing business in Qianhai, was incorporated.

12.  The Target Company held 36% shareholding of Zhonghan Finance. The other shareholders were 廣州市國大藝術品有限公司(“Guoda”) and 前海哥德巴赫進出口貿易(深圳)有限公司 (“Gedebake”), each a 32% shareholder.

13.  In December 2018, Huang learnt that a majority stake of 74.93% shares (“Majority Stake”) in a listed company, namely China Graphene Group Ltd (“Listco”) was available for sale. He was interested in having China Asia Group acquire the Majority Stake.

14.  In January 2019, Tong was recruited by Huang to join the China Asia Group as an executive to, amongst others, take charge of the acquisition of the Majority Stake and expand its financing and investment businesses.

15.  In April 2019, a conversation took place between Tong and Huang. There is dispute as to what was said and agreed between Tong and Huang, which forms the core dispute in this case.

16.  The Plaintiff’s pleaded case is that Huang had originally intended to use D1 as the corporate vehicle to acquire the Majority Stake. However:

(1) D1 did not maintain any bank account in Hong Kong, making the payment of consideration to Clever Robust (the chargee who was selling the Majority Stake through its appointed receivers) potentially difficult.

(2) D1, having no business operations and assets at the relevant time, was unlikely to satisfy the due diligence to be conducted by the Receivers and the requirements of the regulatory authorities.

(3) By reason of sub-paragraphs (1) & (2) above, and the competition from other potential buyers, Huang accepted Tong’s proposal for the Group to purchase the Target Company which (i) had an established business and substantial assets; (ii) had no debts; and (iii) maintained a bank account in Hong Kong.

(4) On or about 16 April 2019, Tong (on behalf of the Plaintiff) and Huang (on behalf of D1) entered into the Alleged Agreement, whereby D1 agreed to purchase the Shares at a consideration of HK$60 million and to pay to the Plaintiff upon the completion of the transfer of the Shares to D1.

17.  D1’s pleaded case is that:

(1) In around late April 2019, at Huang’s office, Tong advised that because D1 did not maintain any bank account in Hong Kong, that might make the payment for the acquisition of the Shares difficult.

(2) Tong thus made representation to Huang (the “Representation”) that Tong would, for free, transfer to D1 a company of his which had bank accounts in Hong Kong. That company of his was subsequently known to be the Target Company, whose sole director (it was subsequently discovered) was Tong and whose sole shareholder (it was subsequently discovered) was the Plaintiff.

(3) Acting in reliance on Tong’s advice and the Representation, Huang agreed that D1 should acquire the Target Company for the purpose of acquiring the Majority Stake in the Listco.

(4) On 30 April 2019 (“Completion Date”):-

(a) The Plaintiff, Tong & Wang (on behalf of D1) visited an accountant firm Prestige CPA Limited and signed the share transfer documents on the spot. Those documents had not been provided to Huang or Wang for perusal beforehand, were not explained to Wang at all and which Wang, an English-illiterate, could not read and understand by herself;

(b) Wang, trusting Tong, simply focused on the Chinese name of the Target Company and signed the documents as requested; and

(c) Wang simply did not pay attention to any figure on the documents because she (as well as Huang) trusted Tong that the transfer of the Target Company was for free.

18.  Wang admits that she had paid HK$120,005 stamp duty (which was based on the consideration of HK$60 million). However, she claims that she had signed without paying any attention to the contents of the documents.

19.  Having acquired the Target Company the China Asia Group proceeded to acquire the Majority Stake through the Target Company for HK$350 million.

20.  On 17 June 2019, D1 transferred 34.5 million of the Shares to D2. D2 was a BVI company of which Huang was a 90% shareholder.

21.  Accordingly, D1 (and the China Asia Group) had wholly achieved its commercial objective of acquiring the Majority Stake with the benefit of the Target Company. The Plaintiff says that D1 has wrongfully refused to pay for the Shares at the expense of the Plaintiff.

Legal principles on summary judgment

22.  There is no dispute on principles.

23.  Before the court looks at the defence, it must look at the plaintiff’s case first. If possibly genuine weaknesses are exposed in the plaintiff’s case, the Court should not give summary judgment: Li Mingren v Questex Development Inc & Anor, CACV 141/2014, 18 November 2015, at §13, applying Billion Silver Development Ltd v All Wide Investments Ltd [2000] 2 HKC 262.

24.  Where (as in the present case) an oral contract is sued upon and its terms (let alone its existence) are in dispute, summary judgment must be refused unless the plaintiff can satisfy the Court either that the plaintiff is entitled to judgment even on the defendant’s version, or that the defendant’s version is not truthful or is incapable of belief: Li Chuen Kwai v Po Lam Constructions Development Ltd, HCA 2376/2013, 24 September 2014, at §14, DHCJ Wilson Chan (as he then was).

25.  It is for the defendant to show that there are triable issues and the defendant must condescend to particulars. The mere assertion in an affidavit of a given situation by the defendant does not, ipso facto, ground leave to defend. The defendant must satisfy the court that his evidence is capable of belief and that on the basis of such evidence, there is a fair or reasonable probability of the defendant having a real or bona fide defence: Biel Crystal (HK) Manufactory Ltd v U-Borne Environmental Ltd [2021] HKCFI 2097, §24, Au-Yeung J.

26.  Whilst the Court should not embark on mini-trials, that does not mean that the Court is obliged to suspend its critical faculties and assume that the defendant’s evidence is accurate. If having regard to inherent plausibility, inconsistency with contemporaneous documents, and other compelling evidence, the defence is not credible, the court must say so. If the defendant’s defence is incredible in any material respect, it cannot be said that there is a fair or reasonable probability that the defendant has a real or bona fide defence: Biel Crystal, §§25-26.

Legal principles on ordering interim payment

27.  The Court has power to grant conditional leave to defend if the defence raised is a sham or the Court would have nearly given judgment to the plaintiff: Hong Kong Civil Procedure 2022, Volume 1, §14/4/16.

28.  Under Order 29, rule 12, a plaintiff may obtain an order for interim payment if he/she can prove that he/she would, as opposed to would likely, obtain judgment for a substantial sum of money against the defendant at the trial: Guo Jing Jing v Art Master Investment Ltd, HCA 1008/2009, 11 December 2009, at §88 Au J (as he then was); Hong Kong Civil Procedure 2022, Volume 1, §29/11/1, at p838.

29.  Mr Man SC relies on Million (Far East) Ltd v Manley Best (International) Food Ltd [2018] HKCFI 2193, §§18(5) & (9). However, that case concerns interim payment of remuneration and disbursements to provisional liquidators pending taxation. It has no application to the present case.

30.  The claim is for a substantial debt of $60 million. If the Plaintiff can show that she would obtain judgment after trial, most probably the Court will give summary judgment to her instead of interim payment. I think what the Plaintiff really means is to invite the Court to impose a condition for payment-in if leave to defend is given.

Analyses of the Plaintiff’s case

31.  Firstly, the Plaintiff relies on contemporaneous documents which, she says, entirely contradicted D1’s version. Those documents are the share transfer documents, ie the Instrument of Transfer and Bought and Sold Notes, both signed by the Plaintiff and Wang and stating the consideration to be HK$60 million.

32.  There was simply no reason to state the consideration there unless there was an agreement between the parties. Stamp duty could be calculated on the real value of the Shares without having to state a false consideration on the share transfer documents. Stamp duty in this case was computed on a consideration of HK$60 million and stamp duty was paid on the Completion Date.

33.  Wang attempts to explain away these documents on account of her illiteracy in English and her faith in Tong. There is dispute as to whether, with a degree in business management in 2008, Wang possessed sufficient literacy in English. However, that is beside the point. The material contents of those documents were, as Mr Man SC submits, not the English words but the figure of HK$60 million. It is hardly credible that as CFO of China Asia PRC since 2008 and non-executive director of the Listco, Wang would overlook a figure of that magnitude in formally signed documents.

34.  Secondly, the Target Company was not a worthless company.

(1) It had a paid up capital of $60 million in 2019.

(2) According to the Plaintiff, the Target Company had a registered capital of RMB120 million and had incurred no significant loss since 2014.

(3) Huang was well aware that the Target Company had valuable assets, in particular its then shareholding in Zhonghan Finance, when the Alleged Agreement was entered into. That was because Huang agreed to acquire a 75% stake in Zhonghan Finance for a total price of RMB40 million, with a view to expanding China Asia Group’s financing business. That acquisition comprised of China Asia Property’s purchase of 32% shareholding in Zhonghan Finance for MB17,066,666 from Guoda; 32% for RMB17,066,666 from Gedebake; and 11% for RMB5,866,666 from the Target Company. All 3 sale and purchase agreements were signed on 14 January 2019. By the time of the Alleged Agreement in April 2019, the Target Company was left with only 25% shares in Zhonghan Finance but they must still be of some value.

(4) As the Target Company was acquired to hold a valuable asset, D1 would have taken care to acquire a company that did not have negative value. However, D1 says that the Target Company had negative worth, ie -RMB12 million, which Mr Man SC submits, has no commercial sense.

(5) The Plaintiff claims that Zhonghan Finance had a value of RMB278,402,940 as at the end of 2018 (based on the last audited statements before the Completion Date and a PRC judgment). Although by virtue of its acquisition of the 75% shares in Zhonghan Finance, China Asia Property would have access to Zhonghan Finance’s financial documents, none such was produced to contradict the Plaintiff’s assertion of Zhonghan Finance’s value.

35.  Thirdly, the Target Company had other assets and business, including an oil tanker purchased at a price of US$38.6 million on 20 October 2015; a contract of affreightment dated 12 October 2016 whereby the Target Company chartered its vessel for 4 years; and a new vessel that was commissioned to be built for US$52.5 million pursuant to a construction contract dated 28 March 2018.

36.  It was thus inherently unlikely for a valuable company to be sold for free. The fact that Tong was an executive of the China Asia Group responsible for the acquisition of the Majority State did not make it likely that he would have sold for free.

37.  On the above analyses, the Plaintiff has a prima facie case to seek summary judgment.

Triable issues on D1’s case?

38.  As Mr Chang SC and Mr Gary Lam, counsel for D1, point out, there are unusual features in the present case.

39.  Firstly, there had been no bargaining between the Plaintiff and D1 on the price for the Shares. All that the Plaintiff says is that the HK$60 million represented the paid up value of the Target Company. D1 says that the Plaintiff had never met or dealt with any of D1’s representatives directly.

40.  Secondly, for a deal of this value, one would have expected the vendor to demonstrate to the purchaser the worth of the Shares, however urgent the acquisition of the Target Company was. And yet there had never been any valuation of the Shares or any correspondence between the parties to discuss the value prior to the Alleged Agreement.

41.  The value of the Shares suggested by the Plaintiff is disputed by D1. D1 relies on a valuation report dated 9 January 2020 (ie post-Completion Date) to show that, as at 31 March 2019, Zhonghan Finance was worth -RMB12 million. With 25% shareholding retained by the Target Company, it would have meant a negative value of about RMB3.8 million.

42.  This is, of course, not an exercise for the Court to choose between 2 competing valuations. However, in my view, the lack of valuation and D1’s dispute over the Plaintiff’s valuation go to support the defence that there was no Alleged Agreement and thus valuation never came across the minds of the parties.

43.  Thirdly, to enter into an agreement of this value without a single document (other than the share transfer documents) raises one’s eyebrows. That was quite inconsistent with the approach adopted when the Target Company sold 11% of Zhonghan Finance to a company within D1’s Group. An elaborate agreement was entered into covering, amongst others, representations by the vendor, despite the fact that the consideration was only RMB5.8 million.

44.  Mr Chang SC suggests that transfer of the Shares, being for free, explains why there was nothing in writing – because there were no obligations to perform between the parties.

45.  Fourthly, it was a term of the Alleged Agreement that the consideration would be paid on the Date of Completion. However, the Plaintiff transferred the Shares to D1 even though D1 had not paid the price. She claims to have repeatedly demanded D1 for payment. However, the fact remains that she had issued no written demand to D1 until over 6 months after the Date of Completion, first by the solicitors’ letter in November 2019, then by a statutory demand on 19 December 2019, and later by a winding up petition against D1 (which was struck out).

46.  Mr Man SC submits that it was because a lot of other things happened in the meantime for raising capital for the China Asia Group that payment of the HK$60 million was not pressed for. With respect, that begs the question of why it was (falsely) stated on the share transfer documents that the consideration had been paid. The Plaintiff cannot rely on those documents to support the existence of an Alleged Agreement over the consideration on the one hand, but ignore the (false) confirmation of receipt of the consideration on the other. Those documents simply do not support the Plaintiff’s case.

47.  Fifthly, Mr Chang SC queries whether Tong really gave away the Shares for free. Tong was promised a cash bonus and shares in the Listco if he were to successfully acquire the Majority Stake (§22.1 of Tong’s affirmation), although Tong did not elaborate further on what the shareholding would be. Similarly, on Huang’s own evidence (§15 of Huang’s affirmation), Tong would not have a salary but if Tong did his job properly he and his team would get 30% shareholding as reward, although there was no express reference to the Target Company deal. Accordingly, as senior personnel of the Group, Tong had reason to give away the Shares for free.

Findings

48.  An oral agreement is easy to allege but hard to prove, particularly when one is talking about such enormous consideration. Credibility of witnesses is important. Having heard counsel, I am of the view that D1 has raised triable issues of fact that can only be resolved by oral evidence at a trial. The defence does have a fair probability of success. I therefore give leave to defend.

49.  This is not a case where the Court holds a strong inclination as to merits of either party’s case. The defence cannot be said to be sham, or that I would have nearly granted judgment to the Plaintiff. Accordingly, no condition, let alone interim payment, should be imposed on D1.

50.  I therefore dismiss the appeal. On a nisi basis, I make an order for the Plaintiff to bear the costs of D1, with certificates for 2 counsel. Despite the amount involved, the core dispute is not complicated. With 2 counsel engaged, the appeal simply does not justify 2 fee earners. On a nisi basis, I summarily assess the costs and order the Plaintiff to pay D1 HK$500,000.

51.  I thank counsel for their assistance.