NGAN PUI CHI AND ANOTHER v. BAO QUAN

CACV 260/2017

[2019] HKCA 852

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 260 OF 2017

(ON APPEAL FROM HCA 2262/2013)

________________________

________________________

________________

J U D G M E N T

________________

Hon Lam VP (giving the Judgment of the Court):

1.  In this appeal, the Defendant seeks to overturn the judgment given by Deputy High Court Judge Cooney SC (“Judge”) of 20 October 2017. After trial, the Judge gave judgment on in favour of the Plaintiffs.

2.  The Defendant advanced two loans to the Plaintiffs on the security of some shares of the 1^st Plaintiff in a company formerly called Wealth Blooming (Asia Pacific) Bullion Limited (“the Company”). The Company was (and we were told still is) a member of the Chinese Gold and Silver Exchange Society (“CGSE”). Apparently, to comply with the rules of CGSE, transfer of shareholdings and personnel in the Company have to be registered and approved by CGSE. Due to the disputes between the parties, the applications arising from changes arising from the transactions which are the subject matters of the present litigation had been pending[1].

3.  The first loan was advanced under an agreement of 23 August 2012 (“the First Loan Agreement”) in the sum of $1,500,000. The date of repayment was 22 February 2013. The security was 26% of the shareholdings in the Company, viz 2,600,000 shares (as the total issued share of the Company at the time was 10 million shares).

4.  The second loan was advanced under an agreement of 17 October 2012 (“the Second Loan Agreement”) in the sum of $610,000. The loan was to be repaid by three instalments: $214,880 on 16 November 2012; $203,200 on 16 December 2012 and $201,600 on 16 January 2013. The security was 15% of the shareholdings in the Company, viz 1,500,000 shares.

5.  At the time of the making of these loans, some undated bought and sold notes in respect of the shares of the Company were executed by the 1^st Plaintiff for the purpose of the security. The 1^st Plaintiff said she did not execute any instruments of transfer.

6.  The Plaintiffs defaulted in the repayments of both loans. The post-dated cheques issued for the instalment payments of the second loan were dishonoured.

7.  According to the records of the Company, two lots of shares in the Company were transferred from the 1^st Plaintiff to the Defendant on 31 January 2013: 2,600,000 shares (security for the first loan) and another 600,000 shares (part of the security for the second loan). Another 900,000 shares were transferred to a company controlled by her called GBS Bullion Limited (“GBSBL”).

8.  After those transfers had been registered with the Company, the management of the Company was under the control of the Defendant and her husband, Kaiser Chan. On 25 April 2014, the board of the Company passed a resolution forfeiting another 4,700,000 shares in it held by the 1^st Plaintiff on the ground that the capital for those shares had not been paid up.

9.  The forfeiture was disputed by the Plaintiffs.

10.  The Plaintiffs said the 31 January 2013 transfers were invalid for several reasons. In this appeal, the main issue (and the Judge decided the case primarily based on his conclusion on this aspect of the case) is the issue of forgery[2].  At [2] of the judgment, the Judge set out his understanding of this part of the Plaintiffs’ case as follows:

“ The plaintiffs allege that the 4,100,000 shares were transferred to the defendant and one of the defendant’s companies, GBS Bullion Limited …, on 31 January 2013 by the use of bought and sold notes and instruments of transfer which bore forgeries of the plaintiffs’ signatures.”

11.  This appears to the primary case of the Plaintiffs. In the alternative, the Plaintiffs’ case was set out by the Judge at [4] and [5] of the judgment as follows:

“ 4.  Should the Court find that the signatures appearing on the disputed documents were not forged, the plaintiffs’ case is:

(1)  As regards the transfer to the defendant of the 2,600,000 shares which were pledged to secure the First Loan, the transfer was wrongful and in breach of the express terms of the First Loan Agreement (also described below) on the ground that the First Loan had not fallen due as at the date of the share transfer, and that the transfer was done without the plaintiffs’ consent, knowledge or approval; and

(2)  Regarding the entire 4,100,000 shares, the defendant has wrongfully refused to accept full repayment of the loans. Hence, the defendant is not entitled to the shares.

5.  In addition, the plaintiffs ask the Court to re-open the two loan agreements and rescind the loan agreements pursuant to section 25 of the Money Lenders Ordinance, Cap 163 on the ground that the transactions are extortionate.”

12.  After summarizing the respective case of the Plaintiffs and the Defendant, the Judge identified the common ground and disputed issues at [110] and [111] of the judgment:

“ 110.  There is no dispute that:

(1)  The two Loan Agreements were entered into and the defendant loaned the plaintiffs HK$1,500,000 and HK$610,000 respectively.

(2)  The 1^st plaintiff pledged a total of 4,100,000 Company shares.

(3)  The loans have not been repaid (save for $200,000, which the plaintiffs assert was a part payment, which the defendant denies).

(4)  4,100,000 shares were transferred from the 1^st plaintiff on 31 January 2013 (there is a dispute as to whom the shares were transferred but it is not necessary for me to resolve that dispute).

(5)  4,700,000 shares were forfeited on 25 April 2014.

111.  The issues are:

(1)  With regard to the transfer of the 4,100,000, 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 of transfer (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?”

13.  Despite his recognition of the Plaintiffs’ case to be one of forgery, the Judge eventually decided this part of the case by reference to the Defendant’s failure to discharge the onus of proving the authenticity of the impugned documents. His conclusion in this respect can be found at [124] and [144] of the judgment:

“ 124.  I find that the defendant failed to discharge her persuasive burden of proof for the following reasons.

…

144.  In conclusion, for the reasons above, the defendant has failed to prove the genuineness of: (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 of transfer (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.”

14.  The Judge regarded such conclusion as sufficient in disposing of the issue of forgery due to his analysis of burden of proof at [112] to [121] of the judgment. His analysis of the burden in the present context was set out at [120] and [121]:

“ 120.  Although the Re-Amended Statement of Claim does not allege fraud specifically, the gravamen of the claim is that the 1^st plaintiff has been defrauded but the plaintiffs make no allegations that documents have been forged. The defendant produced the disputed documents, asserted their validity, and alleges they demonstrate that the 1^st plaintiff consented to the share transfers. The existence and genuineness of the disputed documents form an essential part of the defence because the defendant relies on them to demonstrate consent. Although in reply the plaintiffs assert that the disputed documents are forgeries, the above quoted passages lead me to conclude that, as an essential part of the defence, the defendant bears the persuasive burden to prove that the disputed documents are genuine.

121.  In the Re-Amended Statement of Claim, the plaintiffs averred expressly that the 1^st plaintiff did not execute any instruments of transfer but this averment does not put a persuasive burden of proof on the plaintiffs to prove that the disputed documents were forged. The existence of forged instruments of transfer is not an essential part of the plaintiffs’ case because the plaintiffs could succeed by persuading the Court only that the 1^st plaintiff did not execute instruments of transfer.”

15.  The Judge did not find the Plaintiffs or the Defendant impressive as witnesses, see [122] of the judgment.

16.  After holding that the Defendant failed to discharge her burden of proof, the Judge came to the conclusion that the 4,100,000 shares had not been validly transferred to the Defendant. He also held that the Plaintiffs were entitled to a declaration and order for the return of the shares to the Defendant, see [146] of the judgment.

17.  He then held at [147] of the judgment that the Defendant was not entitled to act as majority shareholder to forfeit the 4,700,000 shares.

18.  On the issue related to the Money Lenders Ordinance, the Judge concluded that the default interest is extortionate and unreasonable. He re-opened the loan agreements and struck down the provisions for default interest, see [149] to [157] of the judgment.

19.  He rejected the Plaintiffs’ claim for set-off in respect of $200,000 at [158] of the judgment.

20.  The Judge did not find it necessary to determine issues (2), (3), (4) or (5) set out in [111].

21.  In the end, the Judge granted the following reliefs:

(a)  A declaration that the Defendant is liable to return the said 26% shares of the Company provided by the 1^st Plaintiff as security under the First Loan Agreement and the said 15% shares of the Company provided by the 1^st Plaintiff as security under the Second Loan Agreement;

(b)  An order against the Defendant to deliver up or cause to be transferred 85% shares of the Company (which is equivalent to the said 26% shares of the Company provided by the 1^st Plaintiff as security under the First Loan Agreement and the said 15% shares of the Company provided by the 1^st Plaintiff as security under the Second Loan Agreement) to the 1^st Plaintiff;

(c)  An order that the First Loan Agreement and the Second Loan Agreement be reopened and the term providing for default interest in each loan agreement be struck out;

(d)  A declaration that the Defendant was not entitled to forfeit the said 4,700,000 shares of the Company;

(e)  A declaration that the Defendant is liable to return 44% shares in the Company to the 1^st Plaintiff;

(f)  An order against the Defendant to deliver up or cause to be transferred 44% shares of the Company to the 1^st Plaintiff.

22.  The Judge refused to grant a declaration that the First and Second Loan Agreements were null and void, unenforceable and or no legal effect. He was of the view that these agreements were validly entered into and the security thereunder validly given.

The interests of the parties over the 4,100,000 shares

23.  Before we address the grounds of appeal canvassed by Mr Lam SC, we have to reiterate some observations by the Court at the hearing of the appeal.

24.  There is no dispute that in respect of the 4,100,000 shares the relationship between the Plaintiffs and the Defendant was primarily one of debtors and creditor. The interests of the Defendant over these shares are her security interest for the repayment of the two loans.

25.  As canvassed at the hearing of the appeal, irrespective of the validity of the 31 January 2013 transfers, the 1^st Plaintiff has an equitable right of redemption over the shares. Mr Lam accepted and submitted on behalf of the Defendant that the equity of redemption continued to subsist notwithstanding any transfer of legal title over the shares in the meantime.

26.  At the same time, until the repayment of the loans, as submitted by Mr Lam, the Defendant’s security interest over the shares could not have been extinguished.

27.  Ms Lan however submitted on behalf of the Plaintiffs that the Defendant had enforced the security when the shares were transferred on 31 January 2013 (if the transfers were valid, which of course is disputed by the Plaintiffs).

28.  Insofar as enforcement of security means the perfection of the Defendant’s legal title to the shares, it does not necessarily mean that the equity of redemption has been destroyed. As a matter of law, the equity of redemption would not be destroyed just because the legal title of the shares had been transferred to the mortgagee. This was obviously the meaning of Mr Lam when he alluded to the enforcement of security in his skeleton submissions at paragraph 24(b) (which should be read together with paragraphs 19 to 22). Mr Lam clearly acknowledged that the title of the Defendant is subject to the equitable right of redemption citing Common Luck Investment Ltd v Cheung Kam Chuen (1999) 2 HKCFAR 229 at 235D-F.

29.  Ms Lan referred to the transfer of 900,000 shares to GBSBL and the subsequent sale of 600,000 shares by GBSBL to Chen Peng. Subsequently, Chen Peng attended an extraordinary general meeting on 19 April 2013 as shareholder.

30.  The transfer to GBSBL was explained by the Defendant in her oral evidence as a measure to avoid the payment of a higher fee to CGSE[3]. GBSBL appears to be a nominee for the Defendant. There is not much information regarding the onward sale to Chen Peng and the Judge did not make any finding on its effect. There is no evidence to show that Chen Peng was a bona fide purchaser for value without notice so that the sale of 600,000 shares to him/her would defeat the equity of redemption of the 1^st Plaintiff over the same. Whilst the former solicitors for the Defendant had asserted in a letter of 16 October 2014[4] that the sale to Chen Peng was an exercise to reduce the indebtedness (thus an exercise of the power of sale), this was not accepted by the Plaintiffs as their solicitors wrote in a letter of 27 October 2014 refuting the validity of such exercise.

31.  In any event, it is not disputed that the title of the shares had reverted to the Defendant. Thus, Mr Lam was in a position to indicate on behalf of the Defendant that all the 4,100,000 shares were subject to the equity of redemption.

32.  In those circumstances, it is rather surprising that Ms Lan would take the position that the issues between the parties could not be resolved by way of a redemption action. The other matters relied upon by Ms Lan in this respect are plainly misconceived. Previous refusal to accept repayment and the failure to make a counterclaim for repayment in the present action cannot be obstacles to the bringing of a redemption action by the Plaintiffs.

33.  Ms Lan’s submission that the Defendant would be estopped from claiming for repayment of the loans by reason of her failure to make a counterclaim in this action (as argued by her in the Respondents’ Notice) is clearly a bad point based on misunderstanding of the law of issue estoppel. We cannot see how in the absence of any claim for redemption on the part of the Plaintiffs it can be suggested that there was abuse on the part of the Defendant to reserve such a claim for another action. Without any abuse, there is no basis for the application of the doctrine of Henderson v Henderson estoppel to bar such a claim, see Ko Hon Yue v Chiu Pik Yuk (2012) 15 HKCFAR 72.

34.  Be that as it may, as we have said at the hearing, this Court would not impose a redemption action upon the parties. In this connection, we note the stance of the Plaintiffs as indicated by Ms Lan in the Note lodged by her on 12 July 2019 in accordance with our direction and the stance of the Defendant as set out in the Note of Mr Lam of 10 July 2019. Notwithstanding the willingness on the part of the Defendant to issue foreclosure proceedings, in light of the stance of the Plaintiffs, we do not consider it appropriate for us to grant a stay of the present action after the disposal of this appeal. Nor would we make any order for the joinder of the Company. We would simply leave it to the parties to decide on the future course to be taken.

The defect in the claim in respect of the forfeiture of 4,700,000 shares

35.  Ms Lan also alluded to the forfeiture of the 4,700,000 shares as an obstacle to redemption. Counsel submitted that by reason of the challenge to the forfeiture, it cannot be worked out how many shares were to be redeemed.

36.  At the hearing before us, it has already been explained (and Ms Lan quite properly accepted) that as the forfeiture was an act of the Company instead of the Defendant, the Company has to be joined as a party to the proceedings.

37.  There is a fundamental misconception on the part of the Plaintiffs in the formulation of the cause of action in respect of the forfeiture. The shares were forfeited by the Company on the ground that the 1^st Plaintiff (or her predecessor in title the 2^nd Plaintiff) had not paid for the allotment of the 4,700,000 shares. The Defendant’s part in the forfeiture was her act as a director of the Company. The shares were not forfeited by her. Even if the Plaintiffs were successful in establishing that the Company were wrong in coming to the view that the share capital for the 4,700,000 shares had not been paid, the remedy should be an order against the Company (not the Defendant) for the rectification of the share register to increase the share capital by 4,700,000 shares under the name of the 1^st Plaintiff. It is wholly wrong to proceed on the basis that the act of forfeiture was an act of the Defendant and on that basis to seek an order requiring the Defendant to “return” a percentage of her shareholding[5] to the 1^st Plaintiff. The 4,700,000 shares had never been transferred to the Defendant and she had no power to “return” such shares.

38.  This misconception is set out at paragraphs 35 to 36 of the Re-amended Statement of Claim.

39.  The misconception was further compounded when the Judge did not address issue (5) at [111] of the judgment before he concluded that the forfeiture was invalid. The Company exercised its right to forfeit the allotment of the 4,700,000 shares on account of the failure of the Plaintiffs to pay for the same. This is the right of the Company, not a right of the Defendant as majority shareholder. The exercise of that right cannot be impugned unless payment had actually been made in the past for those shares. This would be the position irrespective of the Defendant’s shareholding in the Company. Thus, the Judge should have addressed issue (5) before he could grant any relief in respect of the forfeiture.

40.  His conclusion at [147] of the judgment was on the wrong premise that the act of forfeiture was an act of the Defendant as majority shareholder. As we said above, the act was an act of the Company though it took the form of a resolution by the board with the Defendant as its sole director. Irrespective of the position of the Defendant in terms of her shareholding in the Company, her directorship in the Company was not challenged in the action.

41.  These misconceptions led the Judge to err in granting relief in respect of the 4,700,000 shares.

42.  For all these reasons, the declarations and order made by the Judge regarding the 4,700,000 shares cannot be sustained.

The correct form of relief in respect of forged transfers

43.  Even assuming that a case of forged transfer is established (which is not the case here as we shall explain below) it is incorrect for relief to be formulated in the form of the “return” or “delivery up” of the shares (as the Plaintiffs prayed for in the Re-amended Statement of Claim) as if they were chattels or tangible objects.

44.  Shares in a company are choses in action. They are not tangible objects. A shareholder has a bundle of rights in the company and the company would only recognise his status by reference to the share register of the company[6]. Upon a transfer, the company should issue a new share certificate in favour of the new shareholder[7]. Thus, to restore the position of a shareholder whose shares have wrongly been transferred out of his name by a forged transfer, the proper remedy is to seek a rectification of the share register[8], see Palmer’s Company Law paragraph 6.441, Barton v London & North Western Railway Co (1888) 38 Ch D 144. The company is a necessary party to the claim. At the same time, the person who presented a forged transfer is bound to indemnify the company for the loss incurred by the company[9], see Palmer’s Company Law paragraph 6.442.

45.  Also, in cases of forged signatures on the relevant instruments of transfer, the instruments do not in law effect any transfer. Hence, the transferee is not in a position to “return” or “deliver up” the shares to the transferor. In the eyes of the law, the legal title of the shares remains with the transferor.

46.  Thus, it is necessary to join the Company as a party to this action to provide proper redress for the alleged forged transfers.

Burden of proof and the claim based on forgery

47.  As we have seen, the Judge identified the primary issue at [111] in these terms:

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

48.  Yet in the end, he only concluded that the defendant failed to discharge her persuasive burden of proof in proving that the documents were genuine, see [124] and [144] of the judgment. This is not and, as we shall see below, cannot be a finding of forgery. With respect, the Judge failed to decide the primary issue before he concluded that the Plaintiffs were entitled to the reliefs he granted in their favour.

49.  At the time when the writ was issued on 21 November 2013, the 4,100,000 shares had already been transferred out of the name of the 1^st Plaintiff and the transfers had been registered by the Company. The Plaintiffs were aware of the same[10].

50.  In the Re-Amended Statement of Claim (“RASC”), the Plaintiffs advanced several bases for seeking to have the 4,100,000 shares restored to them:

(a)  No instrument of transfer had been executed for the transfers, see paragraphs 14 and 18 of the RASC;

(b)  The loan agreements contravened the Money Lenders Ordinance and the security given in respect of the loans are illegal and unenforceable, paragraphs 22 to 28 of the RASC (“the MLO point”);

(c)  The Defendant was only entitled to hold the shares as security and the transfers of 31 January 2013 were without the consent and approval of the Plaintiffs. Also, the Defendant was not entitled to transfer 600,000 shares to GBSBL, paragraphs 29 to 34 (“the security limitation point”).

51.  For the purpose of ascertaining the burden of proof, we can focus on basis (a). The Plaintiffs averred that no instrument of transfer had been executed. Since a transfer cannot be registered by the Company without any instruments of transfer[11], by necessary implication the Plaintiffs averred that the signatures of the 1^st Plaintiff on such instruments of transfer were forged.

52.  As we shall see, the case of the Plaintiffs on forgery was pleaded explicitly later.

53.  In the Amended Defence, the Defendant denied that no instruments of transfer had been executed, see paragraphs 12(ii) and 17(ii). It was also pleaded that the transfers were made with the full consent and knowledge of the 1^st Plaintiff, paragraphs 30(i) and 31(iii).

54.  In the Reply, the Plaintiffs averred that the signatures of the Plaintiffs on the instruments of transfer of 31 January 2013 were forged and the fraudulent transfers were made without their knowledge and approval and liable to be set aside, see paragraphs 8(iii) and (iv) and 22(iv) to (vii).

55.  In their witness statements, the Plaintiffs also advanced a case of forgery in respect of the instruments of transfer: see paragraphs 33, 36, 71(5) and (6), 76, 77 of the witness statement of 2^nd Plaintiff which were also adopted by the 1^st Plaintiff.

56.  As we have seen, the Judge also understood that the Plaintiffs were running a case of forgery in respect of these transfers.

57.  However, when he came to consider the burden of proof, the Judge accepted the submission of the Plaintiffs that the onus is on the Defendant to prove the authenticity of the instruments of transfer and the disputed bought and sold notes. We have quoted the crucial parts of his reasoning at [120] and [121] of the judgment.

58.  With respect, we are of the clear view that the Judge erred in so holding.

59.  The situation facing the parties was that the transfers of 31 January 2013 were accepted by the Company with the registration of the Defendant and GBSBL as shareholders of those shares in place of the 1^st Plaintiff. In order to sustain their claims to nullify the transfers, the Plaintiffs had to advance a basis for doing so. One of the bases for nullifying the transfers relied upon by the Plaintiffs was to contend that no instrument of transfer had been signed by her. In the absence of any case of mistake on the part of the Company, to make good such a claim, the Plaintiffs had to allege that the signatures on the relevant instruments were forged. We reject Ms Lan’s oral submission that the Plaintiffs started off by asserting a “bare denial” to the validity of the instruments of transfer. The plaintiffs asserted claims in the RASC instead of responding to a pleading of the Defendant. Thus, there was no room for any bare denial in that pleading. Further, as a matter of substance, the Plaintiffs pleaded that the 1^st Plaintiff did not execute any instruments of transfer. It is a positive plea, not a passive one.

60.  Thus, even though the Plaintiffs did not use the expression “forged signatures” or forgeries in the RASC, the gravamen of the charge at paragraphs 14 and 18 is that her signatures on the instruments of transfer by which the shares were transferred on 31 January 2013 were forged. The necessary implication of the plea that the 1^st Plaintiff did not execute any instrument of transfer is that insofar as there are such instruments bearing her signatures those signatures were forged. In this connection, the present case is similar to the situation in Ming Shiu Chung v Ming Shiu Sum (2006) 9 HKCFAR 334: see [13] and [14] of that judgment.

61.  This analysis is reinforced by the fact that the plea that the 1^st Plaintiff did not execute any instrument of transfer was added by way of re-amendments at paragraphs 14 and 18 of the RASC on 12 December 2014 after references were made to the instruments of transfer and bought and sold notes by the Defendant in her affirmation of 18 February 2014. The pleas were therefore consciously added to challenge the instruments of transfer by asserting that the signatures of the 1^st Plaintiff on those documents were not hers. Such sequence of events belies Ms Lan’s submission that the pleas at paragraphs 14 and 18 were not directed specifically to these instruments of transfer.

62.  We have difficulties in understanding the Judge’s reasoning at [120] of the judgment below when he said that the gravamen of the claim was that the 1^st Plaintiff had been defrauded but the Plaintiffs made no allegation that the documents had been forged. As far as the execution of the instruments of transfers (and other disputed documents) were concerned, as the Judge rightly appreciated when he summarized the issue at [111], the Plaintiffs’ case was that the signatures were forged. This was the only sense one can make out of the plea that the 1^st Plaintiff did not execute any instruments of transfer in the context where the transfers had been registered by the Company. This was in fact the only way in which the Plaintiffs alleged that she was defrauded in respect of the transfers of the shares on 31 January 2013.

63.  The Judge somehow thought that since it was the Defendant who produced the disputed documents, she bore the burden of proof. This analysis is, with respect, incorrect. Since the transfers had been registered, the Defendant needed not prove anything to establish her legal title in the shares. The burden falls squarely on the Plaintiffs to prove that such apparent transfer of the title was invalid and in the present case they sought to do so by alleging (in this part of the case) that the signatures were forged. In Ming Shiu Chung v Ming Shiu Sum, supra, the disputed minutes and share certificates were relied upon by the defendant (see judgment of Ribeiro PJ at [11]) but the burden of proof was on the plaintiffs to prove that signatures on those documents were forged. The Court of Final Appeal held that even if the evidence of the defendant as to the provenance of the documents was rejected, the plaintiffs still had to discharge the burden of proving the forgeries of the signatures: see [51] and the trial judge in that case had erred in holding the burden had been discharged.

64.  In the present context, if the Plaintiffs failed to discharge the burden of proving that the signatures on the disputed documents were forged, the Judge should proceed to consider the other two bases relied on by the Plaintiffs to claim back the 4,100,000 shares, viz the MLO point and the security limitation point, which do not depend on the authenticity of the transfers. The Defendant has no burden in establishing the genuineness of the signatures on these documents.

65.  At [117] to [118] of the judgment, the Judge relied heavily on the dicta of Kwan JA in Pacific Electric Wire & Cable Co Ltd v Texan Management Ltd, CACV 90, 91, 93–96/2012, 17 September 2013 to support his analysis of burden of proof. With respect, the Judge had failed to read that judgment in the context of the facts of that case.

66.  The relevant factual background was set out at [24] to [27] of the judgment of Kwan JA. The plaintiff in that case was not making a claim on a takeover agreement. Instead it claimed against its former directors and related parties for misappropriation of the plaintiff’s assets and sought to trace and recover the same. In the defence of the former directors, they relied on a takeover agreement to justify the disposal of some assets. The plaintiff was not a party to that agreement but the defendants claimed that they entered into that agreement for the good of the plaintiff. In its reply, the plaintiff said the takeover agreement was a recent fabrication. It was in such context that the Court of Appeal held that the plaintiff needed not establish the falsity of the takeover agreement in order to succeed, and the burden of proving the existence of the takeover agreement was on the defendants who had to rely on it to establish their defence.

67.  That was a wholly different situation from the present case where the Plaintiffs did impugn the authenticity of the signatures on the instruments of transfer in the RASC and they had to establish the forgery of those signatures in order to succeed in nullifying the transfers on the basis that the 1^st Plaintiff did not execute the same.

68.  In the circumstances, the Judge’s reliance on Pacific Electric Wire & Cable Co Ltd v Texan Management Ltd, supra, is misplaced.

69.  In our judgment, the Judge had fallen into error when he held that the onus was on the Defendant to establish the genuineness of the transfers. In so doing, the Judge actually reversed the burden of proof and required the Defendant to disprove the allegations of forgery put forward by the Plaintiffs in respect of the signatures on the disputed documents.

70.  We cannot accept Ms Lan’s submissions that the finding of the Judge was as good as a finding of forgery. Firstly, the Judge did not express himself as if he were making such a finding. To the contrary, he confined himself to a finding of the Defendant’s failure to discharge her burden of proof. If the Judge saw no difference in substance between the former and the latter, one might ask rhetorically the purpose of his discussion on the burden of proof.

71.  Secondly, if one examines his reasons for finding the Defendants’ failure to discharge the burden of proof at [125] to [143] of the judgment, we agree with the submissions of Mr Lam SC that none of the reasons, whether individually or cumulatively, can constitute a sufficient basis for finding forgery. Taken to their highest, those matters only go to the rejection of the defence case as to the provenance of the documents. They do not provide a reasonable foundation for an inference of forgery to be drawn.

72.  The proper approach in this regard was discussed by the Court of Final Appeal in Nina Kung v Wong Din Shin (2005) 8 HKCFAR 387 and Ming Shiu Chung v Ming Shiu Sum (2006) 9 HKCFAR 334. Inferences of fraud or forgery cannot be reached by conjecture, and without a reasonable foundation for an inference to be drawn, one cannot elevate the rejection of the defence’s evidence or the defence’s case or failure to dispel suspicious circumstances as proof of such serious allegations, see also To Pui Kui v Ng Kwok Piu CACV 281/2012, 21 August 2014 at [63] to [66], [74]. See also Choi Lisa Mei Yin v Yau Pak Kin [2019] HKCA 812 at [36].

73.  In this connection, we cannot neglect the Judge’s finding on the lack of credibility of the Plaintiffs at [122] of judgment. We disagree with Ms Lan in her submission that the Judge had impliedly accept the Plaintiffs’ evidence that they had not signed the documents. Even assuming that the Judge had partially accepted the evidence of the 2^nd Plaintiff with regard to his non-receipt of the email of 28 December 2012[12], it could not reasonably be extended as the acceptance of all the evidence of the Plaintiffs.

74.  The Judge did not explain at length the reasons he found the Plaintiffs to be unimpressive as witnesses. But he said they (as well as the Defendant) were evasive and unreliable.

75.  Further, as submitted by Mr Lam, the Second Loan Agreement expressly provided for the giving of an instrument of transfer to the Defendant. As we have seen at [51] above, the giving of bought and sold notes without an instrument of transfer were not enough to facilitate the Defendant’s exercise of right of security over the shares when it became necessary to do so.

76.  Even though according to the Judge’s finding the 2^nd Plaintiff had not received the email of 28 December 2012, there was no finding that the email was a fabrication. The Judge specifically limited his finding to the lack of discussion between the 2^nd Plaintiff and Kaiser Chan. At [137] of the judgment, he did not reject the evidence of Channing Chan that he did receive the email at that time.

77.  Thus, whilst we would not attach as much significance to the email as Mr Lam did, it can at least corroborate the terms of the Second Loan Agreement and shows that the Defendant was aware of the need to have an instrument of transfer to facilitate the exercise of her right over the shares by way of security.

78.  The Plaintiffs accepted that blank bought and sold notes were signed by the 1^st Plaintiff to facilitate the mortgage of the shares. On the evidence, there was no good reason why they as borrowers could decline to execute instruments of transfer (in addition to the bought and sold notes) as part of the security for the loans. The mere giving of bought and sold notes were meaningless as they could not serve the stipulated objects of the Loan Agreements by way of fulfilling the formalities for providing the Defendant with security over the shares.

79.  In light of these, the inherent probability is that the Defendant would demand instruments of transfer to be executed by the Plaintiffs and the Plaintiffs would agree to do so. The Judge did not address such inherent probability which he should if he were to come to a positive finding of forgery.

80.  Moreover, the transfers did not take place in a vacuum. It happened in the midst of the change of control and management of the Company from the Plaintiffs to the Defendant. Bank account mandates had been changed in November 2012[13] and the staff of the Company apparently took instructions from the Defendant since mid-November. Ms Lan referred us to the relevant parts of the evidence of the 2^nd Plaintiff in that regard. His apparent ignorance on how such changes could have happened without any involvement on the part of the Plaintiffs is, to say the least, inexplicable.

81.  The transfers also took place against the background that the Plaintiffs were unable to meet the instalment repayments under the Second Loan Agreement and they were in financial difficulties with another company Wealth Blooming (Hong Kong) Limited being sued by a creditor for advertising fees in the sum of $1.5 million on 6 December 2012.

82.  Against such background it is not surprising that the Judge did not find himself able to accept the Plaintiffs’ evidence on forgery. He made no finding to that effect because he could not do so on the evidence before the court.

83.  It therefore appears from the judgment that the Judge resorted to the burden of proof to decide the case when he was faced with the conundrum of not being able to accept the evidence of either side.

84.  Once the Plaintiffs’ evidence that their signatures had been forged on these documents was rejected, there was no reasonable foundation for drawing an inference to the same effect by reference to the other evidence.

85.  As we have come to the view that the burden of proof lies on the Plaintiffs, it follows from the above analysis that the Plaintiffs’ case on forgery must fail.

Disposition

86.  For these reasons, the appeal is allowed. We set aside the declarations granted by the Judge. We also set aside paragraphs 4, 6 and 7 in the sealed judgment of 6 November 2017.

87.  In view of our analysis on the forgery claims for the 4,100,000 shares, and the Judge’s rejection of the MLO point in respect of the security under the two Loan Agreements, the only outstanding issue regarding the 4,100,000 shares (apart from its overlap with the forfeiture of the 4,700,000 shares[14]) is the security limitation point.

88.  In our judgment, given the acceptance by the Defendant that the shares were still subject to the equity of redemption of the 1^st Plaintiff, we deem it appropriate to grant a declaration that 3,800,000 shares now held by the Defendant in the Company are subject to the equity of redemption of the 1^st Plaintiff arising from the two Loan Agreements.

89.  In the event that the forfeiture claim is resolved in favour of the 1^st Plaintiff, there will be a similar declaration in respect of the 300,000 shares (being part of the 4,700,000 shares) which would be restored to the register in the name of the Defendant.

90.  As regard the dispute on the forfeiture of the 4,700,000 shares, we have explained the defect in the action. As the Judge had not adjudicated on the validity of the forfeiture, the matter should be remitted to the Court of First Instance (and it could be heard by any judge in the Court of First Instance). The Plaintiffs would have to apply to that judge to join the Company as a party before taking further steps to prosecute the remitted claim on forfeiture. The statement of claim would also have to be amended in light of what we said regarding the correct form of relief to be sought.

91.  We do not disturb the Judge’s findings on default interest under the two Loan Agreements. We also refuse to reverse the Judge’s rejection of the set-off of $200,000. We do not see any basis for disturbing the Judge’s finding of fact that the party to the joint venture agreement was GBSBL in light of his assessment that the Plaintiffs were not reliable witnesses. The transcript reference quoted by Ms Lan did not support her assertion that the Defendant had accepted that the Defendant herself would take part in the joint venture as opposed to GBSBL.

92.  The cross-appeal by the Plaintiffs is dismissed.

93.  We order the Plaintiffs to pay the Defendant the costs of this appeal and the cross-appeal with certificate for two counsel.

94.  As for the costs below, in light of our conclusions above and the remittance of the issue relating to the 4,700,000 shares, the rejection of the evidence of the Defendant and the partial success of the Plaintiffs in setting aside the default interest rates, we would order the Plaintiffs to pay one third of the costs of the Defendant at the court below.

95.  We believe the above orders cover all outstanding matters which we could usefully dispose of in the present context. If there were any other matters which should be added to our orders in light of our judgment, either party is at liberty to raise it with the Court by letter within 14 days from the handing down of this judgment.