EXCEL COURAGE HOLDINGS LTD AND ANOTHER v. WONG SIN LAI AND OTHERS

HCCL 34/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 34 OF 2013

(Transferred from High Court Action No 1827 of 2013)

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(By Original Action)

AND BETWEEN

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(By Counterclaim by Sun Xiao Xiang)

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D E C I S I O N

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1. I have before me two summonses of the 1^st defendant for leave to amend his defence and counterclaim and to file a supplemental witness statement of himself that first came before me on 2 December. It was considered then that there were problems with the terms of the amendments sought as a result of which the summonses were adjourned. I indicated on the last occasion that any new proposed amendments should be filed by 8 December. That has since been done. Without any opposition from the plaintiffs, I gave leave at the outset today for the 1^st defendant to amend his two summonses.

2. So the applications now before me are to make the amendments as shown in the draft amended defence and counterclaim attached to the summons as amended with leave given today, and to file and serve the supplemental witness statement attached to the other summons as amended today.

3. In this action, in broad terms, the plaintiffs allege there was an agreed arrangement implemented with the assistance of the 2^nd plaintiff’s friend, Mr Joseph Lau, whereby the 1^st defendant would be appointed a director of the 1^st plaintiff and hold one issued share in the 1^st plaintiff for the 2^nd plaintiff, and that the 1^st plaintiff would be used as the 2^nd plaintiff’s vehicle for investment in Hong Kong stocks.  For the purpose of that arrangement, the 1^st defendant executed: (1) a deed of trust dated 21 February 2011 in respect of one issued share in the 1^st plaintiff; (2) a blank undated share transfer form; and (3) an undated letter of resignation as director of the 1^st plaintiff.

4. The plaintiffs say that, on the instructions of the 2^nd plaintiff, the 1^st defendant caused the 1^st plaintiff to acquire shares in Luxey International Holdings Limited, stock code 8041.  By September 2013, the 1^st defendant had caused the 1^st plaintiff to acquire 974,180,000 shares in Luxey on that basis.  There is no complaint by the plaintiffs about the acquisition of the shares.  The plaintiffs’ case is that in breach of trust, the 1^st defendant subsequently wrongly caused the 1^st plaintiff to transfer all of those shares into four securities accounts held in the name of the 2^nd to 5^th defendants respectively, and caused the substantial portion of those shares to be sold

5. The plaintiffs claim that the 1^st to 5^th defendants are all trustees in respect of the unsold shares and the proceeds of sale of the sold shares, that there was a conspiracy, and that the 2^nd to 5^th defendants had dishonesty assisted the 1^st defendant’s breach of fiduciary duties.

6. The 1^st defendant does not dispute that he held the share in the 1^st plaintiff on trust, but says he held it on trust for Joseph Lau, not for the 2^nd plaintiff.  Lau was the chairman and a major shareholder of Luxey.  The 1^st defendant says Lau intended to use the 1^st plaintiff as a corporate vehicle to acquire and re-sell a travel agency business, and that the 1^st defendant agreed to act as Lau’s “front man” in the negotiation with potential purchasers of the business. 

7. The 1^st defendant admits having signed the deed of trust, share transfer form and letter of resignation, but says he signed them in blank.  The 1^st defendant says he was never informed that Lau had transferred his interests in the one share in the 1^st plaintiff to the 2^nd plaintiff or indeed anyone else.  In the event, Lau did use the 1^st plaintiff to acquire a travel agency called Achiever World Travel Services Limited, but did not resell it. 

8. The 1^st defendant’s case is that in February 2012, he and Lau decided to trade in listed securities through the 1^st plaintiff. There was an oral agreement whereby the 1^st defendant and Lau would each contribute HK$30 million to form a fund, which would be used by the 1^st plaintiff to acquire listed securities to be held on trust for the 1^st defendant and Lau in equal shares.  According to the 1^st defendant, pursuant to this investment agreement, he paid HK$30 million in cash to Lau in three tranches in April 2012.  Lau then injected, via a company called Fully Wealth Inc., the sum of approximately HK$61.9 million into the 1^st plaintiff’s bank account.  During the period from March 2012 to February 2013, the 1^st defendant caused the 1^st plaintiff to acquire a total of 974,180,000 shares in Luxey, and 147 million shares in another listed company called China Railsmedia.  These shares were held by the 1^st plaintiff on an express trust or a common intention constructive trust for the 1^st defendant and Lau in equal shares.

9. The 1^st defendant says that between February and August 2013 he and Lau discussed whether they should sell the Luxey shares and the Railsmedia shares.  The 1^st defendant says the 2^nd defendant was an investor from the Mainland who had expressed an interest in acquiring the Luxey shares and the Railsmedia shares at 40 per cent of the closing price on the day before receipt of the shares.  The 1^st defendant considered it would be in the best interests of himself and Mr Lau to sell the shares to the 2^nd defendant, and so, on 25 September 2013, he caused the 1^st plaintiff to sell the shares to the 2^nd defendant and transfer the shares to various accounts nominated by the 2^nd defendant.

10. As to why the 1^st defendant considered it to be in the best interests of himself and Lau to sell the shares then, in the existing defence, at paragraph 24,  the 1^st defendant pleads:

“In the light of (a) the fact that share price of the Luxey Shares had not risen substantially since February 2013; (b) the fact that the Luxey shares and the Railsmedia Shares were thinly traded; (c) Luxey’s disappointing 2013 annual result, Mr Wong considered that it would be in the best interests of himself and Mr Lau to sell the Luxey Shares and the Railsmedia Shares to Mr Sun pursuant to the Proposed Terms.”

11. By way of relief, the 1^st defendant seeks, inter alia, a declaration that the 1^st plaintiff is and was at all material times holding the Luxey shares, the Railsmedia shares and the proceeds of sale of the shares on express trust or common intention constructive trust for the 1^st defendant and Lau in equal shares.  Lau has been joined as the 3^rd defendant by counterclaim.  His defence to counterclaim takes the same line as the plaintiffs’ case. 

12. The amendments that the 1^st defendant seeks leave now to make assert the existence of a scheme devised by Lau to control a substantial amount of shares of Luxey via the 1^st plaintiff without disclosing his interest in those shares.  It is said that in mid April 2012, Lau asked the 1^st defendant and another person to help find six persons to act as nominees to subscribe for shares in a rights issue of Luxey.  The nominees were lent money to subscribe for shares and they were duly allotted shares.  Later in November 2012, they were told by Lau to sell their shares.  At the same time, the 1^st defendant, as instructed by Lau, caused the 1^st plaintiff to acquire a substantial amount of shares in Luxey.  This resulted in the 1^st plaintiff’s shareholding in Luxey to increase from 5.52 per cent to 19.75 per cent.

13. The 1^st defendant also wants to add a plea that when he caused the Luxey shares to be sold in September 2013, one of the reasons was that he considered Lau’s scheme to be improper and that it would be in the best interests of Lau, the 1^st defendant himself and the 1^st plaintiff, to dispose of the Luxey shares as soon as possible to prevent Lau from committing any further wrongdoing.

14. The 1^st defendant also seeks leave to adduce a supplemental witness statement of himself.  That witness statement largely covers the matters he seeks to add to the pleading. 

15. The crucial issues in the case are whether the 1^st defendant was a trustee holding the one share in the 1^st plaintiff for the 2^nd plaintiff as the plaintiffs allege, or for Lau as the 1^st defendant alleges, and whether the oral investment agreement alleged by the 1^st defendant existed. 

16. The plaintiff’s case is that the alleged oral investment agreement did not exist.  However, the plaintiff’s case is not that the 1^st plaintiff belonged 100 per cent to Lau, but that they belonged wholly to the 2^nd plaintiff from the outset. 

17. On the basis of the 1^st defendant’s new allegation, Lau wanted to have control over the shares in Luxey using the names of others including the nominees and ultimately the 1^st plaintiff.  The arrangement alleged by the 1^st defendant would enable Lau to retain control (together with the 1^st defendant if the oral investment agreement existed) over the shares acquired by the 1^st plaintiff in Luxey.

18. This seems to me to be relevant to the issue whether in fact Lau had no control at all, and that the 2^nd plaintiff was the full 100 per cent beneficial owner of the 1^st plaintiff. 

19. In the witness statement of Lau at paragraph 9, it is said:

“… the acquisition of any shares by Excel was completely out of the initiative and decision of the 2nd Plaintiff. I have never had any interest in Excel nor in the investment of Excel, including the shares discussed below.”

20. The evidence that the 1^st defendant wishes to adduce as set out in the supplemental witness statement plainly takes issue with Lau’s evidence and explains the circumstances in which Lau allegedly controlled the 1^st plaintiff via the 1^st defendant and the Luxey shares acquired in the name of the 1^st plaintiff.  It seems to me the materials that the 1^st defendant wishes to put forward would be relevant to that issue.  The main point seems to me to be that the allegations, if established, might arguably make one party’s case more credible or probable as compared to the other party’s case.

21. While the new matters do not seem to me directly to support the existence of the oral investment agreement in February 2012, if indeed it is established that there was the scheme alleged, it would to my mind throw doubt on the plaintiffs’ case that Lau had no interest in the 1^st plaintiff or in the Luxey shares acquired by the 1^st plaintiff, especially the substantial portion of shares acquired since November 2012 and that the 2^nd plaintiff is the only person with any real beneficial interest in the 1^st plaintiff and the Luxey shares.

22. Further, as Miss Ho points out, the allegation that Lau wished to hold shares in Luxey without that fact being known to the public is not completely new.  In the 1^st defendant’s first witness statement dated 27 March 2014, at paragraph 14, it is said:

“Mr Lau suggested that we should acquire shares in Luxey as part of our investment. He said that I should continue to act as the sole shareholder and director of Excel, so that the public would not know that he was a beneficial owner of the Luxey shares to be acquired by Excel. He said that the arrangement would be convenient to him, as he could avoid the requirements under the Codes on Takeovers and Mergers and Share Buy-backs.”

23. This is denied by Lau in his supplemental witness statement dated 14 August 2014 at paragraph 5, where he maintains the purchase of the Luxey shares was at the initiative and decision of the 2^nd plaintiff giving instructions to the 1^st defendant as his nominee. 

24. Miss Ho submits that the justification for the 1^st defendant to cause the shares to be sold as he did in September 2013 is also relevant, although the plaintiffs make no complaint of a breach of duty by the 1^st defendant on the basis of the 1^st defendant’s own case of the oral investment agreement.  Miss Ho submits that even if the 1^st defendant’s oral investment agreement is established, the court might find the 1^st defendant to have been in breach of it if he was unable to show it was in the best interests of himself and Lau to sell the shares. 

25. On the present shape of the case, I think it is a little far-fetched to suggest that the 1^st defendant would become liable on such a basis.  However, it is part of the 1^st defendant’s case on the facts as to why he decided to sell the shares.  Given the existing state of the pleading, it is not I think desirable to try to cut the 1^st defendant’s case up into different parts and to admit some and reject other parts of its case on the facts.  The matters he wishes to put forward seem to me to be an integral part of his version of the facts. 

26. Mr Lai submits that the new plea raises scandalous matters in the sense of making grave allegations against Mr Lau and should not be allowed unless properly substantiated.  I am of course not adjudicating on the trial at this stage, and I make no comment on the creditability of either party’s case.  It seems clear to me what is put forward has now been to a large extent particularised and, despite Mr Lai continues to pick holes in it, cannot be said to be a bare assertion made by the 1^st defendant without any details whatsoever.  Whether or not the allegations will be established as fact must remain a matter for trial.

27. As to delay, the 1^st defendant only sought to introduce the new matters in the original summons for leave to file a supplemental witness stated dated 31 July 2014.  By then, I had given leave for the trial to be set down, and a trial date had been allocated in October 2015.  The 1^st defendant has explained that he only raised the matters in July 2014 because he believed the matters involved misconduct and breach of the Securities and Futures Ordinance, and because he was involved in those matters and was concerned that he would incriminate himself by disclosing those matters.  However, after further consideration, he decided to disclose the matters as he considered them relevant to the existence of the investment agreement and his contention that Lau had used the 1^st plaintiff to hold shares in Luxey on his behalf.

28. Mr Lai does not suggest the explanation is incredible.  Rather, he says, it was a conscious decision on the part of the 1^st defendant not to raise the matters previously.  I think that, in the circumstances of this case, the new matters should not be shut out because of the lateness in raising them.  There are still over 10 months to the trial which, in my opinion, will provide sufficient time for the parties to deal with the new allegations.  I do not think the trial dates will necessarily be jeopardised.  If necessary, I am prepared to reserve a few more days after the current allotted days to accommodate the parties

29. The power to allow amendment of pleadings is exercised on the principle that all such amendments should be permitted as are necessary to enable the real questions in controversy between the parties to be decided, subject of course to the prejudice to the other parties, the underlying objectives as set out in Order 1A of the Rules of the High Court, and the importance of not disturbing a milestone date.  I consider that, in the circumstances of this case, I should allow the amendments. I do not think the plaintiffs will suffer significant prejudice that cannot be compensated by costs as a result of the matters not having been pleaded originally and are only being introduced by way of amendment now

30. On that basis, there is no reason why the supplemental witness statement should be excluded, and I also give leave for it to be filed and served. 

(Submissions on costs)

31. I am entitled to take into account the parties’ conduct, including in this case the fact that it was the 1^st defendant’s own decision not to raise the matters at the outset but only relatively late in the day.  I also take into account the lateness of the application in the sense that it was after the 1^st defendant indicated to the court that no further amendment will be required to the pleadings on the basis of which leave was given for the trial to be set down and trial dates were given.  It is therefore a matter of indulgence for the 1^st defendant. 

32. In all the circumstances, I would order that the plaintiffs’ costs of and relating to the 1^st defendant’s application be in the cause.