SUN JIYOU AND OTHERS v. L & A INTERNATIONAL HOLDINGS LTD AND ANTOHER

HCMP 1929/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1929 OF 2016

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D E C I S I O N

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INTRODUCTION

1.  This dispute is over voting rights exercisable in relation to 1.545 billion shares (constituting approximately 7.3% of the issued shares) in the 1^st defendant L & A International Holdings Ltd (“the Company”).

2.  On 27 July 2016, the plaintiffs (“Ps”) who are individual investors residing in the PRC took out an originating summons for an order pursuant to section 152 of the Companies Ordinance, Cap 622 (“the Ordinance”) for registration of six share transfers which in the aggregate involve 1.545 billion shares in the Company after the subdivision mentioned in §8(b) below.  On the following day they applied for interim relief in terms of a draft order attached to the summons dated 28 July 2016.

3.  The summons came before Au‑Yeung J who granted an injunction order at the hearing on 5 August 2016 (“the injunction order”) ordering the 2^nd defendant Yang’s Holdings Capital Ltd (“YHCL”) who is the registered holder to exercise its voting rights in respect of the disputed shares (the subject matter of Ps’ registration applications) in accordance with Ps’ instructions but adjourned paragraphs 3 and 4 of the draft order to a date to be fixed.

4.  The relief sought in paragraphs 3 and 4 of the draft order was for an order, inter alia, to compel the Company to register the share transfers from YHCL to Ps forthwith (“Ps’ registration applications”), alternatively, that the Company be restrained from holding any general meeting of the shareholders until after completion of Ps’ share registrations.

5.  On 23 August 2016, Flying Mortgage Ltd (“FM”) issued a summons inter alia for leave to intervene in the proceedings and be joined as the 3^rd defendant. FM sought orders to vary the injunction order.  On 26 August, Au‑Yeung J adjourned FM’s summons to be heard at the adjourned hearing of Ps’ summons.

6.  The hearing was the adjourned hearing of Ps’ summons and FM’s summons.  At the conclusion of the hearing the decision was reserved which I now give.

BACKGROUND FACTS

7.  The facts are involved and contentious. At the hearing the court requested that a chronology be prepared.  It now transpiresthat Ps did not even circulate their chronology for comment until 8 days after the conclusion of the hearing.  That is wholly unacceptableand regrettable given that Ps are very much aware that the Company’s AGMmust take place on or before 28 October 2016 and that it would be desirable from every point of view for the court’s decision to be available before then.  In the event, the court was only provided with Ps’ version on 17 October and the agreed version of the Company and FM on19 October 2016.

8.  Be that as it may, in outline, the facts and events before the court when the injunction order was made may be summarised as follows:

(a)  The Company is listed on the Growth Enterprise Market of the Stock Exchange of Hong Kong.

(b)  YHCL was a major shareholder of the issued shares of the Company.

(c)  On 23 June 2016 the Company resolved to subdivide each existing share into 5 shares.

(d)  On 30 June 2016 the Company announced an AGM for 28 July 2016.

(e)  Ps claimed to have acquired the disputed shares from YHCL in July 2016 through Yang Wenkang (“YWK”), a ‘middleman’ or agent acting for YHCL.

(f)  Ps claim to be experienced with stock investment in Hong Kong.

(g)  In acquiring the disputed shares, Ps’ did not deal directly withYHCL but only through YWK.  Ps were given to understand by YWK that upon settlement of the consideration from the relevant plaintiff, Yang Si Hang would execute the relevant share transfer form and provide the agent with the relevant original share certificates.

(h)  Ps executed standard forms of share transfer, paid consideration to YWK and were given 309 share certificates of 1 million shares each of the Company (being the disputed shares prior to the subdivision mentioned in (c) above), said to have taken place before 13 July 2016.

(i)  No contract notes were produced and among other irregularitiesthe “Consideration” column of each of the share transfer forms was left blank.

(j)  Ps’ HK agent submitted the executed and stamped share transfers together with the original share certificates of the disputed shares comprising 309 million shares (pre‑subdivision) to Boardroom Share Registrars (HK) Ltd (“Boardroom”) for registration on 13 July 2016 and was provided with receipts to the effect that the new certificates for 1.545 billion shares (post‑subdivision) would be ready for collection on or within one month of 20 July 2016.

(k)  Several events then occurred on 25 July 2016 although the precise order of the events is not entirely clear:

(i)     The Company discovered a forged proxy form in relation to the AGM scheduled for 28 July 2016 and caused a police report to be filed.

(ii)    The Board noted irregularities in Ps’ transfer forms submitted for registration in that certain material information was missing and decided to withhold registration pending investigation of the irregularities.

(iii)   Boardroom was informed on the same day in writing of the Board’s decision not to proceed with Ps’ share transfer applications pending further notice.

(iv)   Ps’ agent Tang Wing Shing (“Mr Tang”) lodged proxy forms with Boardroom in connection with the AGM and also presented receipts to collect the new certificates for the disputed shares.

(v)    Mr Tang was informed that all share transfer applications in progress were being withheld pending “checking”.

(l)  On 26 July 2016, in view of (k)(i) above and the possibility ofother proxy forms having been forged, the Board decided thatin the interests of the Company and the shareholders, the AGM be postponed until further notice.  An announcement was issued the same day announcing that the AGM for 28 July be postponed pending investigation of the forged proxy form issue.

9.  Ps issued an originating summons on 27 July 2016 and a summons for interim relief on 28 July 2016.  The injunction order was made on 5 August 2016.

10.  Subsequently, on 23 August 2016, FM issued an originating summons (HCMP 2182/2016) against the Company, Ps and YHCL claiming a declaration that FM is the beneficial owner or alternatively the equitable mortgagee of the disputed shares.

11.  FM also took out a summons for an order that:

(i)     FM be joined as the 3^rd defendant in these proceedings;

(ii)    the injunction order be varied or set aside such that until furtherorder the voting rights in respect of the disputed shares not be exercised;

(iii)   Ps and the Company be prohibited or restrained from registering any of the disputed shares in the names of Ps.

12.  As earlier noted, on 26 August 2016, Au‑Yeung J adjourned FM’s summons to be heard at the same time as Ps’ adjourned summons.

13.  When the injunction order was made, Ps’ claims for relief were supported, interalia, by the affirmation of Sun Jiyou (“P1”) dated 27 July 2016 (“Sun I”).  Ps claimed that as purchasers of the disputed shares from YHCL, they acquired beneficial ownership of the disputed shares.  It would appear that the injunction order (requiring YHCL to vote at the Company’s general meetings in accordance with Ps’ directions) was made on that basis.

14.  FM’s interest arises under a Loan Agreement dated 21 April 2016 and a Share Charge of the same date whereby YHCL charged 840 million shares in the Company (“the charged shares”) to secure repayment of a loan of $128 million advanced under the Loan Agreement.

15.  FM’s case is that an event of default having occurred on 11 May 2016, it obtained possession of the original share certificates of the chargedshares that included the disputed shares through exercising its powers under the Share Charge and passed the charged shares to Choy Sheung Ki Gary (“Mr Choy”) of Mega Step Capital Ltd (“Mega Step”) for disposal the very same day.

16.  A train of enquiry was set in motion after FM received an enquiry from the Company on 19 July 2016 requesting it to confirm if it had approved certain transfers to 6 transferees involving 309 million shares (see §18(o) below).

17.  After FM’s application to be joined as the 3^rd defendant was made, further evidence was filed in support of Ps’ case.  There is now an affirmation of YWK affirmed on 31 August 2016 and a second affirmation dated 2 September 2016 affirmed by P1 (“Sun II”).

18.  The relevant events that emerge from the evidence filed for the hearing of FM’s summons may be summarised as follows:

(a)  In July 2015 YWK reached an agreement with YHCL through Mr Choy of Mega Step for the disposal of 45% of the issued capital of the Company (or 60% of YHCL’s shareholding in the Company) at HK$0.09 per share through road shows in the PRC.  It is not suggested that YWK ever had any direct dealings with YHCL.

(b)  Under the arrangement if investors agree to purchase the shares in the Company from YHCL at a price higher than HK$0.09, YHCL would pay the difference to YWK in the form of commission shares calculated on the basis of HK$0.09 per share (“the arrangement”).

(c)  According to Ps, between 20 August 2015 and 11 May 2016, YHCL disposed of 1,799,244,000 of the Company’s shares comprising (i) 181,880,000 shares sold to investors at an average price of HK$0.89 per share, such sales being facilitatedby YWK and (ii) 1,617,344,000 commission shares (resulting from the arrangement) transferred to YWK by YHCL.

(d)  YWK maintained an undated list of “particulars of payment received and stocks” of the Company YHCL had transferred to YWK.  The list (exhibit YWK‒8) shows an entry recording a transferfrom YHCL of 840 million shares on 11 May 2016 but according to YWK’s affirmation the original certificates of the commissionshares as well as share transfer forms pre‑signed by Yang Si Hang were delivered to him by Mr Choy.

(e)  The last six items on the list are said to reflect the disposals of the disputed shares from YWK to Ps that took place on 5, 11 and 12 July 2016.

(f)  Meanwhile, on 21 April 2016, YHCL and FM executed the Loan Agreement and Share Charge and 840 share certificates of the Company (the subject matter of the Share Charge) were put in the custody of an escrow agent.

(g)  A Share Price Default within §6(i) of the Loan Agreement occurred on 9 May 2016 which was not cured within the available 24‑hour window of its occurrence causing an event of default to occur on 11 May 2016.

(h)  FM exercised its rights under the Share Charge (as it was entitled to do) to take possession of the charged shares (ie all 840 million shares comprising 840 share certificates of 1 million shares each) and obtained possession of the same from the escrow agent on 11 May 2016 so that they could be sold.

(i)  On the same day FM gave the original share certificates of the charged shares to Mr Choy the sole shareholder and directorof Mega Step (with whom FM had a business relationship) toarrange for the disposal of the charged shares on FM’s behalf.

(j)  FM did not know at the time that Mr Choy/Mega Step in fact passed all 840 share certificates to Chan Koc Kong (“KK Chan”) for disposal on 11 May 2016.

(k)  On 12 May 2016 the Company issued a public announcement of the default and its enforcement.  The announcement also stated that the charged shares had been transferred to independent third parties.

(l)  On 16 May 2016 FM filed two DI forms: the first (“the 1^st DIForm”) stated that on 21 April 2016 FM acquired a security interest in 840 million shares in the Company; the second (“the 2^nd DI Form”) stated that on 11 May 2016 it ceased to have any interest in the charged shares.

(m)  KK Chan last saw the share certificates of the disputed shares in Macau on or around 1 June 2016.

(n)  On 30 June 2016 the Company gave notice of the AGM referred to in §8(d) above.

(o)  On 19 July 2016, FM received an enquiry from the Company as to whether FM had approved the sale of shares to 6 purported transferees (ie Ps).

(p)  On the same day FM sought confirmation from Mr Choy as to whether Ps were legitimate buyers of the shares from Mega Step.

(q)  The certificates lodged with Boardroom for registration were original certificates before the June subdivision and related to309 million shares in the Company.  The certificate numberscorresponded to the certificate numbers of 309 million of the 840 million constituting the charged shares prior to the subdivision.

(r)  There is an unsigned rejection advice dated 26 July 2016 fromBoardroom to Mr Tang, refusing to register Ps’ share transfers.

(s)  Meanwhile, on 27 July 2016, Ps commenced these proceedings to be registered as shareholders of the disputed shares.  At that point FM was still awaiting Mega Step’s response.

(t)  On 4 August 2016, FM advised the Company of its claim and interest in, the disputed shares, the subject matter of Ps’ registration applications.

(u)  In or about mid‑August Mega Step confirmed that the disputed shares had not been sold to Ps and in fact the share certificates were lost.

(v)  On 11 August 2016, FM requested the Company to investigate the share transfers to Ps and to refrain from registering the disputed shares without FM’s consent pending proceedings by FM.

(w)  FM then learned that Mega Step had in fact entrusted KK Chan to dispose of the charged shares on 11 May 2016.

(x)  After KK Chan’s return to Macau he made a police report on 1 September 2016 and a second report on 9 September 2016to clarify a misunderstanding in the first report.  According to KK Chan’s affirmation, the police reports were inaccurate in that he had last seen the certificates in Macau on or around 1 June 2016 but does not know when exactly the certificates went missing.

19.  FM had reason to believe that the disputed shares claimed by Ps are among the charged shares involved in FM’s enforcement of the Share Charge on YHCL’s default under the Loan Agreement: see §18(q) above.

20.  According to YWK the disputed shares formed part of the 1,617,344,000 commission shares he received from YHCL, all of which YWK sold to other investors between 20 August 2015 and 12 July 2016.

21.  The issues that arise on both summonses will be considered under the headings below.

THE NATURE OF FM‘S INTEREST IN THE DISPUTED SHARES

22.  The first issue that needs to be determined is whether FM hassufficient interest in the disputed shares to intervene in Ps’ proceedings against the Company and YHCL.  ‌If not, its application to vary the injunctionorder must fail.

23.  At the hearing, FM relied exclusively on its being an equitable mortgagee and abandoned any claim previously asserted to beneficial ownership.

24.  Ps submitted that under the Loan Agreement and the Share Charge, FM had no more than a security interest in the disputed shares which, it was submitted, meant nothing more than a mere commercial interest over the outcome of Ps’ proceedings.

25.  It is common ground that the loan of $128 million made by FM to YHCL was secured by a Share Charge of the charged shares. The Share Charge provided, inter alia, that:

(a)  the charged shares were “a continuing security for payment” of all the secured indebtedness by way of a first charge (clause 3.01(a)), the chargor (YHCL) assigned or agreed to assign to FM “the full benefit and all rights of all the charged shares ” (clause 3.01(b));

(b)  YHCL agreed to deliver to FM duly executed instruments of transfer in blank (clause 3.02(a)).

(c)  if any event of default shall have occurred, FM shall have the right to “sell or dispose of the charged shares” and to exercise “any powers or rights incidental to the ownership of the charged shares” (clause 6.02(a) (b) and (c)).

26.  What then is the true nature of FM’s interest in the charged shares?

27.  Both Mr Wong SC for Ps and Mr Khaw SC for FM sought to derive assistance from the following passage in Bridge on The Law of Personal Property 1^st Edition at §7‒079:

“Nature of the parties’ proprietary interests in the charged assets As is clear from what has gone before, the chargor (the debtor) remains the owner of the charged assets, and the chargee (the creditor) acquires a new form of equitable proprietary interest, an interest by way of charge, which has attached to it the various rights agreed between the parties (and, in particular, include the chargee’s right in defined circumstances of default to realise the charged assets and use the proceeds to satisfy the secured obligation), which rights are quite distinct from either legal or equitable ownership or possession (which remain with the debtor …”

Mr Wong relied on it to show that FM is not the owner of the charged shares as YHCL remained the owner but that is no longer material since beneficial ownership is not a live issue for present purposes.

28.  Mr Wong submitted that the essence of a mortgage requires “a split of ownership between legal ownership and equitable ownership”, that no segregation of ownership arises under a charge because there is no transfer of equitable ownership and that it is nothing more than an encumbrance on the shares.  His stance was that FM could not be an equitable mortgagee for those reasons.

29.  Bridge (at §7‒084) helpfully expands on the earlier passage quoted above and renders a lucid exposition of the blurring of doctrinal distinctions between a mortgage and a charge, shedding considerable light on the true nature of FM’s interest.

30.  The relevant passage reads:

“Difference between equitable charges and equitable mortgages The difference between a charge and an equitable mortgage is, in theory, clear: an equitable mortgage involves the conveyance bythe debtor to the creditor of equitable ownership of the mortgagedassets, subject to the debtor’s equity of redemption; a charge, bycontrast, involves no conveyance or division of ownership, merely the carving out of the creditor’s security interest by way of an encumbrance on the debtor’s assets. Again, however, the facts may often be difficult to interpret, and the analysis provided by the courts blur the doctrinal distinctions. This is encouragedby various statutes which define a charge as including a mortgage, and provide for common means of enforcement.

On the debtor’s default, the chargee has a choice of judicial remedies(an order of the sale or for the appointment of a receiver, but notforeclosure, and no self help remedies unless specifically providedfor in the charge document). By contrast, the mortgagee has the additional rights of … and of foreclosure. But typically the charge document makes detailed provision and no resort to the courts is needed, and indeed the ‘charge’ agreement may often stipulate for rights analogous to those of a mortgage. This tendency of mortgage and charge to converge in practice is supported by a judicial disinclination to separate the two. It has indeed been remarked that the notion of an equitable charge embraces both equitable mortgages and equitable charges not by way of mortgage.” (emphasis added)

31.  It is abundantly clear that the Share Charge contains detailed provision as to the chargee’s powers on the occurrence of an event of default, specifically conferring on the chargee “self help remedies” mentioned by Bridge.  The scope and nature of the powers conferred on the chargee are analogous to those normally given to a mortgagee.

32.  If one is looking to ascertain the intent of the parties to the Share Charge, the scope and extensiveness of the powers accorded (see §25 above) are undeniable.  In those circumstances, there can be but one answer to the question of the parties' intent: that FM would be an equitable mortgagee of the charged shares.  I have no doubt that FM has an equitable proprietary interest in the disputed shares.  As such, FM must be allowed to intervene.  Accordingly, it would be appropriate to order that FM be joined as the 3^rd defendant.

WHETHER FM NO LONGER HAS ANY EQUITABLE INTEREST IN THE CHARGED SHARES

33.  The events that occurred on 11 May 2016 are obviously important.  It appears to be common ground that (i) the disputed shares were among those charged by YHCL to secure repayment of FM's loan; (ii) the disputed shares were delivered to and held in escrow by a firm of solicitors for FM when the security was created on 21 April 2016; (iii) on 11 May 2016, an event of default occurred; (iv) the solicitors released the charged shares including the disputed shares to FM on 11 May 2016.

34.  Ps rely on the following to show that FM ceased to have any interest in the charged shares on 11 May 2016:

(a)  the 2^nd DI Form;

(b)  FM’s letters dated 4 and 11 August 2016 to the Company and YHCL respectively;

(c)  the Company’s public announcement dated 12 May 2016.

35.  According to FM, the 2^nd DI Form (to the effect that FM ceased to have an interest in at least 5% of the issued shares of the Company) cameabout due to a misunderstanding that arose when instructions were given forthe necessary statutory filings on FM’s behalf relating to its acquisition of an interest in the charged shares.  The error was explained to the Exchange on9 September 2016 and since rectified by the withdrawal of the 2^nd DI Form.

36.  FM informed its solicitors that the share certificates of the charged shares had been “dealt with or handled” in the sense that it hadpassed the share certificates to Mega Step for disposal on 11 May 2016 but the solicitors were under the impression that the charged shares had been disposed of or sold and on that basis in addition to filing the 1^st DI Form relating to FM’s acquisition of an interest in the charged shares on 21 April 2016, filed an additional DI form ie the 2^nd DI Form.

37.  Ps drew attention to the absence of any evidence from the solicitors responsible for filing the DI Forms and, further, the fact that in the 2^nd DI form, the transaction was designated as “off exchange” stating the average consideration per share of 0.152.  No doubt those features need explanation.  While Ps’ observation as to the absence of evidence is valid, it does not follow that FM’s explanation is to be rejected out of hand.  Its veracity is a matter for trial.

38.  What is said in §37 above is equally applicable to the statement contained in its letter to the Company of 4 August 2016 to the effect that the disputed shares have been “disposed of” as well as the Company’s announcement dated 12 May 2016 to the effect that the charged shares had been “enforced and transferred to third party(ies) independent of the Company”.  Those statements do not take Ps’ case any further.

39.  I would only add this observation in relation to the announcement of 12 May 2016: had it been true, why would the Company have made the enquiry that it did on 19 July 2016?  It makes little sense.

40.  As regards the letter of 11 August 2016 from FM to the Company, I do not see how it is relevant to the submission that Ps are advancing.  FM was there asserting a beneficial interest in the disputed shares, requesting that the Company to investigate into the six transfers about which litigation was on foot and to refrain from registering the disputed shares pending the resolution of the litigation.

41.  In summary, I do not accept that the matters on which Ps rely are dispositive on the issue whether FM ceased to have an interest in the disputed shares on 11 May 2016.

42.  To the contrary, FM has shown why and how it took possession of the charged shares on 11 May 2016 and what it did with them.  They were given to Mr Choy on the same day for “disposal” in the sense of finding purchasers for them.  That is corroborated not only by the evidence of Mr Choy but also that of KK Chan to whom on the same day Mr Choy had passed the charged shares for disposal.

FM’S APPLICATION TO VARY THE INJUNCTION ORDER

43.  I propose first to consider whether there were any changes in the circumstances since the date of the injunction order that affect the order.

(a)  Change in circumstances?

44.  Significantly, and first and foremost, Ps has now put forward a different case altogether.  I have little doubt that YWK’s evidence (filed for the purpose of opposing FM’s application to intervene and to vary the injunction order) was the reason for it.

45.  The evidence in Sun II is that Ps’ commercial objective was to purchase the disputed shares from YWK and not YHCL as had been the original case.  Ps’ case now is that their agreements were made with YWK to acquire his beneficial interest in the disputed shares, YWK having previously acquired his beneficial ownership of the disputed shares as commission shares.

46.  In his affirmation, YWK described the arrangement he had made with YHCL through Mr Choy/Mega Step and how he became entitledto commission shares.  Whether or not Ps were aware of the arrangementbetween YWK and YHCL whereby the former stood to receive commission shares from YHCL is not strictly relevant.

47.  However, Ps’ change of case to acquiring YWK’s beneficial interest in the disputed shares bears the hallmarks of expostfacto rationalisation in light of YWK’s affirmation.  Ps could not really assert that they were acquiring the disputed shares from YWK for that would have meant that the disputed shares would have been in YWK’s name which they were not.  Hence it had to be the acquisition of YWK’s beneficial interest in those shares as YHCL was still shown as the registered owner.  But it remains a mystery how Ps gained the understanding that they were contracting with YWK to purchase YWK’s beneficial ownership in the disputed shares particularly as they disown any knowledge of the arrangement.

48.  Be that as it may, on Ps’ case (based on YWK’s evidence), it was Mr Choy of Mega Step acting on behalf of YHCL who passed the 840 share certificates together with pre-signed share transfer forms to YWK by way of commission shares pursuant to the arrangement.

49.  That assertion is highly controversial: Mr Choy has filed an affirmation denying that he knows YWK at all and stating that the matters stated in YWK’s affirmation relating to Mr Choy “are a fabrication”. Mr Choy also denies ever acting as YHCL’s agent or representative in relation to any sale of its shares in the Company.

50.  Plainly that dispute is a matter that can only be resolved at trial and not on affidavit evidence.  What is significant however is that the circumstances now before the court are wholly different from those prevailing on the date of the injunction order.

51.  There is a direct conflict of evidence on the issue of how and why, inter alia, the charged shares came into YWK’s hands.  YWK’s account that Mr Choy/Mega Step delivered the charged shares to him as commission shares due under the arrangement is flatly denied: Mr Choy’s evidence is that he does not even know YWK.

52.  In this regard, it should also be noted that according to the version of Ps’ claim initially advanced (on the basis of which the injunction order was made), YWK was said to be the middleman or agent for YHCL.  In that connection,Yang Si Kit Kenny a director of YHCL has filed an affirmation on behalf of YHCL.  Its directors deny that YHCL has ever directly or through any agents handed over the share certificates in the Company to Ps.  In fact, after FM enforced the Share Charge on 11 May 2016, YHCLceased to have any beneficial interest in the charged shares.  Consequently, it could not have given the share certificates to any agent after that date with a view to their being sold.

53.  It is noteworthy that in advancing their initial case, Ps never exhibited any share transfer receipts acknowledging receipt of the consideration they paid for the shares.  Now exhibited to YWK’s affirmation and Sun II (respectively dated 31 August 2016 and 2 September 2016) are personal written receipts issued by YWK acknowledging receipt of payment but in which no mention is made of YHCL at all.  Such receipts only surfaced after FM had applied to intervene.

54.  There are other unsatisfactory features of YWK’s evidence andPs’ evidence that should be highlighted:

(a)  Ps have not adduced any evidence of actual payment (for example, by way of bank statements or bank transfers) for the disputed shares as distinct from bald assertions and YWK’s self‑serving personal receipts.

(b)  Notwithstanding the specific figures and amounts given in §§16 and 18 of YWK’s affirmation (not to mention a detailed list of “dealings” arriving at the total number “1,617,344,000” (exhibit YWK‒8 alluded to in §18(d) above in support), having performed the necessary mathematical exercise, one arrives at a number for commission shares that is different from that stated by YWK.  In other words, if I am right, his account becomes highly questionable.

(c)  Exhibit YWK‒8 maintained by YWK purports to be a record inter alia of the commission shares including their receipt/‌delivery from YHCL and disposal by YWK.  As earlier noted, it purported to show that YWK took delivery of 840 certificates of 1 million shares each on 11 May 2016.  But at §19 of his affirmation, YWK was far from being specific: the date was said to be “in or around mid‑May 2016” when one would have expected something precise.

(d)  At §13 of YWK’s affirmation it is stated as follows:

“Upon arranging for the roadshows and when any investor agreed to purchase YHCL’s shares in the Company, I would arrange for the matching of sale and purchase of the relevant shares in the Company between YHCL and the relevant investor in the market.” (emphasis added)

But nowhere does YWK explain how that could be achieved or implemented when the Company’s shares are traded in the open market.  ‌In the ordinary course of business, the transfer of shares to the investor has to go through the ordinary automatic matching or central system.  How would one go about identifying whether the buyer is one procured by YWK?  How could YWK guarantee that the person making the matching order was an investor he had procured?

55.  Despite some faint attempt that (wisely) was promptly dropped to explain that those transactions were “off exchange” or “off the counter” transactions, not a shred of evidence in support can be found in the hearing bundles.

56.  The long and short of all this is that Ps’ case stands or falls with the veracity or otherwise of YWK’s evidence.

57.  FM’s case is by no means problem-free.  Quite obviously, the difficulties with the evidence of both sides cannot be resolved until trial.  But the injunction order does presuppose and operate on the basis that the likelihood is that Ps’ claims will prevail.  Whether the injunction order should stand or be varied is considered later.

(b)  Prejudice to FM

58.  The thrust of Ps’ argument is that (i) the right to vote is an incident of ownership; (ii) as FM is not asserting ownership, there is no competent competing claim to Ps’ claim to beneficial ownership; (iii) in any event, there is no evidence as to how Ps’ way of voting (Ps’ voting intention having been made known to the parties) would prejudice FM; and (iv) absent prejudice, the court should not vary the injunction order.

59.  The argument advanced would not appear to be correct: while (i) is unexceptionable, it does not mean that an equitable mortgagee has no right to vote.  The Share Charge (clause 6.02(c)) specifically empowered FM to “exercise any powers or rights incidental to the ownership of the charged shares”.  As an equitable mortgagee, FM is entitled to direct how the shares are to be voted: see Sunlink International Holdings Ltd v Wong Shu Wing [2010] 5 HKLRD 653 at §12.

60.  While FM has not disclosed its voting intention, that is irrelevant as it is not under any duty to disclose how it proposes to vote.  In so far as it is suggested that FM is not proposing to exercise its vote and so can suffer no harm, there is no such evidence.

61.  In any case, FM would be prejudiced if its right to vote were to be exercised by someone else because that would take away its free choice in the matter.  Usurpation of a right necessarily prejudices the owner of that right.

(c)   Whether damages are an adequate remedy

62.  As will have been apparent, the change in Ps’ case since the date of the injunction order could conceivably have consequences. First, Ps’ entitlement to relief is now contingent on the court accepting that YWK acquired the beneficial interest in the disputed shares by way of a bona fide transaction.  That cannot be taken as a given in view of the matters considered in §§51 – 54 above.  If YWK’s case is not accepted, Ps will not even be in a position to seek any relief.

63.  Second, assuming they are over the first hurdle, there are other difficulties in the way of specific performance.  Mr Khaw submitted that:

(i)     A vendor purchaser trust does not arise unless the sale and purchase of property is specifically enforceable: Okachi (Hong Kong) Co Ltd v Nominee (Holding) Ltd [2007] 1 HKLRD 55 at §95 citing a passage from Degeling and Edelman in Equity in Commercial Law at 465.

(ii)    A contract for the sale of shares in public companies is generally not specifically enforceable because such shares are not unique and damages would be an adequate remedy: Chinn (SC) v Hochstrasser (Inspector of Taxes) [1979] Ch 447 at 462B–D; Chitty on Contracts, 32^nd edition 2015, §27‒010.

(iii)   YWK’s entitlement to commission shares under the arrangement is not a specifically enforceable contract because again it concerns shares in a publicly listed company and damages would have been an adequate remedy for any breach of the arrangement.

64.  There is considerable force in FM’s submissions that no vendor purchaser trust arises whether under Ps’ new case or their original case.  Mr Wong did not have any ready answers but, instead, digressed to make other points.

(d)  Other considerations relevant to injunctive relief

65.  Both parties relied on the statement of principles on the grant of an interlocutory mandatory injunction in Music Advance Ltd v Incorporated Owners of Argyle Centre Phase I [2010] 2 HKLRD 1041.  Generally, an interlocutory mandatory injunction would not be granted unless the court felt a “high degree of assurance” that at trial, it would be shown that the injunction was rightly granted.

66.  Applying that principle, I have little doubt that Ps have not met that threshold.  I have set out at length the difficulties Ps must surmount if they are to succeed at the end of the day.

67.  Do Ps fall within the exception to the general approach — that the withholding of the injunction would carry a greater risk of injustice than granting it?  FM is not asking that it be granted the right to exercise the voting rights pending trial.  Rather, the order sought would simply ‘freeze’ or hold those rights in abeyance pending trial.

68.  But it was said that what is at stake here is control of the Company.  There is a hostile takeover on foot and apparently requisitionshave made to remove every single director and to give a mandate to increase the share capital.  Mr Wong submitted that his clients would suffer irreparable prejudice if they are not allowed to vote at the AGM and it ultimately turns out that they are the true shareholders.  It was submitted that the damage to FM would be of a different nature in that any damage FM would suffer is capable of compensation in monetary terms.

69.  While Ps are willing to provide an undertaking as to damages, it is clear from the 2^nd affirmation of Mr Tang that all the real properties offered are situated in the PRC.  Enforcement difficulties are evident.  Therefore what is offered cannot be regarded as an acceptable or sufficient undertaking.

70.  The Company’s management sets the direction of the Company.  A fundamental change in management would bring about an unknown not to mention uncertainty that could affect the value of the Company.  The potential effect on FM if at the end of the day Ps were to fail to establish their claim cannot be ignored.

71.  Ps’ claims and their strength have to be assessed against the new backdrop brought about by their change of case.  That is a factor that also needs to be taken into account.

(e)  Conclusion on FM's application to vary the injunction order

72.  The injunction order was made in the absence of a competing interest. Circumstances have changed.  What is clear is that on the material before the court it would be quite wrong to allow the voting rights attachedto the disputed shares to be exercised by Ps pending resolution of the issues that have arisen when, as here, the high degree of assurance that, at trial, it would be shown that the injunction order was rightly granted is lacking.

73.  Accordingly, the injunction order is to be varied in terms of paragraph (3) of FM’s summons to provide that the 2^nd defendant shall not exercise its voting rights in respect of the disputed shares in any general meetings of the Company until further order.

RELIEF SOUGHT IN PARAGRAPHS 3 AND 4 OF PS’ SUMMONS

74.  The relief sought against the Company is for an order that Ps’ share transfer applications be registered.  In substance, Ps are seeking summary judgment but by‑passing the normal procedure.

75.  Ps’ case is that the applications for registration were made by 14 July 2016.  While under section 151 of the Companies Ordinance, Cap 622 the Company had 2 months to consider the applications, that period has long elapsed.  On that basis the Company should now be compelled to make the registrations.

76.  Mr Bell SC, counsel for the Company, submitted that:

(1)  Ps’ application for relief on 27 July 2016 was premature; and in the alternative,

(2)  If Ps application to register had been rejected, the Company was entitled to reject it.

77.  Ps’ case is that as there is no valid refusal to their applicationsfor registration made by 14 July 2016, pursuant to sections 151 – 152 of the Ordinance, they are entitled to an injunction to compel the Company to register Ps as shareholders after the expiration of 2 months from the date of application, citing Re Redford International Ltd [2016] 2 HKLRD 27.

78.  The events concerning the registration process are set out in §8 above.  Ps rely on Sun I and an affirmation of Mr Tang also dated 27 July 2016 (“Tang I”). In particular, Ps now attach importance to the rejection advice of 26 July 2016 which the Company maintains Boardroomhad no authority to send given §8(k)(iii) above giving them express notice on 25 July of the Board’s decision not to proceed with Ps’ applications pending further notice.

79.  The rejection advice appears to be a computer generated document.  ‌The name of the addressee (Mr Tang) was handwritten.  ‌While it appears to bear Boardroom’s chop, the box for the recipient’s signature is empty.  No rejection reason was specified although 6 usual reasons appear on the printed form as available choices for Boardroom’s selection.  Notably, the rejection advice did not surface in the evidence until 2 September 2016 as an exhibit to Sun II.  Given the importance now attached to it, it defies belief that had Ps been aware of its existence at the time of the injunction order, it would not have been adduced in evidence.

80.  Significantly, despite Ps’ heavy reliance on the rejection advicenow, neither Sun I nor Tang I mentioned it in their supporting affirmations which were affirmed on 27 July the day after the date of the rejection advice.  This omission has not been explained or satisfactorily accounted for.  The ineluctable inference is that Ps were not aware of the rejection advice at all when proceedings were instituted. That also causes questions as to its provenance to arise.

81.  That there had not been a rejection is also consistent with the evidence from the company secretary Leung Tze Wai.  ‌As late as 5 August 2016, the company secretary referred to the investigation (to ascertain the identity of the new shareholders and how they came by the shares) as being still in progress.

82.  On the evidence before the court, as at 27 July 2016, Ps understood that their applications were still under consideration and had not been rejected.  Had they been rejected, rejection would have been at the forefront of their case.  Their evidence is inconsistent with a rejection having already taken place.  For this reason, I agree with Mr Bell that this claim against the Company was premature.

83.  Moreover, even if the rejection advice is to be taken at face value, there is no evidence to support the view that it came to Ps’ notice prior to the issuance of the originating summons.  If it only surfaced subsequently, after 27 July, in my view it could not, as it were, retroactively validate the proceedings.  In any event, the circumstances of its receipt remain a mystery.

84.  In so far as Redford is relied on, it is distinguishable on the facts because in that case the action was commenced long after the expiration of the 2‑month period which is not the present case.

85.  It is strictly unnecessary to consider Mr Bell’s submissions on the alternative case of the applications to register having been refused.  He submitted that there are 4 grounds why the Company had been entitled to do so.  I need only mention 2 of the grounds (relating to consideration allegedly paid and the stamp duty point) to show that they appear to have substance.

86.  The consideration P1 allegedly paid has been stated variously as HK$16.5 million (Sun I §7, Tang §6(2)) and HK$12.5 million (YWK §23.1, Sun II §9.1).  That at the very least raises suspicions as to the bona fides of the transactions especially when coupled with the fact that other than a bald assertion of payment of full consideration, no evidence has been tendered of actual payment despite ample opportunity to do so: see §54(a) above.

87.  Nor is it evident how the amount of consideration could be deduced from the stamp duty shown paid on the certificates.  They seem to have been stamped on the basis of a gift attracting a nominal duty of $5.  That of itself contradicts Ps’ assertion of acquisition through a sale and purchase whether from YHCL or YWK.

88.  In any event, Ps gave no explanation at all as how the stamp duty was calculated on the various share transfers, what documents were submitted for the assessment of stamp duty andhow one is to arrive at the true consideration.  All that is highly unsatisfactory.

89.  Moreover, there was no contract note which is a mandatory requirement: see section 19of the Stamp Duty Ordinance, Cap 117 (“the SDO”).  An instrument is not “duly stamped” merely because it shows a stamp on its face.  “Duly stamped” in relation to an instrument means duly stamped under the SDO in respect of stamp duty chargeable on such instrument: section 2(1) of the SDO.

90.  It was held in Maynard v Consolidated Kent Collieries Corporation [1903] 2 KB 121 that in determining whether the transfer was duly stamped, the directors are entitled to go behind that which appeared on the face of the document.  So an instrument is not duly stamped if the consideration is incorrectly stated and the stamp is incorrectly stated and the stamp is in accordance with the improper statement: see 46 Halsbury’s Laws of Hong Kong, §370.353, footnote 11.

91.  Accordingly, I hold that Ps are not entitled to the relief claimed in §§3 and 4 of draft order attached to Ps’ summons and those claims are dismissed.

92.  FM seeks an injunction restraining the Company from registering the disputed shares until after the determination of the dispute between Ps and FM.  The Company has informed the court that it is willing to give an undertaking to the court and FM that “the 1^st Defendant shall not register the transfer of shares (1,545,000,000 shares in total) in the Company until further order of the Court”.

93.  Accordingly, upon such an undertaking I will make an order in terms of FM’s summons save that the phrase “and the 1^st Defendant” be deleted from §4 of FM’s summons.

94.  So far as costs are concerned, costs should follow the event as regards both summonses and there is to be an order nisi of costs to that effect, with certificate for 2 counsel for FM and the Company.