ZHANG XIUHONG v. LIU WENCHEN AND OTHERS

HCA 2118/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2118 OF 2012

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J U D G M E N T

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Introduction

1.  The plaintiff claims against the 4^th defendant for various declarations that changes in membership and directorship were void and of effect and that its register of members and directors should be rectified.

2.  On 23 December 2016, 3½ years after the 4^th defendant filed its defence, the 4^th defendant filed a notice to withdraw its defence.  In addition, the 4^th defendant filed an amended acknowledgement of service, indicating that it does not intend to contest the proceedings.

3.  Against these developments, the plaintiff seeks default judgment against the 4^th defendant. 

4.  The 4^th defendant’s solicitors have confirmed that the 4^th defendant would not appear at this hearing.

Background

5.  The 4^th defendant is a Hong Kong company with an authorized share capital of HK$40,000 divided into 40,000 shares (“the Shares”).

6.  By a series of transfers in January and March 2011, the plaintiff became the sole legal and beneficial owner of the 4^th defendant. 

7.  In about July 2012, the plaintiff became aware of a fraud whereby the Shares were purportedly transferred by him to the 1^st defendant; and later, the 1^st defendant transferred 14,000 Shares and 26,000 Shares to the 2^nd and 3^rd defendants respectively (“the disputed transfers”).  The plaintiff and his nominee (Mr Zhang Yanjie) were also removed from directorship.  In their place, the 1^st, 2^nd and 3^rd defendants, Wu Yunfeng, Li Yong, Fu Yanling and Wang Lei (collectively “the purported directors”) were purportedly appointed as directors of the 4^th defendant at different points in time.

8.  The disputed transfers were effected through signatures and fingerprints purporting to be the plaintiff’s but were in fact forged. 

9.  The plaintiff has since obtained default judgment against the 1^st to 3^rd defendants in June 2016 to set aside the disputed transfers and has recovered the Shares.  It was further ordered that the 1^st defendant do pay the plaintiff equitable compensation for breach of trust, and damages for wrongful interference with the plaintiff’s legal and contractual rights by unlawful means, with such compensation and damages to be assessed. 

10.  The 4^th defendant, being the subject company, is just a nominal defendant against whom the plaintiff seeks consequential reliefs.

11.  As regards the 5^th to 7^th defendants, in gist, the 5^th defendant is the sole practitioner of Messrs Augustine CY Tong & Co (“ACYT”), a firm of solicitors. The 7^th defendant is an employee (Office Manager and Legal Clerk) of ACYT, and the sole director and shareholder of the 6^th defendant.

12.  The plaintiff says that in implementing the disputed transfers and change of directorship in the 4^th defendant, the 5^th to 7^th defendants have acted in breach of their duty of care to the plaintiff.  Those defendants are allegedly also liable in the tort of unlawful interference, breach of trust in respect of the re-transfer of the dispute transfers, dishonest assistance of the 1^st defendant in his breach of trust, conspiracy to defraud or injure the economic interests of the plaintiff. 

Legal principles for entering default judgment

13.  The following principles regarding default judgment are well established:

(a) The statement of claim must show a case for the order the plaintiff seeks to obtain.  The Court’s task (in exercising its discretion) is to see whether the plaintiff appears to be entitled to judgment on his statement of claim.

(b) The Court cannot receive any evidence but must give judgment according to the pleadings alone.

(c) A plaintiff may apply for default judgment against a defendant and proceed with the action against other defendants if his claim against the defendant in default is severable from his claim against the other defendants.

Chan Ka Hay & ors v Sino Favour Development Limited & ors, HCA 2457/2008 (unreported, 9 October 2012) at §22; Hong Kong Civil Procedure 2017, Vol 1, at §§19/7/6 & 19/7/11:

14.  Further, there is a general proposition that a declaration will not be granted when giving judgment without trial (e.g. judgment in default of defence).  However, it is a rule of practice and not of law, and will give way to the paramount duty of the Court to do the fullest justice to the plaintiff to which he is entitled: Law Yuk Fong v Man Chung Wai & anor, HCA 2195/2015 (unreported, 16 January 2017) at §17, DHCJ Marlene Ng.

Plaintiff appears entitled to judgment

15.  In the present application, there are two claims of rectification orders against the 4^th defendant as follows:

(1)   An order that the 4^th defendant’s register of members be rectified so as to remove the 2^nd and 3^rd defendants as members and reinstate the 1^st defendant as a member holding the 40,000 shares.

(2)   An order that the 4^th defendant’s register of directors be rectified so as to remove the 2^nd and 3^rd defendants as directors and reinstate the plaintiff and Mr Zhang Yanjie as directors.

16.  The Court has power to rectify a register of members pursuant to section 633 of the Companies Ordinance (Cap 622).  It also has power to rectify a register of directors: eg She Tsu Yi v Tsui Ki Ting & ors, HCA 1684/2004 (unreported, 5 November 2007) at §123, Poon J (as he then was).

17.  The default judgment against the 1^st to 3^rd defendants shows a case for saying that without sufficient cause, the names of the 1^st to 3^rd defendants have been entered in the register of members of a company under section 633 of Cap 622.  Similarly, the purported removal of the plaintiff and Mr Zhang Yanjie as directors was also null and void.

18.  Thus the plaintiff entitled to require, as a matter of consequential relief, the 4^th defendant to rectify its register of members and register of directors accordingly. 

19.  Following from that, fullest justice can only be done to the plaintiff if it is declared that the following are null and void:

(1)   the Memorandum (forged);

(2)   the Letter of Resignation (forged);

(3)   the purported removal of Mr. Zhang Yanjie and the purported resignation of the plaintiff as directors of the 4^th defendant on or around 1 March 2012;

(4)   the purported appointment of the 1^st defendant as director of the 4^th defendant on or around 1 March 2012;

(5)   the purported appointment of the said Persons as directors of the 4^th defendant on or around 6 March 2012;

(6)   the purported appointment of the 2^nd defendant as director of the 4^th defendant on or around 5 April 2012;

(7)   the purported appointment of the 3^rd defendant as director of the 4^th defendant on or around 30 April 2012;

(8)   all directors’ resolutions purportedly passed by the 1^st defendant and all other acts purportedly done by the 1^st defendant as director of the 4^th defendant as from 1 March 2012; and

(9)   all directors’ resolutions purportedly passed by the purported directors, the 2^nd defendant or 3^rd defendant (or any of them) and all other acts purportedly done by them (or any of them) as directors of the 4^th defendant.

20.  These declarations do serve a practical purpose of showing third parties of the lack of authority of the 1^st to 3^rd defendants and the purported directors, and to bind the 4^th defendant.  These cannot be achieved only by ordering the re-transfer of shares and the rectification of registers.

Severability of claims against D5-D7

21.  There will be a full-blown trial against the 5^th to 7^th defendants. The claims against them are clearly severable from those against the 4^th defendant. The 5^th to 7^th defendants did not contest the plaintiff’s claims for setting aside the share transfer and appointment of directors.  They are simply contending that they had not breached any duty, were unaware of the fraudulent acts of the 1^st to 3^rd defendants and that the 5^th to 7 defendants were not part of the conspiracy.

22.  For the above reasons, I enter default judgment against the 4^th defendant for rectification of its register of members and directors and the declarations sought.  Costs shall be to the plaintiff to be borne by the 4^th defendant.

23.  I thank Mr Siu for his assistance.