LONG HAI HONG (龍海紅) the administratrix of the estate of LEE SO WINSTON (李甦), deceased (suing on behalf of herself and all other shareholders in the 5th defendant other than the 1st to 3rd defendants) v. LIU DAN AND OTHERS

HCA 175/2018

[2019] HKCFI 1827

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 175 OF 2018

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REASONS FOR DECISION

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A. INTRODUCTION

1.  This is an application by the 1^st, 2^nd and 4^th defendants (“D1”, “D2”, and “D4” respectively) to strike out the Statement of Claim (“SOC”) and the Reply and to have the action dismissed under Order 18, rule 19(1)(b) – (d) of the Rules of the High Court (“RHC”) and/or inherent jurisdiction of the court.

2.  The plaintiff’s claim is a common law derivative action brought on behalf of the 5^th defendant (“Company”) against the 1^st to 3^rd defendants (“D1 – D3”) being directors of the Company for breach of fiduciary duties and against D4 (a corporate vehicle controlled by D1 and D2) for knowing receipt and dishonest assistance by causing the transfer by the Company to D4 its interest in a valuable PRC subsidiary at an undervalue.  It is also common ground that the consideration in the sum of US$4.95 million (“Consideration”) was never paid.

3.  The crux of pleaded case in the SOC is as follows:

(1)  The plaintiff (“P”) is the widow of Winston Lee (“Winston”) and the sole administratrix of his estate.  Winston passed away on 18 September 2013.

(2)  D1 – D3 were directors of the Company but D3 resigned on 3 January 2013.  D1 and D2 are presently the only directors.

(3)  It is common ground that Winston and D1 each held 3% of the issued shares of the Company since early 2005 but the beneficial ownership of the remaining 94% (“Disputed Shares”) is hotly contested in a separate set of proceedings (ie HCMP 3179/2013).  The action was commenced by P in her personal capacity against D1 for rectification of the register of members.  P was the registered owner of the Disputed Shares between 2 November 2011 and 14 June 2013.  Her case is that the Disputed Shares were transferred to her on 2 November 2011 (“2011 Transfer”) by D1 as a gift at the direction of Winston.  It is alleged that D1 held the Disputed Shares as Winston’s nominee.  It is further claimed that without P’s knowledge or consent, the Disputed Shares were transferred to D1 on 13 June 2013 (“2013 Transfer”) under an instrument of transfer bearing a signature of P that was forged.

(4)  D1’s case in respect of the Disputed Shares is that she was the legal and beneficial owner of the same before 2 November 2011.  P was nominated by Winston upon D1’s request for him to act as her nominee.  The 2011 Transfer merely conferred legal ownership of the Disputed Shares on P who held them as nominee for D1.  In 2013, D1 requested Winston to arrange for the Disputed Shares to be transferred back to her as she no longer needed the nominee arrangement.  The instrument of transfer and other paperwork for the 2013 Transfer were arranged by Winston.

(5)  北京托普世紀科技企業孵化器有限公司 (“Beijing Tuopu”) was incorporated in the PRC and the owner of a real estate development in Beijing.  At the time of incorporation, the shareholders of Beijing Tuopu were: (i) a PRC company known as 北京世紀星空影業投資有限公司 (“Beijing Century”).  The initial investment by Beijing Century was US$4.5 million in share capital (ie 45%); and (ii) the Company which invested US$5.5 million in share capital (ie 55%).  The Company subsequently sold a further 19.64% to Beijing Century in two transactions in 2007.  As a result, the shareholding of Beijing Tuopu held by the Company since late 2007 was reduced to 35.36% (“Tuopu Shares”).

(6)  The shareholders of D4 are D1 (99.99%) and D2 (0.01%). D1 has been a director since 12 April 2012.  D2 was a director since 22 May 1998 but resigned on 3 January 2013.  D3 was a director since 1995 and resigned on 12 April 2012.

(7)  By an Agreement dated 29 January 2012 (“Agreement”) executed by D2 on behalf of both the Company as seller and D4 as purchaser, the Company agreed to sell the Tuopu Shares to D4 for US$4.95 million.

(8)  P alleged breaches of fiduciary duty by D1 – D3 (as directors) for causing or permitting the Company to enter into the Agreement with D4.  It is said that D1 and D2 were in actual conflict; the transaction was at an undervalue; and D1 – D3 have also failed to procure the agreed consideration to be paid to the Company.

4.  In the Defence of D1, D2 and D4, it is said that the Agreement was made to implement the “Restructuring Plan” of D1.  She alleged that in 2011, at around the same time of deciding to have the nominee arrangement, she was looking into other business opportunities in Beijing and planned to use the Company as a vehicle to invest indirectly into those potential new businesses.  Anticipating the financial risks associated with the potential new businesses and with a view to safeguarding her interest in Beijing Tuopu then held through the Company, D1 decided to restructure the interests in Beijing Tuopu with her own to be held by another company controlled by her, ie D4. 

5.  Significantly, it is said that the Agreement was nothing but a formality.  Insofar as the Consideration is concerned, it is alleged no payment was ever intended to be made because the transfer under the Agreement was only to implement the Restructuring Plan with D1 to remain as the ultimate controller of Beijing Tuopu.  D1, D2 and Winston had knowledge of and agreed to this arrangement. 

B.  POSITIONS OF THE PARTIES

6.  Mr Ambrose Ho SC (together with Mr Mike Lui) for D1, D2 and D4 submitted that they are not raising “a conventional locus challenge” but seek to strike out based on RHC Order 18, rule 19(1)(b), (c) and (d).  In other words, it is not suggested that P has no reasonable cause of action but they say there is no merit in P’s claim and seek to demonstrate that with the evidence adduced.  It is accepted that they bear the burden to show a plain and obvious case in order to strike out P’s claim: see Waddington Ltd v Chan Chun Hoo (2008) 11 HKCFAR 370 at §§20 – 21 and Melvin Waxman v Li Fei Yu & Ors (HCA 1973/2012, 23 August 2013) at §§20 – 23. 

7.  In addition, as explained below, it is also submitted that P’s claim is an abuse of process by reason of the way the claim is pleaded and prosecuted. 

8.  Mr Derek J Y Chan for P submitted that the evidence adduced by D1, D2 and D4 (much of which is no longer relied upon in their written and oral submissions) at best raises issues for trial and falls far short of establishing that the claim is plainly and obviously bound to fail.  The complaints of abuse of process are similarly without merit.

9.  The principles associated with an application of this nature is well-known and I shall not repeat them here.  See for example Re Dalny Estates Ltd [2018] 1 HKLRD 409 at §15.

C.  DISCUSSION

C1.  Merits of P’s claim

10.  In short, the main point advanced by Mr Ho SC is that Winston (being a 3% shareholder of the Company) had knowledge of and approved the Agreement and this is said to be supported by contemporaneous documentary evidence which is indisputable.  He relied on: (i) the board resolution dated 29 January 2012 signed by Winston together with D1 and D2; (ii) an agreement to amend the Beijing Tuopu’s articles of association signed by D1 (for Beijing Century), D2 (for D4) and Winston (as legal representative for Beijing Tuopu).  There is no suggestion that Winston’s signatures were forged.  As a 3% shareholder who approved the Agreement, he is clearly estopped from complaining.

11.  As to P’s suggestion that she was a 94% shareholder and had never given consent, Mr Ho SC emphasised that Winston had agreed to the Restructuring Plan, the Agreement and the non-payment of consideration before the 2011 Transfer.  Reliance is placed on the fact that on 1 November 2011 (ie the day before the 2011 Transfer), D1 and D2 became D4’s 99.99% and 0.01% shareholder and it is said that this was part of the Restructuring Plan.  Her alleged ownership of the Disputed Shares is therefore not an answer to overwhelming evidence that Winston had given his consent and it was P’s case that Winston was the sole beneficial owner of the Disputed Shares prior to the alleged gift.  She is also not in a position to take issue with Winston’s consent as she was not involved in the operations of the Company, D4 or Beijing Tuopu at the time.

12.  The suggestion that Winston was aware of the Agreement is difficult to dispute in light of the documents identified by Mr Ho SC.  They are contemporaneous and not challenged by P.  However, the existence of the Restructuring Plan and the suggestion that the Agreement was only a formality are less clear.  In particular, as pointed out by Mr Chan, D1’s justification for the non-payment of the Consideration is merely an assertion that is not backed by any contemporaneous evidence. 

13.  Mr Ho SC pointed to the fact that the Agreement was signed in January 2012 and Winston (together with P) were directors of the Company since 30 March 2012.  If the Consideration was intended to be paid, Winston and P ought to have taken action on the Company’s behalf. 

14.  The inaction on the part of P and Winston is certainly consistent with the case of D1, D2 and D4 and is a valid point.  However, given the clear obligation to pay and the lack of any contemporaneous evidence supporting D1’s assertion, this point cannot be conclusive in an application of this nature.

15.  Mr Ho SC also placed reliance on an application for change of investor made by Beijing Toupu dated 8 August 2014 signed by Winston.  In the section entitled “投資者註冊資本繳付情況”, it is stated that the registered capital of US$4.95 million was paid and under the name of D4.  Mr Chan pointed out that the document only supports the fact that the registered capital under the name of the relevant shareholder (ie D4) was paid.  This has nothing to do with whether the Consideration was in fact paid.  In my view, the effect of this document is not entirely clear when construed in isolation and Mr Chan’s point cannot be dismissed on the face of its terms.

16.  However, Mr Ho SC pointed to clause 4.2 of the Agreement which provides as follows:

「 4.2 在乙方根据本条4.1款的规定付款后，各方应促使北京托普世纪科技企业孵化器有限公司立即聘请在中国注册的会计师事务所就股东的出资进行验资，出具验资报告，并根据验资报告向乙方出具新的出资证明书，甲方原获得的出资证明书应予以注销。」

17.  The clause appeared to suggest that the application for change of investor to be made by Beijing Toupu should only take place after the Consideration was paid.  As the application was made on 8 August 2014, this lends support to the suggestion that the Consideration was not intended to be paid or else the application would not have been made.

18.  However, as submitted by Mr Chan, given the nature of this application, the Court must proceed on the basis that Winston was the beneficial owner of the Disputed Shares held in D1’s name prior to 2 November 2011 and P did become the legal and beneficial owner of the Disputed Shares since 2 November 2011.  There is also no attempt by D1, D2 and D4 to suggest that I should form a view on P’s claim in HCMP 3179/2013. If Winston was indeed the beneficial majority owner of the Company, it is simply inconceivable that he would agree to dispose of the Company’s investment in Beijing Tuopu for no consideration.  The precise agreement between Winston and D1 which is contrary to the clear terms of the Agreement is not something that I can resolve on affidavit if I am to proceed on the basis that Winston/P were the beneficial owners of the Disputed Shares at all material times.

19.  In the circumstance, I am not satisfied that the high threshold for an application to strike out is met insofar as the attack on the merits of P’s claim is concerned. 

C2.  Abuse of process?

20.  Mr Ho SC raised three points to support his argument that P’s claim is an abuse of process:

(1)  The complaint about P being (allegedly) a 94% registered shareholder of the Company but having never been told about the Agreement, the Restructuring Plan etc is an afterthought in response to the fact pleaded in the Defence that all shareholders of the Company at the material time had full knowledge of and consented to the Agreement etc — the SOC has not pleaded this complaint at all.  P at first clearly seeks to pursue the claim solely for Winston as the Company’s 3% registered shareholder but then such a claim must be defective by reason of the estoppel point advanced.

(2)  Secondly, as P claimed in her affirmation that this action was started for limitation period purposes, this is obviously an attempt to deflect attention from its being an abuse of the court’s process when the derivative claims in this action are so hopeless for reasons they submitted.

(3)  Finally, as stated above, P commenced proceedings in HCMP 3179/2013 on 25 November 2013 in her (alleged) capacity as beneficial owner of the Disputed Shares gifted to her by Winston in November 2011.  While D1 will not ask the Court to rule on the merits of the rival claims in those proceedings, P has made some clearly untruthful claims therein; for instance, she claims that she has received share certificates in respect of the Disputed Shares but the truth is that the Company has never issued any share certificate and there is no answer to this point in P’s affirmation.

21.  I am not persuaded by any of these points.  Given the views I reached in Section C1 above, it is simply not possible to conclude that P’s claim is unarguable by reason of the points advanced on behalf of D1, D2 and D4.  I also see nothing wrong in permitting P to prosecute the two sets of proceedings in parallel especially in light of limitation issues.  In addition, I cannot see how the veracity of P’s evidence in respect of the share certificate is to be of any relevance when it is accepted that the court is not asked to adjudicate the merits of the claims in HCMP 3179/2013.  In any event, it is also unclear as to how the points advanced (even if they are accepted) constitute an abuse of process.

D.  CONCLUSION

22.  As explained above, Mr Ho SC made a number of powerful arguments in support of the merits of the defence of D1, D2 and D4.  However, this is clearly not a case where P’s claim can be dismissed summarily.  I shall therefore dismiss the application to strike out.  I also make an order nisi that costs of the application be to P to be taxed if not agreed.