NGAN PUI CHI AND ANOTHER v. BAO QUAN

HCA 2262/2013

[2018] HKCFI 1383

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2262 OF 2013

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D E C I S I O N

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A. INTRODUCTION

1.  This is the defendant’s application for stay of execution pending appeal.

2.  Wealth Blooming (Asia Pacific) Bullion Ltd (currently known as GBSI Limited) (“the Company”) had a total of 10,000,000 shares of $1.00 each. The plaintiffs used to own 85% and the defendant 15%.

3.  The plaintiffs borrowed 2 loans from the defendant pursuant to 2 Loan Agreements and pledged 2,600,000 and 1,500,000 shares in the Company (collectively “the Shares”) as security. It was a term in each of the Loan Agreement that upon the plaintiffs’ default in repayment, the defendant was at liberty to dispose of the Shares to reduce the loan(s).

4.  The defendant transferred the Shares to herself (“the 2 transfers”) by documents of which the genuineness was disputed (“the disputed documents”).

5.  Having become a majority shareholder by virtue of the 2 transfers, the defendant caused 4,700,000 shares to be forfeited on the ground that the Company wrongly claimed to have $10 million paid up shares when in fact there had been no injection of capital to the extent of $4,700,000. As a result of the forfeiture, the records in the Companies Registry showed that the Company had 5,300,000 issued shares.

6.  The plaintiffs claimed that the transfers were pre-mature in that they took place before the plaintiffs defaulted in repayment and the disputed documents were forged. The defendant claimed that the disputed documents were executed with the consent of the plaintiffs.

7.  After trial, Deputy Judge Cooney SC found that the disputed documents were forged. He gave judgment to the plaintiffs, ordering that:

(1)   The defendant do return the Shares provided as security to the 1^st plaintiff; (“1^st order”)

(2)   The defendant was to deliver up and cause to be transferred 85% shares of the Company to the 1^st plaintiff; (“2^nd order”)

(3)   The First and Second Loan Agreements be reopened and that the term providing for default interest in each of them be struck out; (“3^rd order”)

(4)   There be a declaration that the defendant was not entitled to forfeit the 4,700,000 shares of the Company; (“4^th order”)

(5)   That the defendant was liable to return 44% (sic) shares in the Company to the 1^st plaintiff; (“5^th order”)

(6)   That the plaintiffs’ application for a declaration that the 2 Loan Agreements together with any security given in respect thereof were null and void and unenforceable be dismissed (“6^th order”).

8.  The defendant filed a notice of appeal and applied for stay of execution of the judgment pending appeal upon certain undertakings. It is the defendant’s case that she has strong grounds of appeal. She says it is unlikely that the plaintiffs would be willing to return the Shares to her so the appeal would be rendered nugatory. She also says that it is practically unworkable for her to return the forfeited shares to the plaintiffs.

9.  On the other hand, the plaintiffs say that the defendant’s grounds of appeal have no merits. There is nothing to show that the plaintiffs would be unwilling to return the Shares to the defendant if the appeal were successful.

B.  THE FIRST INSTANCE JUDGMENT

10.  There was no dispute that the 2 Loan Agreements had been entered into and the defendant lent the plaintiffs HK$1,500,000 and HK$610,000 respectively upon security of the Shares. The loans have not been repaid, save for $200,000, which is irrelevant for present purposes. 4,100,000 shares were transferred on 31 January 2013. 4,700,000 shares were forfeited on 25 April 2014. (§110, Judgment).

11.  Deputy Judge Cooney SC framed the issues as follows: (§110, Judgment)

“(1) With regard to the transfer of the 4,100,000 [shares], were signatures on various documents (“the disputed documents”) used to effect the transfer on 31 January 2013 forged?

(The disputed documents are:

(1)   the instrument of transfer in respect of the 2,600,000 shares (Exhibit D4);

(2)   the bought and sold notes (Exhibit D8), the instrument oftransfer (Exhibit D9) and the board minutes (Exhibit D10) in respect of the 600,000 shares purportedly transferred to the defendant; and

(3)   the bought and sold notes (Exhibit D11), the instrument of transfer (Exhibit D12) and the board minutes (Exhibit D13) in respect of 900,000 shares purportedly transferred to GBS Bullion.)

(2)   With regard to the 2,600,000 pledged as security for the First Loan, as a matter of construction of the First Loan Agreement, was the defendant entitled to transfer the 2,600,000 to herself before the due date of the loan (23 February 2013)?

(3)   With regard to the Board resolutions, dated 31 December 2012, concerning transfers of 600,000 shares to the defendant and 900,000 shares to GBS Bullion respectively, given that they were purportedly made before the third instalment was due under the Second Loan Agreement, are the resolutions valid?

(4)   Was the defendant entitled to refuse to accept full repayment of the loans?

(5)   Regarding the forfeiture of the 4,700,000 shares in April 2014, was the Company’s paid up capital HK$10,000,000?

(6)   Are the plaintiffs entitled to set off HK$200,000 against the loans?

(7)   Is the default interest rate in respect of each loan extortionate?”

12.  Deputy Judge Cooney SC found the plaintiffs and the defendant to be evasive and unreliable witnesses.

13.  On issue (1), he found that the defendant had failed to discharge her persuasive burden of proving that the disputed documents were genuine (§§124-143, Judgment). He found that the only documents signed by the 1^st plaintiff were the bought and sold notes in respect of the Shares and the rest was forged. So the Shares were never transferred validly to the defendant (§§144-146, Judgment).

14.  With regard to issues (2) to (5), it is common ground at this hearing that no findings were made (§159, Judgment).

15.  Regarding issue (6), the findings are not relevant to this appeal.

16.  Regarding issue (7), the default interest was found to be extortionate and unreasonable, so those provisions in the Loan Agreements concerning the default rate of interest were struck out.

17.  However, Deputy Judge Cooney SC considered that the Loan Agreements were validly entered into and the security validly given. He thus declined to make a declaration that the Loan Agreements and security were null and void. (§§157 & 166, Judgment)

C.  GROUNDS OF APPEAL

18.  There are 4 broad grounds of appeal:

(1)   Ground 1: that the learned Deputy Judge failed to apply the correct law in relation to the burden and standard of proof for the alleged forgery.

(2)   Ground 2: that the learned Deputy Judge failed to properly evaluate the evidence for the alleged forgery.

(3)   Ground 3: that the learned Deputy Judge failed to properly consider whether under the Loan Agreements the defendant was entitled to transfer the Shares to herself upon default.

(4)   Ground 4: that the learned Deputy Judge failed to properly evaluate the evidence in respect of the forfeiture of the 4,700,000 shares.

D.  GROUNDS FOR STAY OF EXECUTION

Legal principles

19.  The principles are not in dispute:

(1)   The burden is on the appellant to justify a stay of execution by showing that there are good reasons for stay;

(2)   The existence of a strong ground of appeal or strong likelihood of success on appeal is by itself a good reason for stay. But in the majority of cases, it is undesirable and unnecessary to go deeply into the merits and strength of an appeal;

(3)   If an appellant only has an arguable appeal, he will have to provide additional reasons as to why a stay is justified. A commonly recognized good reason is that an appeal will be rendered nugatory if no stay is granted. To determine that question, the court may have regard to the nature of the order being appealed against;

(4)   However, in considering whether to exercise discretion to grant a stay, the court must not forget the position of the successful party, and it is always relevant to consider the prejudice that would be caused to the successful party in the event a stay is granted; and

(5)   Ultimately, the court embarks on a balancing exercise and uses its common sense, with the starting point that the successful party is not to be deprived of the fruits of his success.

Star Play Development Ltd v Bess Fashion Management Co. Ltd [2007] 5 HKC 84 at §§6 to 10 per Ma J (as the Chief Justice then was). As summarized by Mr Recorder Yuen SC in Hollywood Shopping Centre Owners Committee Limited v The Incorporated Owners of Win Wah Building Mongkok Kowloon, 13 June 2011, HCA 1582/2007 at §10.

20.  The Court must form a preliminary view of the merits and strength of an appeal. The requisite strength to constitute strong appeal is that the appeal must be such that the court takes the view that “something has grievously gone wrong with the process of law in the court below”. In other words, if the party applying for a stay of execution can demonstrate that it is almost bound to succeed in the appeal, this by itself will almost invariably tilt the balance in favour of granting a stay. See Toeca National Resources B.V. v Baron Capital Limited [2013] 5 HKLRD 178, Cheung JA at §6.

21.  An appeal being rendered nugatory does not mean in all cases that without a stay, the appellant faces financial ruin or the loss of all his property. Demonstrating that the failure to grant a stay would have a serious deleterious effect is enough. Toeca National Resources, at §6.

E.  STRONG GROUNDS OF APPEAL

Ground 1: Failure to apply the correct law in relation to the burden and standard of proof for the alleged forgery

22.  Ground 1 turns on whether the disputed documents were forged. Mr Lam submits that Deputy Judge Cooney SC erred in the burden of proof and standard of proof in forgery.

23.  Where an allegation (or document), whether affirmative or negative, forms an essential part of a party’s case, the burden of proof rests on that party to prove that the allegation or document is genuine: Pacific Electric Wire & Cable Co Ltd v Texan Management Ltd & ors, CACV 90, 91, 93-96/2012, 17 September 2013 at §§60, 61, Kwan JA.

24.  Where the respondent makes no allegation of forgery, he bears no persuasive burden to prove forgery. He bears the evidential burden of adducing sufficiently cogent and probative evidence to raise the issue of forgery with a view to defeating the other party’ claim. See Nina Kung v Wong Din Shin (2005) 8 HKCFAR 387, §§180, 183; followed in the Pacific Electric Wire case, at §63.

25.  In Ming Shiu Chung & ors v Ming Shiu Sum & ors, CACV 180/2004, 20 June 2005, Tang JA (as he then was), at §35, held:

“We believe the onus is on the party “who produces (the document), and asserts its validity”. It does not depend on who was the plaintiff. Nor that it was the plaintiffs who sought a declaration that the documents were forged rather than Lawrence who was seeking a declaration that they were genuine. But, here, since we are of the opinion that the genuineness of the signatures have been proved it does not matter who had the burden.”

26.  Cogent evidence of forgery is required. Unanswered suspicion cannot be elevated to proof of forgery under the disguise of drawing inference: Nina Kung at §§ 233, 234, Ribeiro PJ; followed in Chinachem Charitable Foundation Ltd v Chan Chun Chuen & anr, 2 February 2010, HCAP 8/2007 at §211, Lam J (as he then was).

27.  As to standard of proof, Mr Lam submits that since there is usually no direct evidence in forgery cases, a conclusion of forgery is not to be reached by conjecture nor on a mere balance of probabilities. It was to be plainly established as a matter of inference from proved facts. HKSAR v Lee Ming Tee & anr (2003) 6 HKCFAR 336, §72, Sir Mason NPJ.

28.  Mr Lam submits that since it was the plaintiffs who alleged forgery (for the first time in their reply), the persuasive burden of proof rested on them, whereas Deputy Judge Cooney SC erred in placing that burden on the defendant.

29.  Mr Lam also submits that Deputy Judge Cooney SC erred in resting his findings on inferences. The plaintiffs adduced no evidence in discharge of their burden of proving forgery, other than raising suspicion on the circumstances of the disputed documents. There was no expert evidence adduced. The plaintiffs were found to be unreliable witnesses. Their entire case was based on suspicion, bare assertions and fabrication. The Judgment did not consider the law on drawing inferences in forgery cases, nor did it consider the evidence of the plaintiffs.

30.  I am unable to agree with Mr Lam. Deputy Judge Cooney SC did refer to various leading cases on the burden of proving forgery and explained why he did not consider them applicable. He found the present case similar to the scenario in Pacific Electric Wire (§§117-120, Judgment). He did not lose sight of the pleaded case of the plaintiffs and the defendant (§115, Judgment). He found that the plaintiffs made no allegations that the disputed documents had been forged. It was the defendant who produced the disputed documents, asserted their validity and alleged that they demonstrated that the 1^st plaintiff consented to the transfers. The existence and genuineness of the disputed documents formed an essential part of the defence although the plaintiffs asserted forgery in the reply. He thus held that the persuasive burden was on the defendant to prove that the disputed documents were genuine (§120, Judgment).

31.  I am unable to see strong grounds of appeal in Mr Lam’s challenge to the legal principles on forgery that the learned Deputy Judge relied on.

32.  Mr Lam then submits that Deputy Judge Cooney SC had not considered some important evidence against forgery. For example, the fact that the disputed documents were contemplated in the Second Loan Agreement; the contractual provision that entitled the lender to deal with the Shares upon default in repayment, the defendant’s willingness to exchange signed paperwork for the pledged 1.5 million Shares; and the plaintiffs’ change of case in that there was no mention of forgery or fraud in the 1^st plaintiff’s written statement to the ICAC or pre-action solicitors’ correspondence until the reply.

33.  When one looks at §§124-143, there seems to be support for Mr Lam in that Deputy Judge Cooney SC concentrated on analyzing the evidence of the defendant and the defendant witnesses, including the fact that the defendant’s husband (Kaiser Chan) was not called as a witness. There was not much reference to the plaintiffs’ evidence.

34.  Mr Lam’s submission in paragraph 32 above is in the nature of a challenge to findings of fact. With respect, even if his points are arguable, it is not the defendant’s case in the notice of appeal that the findings of fact were plainly wrong so as to justify interference by the Court of Appeal: Ting Kwok Keung v Tam Dick Yuen & ors [2002] 3 HKLRD 1.

35.  Moreover, I accept Ms Lan’s reminder that there is a difference between a case on a forged will and one like the present. In the former, the maker of the will cannot give evidence. It is thus important to know on whom what burden lies. In the latter, the purported parties to the disputed documents are in court to give evidence and it is open to the court to decide on their credibility and see if the case on forgery is established on the evidence available: Ming Shiu Chung.

36.  In summary, I am unable to say that there are strong grounds of appeal as regards Ground 1.

Ground 2: Failure to properly evaluate the evidence for the alleged forgery

37.  The defendant relies in part on the matters in paragraph 32 above. She further complains that Deputy Judge Cooney SC had failed to properly consider the evidence or give the proper weight to several items of evidence:

(a)   Wrongly drawing adverse inference from her failure to call her husband Kaiser Chan as a witness.

(b)   Placing improper weight on the wavering evidence of Li Ho Fung who had little recollection of details of events that took place 4 years before trial.

(c)   Making a problematic finding that an email addressed to Patrick Cheung and Channing Chan was not in fact addressed to the 2^nd plaintiff.

38.  The defendant says that, correctly evaluating the evidence, Deputy Judge Cooney SC ought to have come to the view that there was no compelling evidence warranting the inference that the signatures appearing on the disputed documents were forged.

39.  Paragraph 34 above is equally applicable to Ground 2. Whilst being arguable, it cannot be said that Ground 2 is a strong ground of appeal.

Ground 3: Failure to consider whether under the Loan Agreements the defendant was entitled to transfer the Shares to herself upon default

40.  Resolution of issue (1) on forgery was not the end of the case. The loans remain outstanding even at this hearing. Without resolving issues (2) to (4), one could not say whether the defendant was entitled to refuse to accept purported repayments of the loans and retain the Shares.

41.  The 1^st and 2^nd orders required unconditional return of the Shares to the plaintiffs. This would destroy the security under the Loan Agreements which the learned Deputy Judge expressly upheld (subject to striking out of the default interest provision).

42.  Ms Lan draws to my attention that the defendant had no counterclaim so she must return the Shares. With respect, Deputy Judge Cooney SC was aware of the lack of a counterclaim and expressly declined to make an order barring the defendant from enforcing the loans (§8, Judgment).

43.  There is strong ground to say that something had gone grievously wrong in the court below as regards the reliefs granted.

Ground 4: failure to properly evaluate the evidence in respect of the forfeiture of the 4,700,000 Shares

44.  With regard to the 4^th order, the logic behind the Judgment appeared to be that because the defendant was not entitled to transfer the Shares based on the forged documents, she was not allowed to forfeit the Shares though she was a majority shareholder (§147, Judgment).

45.  In §8 of their original statement of claim, the plaintiffs alleged that the amendment of a missing record of forfeiture of 4,700,000 Shares as at 30 June 2013 made the total number of Shares reduced to 5,300,000 Shares. The plaintiffs did not say that the amendment was wrongful. They also made a bare assertion that the 4,700,000 Shares were paid up. And yet there was unchallenged contemporaneous documents (including company accounts) which unequivocally showed that the Company had only paid up 5,300,000 Shares. The Companies Registry accepted the defendant’s evidence and permitted the amendment to the Company’s records to show the paid up shares as 5,300,000.

46.  Without resolving issue (5), it could not be said that the forfeiture of the 4,700,000 shares was wrongful and so the 2^nd, 4^th and 5^th orders may have been made without bases. Ms Lan accepts at this hearing that a lack of finding of facts may pose a problem.

47.  More importantly, the decision to forfeit the Shares was, strictly speaking, an act of the Company, not the personal act of the defendant. There is a question as to whether or not the 4^th order could be performed by the defendant personally.

48.  Ms Lan suggests that the Company could give the Judgment to the Companies Registrar to show that the defendant was disbelieved by the court and hence the forfeiture should be set aside. Moreover, the question of whether capital had been or should be paid up are matters for the Companies Court. With respect, these submissions support my view that the 4^th order could not be performed by the defendant personally.

49.  Related to this issue is therefore, if the forfeiture was on good grounds, why should the defendant be asked to fund the 4,700,000 shares and “return” those shares to the plaintiffs? On the other hand, how could the defendant convince the Companies Registrar to allow her to “amend” the records to reinstate the 4,700,000 shares, when she had affirmatively told the Companies Registrar that those shares had not been fully paid up?

50.  In my view, there is a strong ground of appeal in Ground 4.

F.  OTHER REASONS FOR GRANTING A STAY

51.  The defendant claims that the appeal would be rendered nugatory if no stay is granted.

52.  The defendant asserts that the plaintiffs would be unwilling to re-transfer the Shares to her if she were successful in the appeal, but there is no evidence in support. In any case, even if that assertion is true, I do not see it as a ground for granting a stay. This is because the defendant, if successful in the appeal, may invoke the assistance of the Registrar of the High Court to execute any necessary documents to re-transfer the Shares to her, pursuant to s.25A of the High Court Ordinance, Cap 4.

53.  Next, the defendant is concerned that the plaintiffs may dissipate the Shares pending appeal. There is no direct evidence but the defendant points to the finding that the plaintiffs were unreliable witnesses. I do not find that in itself to be evidence of dissipation of assets. In any case, the defendant herself was also found to be unreliable and had forged documents.

54.  The defendant next prays in aid (i) the questionable conduct of the plaintiffs, ie the 2^nd plaintiff’s issue of 3 post-dated cheques for repayment of the 2^nd loan which were all dishonoured; and (ii) the query as to whether, if the defendant were to provide $4,700,000 to reinstate the 4,700,000 Shares, the plaintiffs (who had already defaulted in repayment of the loans) would be able to reimburse the defendants for such an enormous sum if the appeal were successful. I find these to be valid concerns of the defendant.

55.  Coupled with the strong grounds of appeal under Grounds 3 and 4, it is proper for the court to exercise its discretion to grant a stay subject to conditions.

G.  STAY OF EXECUTION AND CONDITIONS

56.  The delay since the handing down of the Judgment to this hearing was not caused by the defendant. The Judgment was handed down about 11 months after trial. After filing the notice of appeal within time, the defendant has pursued the application for stay of execution expeditiously. She nevertheless consented to an adjournment at the request of the plaintiff.

57.  Mr Benjamin Lam was not the trial counsel and there was a lot of transcript to go through. The supplemental grounds of appeal are yet to be prepared. He is prepared to undertake to file and serve the supplemental grounds of appeal within 42 days of this hearing.

58.  The Company has a valuable membership in the Chinese Gold and Silver Exchange Society, worth HK$9 million. The defendant herself has 15% shares, worth about HK$1.35 million. She is willing to give undertakings in the following terms pending the outcome of the appeal in CACV 260/2017:

(a)   Not to transfer or dispose of or do anything to diminish the value of the shares of the Company held by her;

(b)   Not to carry on any business or activities in the Company’s name and/or in the capacity of a director/shareholder of the Company without the written consent of the 1^st plaintiff;

(c)   Not to activate the Company’s suspended membership of the Chinese Gold and Silver Exchange Society (Membership no. 232) (“Suspended Membership”); and

(d)   To procure the Company to pay the monthly and annual subscription fees for the Suspended Membership.

59.  The plaintiffs submit, and I agree, that §(c) of the proposed undertakings is redundant as the scope is already covered by §(b). The plaintiffs also dispute the defendant’s capacity to procure under (d) and do not agree to the undertaking. I do not see the need to impose undertaking (d) either.

H.  CONCLUSION

60.  Upon the undertakings of the defendant as per paragraph 58(a) and (b) above, and on condition that the defendant files and serves the supplemental notice of appeal by 15 July 2018, I order that there be stay of execution of the Judgment pending appeal. This stay shall lapse if the defendant fails to comply with the condition.

61.  I make an order nisi that the defendant’s costs of this application shall be in the cause of the appeal.

62.  I thank Ms Lan and Mr Lam for their assistance.