XUE XIAOYUN v. WU SHANG YING

HCA 1823/2022

[2024] HKCFI 1776

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1823 OF 2022

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JUDGMENT

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Background

1.  This is the plaintiff’s application for summary judgment against the 1^st defendant (“D1”) by a summons filed on 22 December 2023.

The Plaintiff’s Case

2.  The plaintiff (“P”) entered into an agreement in or around July 2015 with D1 where P invested US$1.5 million into TS Lines Limited (“TS Lines”) by advancing US$1.5 million to D1’s designated recipient (the “Investment”) on 24 July 2015. D1 or his nominees would hold the shares in TS Lines proportionate to the Investment on trust for P (the “Shares”). Upon the listing of TS Lines, the Shares will then become freely tradeable and will be transferred to P. Prior to the listing P shall be entitled to the dividends from the Shares (the “Trust Arrangement”).

3.  The Trust Arrangement was reduced into a written declaration on 25 July 2015 by D1 for and on behalf of himself and Kent Shipping Co Ltd (a company wholly owned by D1), the designated recipient (the “Declaration”).

4.  The Declaration reads:

“ It is declared that [P] has invested US$1.5 million into [TS Lines] …The aforesaid investment would be registered in the Shareholder Register under the name of [D1].

1. It is anticipated that the company will be listed in Taiwan in early 2017.

2. After listing, the shares shall be transferred to [P].

3. Before listing, [P] is entitled to dividends proportionate to his investment.”

5.  P seeks final judgment against D1 for:

(1)  an Order directing D1 to transfer 2.14% of the issued share capital of TS Lines (the Shares) to P.

(2)  an Order directing D1 to transfer, and/or procure the transfer of, the dividends derived and/or to be derived from and in relation to the Shares since 25 July 2015 (to be further assessed by the court) to P.

(3)  a declaration that D1 holds the Shares and their traceable fruits and/or proceeds (including dividends declared and/or which may be declared in respect of the Shares) on trust for P.

D1’s Defence

6.  D1 admits that the Declaration was entered into and that there was a Trust Arrangement. However, D1 alleges that:

(1)  TS Lines did not declare or distribute any dividends between 2015 and 2017. It was also never listed.

(2)  On or about 31 October 2017, P and D1 communicated on how the Investment should be returned to P.

(3)  D1 sent a WeChat text message to P at around 11:39 am on 31 October 2017, asking for bank details for the return of the US$1.5 million to P.

(4)  During a voice call on WeChat at around 1:06 pm on 31 October 2017, P and D1 reached an oral agreement (the “Termination Agreement”) whereby:

(a)  the Declaration shall be terminated with immediate effect;

(b)  All interest and/or rights in the Shares shall be vested in D1, who will cease to hold the Shares as P’s nominee.

(c)  P shall forthwith renounce all his interest in the Shares (including his interest in any dividends which may arise from the Shares).

(d)  D1 shall arrange to return the US$1.5 million to P within a reasonable time without any interest.

(5)  P acknowledged the Termination Agreement by a WeChat message sent by him to D1 at around 1:06 pm on 31 October 2017.

(6)  The Termination Agreement can be evidenced by the fact that P had repeatedly asked for the return of the US$1.5 million after 31 October 2017.

7.  Mr Chain SC, with Mr Xizhen Wang, counsel for D, submitted that the effect of the Termination Agreement is that:

(1)  As of 31 October 2017, D became the legal and beneficial owner of the Shares.

(2)  As of 31 October 2017, P acquired a contractual right to be paid US$1.5 million within a reasonable time; and

(3)  D has a complete defence to P’s present claim based on the Trust Arrangement / Declaration.

Legal Principles

8.  The applicable principles for summary judgment are trite and not disputed. In Li Chuen Kwai v Po Lam Construction Development Limited[1], it was held that:-

“ 11. As far as the plaintiff’s claim is concerned:

(1) An application for summary judgment must be supported by an affidavit verifying the facts on which the claim is based [Order 14, rule 2(1), Rules of the High Court].

(2) The Statement of Claim must be good and complete in itself; any defect or omission in the Statement of Claim cannot be corrected or supplemented by the plaintiff’s affidavit. If the defect is one of substance, the application for summary judgment will be dismissed [see: Hong Kong Civil Procedure 2014 at Practice Note 14/1/5].

(3) This means that an Order 14 application has to proceed on the case as pleaded, and it is those facts (as pleaded) which have to be verified on affidavit.

(4) Where the assertions in the plaintiff’s affirmation constitute a material deviation from the plaintiff’s pleaded case, the plaintiff will have failed to verify his claim as pleaded, and summary judgment should not be granted [Lin Jan v Long Xiaobo, HCA 1516/2012 (Judgment dated 4/09/2013)].

(5) Equally, summary judgment will not be granted where the plaintiff’s affidavit evidence is materially different from and inherently inconsistent with his/her case in the Statement of Claim [see: Sin Yuk Hung v Sin Tung San, HCA 474/2013 (Judgment dated 18/12/2013)].

12. As far as the defendant’s defence is concerned:

(1) The defendant shoulders the burden to satisfy the court that he has a real or bona fide defence (ie that there are triable issues), or that there ought for some reason to be a trial of the plaintiff’s claim.

(2) However, a complete defence need not be shown. The defence set up need only show that there is a triable issue or question or that for some other reason there ought to be a trial; and leave to defend ought to be given unless there is clearly no defence in law and no possibility of a real defence on the question of fact.

(3) Although the mere assertion in an affidavit does not, ipso facto, provide leave to defend, the court will not embark upon a mini‑trial of the action on paper and leave to defend will be granted unless the defence raised is so incredible or so contradicted by contemporaneous documents or circumstances that it becomes clear that the defence is a sham.

(4) The test is not whether the defendant’s assertions are to be believed, rather it is whether those assertions are believable, ie capable of being believed. If so, the defendant must have leave to defend.

(5) Whether the defendant’s assertions are believable is a question that should be answered not by taking those assertions in isolation bur rather by taking them in the context of so much of the background as either undisputed or beyond reasonable dispute.”

9.  In Ju Yan Di Emperory Genesisy v Yau Wai Han [2015] 1 HKLRD 822, 827, Cheung JA held that:-

“ 14. It is well-established that the burden on the defendant in a summary judgment application is to show that he has a credible defence and he must condescend to give particulars of his defence. However, this does not mean that once the plaintiff invokes the application and irrespective of the strength of his case, the defendant bears all the burden of showing that there are triable issues in the case. This is because the starting point in a summary judgment application is that it should only be invoked when there is no defence to the claim. This means that the plaintiff must in the first place demonstrate that the defendant has indeed no defence. This requirement is further recognised in the procedural rules which mandate the plaintiff to state his belief in the verifying affidavit that there is no defence to the claim. This requirement must be kept in proper perspective when assessment is made of the strength of the application, otherwise there is a danger that the attention will be focused solely on what the defendant has said without consideration at the same time of the basic premise of the plaintiff’s claim or its inherent strength and weakness…”

10.  Insofar as D relies on the purported oral Termination Agreement to deny liability under the undisputed Trust Arrangement (as evidenced by the written Declaration), Mr Dawes SC and Mr Brian Chiu, counsel for P, submitted, and there is no dispute from D, that:

“ Reliance on an alleged oral agreement to vary the agreement sued upon will not avail a defendant to discharge the onus on him and give rise to a triable issue where such oral evidence is inadmissible …

Where the defence rests on a collateral oral agreement, the defendant’s threshold onus is compounded by the onus to strictly prove the collateral oral agreement…”[2]

11.  Mr Chain further submitted that before the court rejects a defence on an oral agreement for summary judgment purposes, the following is instructive:

“ 43. … The court has to be confident that if The First Defendant gives at trial the evidence he has set out in his witness statement the court will reject the material parts of that evidence as untrue…

48. …can the Court properly and fairly say that it is inevitable that the Court, having heard The First Defendant’s evidence tested under cross-examination, will find that he has lied, as is the Claimants’ case? I have concluded that the Court cannot properly and fairly say that. The Court does not know what answers he will give to the many questions which can fairly and forcefully be put to him…”[3]

12.  As to the principles on interim payment, there does not seem to be disputes between the parties that the principles as set out in Delco Participation B V v Chiho Environmental Group Limited (formerly known as Chiho-Tiande Group Limited) & Another[4] are applicable:-

“ 31. As to an application for interim payment under Order 29 rule 10, whether to order interim payment is an exercise of the court’s discretion. There is some overlap with the test for granting conditional leave to defend, namely whether the defences and/or counterclaims raised can be said to be shadowy. But, essentially, the burden is on the plaintiff to show on the balance of probabilities that it would, and not merely that it is likely to, succeed at trial. The standard of proof required is high.

32. Where unconditional leave to defend is granted, it is at least unlikely that the plaintiff will be able to satisfy the burden of proof required to make an order for interim payment. But that may depend in each case on the nature of the claim and the defence put forward.”

Analysis

13.  Mr Chain submitted that whether the summary judgment application should be allowed depends on whether the court is of the view that the Termination Agreement relied on by D1 raises no triable issues, that his defence is not even “reasonably capable of belief”?[5]

14.  It was submitted by Mr Chain that at the time of the call on 31 October 2017, the Termination Agreement made much commercial sense and is believable in light of the following:

(1)  At that time, TS Lines’ financial performance had suffered in 2016 due to an accident and its financial performance was uncertain. The parties did not have a clear picture of TS Lines’ positive recovery of financial performance in future.

(2)  Coupled with the fact that TS Lines had a long track record of focusing on growth and not declaring dividends since it was founded in 2001, which was likely to continue in the foreseeable future, it is said that there was no realistic timeframe for dividends to be declared.

(3)  The previous plan to list TS Lines by 2017 was abandoned with no alternative dates set for future listing.

(4)  P had indicated that he had a need for the use of the US$1.5 million.

15.  Mr Chain submitted that based on the above, it is eminently possible and commercially sensible that P had accepted the proposal so as to extract himself in whole from the Investment. Otherwise, it is said that he would be locked into the Investment which at the time had no foreseeable prospect of monetarization.

16.  Mr Dawes on the other hand attacked the very fundamental basis relied on by Mr Chain: that at the time of the call in October 2017, there was no foreseeable prospect of monetarization. Although there was a loss suffered by TS Lines in 2016, by the time of the call (on 31 October 2017), it would have been apparent to D1 that TS Lines was doing well for the year 2017. Although the financial results would not have been publicly available at the time, D1, in his own words, was someone who was “acquainted with and had a line of communication with the management and would speak to them from time to time”. It was therefore submitted that D1 would not have been oblivious to the fact that TS Lines had been doing well at least for the first 10 months of 2017.

17.  Regardless of whether there was any foreseeable prospect of P monetarizing on the Investment as at October 2017, I find that as the evidence presently stand, the matters set out hereinbelow point against the existence of such a Termination Agreement:

(1)  The Declaration is not disputed. The starting point is therefore, that the Trust Arrangement was in place in 2015.

(2)  Such a Trust Arrangement is supported by the fact that, D1, in a message to P in February 2016, specifically mentioned that the investment in TS Lines was by P and D1 (“我們投資的德翔公司”, “恭喜我們一起”). This clearly indicated that at the time at least, D1 had acknowledged the Trust Arrangement, instead of thinking that it was any loan arrangement.

(3)  The fact that the Declaration was in writing indicates that parties had in the past set out their agreements in writing. However, there was no written confirmation as to the Termination Agreement.

(4)  The only written contemporaneous evidence that D could rely on is that before the call on 31 October 2017, D had texted the following to P:

“薛兄，有件事和您商量。上次您投資的德翔公司的壹佰伍拾萬美金，因為還沒上市，我有些考量，可否把當初匯出銀行的賬戶告訴我，我先把該欣款匯還您，詳細狀況我再電話告訴您，謝謝幫忙。

方便時通個電話，謝謝您。我人在德國拜訪客戶。吳尚鷹敬上。”

To which，P’s response after the call was:

“吳兄好！您的意思，我聽明白了。謝謝您！小雲”.

D then apologised for causing P trouble, but promised to definitively preserve and protect P’s rights and interest (“謝謝 ，增添麻煩了，但絕對確保您權益。感恩”).

(5)  Parties provide their respective interpretation on the above messages. However, it is not necessary to go into them because it is indisputable that on the face of the messages alone, it cannot be said that there was a meeting of minds that the Termination Agreement (in the terms as pleaded) was reached.

(6)  It is not D1’s case that as at October 2017, P’s investment was in any danger, in the sense of the capital of the investment will be at risk. The Termination Agreement thus seems to make little commercial sense: there is no ostensible reason why P would just accept a simple return of the capital of US$1.5 million after having made the investment for over 2 years, without any interest, and with no repayment deadline.

(7)  Although no dividends had been announced between 2001 and 2017, TS Lines, except for a loss of US$1.7 million suffered in 2016, has always enjoyed profits in its business in the region ranging from US$20 – US$50 million between 2015 and 2017. It is inconceivable that P would be relieved, and thanked D1 after having learned for the first time that there would be a nil return on the Investment.

(8)  It is incredible for D1 to suggest that over a brief phone call of less than 3 minutes, the following had been covered between P and D1 and the terms of the Termination Agreement had been agreed:

(a)  There was a transfer restriction concerning the Shares, as TS Lines was a private company controlled by Mr TS Chen, Director and Chairman of TS Lines with absolute discretion to “refuse to register a transfer of any share” who “would not approve any transfer of shares to any person or entity he was not familiar with” including P;

(b)  as a result of an accident in 2016, TS Lines’ financial performance had suffered and the prospect of the business is uncertain;

(c)  the plan to list TS Lines in 2017 had been shelved with no plans to list in the foreseeable future;

(d)  P had indicated his need for the use of the US$1.5 million.

(9)  This is especially so against the background that in February 2016, D1 was still congratulating the both of them for having made a good investment in TS Lines. It is inconceivable that a year and a half later, P would have raised no queries, sought no clarification or further information, and simply took what D1 said at face value and agreed to a proposal which meant that he would receive nothing from a 2-year investment, all within a 3-minute phone call.

(10)  Pursuant to the Termination Agreement, D1 should have returned the US$1.5 million within a reasonable time. This D1 had not done until 5.5 years later, the day before the deadline for P to serve his evidence and skeleton submissions.

(11)  Not only that, from the WeChat messages on 26 July 2021, when P demanded for the transfer of the Shares to D1, D1 did not immediately mention the Termination Agreement. Instead, the excuse put forward was that the Declaration was illegal due to the involvement of Chinese investment without prior approval. If the Termination Agreement truly existed as alleged, it would have been an easy and complete answer to any demand by P for the Shares.

(12)  In fact, the Termination Agreement was not even once mentioned (by either D1 or his son) when P requested for the transfer of the Shares, until D1 filed his defence.

(13)  The Termination Agreement, as alleged, would not provide any interest. However, during the discussion with D1’s son, he repeatedly proposed interest payment for the alleged loan. This is inconsistent to the Termination Agreement, if there was one.

18.  Despite all the above points that I find to be against D’s contention on the existence of the Termination Agreement, I consider the following points to be against P’s case, such that D’s defence is not entirely incapable of belief:

(1)  P’s case is that he believed the US$1.5 million payment offered by D1 represented advance payments of profits from the Investment and not a return of the capital, such that even after the return of the US$1.5 million, P would still retain his stake in the Shares.

(2)  However, what P received would have been equivalent to a 100% profit return in two years. There is no evidence on what was the likely return for the US$1.5 million as at 31 October 2017. There does not seem to be any basis for P to be under the impression that the US$1.5 million was not a return of capital but a guaranteed minimum return of the Investment.

(3)  P had in the conversation between him and D1 used wording that suggests that the agreement was to return his US$1.5 million as capital of the Investment, rather than as a return on the Investment: “甚麼時間能匯還我150萬美元本金”, “歸還資金事，有無具體時間與方案？”.

(4)  P only raised the demand for the Shares in July 2021 after the business of TS Lines improved drastically, which was not previously expected in 2016. Prior to July 2021, all P demanded was simply a return of US$1.5 million.

(5)  P’s conduct in complaining to the regulators seems to go against his alleged interest in the Shares. If he considered himself a shareholder in TS Lines, it is unlikely that he would risk harming his own interests as a shareholder by complaining to the regulators, which might have derailed the listing of TS Lines.

19.  Having considered the above, I am of the view that at this juncture I cannot come to the conclusion that D1’s defence is not even “reasonably capable of belief”. However, for the reasons set out above in paragraph 17, I consider the defence to be shadowy. I will accordingly only grant D1 conditional leave to defend.

20.  Counsel agreed that D1 should be afforded the opportunity to file evidence on his means before the court decides on what conditions to impose.

21.  I thus direct that D1 should file an affidavit (within 10 pages) within 14 days from the date hereof on his means and other relevant information for the court’s consideration on what conditions should be imposed. P do file and serve an affidavit (within 10 pages) within 14 days thereafter. D1 will have leave to file an affirmation in reply (within 5 pages) to P’s affirmation within 14 days thereafter.

22.  A hearing be fixed for arguments on the conditions to be imposed for the conditional leave to defend, with 2 hours reserved, in consultation with counsel’s diaries, unless in doing so the hearing will be delayed for more than 2 months.

23.  Costs of the application to be reserved for argument at the upcoming hearing.

24.  I thank Mr Dawes and Mr Chain for their assistance.