EMAGIST ENTERTAINMENT LTD v. NETHER GAMES (HONG KONG) LTD AND OTHERS

CACV160/2022

[2023] HKCA 1111

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 160 OF 2022

(ON APPEAL FROM HCA NO 1659 OF 2012)

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(By Original Action)

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(By Counterclaim dated 3 May 2013 as amended on 14 July 2015)

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(BY RE-AMENDED COUNTERCLAIM DATED 24^TH DECEMBER 2018)

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J U D G M E N T

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Hon Yuen JA (giving the Judgment of the Court):

1.  This is an application for stay of execution against the Judgment of Lok J (“the Judge”) which was given on 28 March 2022 (“the Judgment”)¹ after an 8-day trial.

Background

2.  In these proceedings, a number of parties, individual and corporate, were involved in the original claim and two counterclaims.

Parties

3.  In a nutshell,

-  on one side were:

-  the plaintiff in the original claim Emagist Entertainment Ltd (“Emagist”), a Hong Kong company which was a wholly owned subsidiary of Emagist Group Ltd, a Cayman Islands company (“Emagist Cayman”), and

-  Emagist Cayman’s controlling shareholder² Lee Shiu Yin Boniface (“Boniface”);

-  on the other side were other shareholders of Emagist Cayman, viz.:

-  Law Chi Man (“Alvin”)³, Ip Chi Yung (“Ryan”)⁴, Man Chi Wai (“Terry”)⁵, who were referred to jointly by the Judge as “ART”, and

-  Lo Kwong Man (“Simon”)⁶;

ART and Simon (“ARTS”) were co-plaintiffs in one counterclaim (“the ARTS counterclaim”);

-  taking a position which did not completely align with any of the above parties was another shareholder of Emagist Cayman viz. Cheng Eric Tak Kwong (“Eric”)⁷, who was a defendant in both Emagist’s claim and ARTS’ counterclaim, but who was also the plaintiff in his own counterclaim against Emagist and Boniface.  (In the Judgment, the Judge had “serious reservations” about the truth of Eric’s evidence [83].  The Judge dismissed his counterclaim, from which he is not appealing).

4.  Notably, there is no derivative action in respect of either Emagist or Emagist Cayman.

5.  ARTS are asking this court for a stay of the Judge’s orders⁸ in the circumstances set out below.

The Dispute

6.  At the centre of the dispute was an online game (“the Game”).  It was common ground that:

-  the codes and database materials for the Game were written by ART after February 2009;

-  the Game became very successful, and

-  apart from the above shareholders, a Taiwanese company called Cherubic Ventures Partners Inc (“Cherubic”) had also acquired 2.5% of the shares in Emagist Cayman for US$1 million in 2011.

7.  In August 2012, while Boniface was not in Hong Kong, ART and Eric removed the source codes and the databases of the Game from the Emagist workstations and migrated them to their own company called Nether Games (Hong Kong) Ltd.

8.  Emagist commenced HCA1659/2012, claiming to own the copyright in the Game, and suing Nether, ARTS and Eric for breach of copyright and other causes of action.

9.1.  DHCJ Woo gave an interlocutory injunction sought by Emagist in January 2013 and ordered Ryan to pay (in total) US$455,928.39 into court⁹.

9.2.  On 7 July 2020, the Judge ordered Emagist to pay US$3,232,677.28 into court as fortification for the undertaking it gave for the injunction (“the fortification sum”).

10.1.   At the trial, ARTS’ primary defence was that Boniface, ARTS and Eric were all partners, and the Game was a partnership asset (“the Partnership Asset Defence”). They alleged that a partnership agreement had been made orally between ART and Boniface in February 2009 at the Sun Chiu Kee Restaurant (“the SCK agreement”).

10.2.  An alternative defence (the content of which is disputed)¹⁰ was that the copyright in the Game was owned by ART, and they had given a license to Emagist which they terminated when Boniface failed to give them the “agreed shares” in Emagist (“the Licence Defence”).

The Judge’s Judgment

11.1.  The Judge found as a fact that there was no SCK agreement and, for that and other reasons, rejected the Partnership Asset Defence [Judgment, §§86 - 129].

11.2.  He also found that ART were employees of Emagist at the time they wrote the codes and databases, and so Emagist owned the copyright pursuant to s.14 Copyright Ordinance Cap.528.  Accordingly, he also rejected the Licence Defence [§§131 - 134, 143-145].

11.3.  The Judge gave judgment for Emagist and dismissed both counterclaims.  In the sealed Order, he ordered at para. 1 that ART should pay damages to Emagist in the same amount as the sum paid into court i.e. US$455,928.39¹¹ [§154], and at para. 4 that the parties be at liberty to apply for payment out.

ARTS’ appeal 

12.  On 25 April 2022, ARTS¹² filed a Notice of Appeal.

Emagist’s summons in CFI for payment out  

13.  On 14 June 2022, Emagist applied for (among other things) payment out to it of the fortification sum¹³.

ARTS’ summons in CFI for stay of execution

14.  On 27 July 2022, ARTS applied for a stay of execution pending appeal of paras. 1 and 4 of the Judge’s Order.  Apart from the merits of the appeal, ARTS also submitted (by reference to allegations of misappropriation by Boniface which they had made at trial, on which the Judge made no findings) that since he had gone to Canada, they would have difficulty claiming back the funds if they were to succeed on appeal.

The Judge’s Decisions

15.1.  After receiving written submissions on both summonses above, the Judge handed down his Decisions on 24 February 2023.  He held that:

-  the case had turned on his determination of various issues of fact leading to his rejection of the Partnership Assets Defence, and that as an appellate court would be slow to disturb a trial judge’s findings of fact, there were no merits in the appeal;

-  only Emagist would be entitled to enforce the Judgment (not Boniface).  Even if Boniface were to misappropriate Emagist’s funds, the other shareholders (including ARTS) of Emagist Cayman the holding company would be able to take steps to protect Emagist.  Accordingly it was irrelevant where Boniface was currently living.

15.2.  For those reasons, the Judge dismissed ARTS’ summons for stay of execution and ordered the release of the fortification sum to Emagist.  We understand an application for leave to appeal these orders was made to the Judge on 10 March 2023 which the Judge has directed will be disposed of on paper.

ARTS’ summons in CA for stay of execution

16.1.  On 23 March 2023, ARTS applied to this court for a stay of execution pending appeal of paras. 1 and 4 of the Judge’s Order (“the CA Summons”).  It was supported by Alvin’s affirmation filed on the same day which referred to various documents.

16.2.  Emagist filed an affirmation of Boniface in opposition on 4 April 2023 challenging the relevance of the documents referred to in Alvin’s affirmation.  Further, he deposed that he has returned to live in Hong Kong after the Covid travel restrictions were uplifted.

Discussion

17.1.  Written submissions were filed by both sides in April and May 2023, which we have considered.

17.2.  Although ARTS have sought a direction for an oral hearing of the CA Summons, we do not see the need for it.

18.  The principles governing an application for a stay of execution pending appeal are well-established and articulated as follows in Star Play Development Ltd v Bess Fashion Management Co Ltd¹⁴:

(1)  an appeal does not operate as a stay of execution¹⁵;

(2)  the burden being on an appellant to justify its claim for a stay, it has to demonstrate that good reasons exist for a stay pending appeal.  If the appeal is strong, that may itself be enough for a stay to be granted.  However, if the appeal is only arguable, the appellant would need to provide the court with additional reasons to justify a stay, e.g. that the appeal would be rendered nugatory if a stay were not granted.

19.1.  We have read the Judgment thoroughly.  Without delving into the details at this stage, it is sufficiently clear that the Judge’s rejection of ARTS’ case of a partnership relationship with Boniface was a finding of fact which the Judge was able to make on the evidence.

19.2.  Essentially, the Judge rejected the allegation that an agreement for a partnership was made in February 2009 at SCK.  It was common ground that there were no discussions (then or later) on the respective shares of ART and Boniface in the alleged partnership business.

19.3.  Whilst the Judge accepted that ART had worked long hours for little pay when writing the Game, he found that in its early stages, the business did not have much in the way of financial resources, and Boniface had, only as an incentive, promised to give ART some shares in the business if the Game turned out to be successful, which he subsequently did, as a matter of his discretion as their employer.

20.1.  In brief, the first argument on appeal is that the Judge should have found there was a partnership from the outset, otherwise ART would not have worked long hours for irregular payment of low wages on a game in which they would have no copyright, and when they would be unable to enforce Boniface’s vague promises of giving them unspecified numbers of shares in his discretion.

20.2.  We do not consider that to be a strong ground.  The Judge had seen and heard the witnesses.  ART were young people who, the Judge found, did not give a lot of thought to business matters and their positions.  They were not experienced, calculating businessmen looking to engage Boniface in negotiation of terms to protect their self-interests.  At Keyvalue, they were also only employees, answering to Boniface, who was an experienced businessman in the industry. 

20.3.  Thus it would be difficult for ARTS to argue that the Judge was plainly wrong to find that ART had remained no more than employees (albeit with a promise of shares if the Game turned out to be successful), and should have found that they and Boniface had changed their statuses to become equal partners, with ART entitled to share profits equally with Boniface, and yet not obliged to contribute to expenses.  ARTS’ argument that the Game was “self-financing” was not accepted by the Judge.  Even on ARTS’ case, the online game business was highly competitive.  Indeed, at the early stages, cash flow was so tight that payments to ART could only be made irregularly.

21.1.  Another argument advanced by ARTS is that the Judge paid ex post facto regard to the parties’ subsequent relationship when examining whether ART were employed to create the Game, or whether they were partners as per the SCK agreement.

21.2.  We do not consider this to be a strong ground.  It is well-established that subsequent acts are admissible to show whether there was a contract¹⁶, although not to construe the terms thereof.

22.1.  Another argument is that ARTS had, in their written statements, explained that they did not object to Boniface’s allotment of various percentages of shares to them because they treated the allotments as an “interim measure”, but the Judge had not considered that explanation.

22.2.  We do not consider this to be a strong ground either.  Quite apart from there being no contemporaneous written evidence evidencing this “interim measure”, if there was indeed an equal partnership relationship, one would have expected ART to be more concerned (or at least interested) when Simon and Eric were invited by Boniface to join the business, as there would necessarily have to be a change in the original “partners’” equal shares.  However, there was no evidence of discussion and agreement among the four original “partners” (ART and Boniface).  This was so even when an outside investor (Cherubic) became involved in 2011, by which time the Game had become very successful and, to the knowledge of everyone, the business had become very valuable.  ART’s silence was more consistent with a situation where Boniface was at liberty to allocate shares in his discretion because he owned the Game business, than one where he and ART had agreed to be equal partners. 

22.3.  Finally, on this point, ARTS referred to the Judge’s Decision on Costs given on 15 November 2022 in which the Judge said “Eric is a partner proper” [12]. However, these words must be read in context.  The context was as follows. 

22.4.  In the Judgment, the Judge had made a costs order nisi. Boniface, Emagist and Emagist Cayman (“the Emagist parties”) then applied to vary the order nisi, asking for costs on an indemnity basis against what they called “the ARTSE parties” (i.e. ARTS plus Eric).  One of the grounds supporting the indemnity basis was that the Emagist parties had made a sanctioned offer to the ARTSE parties in August 2020 (“Emagist’s Offer”).  This offer included the condition that the ARTSE parties had to issue a statement confirming that “ART and Simon were not partners with Boniface in the operation of the Game Business” [10(i)(b)].

22.5  Eric was not included in that statement in Emagist’s Offer.  Whatever may have been the reason for that (in fact Boniface accepted that Eric had a 20% interest in the Game business for raising capital for it: Judgment [66], and the Judge found Eric and Boniface had conducted the Game business and the Cherubic transaction as if they two were its only owners: Judgment [83]), in the context the Judge was justified to say the words in §22.3 above, and they do not subvert his finding that ARTS were not partners of Boniface.               

23.1.  Then, as to the Licence Defence, ARTS argue that the Judge had only considered the pre-amendment version of that defence, and not the Re-Amended Defence.

23.2.  Suffice it at this stage to say that the Judge’s understanding of that defence appears to accord with §9.2 of ARTS’ Re-Amended Defence which still pleaded:

“Alternatively, even if the Game was not partnership property, Alvin (D2/P2), Ryan (D3/P1) and Terry (D5/P3), as owner of the copyright of the Game, deny that they, Nether (D1) or Simon (D6/P4) required any consent of Emagist (P/D3) to copy the Game and to protect their interests in the partnership business carried out by Emagist (P/D3) as the corporate vehicle”. (Emphasis added).

23.3.  The italicized words pleaded that the Game was not partnership property and that ART remained the owners of the copyright.  As such, the use of the Game by Emagist before the events of August 2012 must have been with a licence they granted to it, which licence they terminated (on their case, lawfully) when they removed the Game codes and databases from Emagist and transferred them to Nether.  As such, it is difficult to see a strong case for ARTS’ argument that the Judge misunderstood the nature of the Licence Defence.

24.  As we do not consider the grounds of appeal to be strong, we have proceeded to consider whether there are additional reasons to justify a stay, e.g. that the appeal would be rendered nugatory if a stay were not granted.

25.1.  In this respect, ARTS submitted that “there is a grave risk that Boniface would misappropriate or dissipate the assets of Emagist”, resulting in an appreciable risk or no reasonable prospect that Emagist would be able to repay in the event of a successful appeal.  There is no challenge to Boniface’s affirmation that he had returned to live in Hong Kong after the Covid pandemic, but ARTS relies on his ease of relocation.

25.2.  The matters relied upon (pre-action and post-action) by ARTS as Boniface’s acts of misappropriation of Emagist’s assets are the same as those raised before the Judge at trial.  The Judge held in the Judgment that it was not necessary to make a decision on the allegations, as there was no derivative action.

25.3.  We note that in the nearly one and a half years since the Judgment was given, ARTS have still not launched a derivative action.  There is no satisfactory explanation for their inactivity if they consider the evidence is sufficient to support their allegations.  They cannot, under the guise of an application for stay of execution, ask the appellate court to essentially determine whether leave should be given to launch a derivative action, in the absence of any relevant findings by the trial judge as he was not being asked in company proceedings to give leave.  Issues relating to Emagist’s assets and their disposition should be determined pursuant to principles and procedures of company law. The fact that Boniface can move freely between Canada and Hong Kong is neither here nor there.

26.  In view of the above, we are not satisfied that there are additional grounds to justify a stay of execution.

Order

27.  Accordingly, the CA Summons is dismissed with costs which we summarily assess at $35,822.