SMART EDGE LTD v. HG PROPERTY INVESTMENT HK LTD

CACV 138/2023, [2024] HKCA 744

On appeal from [2023] HKCFI 1059

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 138 OF 2023

(ON APPEAL FROM HCMP NO 2146 OF 2022)

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J U D G M E N T

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Hon Barma JA (giving the Judgment of the Court):

1.  This is the defendant’s renewed application by Summons dated 13 July 2023 (“the Summons”), seeking a stay of execution of [54] and [55] of the judgment of Cheng J (“the Judge”) dated 27 April 2023 (“the Judgment”) ([2023] HKCFI 1059) pending the determination of its appeal to the Court of Appeal, pursuant to RHC Order 59 rule 13. The appeal is fixed for hearing on 21 August 2024.

2.  By the Judgment, the Judge made (at [54]) the following declarations and/or orders:

(1)  The agreement for sale and purchase dated 22 September 2022 between the shareholders of the plaintiff (“Shareholders”) and the defendant (“the Agreement”), and the writ of summons and amended writ of summons filed by the defendant in HCA 1469/2022 (“the Writ” and “the Amended Writ” respectively) are not instruments registrable on the Land Register of the Property under the Land Registration Ordinance (Cap. 128) (“LRO”);

(2)  The defendant do procure the removal of references to the Agreement, the Writ and the Amended Writ from the Land Register of the Property; and

(3)  The defendant be restrained from delivering the Agreement, the Writ and the Amended Writ to the Land Registry for registration against the Land Register of the Property.

3.  The Judge also made a costs order nisi that the costs of and occasioned by the plaintiff’s Originating Summons (and the Amended Originating Summons) should be paid by the defendant to the plaintiff, to be taxed if not agreed (see [55] of the Judgment).  

4.  The defendant lodged a Notice of Appeal against the Judgment on 5 May 2023.  On 9 May 2023, the defendant applied to the court below for a stay of execution.

5.  By her Decision dated 30 May 2023 ([2023] HKCFI 1441) (“the Decision”), the Judge dismissed the defendant’s application, and made a costs order nisi that the defendant should pay the costs of and occasioned by the said application to the plaintiff, such costs to be summarily assessed.

6.  The defendant’s renewed application is supported by the 1^st Affirmation of Song Jian Bo filed on 13 July 2023.  The application is opposed by the plaintiff, relying on the 2^nd Affidavit of Cosimo Borrelli filed on 4 August 2023.  In response, the defendant thereafter filed the 2^nd Affirmation of Song Jian Bo on 21 August 2023.

7.  Mr Edward Chan SC (leading Mr Jeffrey Tam) for the defendant lodged written submissions in support of the Summons on 4 September 2023.  Written submissions in opposition dated 18 September 2023 were lodged for the plaintiff by Mr Abraham Chan SC (leading Mr James Wood).  Thereafter, reply submissions on behalf of the defendant were lodged on 25 September 2023.

8.  Having considered the parties’ respective written submissions, we are of the view that it would be appropriate to dispose of this application on paper pursuant to RHC Order 59 rule 14A.   

The Judgment

9.  By its Amended Originating Summons dated 21 February 2023 (“Amended OS”), the plaintiff sought declarations that the Agreement, the Writ and the Amended Writ (collectively, “the Instruments”) are not instruments registrable on the Land Register of the Property under the LRO.  It also sought an order that the defendant do forthwith procure the removal from the Land Register of the Property of all references to the Instruments.

10.  The background to this matter and the parties’ respective positions were set out by the Judge at [3] to [28] and [32] to [37] of the Judgment.  For present purposes, it suffices to highlight the following:

(1)  At all material times, the plaintiff was the sole legal and beneficial owner of the Property.

(2)  On 13 July 2020, Mr Cosimo Borrelli and Mr Ma Siu Ming Simon (“the Receivers and Managers”) were appointed as the joint and several receivers and managers of the shares in and assets of the plaintiff.  The shareholders of the plaintiff (“the Shareholders”) were Cheng Mei Holdings Limited (Receivers and Managers Appointed) and Goal Eagle Limited (Receivers and Managers Appointed).  Between them, they owned the entirety of the issued shares of the plaintiff (“the Shares”).  There were also loans and indebtedness due and owing by the plaintiff to the Shareholders (“the Loans”).

(3)  On 22 September 2022, the Shareholders entered into the Agreement with the defendant to sell the Shares and Loans to the defendant. Under clause 4.1(d) of the Agreement, completion was conditional upon the defendant providing to the Shareholders, within 14 days, certain written confirmations from its financier.  On 1 November 2022, the Shareholders gave written notice to the defendant of termination of the Agreement on the grounds of the defendant’s failure to comply with clause 4.1(d).

(4)  On 3 November 2022, the defendant filed the Writ in HCA 1469/2022 (“the Action”) in relation to the Shareholders’ termination of the Agreement. At that stage, the only defendants named in the Action were the Shareholders.

(5)  On 25 November 2022, the Receivers and Managers entered into a sale and purchase agreement (“Goldstone SPA”) to sell the Property to Goldstone Asset (HKSAR) Limited (“Goldstone”). The Goldstone SPA was registered against the Property on 19 December 2022.

(6)  On 28 November 2022, the defendant’s solicitors delivered to the Land Registry a copy of the Writ and a copy of the Agreement for registration against the Property.

(7)  By its Originating Summons issued on 16 December 2022, the plaintiff commenced these proceedings against the defendant, seeking to remove the attempted registrations of the Writ and the Agreement from the Land Register of the Property.

(8)  On 20 January 2023, the defendant filed the Amended Writ, adding the plaintiff as the 3^rd defendant in the Action.  On 27 January 2023, the defendant’s solicitors delivered a copy of the Amended Writ to the Land Registry for registration against the Property.

(9)  The Writ, Amended Writ and the Agreement currently continue to appear in the “Deeds Pending Registration” section of the Land Register of the Property.

11.  The plaintiff’s case in the Amended OS is that neither the Agreement nor the Writ/Amended Writ is registrable against the Property. To be registrable under section 2(1) of the LRO, an instrument must create some legal or equitable interest in the land.  However, the plaintiff contends that the Agreement is only for the sale and purchase of the Shares and the Loans and therefore does not affect or create any legal or equitable interest in the Property.  Furthermore, the plaintiff points out that the Action asserts no claim to, or proprietary interest in, the Property.

12.  The defendant’s position is that the Agreement is not merely a simple agreement for the sale and purchase of Shares in the plaintiff.  It is said to be an agreement pursuant to which the defendant was to acquire an interest in the Property, and which is therefore registrable.  Specifically, it is contended that clause 11 of the Agreement,[1] interpreted in light of other clauses, requires the Shareholders to deliver possession of the Property to the defendant, or to procure that this be done.

13.  Having heard the parties’ submissions, the Judge allowed the plaintiff’s application and granted the relief in the Amended OS for the following reasons. 

14.  First, the Judge held that the Agreement does not create any legal or equitable interest in the Property on the part of the defendant and hence the Agreement is not registrable under section 2(1) of the LRO (see [38] to [45] of the Judgment):

(1)  The subject matter of the sale and purchase under the Agreement is the Shares and the Loans.   

(2)  Sale of the Shares would mean that the defendant would become the owner of the plaintiff, who owned various items of property including the Property.  However, upon construction of clauses 8[2] and 11 of the Agreement, they simply provide for the features of the Property as at the time of completion, which the defendant was to accept.

(3)  Clauses 11 of the Agreement, read in conjunction with clause 8, does not impose an obligation on the Shareholders to deliver vacant possession of the Property such that an interest in land was conferred on the defendant.

(4)  The plaintiff, as the owner of the Property, is not a party to the Agreement.  Even though the Shareholders’ act of entering into the Agreement would bind the plaintiff, this could not amount to the plaintiff conferring any interest in the Property on the Shareholders. 

15.  Second, the Judge held that the Action does not properly assert any claim to, or proprietary interest in, the Property so as to make it registrable as lis pendens. A claim to a lien in respect of the shares of a company is not a claim to a proprietary interest in the company’s land (see [46] to [51] of the Judgment).

16.  Third, as for the claim to specific performance of the Agreement, the Judge held that this cannot be a claim to an interest in land if the Agreement itself does not create any legal or equitable interest in the Property on the part of the defendant (see [53] of the Judgment):

The Decision

17.  The Notice of Appeal sets out its three grounds of appeal (summarized by the Judge at [8] of her Decision):

(1)  Ground 1: on a proper construction of clause 11 of the Agreement, the clause imposed an obligation on the vendor under the Agreement, namely the Shareholders, to procure the plaintiff to deliver vacant possession of the Property to the defendant.

(2)  Ground 2: the Judgment did not consider all the circumstances of the case and the context in which the Agreement, the Writ and the Amended Writ arose when considering whether the Agreement affected land.

(3)  Ground 3: the Judgment did not properly consider specific performance of the Agreement in the light of the obligation on the Shareholders to deliver vacant possession of the Property to the defendant in the Agreement.

18.  After the defendant filed the Notice of Appeal, it applied to the Judge for a stay of execution of the Judgment pending appeal.  The Judge determined the said application on paper and dismissed it.

19.  The Judge held that the defendant had not identified any arguable grounds of appeal against the Judgment.

(1)  For Ground 1, the Judge held that clause 11 of the Agreement does not expressly impose an obligation on the Shareholders to procure the plaintiff to deliver possession of the Property to the defendant.  Clause 11 refers, in the passive voice, to possession being delivered on the basis that it would be subject to, and have the benefit of, certain rights and obligations ([9] to [11] of the Decision).

(2)  For Ground 2, the Judge held that the legal and beneficial ownership of the Property is not altered by the Agreement.  The Agreement only provides for the transfer of the Shares and the Loans ( [12] to [14] of the Decision).

(3)  For Ground 3, the Judge held that the claim to specific performance of the Agreement cannot be a claim to an interest in land if the Agreement does not create any legal or equitable interest in the Property on the part of the defendant ( [15] to [16] of the Decision).    

20.  As the Judge did not consider that the defendant had established the minimum requirement of an arguable appeal, she dismissed the application for a stay. She held that she did not need to go on to consider whether she would have exercised the discretion to grant a stay in the defendant’s favour, had she considered that there was an arguable appeal.   

Legal principles

21.  The principles governing the grant of a stay of execution pending appeal are well-settled.  They are set out in the judgment of Ma J (as he then was) in Star Play Development Ltd v Bess Fashion Management Co Ltd [2007] 5 HKC 84 at [6] to [10], and have been consistently applied since then.   

22.  An appeal does not operate as a stay of execution of the decision below.  Unless an appellant can justify a stay by demonstrating that good reasons for granting one exist, a stay will not be ordered.  The existence of a strong appeal will usually by itself constitute a good reason for granting a stay, whereas the existence of a merely arguable appeal (i.e. one with reasonable, but not strong, prospects of success) does not by itself amount to sufficient reason for a stay. 

23.  While the existence of a strong appeal would tend to lead the court to exercise its discretion in favour of granting a stay, the threshold is a high one.  This court has held that the requisite strength of the grounds of a “strong appeal” must be such that would lead the court to conclude that “something has grievously gone wrong with the process of law in the court below”, or in other words, the appellant is “almost bound to succeed” in the appeal.  See Ming Hsieh v Xu Zhe & ors [2018] HKCA 390 at [10], per Kwan JA (as she then was).

24.  For the purposes of a stay application, the court is only required to form a preliminary view on the merits.  It would be impractical and undesirable for the court to go deeply into the strength of the appeal, and the court should refrain from embarking upon detailed discussion and analysis of the grounds of appeal.  See [9] of Ming Hsieh, supra.

25.  Ultimately, the court carries out a balancing exercise and uses its common sense, bearing in mind at all times the starting point that the successful party is not to be deprived of the fruits of his success.

Discussion

(i) Merits of the appeal

26.  In the parties’ written submissions to this court, they raise essentially the same arguments which had been canvassed before the Judge below.  Having considered the Judgment and the Notice of Appeal, adopting the approach indicated above, we take the view that the defendant has not demonstrated that the appeal is so strong that it is almost bound to succeed.  At best, the appeal is arguable.  The merits of the appeal do not of themselves justify the grant of a stay.  That being so, something more is required.

(ii) Would the appeal be rendered nugatory without a stay

31.  Where there is no very strong ground of appeal, the starting point is that the winning party should be entitled to the fruits of his success.  It is necessary for the appellant must show additional good reasons to justify a stay. 

32.  The defendant submits that if a stay is not granted, the appeal would be rendered nugatory.  In this regard, the defendant essentially made two main submissions:

(1)  First, in light of the fact that the Goldstone SPA was completed on 29 June 2023, if a stay is not granted, the defendant would lose its chance to put Goldstone on notice of its alleged interest in the Property even if the Appeal should ultimately succeed.  The inclusion of the Instruments on the register serves to protect the defendant’s interest, and removal of such protection would render the appeal nugatory because the plaintiff’s rights (if established) would lose priority over the Goldstone SPA.

(2)  Second, on 13 July 2023, the defendant filed a summons to join Goldstone as the 4^th defendant in the Action and intends to claim against Goldstone for a declaration that the Goldstone SPA constituted a disposition of property by the defendants with the intent to defraud creditors and for an order to set aside the Goldstone SPA.  There is a real need for a stay of execution of the Judgment pending the appeal as the lis pendens would protect the defendant’s interests in the Property.  Refusal of a stay would render the defendant’s claims in the Action futile. 

33.  In our view, the defendant is unable to demonstrate that the lack of a stay would render the appeal nugatory.

34.  At the outset, it is to be noted that this appeal concerns whether the Instruments are registrable against the Land Register of the Property under section 2(1) of the LRO.  It must be borne in mind that the Instruments have not as yet been registered against the Property and they currently remain in the “Deeds Pending Registration” of the Land Register.

35.  We agree with the plaintiff that the defendant’s first argument is founded on the false premise that the Instruments would take priority over the Goldstone SPA.  The Goldstone SPA, which was executed on 25 November 2022, was submitted for registration within one month of the date of execution (on 19 December 2022).  It follows that the Goldstone SPA would take priority as from the date of its execution by virtue of section 5 of the LRO.  In contrast, the Instruments were only presented for registration on 28 November 2022 and they remain pending registration.  Even if the defendant were to ultimately succeed in the appeal, and the Instruments were to be treated as having been registered on 28 November 2022, the defendant’s interest pursuant to the Instruments would nonetheless be subject to the Goldstone SPA, which would be a prior registered interest. 

36.  We are also unable to accept the defendant’s second argument that it would render the Action futile if a stay were not granted.  It is trite, and it is not disputed by the parties, that registration of a lis pendens only serves as a notice to third parties and does not have the effect of restraining the dealing of the Property.  When the lis pendens still remains pending registration, it makes no practical difference to the defendant’s position regardless of whether a stay is granted, as the defendant would lose priority to any third party’s interests in the Property which have been registered pending the determination of the appeal.  As a result, refusal of a stay would not render the appeal or the Action nugatory.

37.  In the circumstances, in the absence of any other good reasons to justify a stay, we take the view that the plaintiff should not be deprived of the fruits of success and we would therefore refuse to grant a stay of execution of [54] and [55] of the Judgment.   

(iii) Disposition and costs

38.  For the foregoing reasons, we would dismiss the defendant’s Summons.  As to the costs of this application, we order the defendant to pay the plaintiff its costs, such costs to be summarily assessed on paper.  For this purpose, we direct the plaintiff to file and serve its statement of costs within 14 days, and the defendant shall file and serve any grounds of objection within 14 days thereafter.