WONG KAM SAN AND OTHERS v. ZHAO KAI INVESTMENT LTD AND OTHERS

HCA 1653/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1653 OF 2004

____________

____________

_____________

D E C I S I O N

_____________

1. This action was tried by me in April this year.  In my judgment of 11 April 2006, I declared that 75 shares in the 8th defendant, Hawkins Developments Limited (“Hawkins”), as held by the 1st and 2nd defendants, were held by them on trust for the 1st plaintiff.  I also ordered them to forthwith transfer these shares to the 1st plaintiff or his nominees.  In addition, I also granted an injunction to enjoin the 2nd to 7th defendants from interfering with the business of Hawkins or the business of a Sino-foreign joint venture between Hawkins and two Mainland entities called Liaoyang Shunfeng Iron and Steel Company Limited (“Shunfeng”) or the mining operation carried on by Shunfeng.

The Applications

2. The 1st and 2nd defendants have not transferred any of the 75 shares of Hawkins to the 1st plaintiff pursuant to my judgment.  The 1st plaintiff thus issued a summons for an order to nominate the Registrar of the High Court to execute the necessary documents for the transfers.  However, the 1st, 5th and 7th defendants have applied to stay the execution of the judgment pending their appeal to be heard in mid-January 2007. 

3. The 1st defendant does not want to transfer the 74 shares in its name to the 1st plaintiff pending the appeal. 

4. The 2nd defendant is holding the other share.  He is a bankrupt, and the Official Receiver, who is his trustee in bankruptcy, has chosen not to take part in this action.  The 2nd defendant is thus absent. 

5. The 5th and 7th defendants want to stay the injunction pending their appeal.

Order for transfer of shares

6. In this morning’s hearing, the 1st defendant abandoned its opposition to the 1st plaintiff’s summons and I made an order in terms of that summons against the 1st and 2nd defendants.

Background

7. Hawkins at all materials times is and was the owner of 80 per cent of the interest in Shunfeng.  The remaining 20 per cent are held by two Mainland entities.  Shunfeng carries on the business of iron ore mining in Denta Municipality, Liaoning Province.    

8. Prior to March 2000, the 1st plaintiff owned and controlled Hawkins, which had issued and allotted 100 shares.  The 2nd plaintiff used to hold 80 of those shares and the 3rd plaintiff held the remaining 20.  They held them as nominees of the 1st plaintiff.

9. On about 7 March 2000, the 2nd plaintiff transferred her 80 shares away.  Seventy-four of those shares were transferred to the 1st defendant and one to the 2nd defendant.  The remaining five shares were transferred to the 4th plaintiff.  The 3rd plaintiff at the same time also transferred her 20 shares to the 4th plaintiff.  The 4th plaintiff is a BVI company owned and controlled by the 1st plaintiff.  The 4th plaintiff is still holding those 25 shares for the 1st plaintiff.

10. After the transfers of shares, the 1st plaintiff through the 4^th plaintiff was in control of 25 shares of Hawkins, and the 2nd defendant through himself and the 1st defendant was in control of 75 shares.  The 1^st plaintiff pleaded that the 75 shares of Hawkins were transferred to the 1st and 2nd defendants for them to hold on trust for him.  He pleaded the purpose was for the 2nd defendant to procure the listing of Hawkins in the GEM board of the Hong Kong Stock Exchange.  If the 2nd defendant should succeed in this task, the 1st plaintiff would give him 1% of the shares of Hawkins as his remuneration.  The 1st plaintiff further pleaded that since the 2nd defendant had breached this agreement, he therefore asked for return of the 75 shares.  The 2nd defendant pleaded that the 75 shares were transferred to him and the 1st defendant for them to hold on trust for an investor called Zhao Ahping.

11.  In my judgment, I held in favour of the 1st plaintiff.  I did not accept the story of the 2nd defendant.  I made the transfer orders and the injunction aforesaid.

Appointments before Judgment

12. As a result of the transfers of shares and the agreement to procure listing of Hawkins, the 5th and 7th defendants were appointed as directors to Hawkins’ board.  The 5th defendant is the wife of the 2^nd defendant and the 7th defendant is his sister.  Furthermore, the 7^th defendant was appointed as the legal representative of Shunfeng in December 2005 in place of the 1st plaintiff.  At that time, this action had already reached an advanced stage.

Grounds of the Defendants’ Application

13. The 7th defendant filed an affirmation to support the application to stay.  She referred to her appointment in December 2005 as the legal representative of Shunfeng.  She said since then she had assumed many important duties.  They include:

(a) operation of Shunfeng’s bank account;

(b) arranging for insurance for over 400 employees of Shunfeng on a monthly basis;

(c) paying monthly salary to the workers;

(d) paying government tax for Shunfeng;

(e) ultimately responsible for the execution and performance of contracts signed for the design, production and sale of products in the operation of Shunfeng;

(f) to deal with litigations concerning Shunfeng.

She said because of such duties, she was indispensable for the operation and existence of Shunfeng.  Furthermore, she said it was impossible for the 1st plaintiff to be reappointed as the legal representative of Shunfeng because of certain serious allegations of improper conduct committed by him against Shunfeng.

Opposition

14. The 3rd plaintiff, Madam Liu, filed an affirmation to resist the application to stay.  She pointed out that the 7th defendant did not have any experience or training in mining operations.  She had only been to Shunfeng’s place of business once since her appointment as the legal representative.  On the other hand, the 3rd plaintiff is a director and the vice chairman of Shunfeng.  She is familiar with the operation of Shunfeng as she had been stationed there supervising and managing the production between 1996 and 2002. 

15. She also referred to a Chinese legal opinion given for the 1^st plaintiff saying that Shunfeng operated by its board and that the legal representative must exercise the powers in accordance with the directions of the board.

16. She also said that there were five members on the board, including the 7th defendant and herself.  Even if the 7th defendant should be enjoined, the board of Shunfeng could still function.  The articles of Shunfeng provided that the 3rd plaintiff, as the vice chairman, could convene and preside over board meetings.  The quorum was two-thirds of the directors, and the chairman, who was the 7th defendant, had no casting vote.  The 3rd plaintiff also said that she had tried to take over the control of Shunfeng but was unsuccessful because there were some new employees who did not listen to her.

17. She further said that the operation of Shunfeng had been suspended since May 2005 by the Liaoning Government because it had not adopted the proper extraction method.  There was thus not much to do pending attempts to revive the mining operation with the help of a mining consultant.  Since the defendants were still controlling the board of Hawkins, the plaintiffs were having difficulty in liaising with the Liaoning Government to revive the operation of Shunfeng. 

18. She further said that the 2nd defendant was arranging to purchase the 20% interest of Shunfeng from the Mainland parties and the 1st plaintiff wanted to regain control of Hawkins and to protect Hawkins’ pre-emption right to purchase such interest.

19. The Chinese legal opinion supported the 3rd plaintiff by confirming that Shunfeng acted by the board and the legal representative acted pursuant to the board’s direction.  The opinion also said that all the duties referred to by the 7th defendant should in fact be done by the general manager and other senior staff of Shunfeng under the directions of the board.

Applicable Principles

20. The principles for considering an application to stay the execution of a judgment pending appeal have been set out by Ma J (as he then was) in Star Play Development Limited v Best Fashion Management Company Limited, HCA4726/2001 (7/6/2001) (unreported) between paragraphs 6 to 10.  It is for the defendants to show good reasons for the stay.  The two relevant factors are the merits of the appeal and whether, without the stay, the appeal would be rendered nugatory. 

21. On the first ground, Mr Wong submitted for the defendants that they have a good chance of success on the appeal because the arrangement between the 1st plaintiff and the 2nd defendant was an illegal one and it was wrong for me to have ordered the return of the shares as that was pursuant to an illegal agreement.  The illegality was the agreement between the 1st plaintiff and the 2nd defendant not to disclose the identity of the beneficial owner of the 75% Hawkins shares as registered in the names of the 1st and 2nd defendants to the investing public at listing.

22. On this point, I have to refer to the pleadings and the evidence.  The statement of claim pleaded that there was an express condition that the 2nd defendant should not interfere with the operation of the mining project of Shunfeng.  There were also implied conditions that the 2nd defendant should render his services for procuring the listing expeditiously and in a professional manner and that if the 2nd defendant should fail to procure the listing within a reasonable time, the shares should be transferred back to the 1st plaintiff or his nominees upon his request. 

23. The statement of claim went on to plead breaches of the agreement by referring to the failure of the 2nd defendant to provide expeditious service for listing, his attempt to terminate the mining project and convert the same into a theme park, and his attempt to repack the board of Hawkins with new appointees and by removing some of the then existing directors.

24. Regarding the evidence, the 1st plaintiff said that he wanted the shares back because he felt that the 2nd plaintiff was trying to convert the mining project into a theme park and to take over Hawkins.  He did not say that he wanted the shares back because the 2nd defendant had taken too long to procure listing and had still failed to do so. 

25. In my judgment, I said I believe in the evidence of the 1^st plaintiff.  I did not expressly say whether the shares had to be returned because of which particular breach as pleaded in the statement of claim.  However, there is no evidence to support the ground of failure to procure listing within a reasonable time. 

26. The demand letter issued by the plaintiff’s solicitors to the 1^st and 2nd defendants also did not refer to delay to procure listing.  It merely stated that the shares were held on trust by the 1st and 2^nd defendants for the 1st plaintiff and demanded the 1st and 2nd defendants to return them to the 1st plaintiff.

27. I do not think that there is a strong case for the defendants to argue that the order for the return of shares was to perform an illegal agreement or the return of shares were pursuant to an illegal agreement.

28. Furthermore, on the ground of whether the appeal would be rendered nugatory, I do not think the 7th defendant is indispensable for the operation of Shunfeng or Hawkins.  There is the evidence from the Chinese lawyer, which is not contradicted, that Shunfeng can continue to operate by the board, and pending revival of its mining operations, there is really not much to be done.  I cannot see how the appeal would be rendered nugatory if the 7th and 5th defendants are being enjoined from interfering with the business of Hawkins and that of Shunfeng.

29. In the premises, I hold that the 5th and 7th defendants have failed on both grounds and I therefore dismiss this application with costs in any event in the appeal.