PENG FENGSHENG v. WONG TAK HUNG

HCA 1336/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1336 OF 2009

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D E C I S I O N

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1.  This is an application by the defendant to stay the action in favour of the Intermediate People’s Court of Yuexiu District of Guangzhou Metropolis.

The Plaintiff’s Case

2.  The plaintiff claims HK$12,500,000 from the defendant as the consideration for his sale to the defendant of 9,999 shares of and in a Hong Kong company Huge Faith Holdings Limited (“Huge Faith”).

3.  The plaintiff pleaded in his statement of claim that the Intermediate People’s Court of Guangzhou in 2003, wanted to sell a property by auction.  The plaintiff was interested in bidding for the property and wanted to find a partner to do so.  Through the introduction of one Mr Cheng, the plaintiff and the defendant came to know each other and agreed to take part in the bidding together.  They further agreed that the bidding should be carried out by a Mainland company controlled by the defendant and called Wanling Enterprise (Shenzhen) Company Limited (“Shenzhen Wanling”).  This is a company incorporated in the Mainland by the defendant.  The defendant in his affirmation said that Shenzhen Wanling was owned by a Hong Kong company Tat Yeung Holdings Limited (“Tat Yeung”).  Tat Yeung was also under the defendant’s control.

4.  The plaintiff further pleaded in his statement of claim that if the bidding should be successful, Shenzhen Wanling would transfer all its rights in the property to a new company, to be owned by the plaintiff as to 10% and the defendant as to 90%. 

5.  The bidding was indeed successful, and Shenzhen Wanling entered into an agreement dated 1 November 2003 with the auctioneers to confirm the auction sale.  The price was at RMB 548 million.

6.  A Mainland company called Guangzhou City Wanling Property Company Limited (“Guangzhou Wanling”) was then incorporated to hold the property.  The plaintiff then procured Huge Faith to hold his 10% shares in Guangzhou Wanling. 

7.  Huge Faith issued and allotted a total of 10,000 shares.  Of these shares, 9,998 shares were allotted to the plaintiff.  The plaintiff also held one promoter share.  The remaining promoter share was held by a director of Huge Faith, Mr Chan.  The defendant said on affirmation that Mr Chan has already passed away.  The plaintiff is the other director of Huge Faith. 

8.  Guangzhou Wanling was incorporated in Guangzhou in December 2003.  The application form submitted to the Guangzhou Government for incorporating Guangzhou Wanling stated that the three proposed shareholders were Shenzhen Wanling as to 30%, Tat Yeung as to 60% and Huge Faith as to 10%.

9.   The plaintiff then pleaded that he had a dispute with the defendant on the management of the property.  They then orally agreed in Hong Kong on 18 December 2003 that the defendant would purchase the plaintiff’s 9,999 shares in Huge Faith so that the plaintiff could withdraw from the investment project.  The price was agreed at HK$12,500,000 and payable within 120 days after the transfer of these shares. 

10.  The bought and sold note and the instrument of transfer were prepared for the plaintiff’s signature on 20 December 2003.  They were presented to him by the other director of Huge Faith, Mr Chan.  The plaintiff saw that the consideration stated in the documents was HK$9,999.  Mr Chan explained to him that that was in accordance with the usual rule in Hong Kong and assured him that the defendant had agreed and promised to abide by the share transfer agreement and would pay him HK$12,500,000 within 120 days from 20 December 2003.  A Mr Tang, who was with the plaintiff in the trip to Hong Kong, then drafted a memorandum confirming the transfer price at HK$12,500,000.  The plaintiff then signed a memorandum and share transfer documents and passed them to Mr Chan for the defendant’s signature.

11.  However, despite repeated requests, the defendant did not sign the memorandum or make any payment to the plaintiff.  The plaintiff later made inquiries with the Guangzhou Metropolis Administration Bureau of Commerce and Industry and found that when Guangzhou Wanling was formally registered, its shareholders were only Shenzhen Wanling and Tat Yeung.  He also found that there was a letter from Huge Faith filed with the Bureau confirming the withdrawal of Huge Faith from the investment in Guangzhou Wanling.  The copy of this letter as produced by the plaintiff on affirmation was dated 6 January 2004, which was more than two weeks after the plaintiff had signed the share transfer forms.  The letter does not contain any signature, but only the chop mark of Huge Faith.

12.  The plaintiff’s later inquiry with Mr Chan of Huge Faith on 15 January 2004 showed that the defendant had not signed the memorandum.  Since the defendant had failed to pay the HK$12,500,000, the plaintiff therefore started this action on 4 June 2009.

The Affirmations

13.  The defendant has not filed any defence but issued a summons for staying the action on 15 July 2009.  The defendant in his affirmation in support of the application said that he was a resident of Hong Kong and the plaintiff was a Mainland resident.  He denied that the plaintiff had planned to or taken part in the bidding of the property.  He said he had, through Shenzhen Wanling, successfully bid for the property on 1 November 2003.  The plaintiff then, through Mr Cheng, sounded out his interest in participating in the project of managing the property.  The parties then agreed that the plaintiff could have 10% of the investment, but he had to pay 10% of the price, auction fee and tax on the due day stated in the auction confirmation agreement.  It was also agreed that the plaintiff’s participation would be through his company Huge Faith to hold 10% of the shares of Guangzhou Wanling or RMB 20 million share capital of Guangzhou Wanling.  The total capital of Guangzhou Wanling at RMB 200 million should be fully paid by the parties before 15 December 2003. 

14.  This preliminary agreement was reflected in the application form submitted to the Guangzhou Administration Bureau for Commerce and Industry for incorporating Guangzhou Wanling.  However, the defendant and Huge Faith could not put in the RMB 20 million before 15 December 2003 and the joint venture was therefore terminated.

15.  The plaintiff and Huge Faith had not incurred any money in the property project.  The plaintiff, therefore, voluntarily withdrew from the project and Shenzhen Wanling and Tat Yeung then invested in Guangzhou Wanling.  All subsequent incorporation and registration procedure for setting up Guangzhou Wanling were done by Shenzhen Wanling and Tat Yeung to the exclusion of Huge Faith. 

16.  Since the plaintiff had no use for Huge Faith, the defendant, at the plaintiff’s request, agreed to take over the plaintiff’s shares of Huge Faith at HK$9,999.  The defendant denies that he had ever agreed to purchase these shares at HK$12,500,000.  The plaintiff later made a sudden demand for HK$12,500,000 but the defendant declined the demand. 

17.  The defendant also said that after his refusal to pay the HK$12,500,000, the plaintiff used triads to cause him troubles.  He therefore signed two documents dated 24 May 2005, agreeing to pay consultation fees of RMB 6,500,000 and RMB 1 million respectively to the plaintiff’s company.  His company later paid half of the sums.  For the remaining half, his company was sued by the plaintiff company to judgment, and the judgment was then satisfied by his company.

18.  At the end of the affirmation, the defendant said that the plaintiff’s claim arose out of the plaintiff’s alleged 10% shareholding in Guangzhou Wanling, which in turn arose out of the alleged investment agreement made in October 2003.  The dispute should therefore be dealt with by the courts in the Mainland.

19.  He also referred to the previous proceedings by the plaintiff’s company against his company which arose out of problems of the property held by Guangzhou Wanling.  Those proceedings were brought in the Intermediate People’s Court in Yuexiu District of Guangzhou. 

20.  He also said that the alleged agreement relied on by the plaintiff was allegedly made in the Mainland and should be subject to the Mainland’s laws.  The Mainland’s courts are therefore most appropriate to adjudicate the dispute.  However, I think he was factually incorrect on this.  The plaintiff’s case as pleaded in the statement of claim is that the oral share transfer agreement was made in Hong Kong and not in the Mainland.

21.  The defendant also said that the dispute relates to Shenzhen Wanling and Guangzhou Wanling, which are companies incorporated in the Mainland.  These companies have to abide by the Mainland’s laws.  He also said that he would call three friends as witnesses, as these friends had on different occasions witnessed the discussions between him and the plaintiff on their joint investment in the property.  He said it is inconvenient for these people to come to Hong Kong.

22.  The plaintiff opposed the application.  He said in his first affirmation that the property was auctioned by the Intermediate People’s Court in Yuexiu District of Guangzhou.  He learned about this in May 2003 and was interested in it.  He knew that the Intermediate People’s Court wanted to sell the property for no less than RMB 690 million.  His friend Cheng then introduced him to the defendant as his partner in this investment.  The defendant thought that a reasonable price for the property should be RMB 630 million.

23.  On about 26 September 2003, he negotiated with the responsible officials and the officials promised to try to bring the price down to RMB 570 million.  This was well below the figure of RMB 630 million.  The defendant was very pleased because at this price the investment would be profitable.  The plaintiff continued with his negotiation and eventually convinced the officials to bring the price further down to RMB 550 million.  Eventually, the property was sold to Shenzhen Wanling at RMB 548 million. 

24.  The difference between the actual price and the initial reserve price of RMB 690 million was RMB 142,000,000.  When the plaintiff negotiated with the defendant for the sale of his shares in Huge Faith, he took this as the profit of the investment.  He therefore used 10% of this profit and rounded it up to RMB 15 million as his asking price.  However, the defendant was only prepared to pay him HK$12,500,000 for his Huge Faith shares.  Eventually, the parties agreed at this price. 

25.  He also said that after the defendant had obtained his 9,999 Huge Faith Shares, the defendant had also obtained the right to use the chop of Huge Faith and applied the chop on the letter from Huge Faith to the Guangzhou Metropolis Administration Bureau of Commerce and Industry and dated 6 January 2004 to procure the withdrawal of Huge Faith from the investment in Guangzhou Wanling.

26.  The defendant filed his second affirmation to respond to the plaintiff’s affirmation.  He denied that there was the initial reserve price of RMB 690 million or that the plaintiff had successfully negotiated for the reduction of the reserve price.  He said the auction was by reverse pricing.  It started at RMB 650 million and moved downward.  Shenzhen Wanling successfully bid for it at RMB 548 million when the bidding came down to RMB 560 million.  He therefore denied that there was any price difference of RMB 142 million or that he had agreed to purchase the plaintiff’s Huge Faith shares at HK$12,500,000.  Regarding the letter from Huge Faith to the Guangzhou Metropolis Administration Bureau of Commerce and Industry and dated 6 January 2004, he denied knowledge of who had lodged it with the Bureau.

27.  The plaintiff made a further affirmation in reply.  He produced some evidence to show that valuation evidence on the property can be made available in Hong Kong by Hong Kong surveyors. 

28.  The defendant in his third affirmation agreed that Hong Kong surveyors could provide valuation evidence on the property in Guangzhou.  However, he maintained his dispute that the government had a reserve price or that the reserve price was no less than RMB 690 million as alleged by the plaintiff.

29.  He doubted whether the plaintiff could summon the Mainland officials to give evidence in Hong Kong courts.  He also produced a Mainland legal opinion to support his view.  However, the legal opinion says that whether the officials of the Mainland government would or would not give evidence in court is a matter for the relevant government department.   If that is the case, then I do not think the Mainland courts would be in a better position than the Hong Kong courts in summoning the officials to give evidence.  The Mainland lawyers did opine that the Mainland courts are in a better position to summon the officials to give evidence, but they have given no reason for this opinion and I do not think I can rely on it. 

30.  The defendant also repeated his denial of any involvement with the filing of the letter dated 6 January 2004 with the Guangzhou Bureau.  He suggested that this issue could be resolved by seeking discovery by the Bureau and to summon the Bureau’s officials to give evidence.

The Legal Principles

31.  The principles that govern this type of application have been set out in many cases.  I would refer to the judgment of Cheung JA in Pei Zheng Middle School and Another v China Pui Ching Education Foundation Limited and Others, CACV262/2005, at paragraphs 11 and 12:

“Forum non conveniens

11. The House of Lords in Spiliada Maritime Corp. v Cansulex Ltd, The Spiliada [1987] 1 A.C. 460, has set out the principles governing stay of proceedings by reason of forum non conveniens or forum conveniens (the terms are the same).  The principles are adopted in Hong Kong by this court in The Adhiguna Meranti [1987] HKLR 904, (Yang VP, as he then was, Hunter JA and Nazareth J, as he then was, and Louvet v Louvet and Another [1990] 1 HKLR 670 (Fuad VP, Hunter and Penlington JJA).

12. I have in the recent case of DGC v SLC nee C, CACV37/2005, summarised the principles as follows:

(1)   The single question to be decided is whether there is some other   available forum, having competent jurisdiction, which is the appropriate forum for the trial of an action, i.e. in which the action may be tried more suitably for the interests of all the parties and the ends of justice?

(2)   In order to answer this question, the applicant for the stay has to   establish that first, Hong Kong is not the natural or appropriate     forum (‘appropriate’ in this context means the forum has the most real and substantial connection with the action) and second, there is another available forum which is clearly or distinctly more appropriate than Hong Kong.  Failure by the applicant to establish these two matters at this stage is fatal.

(3)   If the applicant is able to establish both of these two matters, then the plaintiff in the Hong Kong proceedings has to show that he will be deprived of a legitimate personal or juridical advantage if the action is tried in a forum other than Hong Kong.

(4)   If the plaintiff is able to establish this, the court will have to balance the advantages of the alternative forum with the disadvantages that the plaintiff may suffer.  Deprivation of one or more personal advantages will not necessarily be fatal to the applicant for the stay if he is able to establish to the court’s satisfaction that substantial justice will be done in the available appropriate forum.”

The Defendant’s Arguments and Analyses

32.  The defendant’s counsel summarised what he called the present issues between the parties as follows:

“(1) whether there was an agreement reached between the plaintiff and the defendant to jointly take part in bidding the property, if so, what actually was agreed between the plaintiff and the defendant in respect of the joint venture business;

(2)   whether there was an oral agreement reached between the plaintiff and the defendant in respect of the sale and purchase of the plaintiff’s shares in Huge Faith to compensate the plaintiff for his withdrawal from the joint venture business; if so, what was the consideration for the transfer of the Huge Faith shares;

(3)   what was the reserve auction price of the property as fixed by the Intermediate People’s Court of Guangzhou and/or its auctioneers;

(4)   whether the document of Huge Faith’s withdrawal from the investment, i.e. the letter dated 6 January 2004, as submitted to the Guangzhou Administration Bureau for Commerce and Industry was filed by the plaintiff or the defendant;

(5)   whether the amount of compensation for the plaintiff’s withdrawal from the joint venture business should be based on the difference between the reserve auction price of the property fixed by the Intermediate People’s Court and the actual purchase price of the property, or the market value of the property at the material time, or the actual loss suffered by the plaintiff.”

The defendant therefore puts the plaintiff to strict proof of all the plaintiff’s allegations. 

33.  Counsel for the defendant submits that the Mainland courts are clearly and distinctly more appropriate than Hong Kong courts in trying this action.  Counsel said the crux of the dispute is the alleged compensation for the plaintiff’s withdrawal from the joint investment or joint venture; hence the reserve price fixed by the Guangzhou Intermediate People’s Court or its auctioneers is a crucial issue.

34.  Counsel then submitted that the property is in Guangzhou and is subject to the laws of the Mainland.  The plaintiff and many potential witnesses are Mainland residents.  The vendor of the property is the Guangzhou Intermediate People’s Court.  It is the vendor and/or its auctioneers who fixed the auction price.  Many important documents are kept by the Guangzhou Court or the auctioneers.  It is therefore anticipated that the officials of the court or their representatives will have to be summoned to give evidence on the reserve price, if any.

35.  However, I do not think these factors can support the defendant’s application for stay.  It is the plaintiff who alleges that he was interested in the property back in May 2003, and had done a lot of work to negotiate for a lower reserve price from RMB 690 million downwards.

36.  The defendant’s case is entirely different.  The defendant’s stance is that the plaintiff only showed interest in investing in the property with him after he had, through Shenzhen Wanling, bid the property for RMB 548 million in November 2003.  Before that, the plaintiff was not in the picture at all.  So the defendant has no positive case to prove on the plaintiff’s alleged reserve price or negotiation.  All the problems about making witnesses and documents available to this court to prove the reserve price and the negotiation are the plaintiffs’.  If the plaintiff should fail to prove his case, it is a matter for him.  These factors do not affect the defendant at all.

37.  Regarding the letter of 6 January 2004, the defendant does not know if the officials of the Bureau can or cannot tell who had filed this letter.  He thinks that discovery will give the clue.  If I should stay the action, there will be no discovery, so I think counsel was referring to discovery by the Bureau.  But there is no evidence on whether the Bureau can or cannot be ordered to make discovery of its documents, or whether the officials and/or the documents to be discovered will or will not give a clue as to who filed the letter.  I therefore cannot rely on this submission. 

38.  Counsel also referred to the difficulty of summoning officials to give evidence in this court.  I have already dealt with this point above when discussing the Mainland legal opinion.

39.  Counsel summed up by saying that the documentary evidence and oral evidence of the officials and/or the auctioneers are material.  But I think they are only material to the plaintiff as the defendant has no positive case to prove against the plaintiff on the reserve price or negotiation. 

40.  The defendant has indeed said that he would call several Mainland residents to testify on the discussion between him and the plaintiff on their investment in the property.  But it has been decided in this court on many occasions that the inconvenience for Mainland residents to come to this court to give evidence is not a factor in favour of staying proceedings in this court in favour of the Mainland courts.

41.  Counsel also referred to the previous proceedings brought by the plaintiff’s company against the defendant’s company in the Yuexiu Intermediate People’s Court and submitted that there are common questions of law and facts between those proceedings and this action, but those proceedings have already been disposed of and the judgment satisfied.  I see no basis to take those proceedings into account in deciding this application.

42.  Counsel also referred to the agreement between Huge Faith, Tat Yeung and Shenzhen Wanling on the incorporation of Guangzhou Wanling and said that the agreement provided for arbitration in the Mainland in case of dispute between the parties, but I think that agreement is merely part of the background of this dispute.  This dispute is focused on the oral agreement for sale and purchase of the plaintiff’s 9,999 shares of and in Huge Faith.

43.  In the premises, I find that the defendant has failed to establish that Hong Kong is not the natural or appropriate forum, or that the Yuexiu Intermediate People’s Court is clearly or distinctly more appropriate than this court. 

44.  In case I were wrong, and that I had to consider the next stage, I would find that the plaintiff has failed to establish that he will be deprived of any legitimate personal or juridical advantage if the dispute should be tried in the Guangzhou Court.

Decision

45.  I therefore dismiss the defendant’s application for stay.  I further make an order nisi that the defendant do pay the plaintiff the costs of this application now.