CHAN CHUN FAI AND OTHERS v. LEE SEE WOO

HCMP 1318/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1318 OF 2007

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BETWEEN

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J U D G M E N T

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BACKGROUND

1.  On 20 April 2000 Madam Leung Oi Wah (“Madam Leung”) entered into a loan agreement with Mr Lee See Woo (“Mr Lee”) the defendant by Original Action and the plaintiff by Counterclaim, by which Mr Lee agreed to make available to Madam Leung a loan up to the sum of HK$10,000,000.

2.  The loan agreement provided, inter alia,

“1. Loan

At the request of Leung, Lee has agreed to make available to Leung a loan up to the amount of HK$10 million (“the Loan”) provided that Lee may at any time hereafter at his absolute discretion cancel or withdraw any undrawn portion of the Loan.

2. Drawdown

The Loan will be advanced by Lee to Leung in such number of installments and in such amounts and on such dates as Leung may request during the period from the date hereof to 31^st March 2002.

3, Interest

Interest will be payable on the Loan as from the date of the drawdown to the date of repayment at the rate of 36% per annum or at such other rates as the parties may agree from time to time, and will be payable monthly in arrears.

4. Repayment

The Loan will be repayable on or before 30^th April 2002 or on such date as the parties hereto may agree.”

3.  From the date of the loan agreement until 1 March 2002 Mr Lee had advanced a total sum of HK$9,701,608 to Madam Leung.

4.  When the repayment date of 30 April 2002 arrived, Madam Leung was unable to repay Mr Lee and requested an extension for repayment to 30 June 2003.  In consequence, Madam Leung and Mr Lee entered into a written supplemental agreement on 30 April 2002 (“the 1^st Supplemental Agreement”) to extend the repayment date, upon provision of security.

5.  The material terms of the 1^st Supplemental Agreement were as follows:

“(ii)   There is now outstanding under the Agreement the total amount of HK$11,083,061.07 (“the Outstanding Loan”) which is repayable by Leung to Lee on or before 30^th April 2002.

(iii)       Leung has requested for an extension of time to repay the Outstanding Loan to Lee which Lee has agreed to grant on condition of Leung agreeing to procure Great Fair Ltd. and Wealth Way Ltd., both companies incorporated in British Virgin Islands and having their correspondence address at 2/F Wing Fai Shopping Arcade, 52 Wing Kwong Street, Hunghom, Kowloon, Hong Kong (“the shareholders”) to execute a charge on or before 8^th March 2003 of the total of 200,800,641 shares of a nominal value of HK$0.10 cents each (“the Shares”) in the share capital of New Chinese Medicine Holdings Ltd., a company incorporated in the Cayman Islands whose shares are listed on the Stock Exchange of Hong Kong, in favour of Lee.

Now it is hereby agreed as follows:

(i) Leung acknowledges that as at the date hereof the Outstanding Loan is immediately due and payable to Lee.

(ii) Leung hereby agrees with and undertakes to Lee to procure the shareholders to execute a charge of the shares in favour of Lee as security for the Outstanding Loan in such form and containing such terms and conditions as Lee shall in his absolute discretion require (share charge) on or before 8^th March 2003.

(iii) In consideration of Leung’s agreement and undertaking as contained in clause (ii) above and conditional upon Leung’s compliance with and fulfillment of and subject to all the terms and conditions contained in the agreement (save and except only the repayment date of 30^th April 2002 which is extended in the manner hereinafter mentioned) Lee hereby agrees to extend the repayment date of the Outstanding Loan from 30^th April 2002 to 30^th June 2003.”

6.  As the repayment date in the 1^st Supplemental Agreement approached, Madam Leung requested another extension to the repayment date of the Loan, from 30 June 2003 to 30 April 2005.  In consequence, Madam Leung and Mr Lee entered into a further written supplemental agreement dated 7 March 2003 (“the 2^nd Supplemental Agreement”).

7.  The 2^nd Supplemental Agreement contained the same terms as those of the 1^st Supplemental Agreement save that:

(i) The total outstanding amount of the loan was increased to an agreed figure of HK$12,852,168.17; and

(ii) The repayment date of the loan was extended to 30 April 2005.

8.  In March 2003, Madam Leung was the beneficial owner of 200,800,641 shares in New Chinese Medicine Holdings Ltd (“the Company”), 89,435,440 of the shares were registered in the name of Great Fair Ltd (“Great Fair”) and 111,365,201 shares were registered in the name of Wealth Way Ltd (“Wealth Way”) (“the Shares”).  Both Great Fair and Wealth Way were owned and controlled by Madam Leung.

9.  In or about October 2002, the shares in the Company were suspended from trading.  After the suspension was lifted in about November 2002, the share price in the Company collapsed by about 90%.

10.  On a date which is contested by the parties, Great Fair and Wealth Way executed a share charge in favour of Lee, charging the said 89,435,440 shares registered in the name of Great Fair and the 111,365,201 shares registered in the name of Wealth Way, to Mr Lee.

11.  The recital to the share charge refers to the 2^nd Supplemental Loan Agreement, and clause 3 of the recital refers to Mr Lee agreeing to grant the request for an extension of the repayment time “upon the chargors executing this charge in favour of Lee.”

12.  Clause 2.1 of the Share Charge provides that the charge is

“As a continuing security for the payment of the indebtedness under the terms of the agreement and the due and punctual performance and observance of Leung’s obligations and liabilities under the agreement, the Chargors, as beneficial owners, charge all the shares and the proceeds of any sale of the shares as a continuing security to Lee for the repayment and satisfaction on demand of all indebtedness.”

13.  The “Agreement” is defined as the Loan Agreement “as amended or supplemented from time to time before or after the execution of this charge”. (Recital 1).

14.  Recital 5 of the Share Charge provides that indebtedness is defined to mean:

“The total from time to time of all principal, interests, costs, fees, expenses, charges and other amounts payable by Leung to Lee under the Agreement.”

15.  The Share Charge further provides:

Clause 2.2:-

“The Chargors (i.e. Great Fair Ltd. and Wealth Way Ltd.) represent and warrant to Lee that the shares will remain within the Chargors’ own deposition and control and free from any restrictions on transfer and from any prior mortgage lien security or other encumbrance whatsoever.”

Clause 2.3:-

“During the subsistence of this Charge, the Chargors undertake not to (or agree or attempt to) sell, transfer, assign, charge or encumber the shares or any part thereof other than as contemplated by Clause 3 below.”

Clause 2.4:-

“The Charge hereby created shall extend to and the shares shall include all dividends or interest paid or payable after the due date hereof on any of the shares and all stocks, shares (and dividends or interests thereon), rights, moneys or property accruing or offered at any time by way of redemption, conversion, substitution, bonus, preference, option otherwise or in respect of any of the shares.”

Clause 3:-

“If so requested by Lee the Chargors shall forthwith execute and deliver a legal mortgage, transfer or assignment of the shares in favour of Lee (or its nominees) in such form or manner as Lee may require and/or forthwith sign, seal, deliver and complete all transfers, renunciations mandates assignments deeds or other documents as Lee may require to perfect its title to the shares, (divest) the shares in Lee (or its nominees) to exercise (or enable its nominees to exercise) any right and power attaching to the shares or to give effect to any sale or disposal under Clause 5 below.”

16.  On or about 11 March 2003 a meeting took place at the Company’s office in Hunghom which was attended, inter alia, by Mr Lee, Madam Leung, Chan Chun Fai (“Mr Chan”) the 1^st plaintiff by original action, Chu Hon Pong (“Mr Chu”) the 4^th defendant by Counterclaim, a Mr Jacky Wong the boyfriend of Madam Leung (“Jacky Wong”), Wong Chai Kit (“Kit”) and Wong Chai Hong (“Hong”), respectively the elder and younger brothers of Jacky Wong, and Mr Philip Wong a solicitor.  What transpired at that meeting (hereinafter referred to as “the Hunghom Meeting”) is hotly disputed, and is pivotal to the resolution of this case.

17.  On 29January 2003 the 5^th defendant by Counterclaim, Richfair Ltd (“Richfair”) was incorporated.  Kit and Hong as nominees of Madam Leung were each allocated 12,500 shares, Mr Chu was allocated 15,000 shares, Mr Lee 7,500 shares and Mr Chan 2,500 shares.  The board of directors included Jacky Wong’s brothers, and Mr Chu and Mr Lee.  The board resolution evidencing these matters is dated 29 January 2003.  Although Mr Lee accepts that the resolution bears his signature he gave evidence that he had no idea when that date was placed on that document.  His evidence was to the effect that he had never heard of Richfair before the Hunghom meeting.

18.  On 18November 2003 Mr Lee caused Stop Notice No 17 of 2003 to be issued and on 21 November 2003 Stop Notice No 18 of 2003.  These Stop Notices were in respect of the Company shares.

19.  On 6 July 2005 the Company resolved that every 4 shares in the Company would be consolidated into 1 share.

20.  Despite the Stop Notices Mr Chu obtained 80% of the 200,800,641 shares, being 106,640,512 shares which were exchanged for  40,160,128 new shares in August 2005, which he then registered in the names of the 2^nd plaintiff by original action, Jenny Chu Cheong Hing (Jenny) and the 3^rd plaintiff by original action, Pang Wing Keung (“Pang”).  Jenny and Pang are respectively Chu’s daughter and son‑in‑law.  Mr Chan obtained for himself 5% of 200,800,641 shares, ie 10,040,032 shares which were exchanged for 2,510,008 new shares.  It is said that Mr Lee agreed to this exercise at a meeting in the Nikko Hotel in Tsimshatsui on or about 4 August 2005 and that he, Mr Lee, would obtain 15% of 200,800,641, ie 30,120,096 shares which amounted to 7,530,024 new shares.  Mr Lee has denied that he had reached any such agreement.

21.  On 13 July 2007 the plaintiffs initially commenced this action by Originating Summons in which the plaintiffs sought to discharge the two Stop Notices in respect of the 200,800,641 shares in the Company.  This action was then proceeded with by way of Statement of Claim dated 14 August 2008.

THE PLAINTIFF’S CASE: - A SUMMARY

22.  In or about January 2003 Madam Leung was indebted to Mr Chu in the sum of approximately $27,800,000, to Mr Lee in the sum of approximately $12,850,000 and to Mr Chan in the sum of approximately $5,000,000.  All these sums were exclusive of interest.

23.  Mr Chan, Mr Chu and Mr Lee were all acquaintances of Jacky Wong who at all material times was Madam Leung’s boyfriend.  In about January 2003, Jacky Wong on behalf of Madam Leung, approached Mr Chan, Mr Chu and Mr Lee and suggested that in consideration of giving time to Madam Leung to make repayment to her creditors, Madam Leung would pledge 50% of her shares in the Company to secure her indebtedness to her creditors in proportion to her respective indebtedness to each of them.  Furthermore that Madam Leung would be allowed to keep the other 50% of her shares through her nominee, so as to have a chance to “re-establish herself”.

24.  As Madam Leung’s shares amounted to approximately 48% of the issued share capital of the Company, this would trigger an obligation to make a general offer.  In order to avoid this difficulty, it was agreed that a BVI company would be acquired to which the shares would be pledged.  The shares of the BVI company would then be allotted as to 50% to Madam Leung’s nominee and as to the remaining 50% amongst the creditors in the proportion to the amounts of Madam Leung’s respective indebtedness to them.

25.  Mr Lee suggested to Jacky Wong that Madam Leung’s shares in Company would first be charged to Mr Lee who would immediately assign the whole benefit of the charge to the BVI company to be incorporated.

26.  In consequence, Madam Leung agreed that she would procure Great Fair and Wealth Way to enter into a share charge whereupon Mr Lee would in turn assign to the BVI company

(a) Madam Leung’s indebtedness to Mr Lee; and

(b) The whole benefit of such indebtedness and the share charge.

27.  Thus the BVI company was to be owned beneficially as to 50% by the nominees of Madam Leung and as to the other 50% by the three creditors, Mr Chan, Mr Chu and Mr Lee in the proportion of Madam Leung’s indebtedness to them.  This proportion was agreed amongst the creditors to be 30%, 15% and 5% based upon their respective advances to Madam Leung of approximately $28,000,000, $13,000,000 and $5,000,000.

28.  Pursuant to this agreement, Richfair was incorporated in the BVI on 29 January 2003 with an initial capital of US$50,000 divided into 50,000 shares of $1 each.  Richfair shares were then allotted in accordance with the agreement, 12,500 to each of Kit and Hong as Madam Leung’s nominees, 15,000 to Mr Chu, 7,500 to Mr Lee and 2,500 shares to Mr Chan.

29.  At the Hunghom meeting in March 2003, Mr Lee executed the said share charge which was dated 7 March 2003 and at the same meeting executed a deed of assignment also dated 7 March 2003 assigning, inter alia, the whole benefit of the share charge to Richfair.

30.  At the same meeting, Mr Chu signed three notices of assignment on behalf of Richfair, to Madam Leung, Great Fair and Wealth Way.

31.  In consequence, the plaintiffs assert that Mr Lee never had any beneficial interest in the shares, alternatively that if he had any interest, such interest was “overtaken” by the deed of assignment, and that the defendant’s interest was limited to his 15% shareholding in Richfair.

THE DEFENDANT’S CASE: A SUMMARY

32.  Mr Lee asserts that he was approached by Madam Leung and Jacky Wong in early 2000, asking for a loan to be advanced to Madam Leung for the listing of the Company. This resulted in the 1^st Loan Agreement dated 20 April 2000.

33.  As noted, Madam Leung was unable to make repayment under the 1^st Loan by the repayment date which resulted in the entering into the 1^st Supplemental Agreement on 30 April 2002.

34.  Again, as noted, Madam Leung was unable to make repayment by the repayment date under the 1^st Supplemental Agreement which resulted in the making of the 2^nd Supplemental Agreement on 7 March 2003.

35.  The share charge which was entered into as a security for Madam Leung’s indebtedness to Mr Lee in the sum of HK$12,852,168.17 was, Mr Lee originally asserted, entered into on 7 March 2003.  It transpired at trial that this date could not have been correct, but in any event Mr Lee’s case remained that the share charge was entered into at a time before the Hunghom meeting.

36.  Mr Lee accepted that he had known Madam Leung and Jacky Wong for a considerable time, but that he only became acquainted with Mr Chu at the Hunghom meeting.

37.  Mr Lee entirely denied the alleged negotiations in January 2003 and denied having even discussed the proposals which eventually were said to have resulted in an agreement in January 2003.

38.  In particular, Mr Lee denied any knowledge of or involvement in a scheme to avoid an obligation to make a general offer for the Company shares, or any arrangement to permit Madam Leung to keep 50% of her shares to “reestablish herself”, or indeed that Richfair was to be established to facilitate the agreement alleged by the plaintiffs.

39.  Mr Lee further asserts that after the execution of the share charge, he received a phone call from Jacky Wong requesting him to attend the Hunghom meeting.  At that meeting, Mr Lee was informed that Mr Chu wanted to become the majority shareholder of the Company and in that regard proposed to purchase from Mr. Lee, through Richfair, an 85% interest in the share charge, for $14,000,000, leaving the remaining 15% interest in the share charge to Mr Lee.

40.  Upon Mr Lee’s acceptance of this proposal, he was presented with a deed of assignment (in the event it became clear that there were two identical deeds of assignment Exhibits PW-2 and PW-3, both signed by Mr Lee.  Nothing turns on this and the two identical deeds of assignment are hereinafter referred to as “the deed of assignment”).  The deed of assignment that Mr Lee signed provided that Mr Chu was required to pay Mr Lee $14,000,000 in consideration of :

(i) The share charge being assigned from Mr Lee to Richfair; and

(ii) That Mr Lee would be allotted 15% of the shares in the issued capital of Richfair, so as to retain an equivalent interest in the share charge.

41.  Mr Lee says that the deed of assignment signed by him at the Hunghom meeting was not the same assignment that has now been produced by the plaintiffs’. In particular Mr Lee says that the purported deed of assignment is a forgery, further or alternatively, the deed of assignment does not reflect the true legal position between the parties, and as such is a sham agreement.

42.  In particular, Mr Lee avers that the first page of the deed of assignment has been substituted by a different page and does not reflect the terms of the deed of assignment that he signed at the Hunghom meeting.  He accepts that his signature appears on the second page of each deed of assignment.

43.  Mr Lee further asserts that the deed of assignment that he signed was conditional in that it would not become effective until he had been paid the full sum of HK$14,000,000 by Mr Chu.

44.  In consequence, Mr Lee says that the deed of assignment now produced by the plaintiffs is ineffective, and that Richfair has never acquired any interest or title in the shares, and that the shares are still subject to Mr Lee’s share charge.

45.  Mr Lee seeks payment of $14,000,000 alternatively declaratory reliefs on the basis that there was no valid assignment to Richfair of the share charge and the underlying debt owed by Madam Leung to Mr Lee.

THE PLAINTIFFS’ (DEFENDANTS’ BY COUNTERCLAIM) REPLY AND DEFENCE TO COUNTERCLAIM :- A SUMMARY

46.  The plaintiffs deny that the share charge was executed by Great Fair and Wealth Way pursuant to the 1^st and/or 2^nd Supplemental Agreements.

47.  The plaintiffs further assert that Mr Lee knew Mr Chu since about 2002, alternatively at least since January 2003.  The plaintiffs specifically deny that Mr Chu proposed to purchase from Mr Lee an 85% interest in the share charge for $14 million.

48.  All allegations of forgery or sham in relation to the deed of assignment are expressly denied.

49.  The Defendants by Counterclaim assert that in any event Mr Lee in issuing and serving the Stop Notices has elected to maintain his interest under the share charge, and thus is not entitled to make claim under the alleged agreement for payment of $14,000,000 for an 85% interest in the share charge.

50.  I have sought to briefly summarize the parties’ respective cases.  However, I have also had the benefit of extensive written and oral submissions by Counsel for each of the parties to which I have paid close attention.

THE WITNESSES

PW1 – Chan Chun Fai

51.  Mr Chan gave evidence of his attendance at the Hunghom meeting.  He was asked about the deed of assignment.  He said he witnessed Mr Lee and Mr Chu signing a document but that as his English was not very good, he was unable to say whether the deed of assignment now produced by the plaintiffs was the same document that he had seen Mr Lee and Mr Chu sign.

52.  Mr Chan did not hear any mention of a payment of $14 million by Mr Chu to Mr Lee.  Mr Chan however said that he was the last to arrive at the meeting and that matters could have been discussed in his absence.

PW2 – Chu Hon Pong

53.  Mr Chu is a trader in petroleum products.  He told the Court that he has a Master of Business Administration degree from a university in the United States, and that he is fluent in written and spoken English.  He gave evidence of the proposals and eventual arrangements that he says were made in or about January 2003.  This included the agreement to avoid a general offer by assigning the benefit of the share charge to a BVI company, and the agreement by Leung’s creditors to take 50% of the shares of the BVI company, leaving the remaining 50% to Leung’s nominees.

54.  Mr Chu was asked about an affirmation he made on 12 July 2007 supporting an application to discharge the Stop Notices Nos 17 and 18 lodged by Mr Lee in 2003.

55.  I will return to the contents of this affirmation in due course, but note at this stage that Mr Chu agreed that material contents of that affirmation were untruthful.

56.  Mr Chu confirmed that at the Hunghom meeting he signed the deed of assignment and the three Notices of Assignment on behalf of Richfair Limited.  He further confirmed that Mr Lee signed both the share charge and the deed of assignment at that meeting, although he says that at that time the documents were undated.

57.  Mr Chu further asserted that he had been acquainted with Mr Lee long before the meeting in Hunghom.

58.  Mr Chu went on to explain how he was able to eventually end up with 80% of the Company shares which he then “gifted” to his daughter and son-in-law.

PW3 – Jacky Wong

59.  Jacky Wong confirmed that he was the boyfriend of Madam Leung and that he had been acquainted with Mr Chan, Mr Chu and Mr Lee for several years.  He gave evidence of the indebtedness of these three gentlemen to Madam Leung and of his “negotiations” with them.  He explained the arrangements that were made which culminated in an agreement in about January 2003 to the setting up of a BVI company, and the equity ratio in that company to reflect the debts due from each of the creditors to Madam Leung.  He further gave evidence of the concern that a general offer would be triggered.

60.  Jacky Wong attended the Hunghom meeting and gave evidence as to what transpired there including witnessing Mr Lee signing the share charge and the deed of assignment “one after another”.

61.  Jacky Wong also gave evidence of other arrangements that he had, principally with Mr Chu, in respect of managing or attempting to manage Madam Leung’s indebtedness to Mr Chu.

62.  It was clear that Mr Wong’s participation was central to the issues in this case in that he appeared to have been an important link between Madam Leung and her creditors, Mr Chu, Mr Chan and Mr Lee.  The plaintiffs’ case is that Mr Wong was responsible for arranging the preparation of the relevant legal documentation including the deed of assignment.

PW4 – Madam Leung Oi Wah

63.  Madam Leung gave evidence of her indebtedness to Mr Chu, Mr Chan and Mr Lee.  She also confirmed entering into the loan agreements with Mr Lee.

64.  Madam Leung attended the Hunghom meeting and also confirmed that Mr Lee had signed the share charge and deed of assignment “one after another”.

65.  She was asked in cross-examination about public announcements made by the Company in 2005 which recognized the continuing validity of the share charge to Mr Lee.  Although an executive director at the relevant time, and a former majority shareholder of the Company, she gave evidence that she was not aware of these announcements.

PW5 – Lo Kin Lun

66.  Mr Lo was employed by Messrs B C Chau & Co, a firm of solicitors.  He gave evidence as to copies of the deed of assignment, the share charge and other documents.  It was apparent that Mr Lo had little or no memory of the documents he was asked about, and his evidence was really of no assistance.

PW6 – Lam Sau Kwok

67.  Mr Lam gave evidence as to the keeping of documents of companies belonging to Mr Chu.  Again, Mr Lam appeared to have little personal knowledge of the documents or their custody and I found his evidence to be of little assistance.

PW7 – Wong Chai Kit

68.  Mr Wong is Jacky’s elder brother.  He attended the Hunghom meeting.  He gave evidence that he did not pay attention to what was said at the meeting and was not really interested in the arrangements that were allegedly made at that meeting.  I found his evidence to be of little assistance.

PW8 – Wong Tak Fu

69.  Mr Wong is the principal of Philip T F Wong & Co, solicitors.  He gave evidence that he was the legal adviser of the Company and of Madam Leung during the period from 2000 to about 2004.

70.  Mr Wong attended the Hunghom meeting.  He conceded in cross- examination that he had no real recollection of the documents that were signed at the meeting, nor the events that transpired at that meeting.  Again Mr Wong’s evidence was of no real assistance in determining the issues in this case.

DW1 – Lee See Woo

71.  Mr Lee gave evidence of the entering into the various loan agreements with Madam Leung.  He further asserted that he entered into the share charge at a time before the Hunghom meeting although it became apparent during his cross-examination that he was not really sure of the date upon which that in fact occurred.

72.  Mr Lee denied being acquainted with Mr Chu before the Hunghom meeting.  He confirmed that he had known Jacky Wong and Madam Leung for a number of years.  He denied having made any arrangements or agreements prior to the Hunghom meeting in relation to setting up a BVI company, the equity of which would be distributed to himself, Mr Chan and Mr Chu in proportion to their indebtedness to Madam Leung.  Mr Lee’s evidence was that until the Hunghom meeting he was unaware that Mr Chan and Mr Chu were owed monies by Madam Leung.

73.  Mr Lee confirmed that at the Hunghom meeting Mr Chu wanted to become the majority shareholder of the Company, and proposed to purchase from Mr Lee through Richfair 85% of the share charge for $14 million, leaving the remaining 15% interest in the share charge to be held by Mr Lee through Richfair.

74.  Mr Lee confirmed that the first page of the deed of assignment was not the same page as the document placed before him at the Hunghom meeting for his signature.  He confirmed that the deed of assignment that he had sought to place his signatures to, provided that Mr Chu would pay Mr Lee $14 million in consideration for the share charge to be assigned to Richfair, and an allotment of 15% of the shares in the issued capital of Richfair to be retained by Mr Lee as an equivalent interest in the share charge.

75.  Both parties instructed forensic experts, Dr Hamilton for Mr Lee and Dr Strach for the plaintiffs, to examine the deed of assignment.  The Experts produced a Joint Report but were not called to give evidence.  The Joint Report was in my view inconclusive as to the issues it addressed, and I have placed no weight upon it.

Discussion

76.  Counsel for the plaintiffs, Mr Lin, and Counsel for Mr Lee, Mr Richard Zimmern leading Mr Jason Yu emphasized that the events that took place at the Hunghom meeting are crucial to the resolution of this case.  Those “events” include the oral representations that were made and the signing of the deed of assignment.

77.  The genuineness of the deed of assignment is thus central to the resolution of this case (whilst there are two identical assignments the second page of each which bears Mr Lee’s signature, the Court, as noted simply refers herein to these two documents as “the assignment”).

78.  Mr Lee has asserted that the assignment is a forgery or sham document in the sense that the first page of the document that he signed has been removed, and has been replaced with another page which contains material to which he did not agree, and to which he did not put his name.

79.  The allegation of forgery/sham document made by Mr Lee is a very serious allegation.  There was some debate between Counsel with the Court as to “persuasive burden” and “evidential burden”.  In the event the question of burden is not a difficult one in that the same has been comprehensively dealt with by the Court of Final Appeal.  I have had regard to the Court of Final Appeal’s judgments in Nina Kung v Wong Din Shin [2005] 8 HKCFAR 387, Ming Shiu Chung & others v Ming Shiu Sum & others [2006] 9 HKCFAR 334 and the judgment of Litton PJ in HKSAR v Egan [2010] 13 HKCFAR 314@410.  I have also considered Re H & others (minors) Sexual Abuse: Standard of Proof [1996] AC 563.

80.  I approach the deed of assignment on the basis that on its face it is a perfectly regular document, signed by the parties thereto.  The burden of displacing what is plainly recorded in this document rests in my view upon Mr Lee who is the person asserting that the same is a forgery or a sham.  Allegations of forgery are very serious allegations and the burden resting upon Mr Lee is correspondingly a heavy one.

81.  I also acknowledge that a standard of proof commensurate with the seriousness of the allegations is required, and that evidence to a very high standard of cogency is necessary before a court could be justified in finding that a document has been forged.  Plainly inferences of fraud and serious misconduct are not to be reached by conjecture, nor on a mere balance of probability.  I also approach this matter factoring in the inherent greater improbability of serious misconduct as compared with lesser forms of misconduct, thus requiring the person bearing the burden of proving the allegation to prove it with evidence of a commensurate cogency.

THE DEED OF ASSIGNMENT

82.  The relevant terms of the deed of assignment all of which appear on the first page of the document which is dated 7 March 2003 are as follows:

“Whereas

(1) Lee is indebted to the Lender (Richfair) in the sum of HK$14,000,000 as at the date of this deed (the 1^st Loan) which is immediately due and payable.

(2) Leung Oi Wah (Leung) is indebted to Lee under an agreement dated 20^th April 2002 made between Lee and Leung (which agreement as amended or supplemented from time to time before or after the date of this deed is hereinafter referred to as “the agreement” in the sum of HK$12,852,168.17 (“the 2^nd Loan”) with interest accruing thereon at the rate of 9.5% p.a. as from 1^st January 2003 until the date of repayment.

(3) Lee is the Chargee under a share charge of even date herewith (“the Charge”) executed by Great Fair Ltd. and Wealth Way Limited in respect of 200,800,641 shares of HK$0.10 each in the share capital of New Chinese Medicine Holdings Ltd. (“the Shares”) being security for the 2^nd Loan.

(4) Lee has requested the Lender to accept an assignment of the 2^nd Loan and of the benefit of the agreement and the Charge in full and final satisfaction of the 2^nd Loan which the Lender has agreed to accept on the terms and conditions hereafter appearing.”

83.  It is apparent that the recital (above) to the deed of assignment which has been produced by the plaintiffs in this case, bears little or no resemblance to the arrangements which the plaintiffs say were worked out by the creditors in about January 2003, and which were supposed to be finalized at the Hunghom meeting.

84.  I accept that on occasion commercial documents are prepared which, for commercial purposes, do not necessarily accurately reflect the position of the parties (a practice which this Court in no way condones).  Mr Chu in cross-examination accepted that Mr Lee was not in fact indebted to Richfair in the sum of HK$14,000,000. He gave evidence that the Recital in the Assignment indicated that Mr Lee was so indebted because Jacky Wong had made some arrangement or scheme with Mr Lee in that regard.  Mr Chu said that he did not ask as to the details of this “scheme”.  In fact this was “a matter between the two of them” and that Mr Chu did not ask anything further about it.

85.  In an attempt to clarify this matter with Jacky Wong the Court inquired of Mr Wong as to how it was that Mr Lee is recorded in the Assignment as being indebted to Richfair in the sum of HK$14,000,000.  Mr Jacky Wong said (the Court’s note):

“Actually it was a scheme everybody agreed. Mr Lee was to assign the shares and the debts up there and how the sum is going to be offset. So everyone assumed that Mr Lee owed Richfair $14,000,000. Mr Lee agreed. That’s why we now see the scheme, that’s why the $14,000,000 came about. Up there the $14,000,000 was offset.”

Upon further inquiry, Mr Jacky Wong then confirmed that Mr Lee never really owed Richfair $14,000,000.

86.  The problem with the evidence presented by Mr Chu and Mr Jacky Wong is this regard arises from an affirmation made by Mr Chu some 4 years after the Hunghom on 12^th July 2007.  Mr Chu made this affirmation on behalf of himself and Mr Chan, Jenny and Pang in their application to apply for a discharge of the Stop Notices Nos 17 and 18 lodged by Mr Lee.  In the course of that affirmation Mr Chu produced the deed of assignment dated 7 March 2003 and said this on affirmation:

“9. At about the same time the Defendant (Mr Lee) was also indebted to me and other people including the 1^st Plaintiff (Mr Chan) via a business vehicle Richfair Ltd. in the sum of $14,000,000.

10. Out of negotiations amongst Leung, the Defendant and myself on behalf of Richfair Ltd. the parties agreed to further execute a Deed of Assignment also dated the 7^th of March 2003 under which the Defendant had accepted an assignment of the loan due to him and the Share Charge to Richfair Ltd. in full and final satisfaction of his debt due to Richfair Ltd. There is now produced and shown to me marked “TC-3” a true copy of the Deed of Assignment dated 7^th March 2003 executed by the Defendant in favour of Richfair Ltd.”

87.  This evidence given on affirmation by Mr Chu on behalf of the plaintiffs in this Action has caused me grave concern.  In answer to questions from the Court Mr Chu confirmed that the 1^st plaintiff Mr Chan knew of and agreed to this account advanced in Mr Chu’s affirmation.  Mr Chu further agreed that he had produced the deed of assignment to the Court by way of this affirmation in order to support the account that Mr Lee was indebted to him, and Mr Chan and other people, via a business vehicle being Richfair Ltd.

88.  I found Mr Chu to be an intelligent and articulate witness.  I have had regard to the fact that he has an MBA in Business Management from an American university and that he appears to be a successful and wealthy trader in petroleum products.

89.  The impression that Mr Chu tried to give to this Court was that at the time of the Hunghom meeting, and again 4 years later when he made his affirmation, that he really did not know any detail about the alleged $14,000,000 indebtedness, and had not made any further inquiry as to this matter from Mr Jacky Wong.

90.  I have no hesitation in rejecting Mr Chu’s evidence in this regard.  He has said clearly on affirmation that Mr Lee was indebted to him and to Mr Chan and other people through Richfair Ltd in the sum of $14,000,000, and that the Assignment was entered into in full and final satisfaction of Mr Lee’s debt to Richfair Ltd.  It is plain that these untruthful allegations were made, and that the deed of assignment was produced, in order to advance the plaintiffs’ attempts, through Mr Chu, to discharge the Stop Notices Nos 17 and 18.

91.  I also have no hesitation in rejecting Jacky Wong’s evidence in this regard.  His explanation of a “scheme” to offset debts which required Mr Lee to acknowledge in the Assignment that he was indebted to Richfair in the sum of $14,000,000, is with respect just nonsense.

92.  Thus, the Court is left with an Assignment produced by the plaintiffs and said to have been signed by Mr Lee, the contents of which are blatantly untruthful.  But more than this, that very Assignment was produced and employed (about 4 years after the Hunghom meeting) in an attempt to persuade the Court that the loan due from Madam Leung and the Share Charge were assigned by Mr Lee to Richfair, in satisfaction of his debt in the sum of $14,000,000 owed via Richfair to Mr Chu, Mr Chan and “other people”.

93.  As Mr Zimmern on behalf of Mr Lee has perhaps rhetorically noted, why would Mr Lee acknowledge a very considerable indebtedness to Richfair, which plainly never existed.

94.  Mr Chu’s evidence on affirmation made on behalf of and with the consent of the plaintiffs in July 2007 is wholly at odds with the account now advanced by the plaintiffs as to Madam Leung pledging 50% of her shares in the Company to secure her indebtedness to her creditors in proportion to her respective indebtedness to each of them; that there was a difficulty with a obligation to make a general offer; that a BVI company (Richfair) would be incorporated, and the shares of Richfair to then be allotted in proportion to Mr Chan, Mr Chu and Mr Lee’s respective indebtedness to Madam Leung.

THE OBLIGATION TO MAKE A GENERAL OFFER

95.  I have also carefully considered the plaintiffs’ assertions that the involvement of Richfair was necessary to avoid triggering an obligation to make a general offer.  I find that this assertion is nonsensical.  Madam Leung had a 48% interest in the Company.  If the arrangements alleged by the plaintiffs are correct, then Madam Leung would keep 50% of her shares to “re-establish herself (which translates as 24% of the issued capital of the Company).  It would then have only been necessary to charge 50% of her shares (again 24% of the issued capital of the Company) to Richfair.  Rule 26 of the Takeovers Code provides that a sale and purchase of more than 30% shares in a listed company requires a compulsory offer to be made to the other shareholders.  I note that the charging of shares is not the same as the sale of shares, but quite apart from that, on the plaintiffs’ case only 24% of the issued capital of the Company needed to be charged to Richfair, which would not have engaged a compulsory offer to be made to the other shareholders.

96.  Mr Zimmern has submitted that it is inconceivable how any arrangement whereby Madam Leung was to retain 50% of her 48% interest in the Company would have to have triggered the Takeover Code.  I respectfully agree.

THE COMMERCIAL SENSE OF THE ALLEGED ARRANGEMENTS

97.  I have set out the relevant terms of the Loan Agreements and the Share Charge in some detail.  I have done so because the content of these agreements, which are not disputed by the plaintiffs, identify clearly the position of Mr Lee vis-à-vis Madam Leung and her indebtedness to him, at the time that he attended the Hunghom meeting.

98.  The 1^st Supplemental Agreement dated 30 April 2002 makes clear that Mr Lee was owed a total sum of HK$11,083,061.07 which was as at 30 April 2002, immediately due and payable to Mr Lee.  The Agreement also establishes that extending the time for repayment was conditional upon Madam Leung agreeing to execute the charge over the shares.

99.  There is no mention in the 1^st Supplemental Agreement of the debts owed by Madam Leung to Mr Chu or Mr Chan.  The intention was to confirm a security interest only to Mr Lee.

100.  The 1^st Supplemental Agreement also evidences the fact that Madam Leung and Mr Lee contemplated executing the Share Charge in Mr Lee’s favour in early 2002, long before the arrangements that were allegedly made between Mr Chu, Mr Chan, Jacky Wong and Mr Lee in January 2003.  Mr Lee plainly had a contractual right to the Share Charge upon entering into the 1^st Supplemental Agreement on 30 April 2002.

101.  In short, Mr Lee was already contractually secured in relation to the debts owed by Madam Leung to him.

102.  The Share Charge itself is consistent with the terms of the Supplemental Agreements.  It is not disputed that by March 2003 Madam Leung owed Mr Lee HK$12,852,168.17.  The Share Charge was designed to secure that indebtedness.

103.  Thus, when Mr Lee attended the Hunghom meeting and met with Madam Leung’s other creditors, Mr Chu and Mr Chan; Mr Lee alone was already contractually secured in respect of his loans to Madam Leung.  This is so whether or not the Share Charge was actually signed at the Hunghom meeting or was signed at an earlier time.  By virtue of the Supplemental Agreements, Mr Lee had an immediate right to call for the execution of a share charge.

104.  Mr Zimmern submits that in these circumstances, it is inconceivable that at the Hunghom meeting Mr Lee would not only have transferred his security but also the indebtedness from Madam Leung when Mr Lee already had a security interest over all of the shares.  The absurdity of the situation (says Mr Zimmern) is that Mr Lee would be assigning everything over for 15% of Richfair, whereas Mr Chu and Mr Chan would receive their respective holdings in Richfair and also retain their indebtedness from Madam Leung.  The plaintiffs’ evidence is to the effect that Mr Lee mastermined the scheme that they say had been agreed in January 2003.  Mr Zimmern makes the point that if this is correct Mr Lee mastermined a scheme which was most unfavourable to him, and by which he was effectively the only party (creditor) to take 15 cents in the dollar of his own loan agreement, valued then at $12,800,000, when he was already secured for the full amount.

105.  The Supplemental Agreements, the outstanding indebtedness and the terms of the Share Charge are all undisputed.  They together unequivocally establish that Mr Lee at the time of the Hunghom meeting was a secure creditor for the amounts owed to him by Madam Leung.  In these circumstances, it simply makes no commercial sense for Mr Lee at that meeting to have assigned away his security and his indebtedness to Madam Leung in the manner described by the plaintiffs.  This does not mean of itself however that Mr Lee did not conduct himself in the way alleged by the plaintiffs at the Hunghom meeting.  There are numerous examples of people who enter into agreements which appear to be commercially unrealistic. However, I proceed on the basis that given the undisputed documentation evidencing Madam Leung’s debt to Mr Lee, and the security over that debt to which he was unequivocally entitled, it is to say the least unlikely that Mr Lee would have conducted himself in the way now alleged by the plaintiffs.

EVENTS AFTER THE HUNGHOM MEETING

106.  Mr Zimmern has also relied upon the conduct of the parties after the purported assignment was signed to demonstrate that none of the parties acted consistently with the terms of the purported deed.  He points to evidence which demonstrates that Mr Chu, Mr Chan, Jacky Wong and Madam Leung continued to deal with the shares in the Company as if Richfair did not have vested rights over the shares.  Mr Zimmern also points to the Company’s official announcement and circular which even as late as 2005 continued to acknowledge Mr Lee’s entitlement to the share charge.  He also relies upon the fact that Mr Lee registered the notices as if the share charge had never been assigned.  Furthermore that the shares were dealt with in breach of the stop notices.  I accept that each of these matters is established by the evidence.

107.  Mr Zimmern also relies upon the fact that Mr Chu eventually took control over the Company and became and remains its chairman, as supporting Mr Lee’s contention that Mr Chu wished to obtain for himself Mr Lee’s interest in the share charge.

MR LEE’S EVIDENCE

108.  Mr Lee was thoroughly and comprehensively cross‑examined.  Mr Lin, Counsel for the plaintiffs left no stone unturned, and tested Mr Lee’s evidence in every material aspect.

109.  During the cross-examination, Mr Lin established that Mr Lee could not as he has asserted, have signed the share charge on 7 March 2003, as Mr Lee’s travel record demonstrated that he was outside Hong Kong between 5 and 9 March 2003.

110.  Mr Lin drew particular attention to Mr Lee’s evidence of a private conversation with Jacky Wong during the Hunghom meeting relating to Mr Chu’s alleged agreement to pay $14,000,000 to Mr Lee.  Evidence of this conversation had not featured in any of Mr Lee’s witness statements or affidavits, and Mr Lin alleged that this was an embellishment by Mr Lee to strengthen his case.

111.  Mr Lin during cross-examination drew attention to the fact that by agreeing to pay $14,000,000 to Mr Lee, Mr Chu was in fact paying a considerable premium over the then value of the shares in the Company.  Furthermore that Mr Chu could have dealt with the matter by making repayment to Mr Lee in the sums then outstanding to Madam Leung of $12,850,000 to “buy out” the share charge.

112.  Mr Lin further investigated with Mr Lee why Mr Chu would only purchase an 85% interest in the share charge and not the entire interest if he wanted to become, as Mr Lee has asserted, the majority shareholder.  Mr Lin suggested that this had occurred because Mr Lee knew of the 15% shareholding in Richfair which he had obtained in January 2003.

113.  Mr Lin further postulated various scenarios to suggest that the first page of the assignment was consistent with the second page of the assignment, which page Mr Lee had admittedly signed.

114.  Mr Lee was carefully cross-examined on his allegation that the deed would not become effective until Mr Lee had been paid the full sum of $14,000,000 by Mr Chu.  It became apparent that Mr Lee was relying upon his construction of the words “immediately due and payable” as meaning that in some way this was conditional upon payment first being made.  Mr Lin in my view successfully established that payment of $14,000,000 was not conditional in the way in which Mr Lee said he believed it to be.

115.  Mr Lin has provided the Court with very full written submissions dealing with the above points and also with various other matters that he raised in cross-examination with Mr Lee.  I have considered all of these matters most carefully.

116.  Mr Lee is a well-educated man having obtained a law degree whilst a student at university, although he did not then pursue a career in the law.  He appeared to be a successful businessman and to be the sort of person who would have carefully considered any commercial or legal document that he was asked to sign.

117.  Mr Lee, as with the other witnesses in this case, was trying during his evidence to recall matters which occurred nearly ten years ago.  He is an elderly man and in the face of Mr Lin’s skillful cross‑ examination, he appeared at times to be confused and unsure about some aspects of his evidence.  At times and in particular in relation to the date upon which the share charge was signed, it appeared to me that he was trying to guess the answer to the questions, rather than having a distinct recollection of the particular event.

118.  Having listened to Mr Lee’s evidence and having watched his demeanor carefully during his lengthy cross-examination, and having considered all of the points put to him in cross-examination, I find that Mr Lee was a truthful witness.  Although at times his evidence caused me to pause for thought, I have reached the conclusion that any material inconsistencies in his evidence are a result of the passage of time, rather than any attempt by Mr Lee to mislead the Court or to embellish his evidence.

119.  Although I have doubts about Mr Lee’s reliability as to exactly when the share charge was signed, or the content of his conversation with Jacky Wong at the Hunghom meeting, I have no doubt that Mr Lee was trying to tell the truth as he remembered it to be.

CONCLUSIONS

120.  The principal allegation in this case, that the first page of the assignment signed at the Hunghom meeting has been replaced with a different page, is a very serious allegation.

121.  In Nina Kung v Wang Din Shin [2005] 8 HKCFAR @561G Lord Scott said this:-

“The Judge started from the wrong standpoint. Instead of requiring Mrs Wang to dispel his suspicious circumstances he should have considered all the reasonably probative circumstantial evidence in the round and asked himself whether its weight was sufficient to establish the very serious allegations that were made against Mrs Wang and Mr Tse.”

122.  The assignment produced by the plaintiffs, as noted, bears little or no resemblance to the arrangements said to have been made by Madam’s creditors in about January 2003.  The document itself is, to put it mildly, inconsistent with the matters said to have been agreed in January 2003 and put into effect at the Hunghom meeting in March 2003.

123.  That assignment was peddled to the Court by Mr Chu on behalf of the plaintiffs in order, in my view, to dishonestly attempt to persuade the Court to discharge the stop notices.  That dishonest exercise, conducted by Mr Chu, causes me concern about the truthfulness of his evidence generally in this case.

124.  I have also rejected Jacky Wong’s explanations as to the reasons why the assignment recorded matters which were plainly untruthful.  This too has caused me concern about the truthfulness of Jacky Wong’s evidence in respect of other matters in this case.

125.  I also reject the evidence given by Madam Leung as to her lack of knowledge of the company announcements and circulars which recognized the validity of Mr Lee’s share charge in 2005.  She is a well‑educated and experienced businesswoman who at material times was intimately involved in the affairs of the Company.  She was fully able to read in English the content of the announcements.  I have no doubt that she was being untruthful when she denied knowledge of these announcements.  This too has caused me concern about her evidence in relation to other matters in this case.

126.  The very basis of the “scheme” which the plaintiffs allege Mr Lee agreed to, being the concern as to having to make a general offer for the Company shares, is in my view without any foundation.

127.  I have found that there was simply no commercial sense for Mr Lee, who was already contractually secured in relation to the debts owed by Madam Leung to him, to have signed away his security and his indebtedness to Madam Leung in the manner described by the plaintiffs.  I am emboldened in this conclusion having seen and heard the evidence of Mr Lee who I conclude would simply not have entered into such an absurd commercial arrangement.

128.  I accept Mr Lee’s evidence that he had not met Mr Chu before the Hunghom meeting, and that Mr Lee had not agreed to the arrangements alleged to have been made in about January 2003 with Madam’s creditors.  Although Mr Lee’s signature appears on the board resolution which bears the date the 29 January 2003 I accept Mr Lee’s evidence that he has no idea when that date was placed on that document, and that he had never heard of Richfair before the Hunghom meeting.

129.  As noted I have also accepted that the evidence establishes the matters that occurred after the Hunghom meeting set out in paragraph 106 hereinbefore.

130.  For the reasons described I have grave reservations about the truthfulness of the evidence of Mr Chu, Jacky Wong and Madam Leung.  Having carefully considered Mr Lee’s evidence, I have found him to be an honest witness.  In all matters where Mr Lee’s evidence conflicts with the evidence of Mr Chu, Jacky Wong or Madam Leung, I prefer the evidence of Mr Lee.

131.  I have considered all the evidence “in the round” and asked myself whether its weight is sufficient to establish the very serious allegation that the assignment now produced to the Court by the plaintiffs is not the same assignment signed by Mr Lee at the Hunghom meeting in March 2003.  I have no hesitation in concluding that it is not the same document in the sense that the first page of that document has been substituted or replaced with the first page now before the Court.  I accept Mr Lee’s evidence that the document that he signed on that occasion is not the document now produced to the Court.

132.  Thus in the sense that the first page of the assignment now produced is not the first page of the assignment signed in March 2003, I find that the assignment is a forgery.

133.  I am not asked to nor do I make any express findings as to who is responsible for this forgery, although in commonsense Mr Chu, Mr Chan, Jacky Wong and Madam Leung have on their own evidence been instrumental in advancing this document to the Court as a genuine document.

THE RELIEFS TO BE GRANTED

134.  I accept Mr Lin’s submission that Mr Lee is not entitled to claim the alleged contract sum of $14,000,000.  Although Mr Lee may have at times chased Mr Chu for the payment of $14,000,000, its plain from his solicitor’s correspondence and from the fact that he issued and served the stop notices, that Mr Lee has elected to maintain his interests under the share charge.

135.  Mr Zimmern originally sought inter alia reliefs based on the establishment of trusts.  During trial he abandoned these reliefs and is content to seek declaratory reliefs on the basis that there being no valid assignment as contended for by the plaintiffs, Mr Lee is still entitled to the benefit of the share charge and the underlying debt.

136.  It is plain from my findings above that there was no valid assignment of the share charge and the underlying debt owing from Madam Leung to Mr Lee, to Richfair.  In these circumstances, there will be a Declaration to that effect.

137.  There will also be a Declaration that Mr Lee is entitled to the benefit of the share charge and the underlying debt.

138.  As to the 2,510,008 (new) shares in the Company, transferred from Wealth Way to the 1^st plaintiff on or about 22 August 2005, the 25,331,292(new) shares in the Company, transferred from Wealth Way to the 2^nd plaintiff on or about 22 August 2005, and 14,828,836 (new) shares in the Company, transferred from Great Fair to the 3^rd plaintiff on or about 22 August 2005 and the reminding 7,530,024 (new) shares in the Company there will be a declaration that the same are subject to the share charge.

139.  The plaintiffs’ Statement of Claim is dismissed.

140.  The parties will draw up an appropriate order to reflect the Court’s   reliefs granted above.

141.  There will be an order nisi that the plaintiffs by original action pay to the defendant (Mr Lee) the costs of and occasioned by the original action, and that the defendants by Counterclaim pay to the plaintiff by Counterclaim (Mr Lee) the costs of and occasioned by the same; all costs to be taxed if not agreed.  This order nisi will, unless either or both parties give notice, become absolute 14 days after the date of this judgment.

142.  It only remains for me to thank all Counsel for the helpful and skillful presentation of their respective cases.