SAMUEL NICHOLAS ARNOLD v. CHAN YIU KEI, KEN

DCCJ 6114/2020

[2021] HKDC 878

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 6114 OF 2020

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JUDGMENT

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A. INTRODUCTION

1.  This is the plaintiff’s application by summons dated 23 February 2021 (the “Summons”) for summary judgment in respect of paragraph (2) of the prayer for relief pleaded in the Amended Statement of Claim (“ASOC”), namely for an order that the defendant do transfer 10,000 ordinary shares in ISMS Group Limited (the “Company”) (being the entire shareholding of the Company) (the “Shares”) to the plaintiff or the plaintiff’s designated persons and sign all such documents necessary to effect such transfer including but not limited to the Instrument of Transfer and board resolutions and that the plaintiff or his designated persons’ name (as the case may be) be entered into the register of members of the Company.

2.  The plaintiff’s claim for the transfer of the Shares from the defendant is based on the following facts:-

(1)  the plaintiff is and was at all material times the sole beneficial owner of the Shares, which he acquired from the defendant in or around March 2017;

(2)  pursuant to a written “Declaration of Trust” executed by the plaintiff (as beneficiary) and the defendant (as trustee) dated 23 March 2017 (the “Declaration of Trust”), the defendant agreed, inter alia, to hold the Shares on trust for the plaintiff, and to transfer the Shares in such manner as the plaintiff shall from time to time direct in writing (see Clause (1) thereof);

(3)  the Declaration of Trust was duly executed and stamped, and its execution was witnessed;

(4)  despite the plaintiff’s request (including by way of a letter from the plaintiff’s solicitors Messrs W K To & Co to the defendant’s then solicitors Pauline Wong & Co dated 11 February 2021), the defendant failed to transfer the Shares back to the plaintiff or his designated persons, in breach of Clause 1 of the Declaration of Trust.

3.  In the ASOC, the plaintiff also pursues other claims and seeks other relief against the defendant, including in respect of the defendant’s alleged breaches of a written “Nominee Director Service Agreement” dated 23 March 2017 (the “Service Agreement”), pursuant to which the defendant agreed to act as the plaintiff’s nominee director of the Company, subject to the terms and conditions therein stated.  However, such other claims are not the subject of the present application for summary judgment pursuant to the Summons. 

4.  The defendant’s pleaded case on the Declaration of Trust is contained in paragraph 5(b) of the Defence (as supplemented by paragraph 1 of the defendant’s answers to requests for further and better particulars of the Defence filed on 14 April 2021), which essentially sets out the alleged circumstances in which the Declaration of Trust was executed by him.  In gist, it is alleged by the defendant that: (i) the Declaration of Trust was amongst a bundle of documents provided by the plaintiff’s accountant, Ms Joanna Loo of Louis Lai & Luk CPA Limited, (“Ms Loo”) for him to sign in a “hastened fashion”; (ii) he was not provided with the said bundle of documents for perusal prior to attending Ms Loo’s office for execution; (iii) Ms Loo informed the defendant that the bundle of documents was “of a standardized nature”; (iv) Ms Loo conveyed to the defendant that the execution of the said bundle of documents “merely represented that there was a change of name of the corporate entity and of the signatory of the corporate entity”; (v) Ms Loo “enticed” the defendant to execute the said bundle of documents; and (vi) the defendant had and has no knowledge of what those documents are, save and except that he was given a copy of the Declaration of Trust and the Service Agreement subsequently.   

5.  The defendant filed a short affirmation in opposition to the Summons (consisting of 2 pages).  In such affirmation, the defendant does not dispute that the plaintiff is the owner of the Shares in the Company (previously known as Friendship (Groups) Ltd), but contends, for the very first time, that the Shares had already been transferred by him to the plaintiff on 23 March 2017 (which is not an allegation which has been pleaded in his Defence).  The defendant thus contends that the transfer of the Shares requested by the plaintiff had already been completed, and that the plaintiff only instigated the present claim to create a financial burden on him.

6.  The defendant’s affirmation is also entirely silent on the Declaration of Trust, save for stating that on 23 March 2017, having agreed to the sale and purchase of the Shares, the plaintiff requested the defendant to attend his accountant’s office where he signed documents provided by Ms Loo.  

B.     APPLICABLE LEGAL PRINCIPLES

7.  The applicable principles for summary judgment applications are well-settled.  Mr Vincent Chiu (Counsel for the plaintiff) relies on the following legal principles which have not been disputed by the defendant.

8.  In On Loong Investment Company Ltd v IO of Wah Luen Industrial Centre (unreported, HCA 341/2014, 8 January 2016), Au-Yeung J summarised the relevant legal principles at paragraph 20 as follows:-

(1)  The burden is on the defendant to show a bona fide defence or some other reason for a trial. This is normally done by affidavit, and it is incumbent upon the defendant to “condescend upon particulars” in such affidavit.

(2)  The mere assertion in an affidavit of a given situation by the defendant does not, ipso facto, ground leave to defend.

(3)  Order 14 is only for clear cases, and ought not be applied in cases where there are serious material factual disputes, or a difficult point of law not fit for summary determination, unless it is obvious that the defence put forward is “frivolous and practically moonshine”.

(4)  The court should not embark on a mini trial on affidavits. Where there are factual disputes, the issue is not whether the defendant’s assertions are to be believed; it is whether those assertions are believable.

9.  In Paul Y Management Limited v Eternal Unity Development Limited & Ors (unreported, CACV 16/2008, 12 August 2008) it was held (per Cheung JA) at paragraph 19:-

“In deciding whether a plaintiff is entitled to summary judgment the relevant test is whether the defendant has raised credible triable issues. If there are, the matter should go to trial. If not, judgment should be entered against the defendant. In considering whether there are triable issues the Court will, of course, not take the alleged defence on its face value but test it against the evidence disclosed in the affidavit including matters such as contemporaneous documents, whether the alleged defence is inconsistent with the defence previously put forward or whether the defence is only recently raised despite opportunity being given to the defendant to respond earlier. The Court will also consider the inherent probability of the defence. But what the Court should not do is to conduct a mini-trial on complicated factual issues.”

C.     WHETHER THE DEFENDANT HAS SHOWN A BONA FIDE DEFENCE

10.  The only defence raised by the defendant in his affirmation (and at the hearing before this court) to resist the order for the transfer of the Shares is that such transfer had already taken place on 23 March 2017, which, as mentioned above, was not his pleaded case in his Defence filed in this action.   

11.  In support of such contention, the defendant relies on the bought and sold notes executed by the parties and stamped on 23 March 2017 (the “Bought and Sold Notes”), which indicate that the Shares were sold by the defendant (as seller/transferor) to the plaintiff (as purchaser/transferee) at the consideration of HK$1.00 per share ie HK$10,000.  According to the defendant’s submissions to this court at the hearing, his understanding has all along been that the transfer of the Shares to the defendant was completed back in March 2017, and all necessary documents had been signed for such purpose.

12.  It is not in dispute that the Bought and Sold Notes evidence the sale of the Shares from the defendant to the plaintiff and hence the transfer of beneficial title to such Shares.  However, there is no evidence before the court to show that the legal title to the Shares was also transferred to or vested in plaintiff in March 2017 or any time thereafter.  Mr Chiu informed this court that no instrument of transfer has been signed to transfer the legal title of the Shares.

13.  In Cheung Pui Yuen v Worldcup Investments Inc (2009) 12 HKCFAR 31, Lord Scott of Foscote NPJ explained how a person may be vested with legal title over a company’s shares:-

“13. Shares in a company are legal choses in action. They are not chattels. ......the rights and obligations of the owners of shares in a company, the owners of the legal choses in action that the shares constitute, depend on the articles of association of the company and the terms on which the shares in question were issued – provided, of course, that the terms of issue were authorized by the articles. ...... Registered shares are transferable by an instrument of transfer leading to the registration of the transferee in the books of the company as the owner of the shares transferred.” (pages 38-39)

“26. ...... A transfer of shares in a company may be complete as between the transferor and transferee but incomplete as between transferee and the company. In such a case the equitable title to the shares may be vested in the transferee, but with the legal title to the shares remaining vested in the transferor. The vesting in a transferee of the legal title to shares in a company will depend upon the requirements for transfer imposed by the company’s articles supplemented by the terms on which the shares were issued and, if necessary, by any relevant provisions of the law governing the company ......” (page 46)

(Emphasis added)

14.  Further, as stated by the Court of Final Appeal in Ng Yat Chi v Max Share Ltd & Anor (1997-1998) 1 HKCFAR 155 at 165E (per Li CJ as he then was):-

“…..a shareholder must be registered in order to be a member or contributory and to exercise the rights attached to that status under the articles and the Companies Ordinance.”

15.  The parties have not adduced any evidence of the Company’s articles of association or the terms on which the Shares were issued.  However, section 112(3) of the Companies Ordinance (Cap 622) provides that a person becomes a member of a company when he so agrees and his name is entered in the company’s register of members.  As stated in Xiao Long v Great Wall Securities Ltd (formerly known as Colors Securities Ltd) [2019] HKCFI 2769 at paragraph 134 (per Marlene Ng J):-

“…..a legal owner of shares is a person in whose name the shares were registered with the company. If a person is not a registered shareholder, he is not the legal owner irrespective whether he has any other interests (including equitable/beneficial interests) in the shares.”

16.  It is noted that the preamble of the Declaration of Trust expressly states that: (i) the plaintiff is the beneficial owner of the Shares; (ii) the plaintiff requested the defendant to register the Shares in the defendant’s name; and (iii) such registration was made to the defendant as nominee of the plaintiff. 

17.  The defendant does not dispute that Declaration of Trust was signed by him.  Despite the defendant’s allegations in paragraph 5(b) of the Defence (see paragraph 4 above) as to the circumstances in which the Declaration of Trust was signed, he has not identified any specific vitiating factor that would render the Declaration of Trust invalid or otherwise void.

18.  Insofar as the defendant is contending that he signed the Declaration of Trust without understanding its contents (which in any event has not been clearly or expressly pleaded in the Defence, nor even mentioned in his affirmation in opposition to the Summons), this is not in itself a valid defence as a matter of law.  It is well-established that absent any recognized vitiating factor (eg fraud, mistake, non est factum, duress, undue influence), when a person signs a legal document, he is bound by the act of his signature, and it is no defence to say that he did not understand its contents: see Ming Shiu Chung v Ming Shiu Sum (2006) 9 HKCFAR 335 at paragraphs 86-87 (per Ribeiro PJ).

19.  In any event, the defendant confirmed to this court at the hearing that he has read the Declaration of Trust after it was signed and fully understood its contents.  He explained that at the time when he signed the Declaration of Trust in March 2017, it was amongst a bundle of document the contents of which he did not read, and which was not explained to him by Ms Loo.  Such explanation is plainly not sufficient to constitute a legally recognised vitiating factor to invalidate the Declaration of Trust.  The defendant must therefore be taken to have agreed, pursuant to the Declaration of Trust, to register the Shares in his name and to hold the same on trust for the plaintiff. 

20.  Further, prior to the hearing before this court, neither the plaintiff nor the defendant has adduced any evidence of (i) any instrument of transfer in respect of the Shares; (ii) the register of members of the Company to show who may be the registered shareholder of the Shares; or (iii) any share certificates in respect of the Shares that may have been issued by the Company.

21.  It is not in dispute that the defendant is at present the only director of the Company.  However, the defendant informed this court at the hearing that the register of members of the Company (the “Register of Members”) is with the company secretary of the Company appointed by the plaintiff, namely, his accountant firm Louis Lai & Luk CPA Limited (the “Company Secretary”).  Mr Chiu also confirmed to this court that the Register of Members is indeed kept with the Company Secretary, but offered no valid explanation as to why the same had not been adduced in evidence, despite the dispute between the parties as to whether legal title to the Shares had already been passed to the plaintiff.  Mr Chiu accepted that if the Register of Members does indicate that the plaintiff has already been registered as the sole shareholder of the Shares, there would be no basis for this court to grant summary judgment on the terms requested in the Summons.  This court therefore stood down the hearing to allow time for Mr Chiu to take instructions and to obtain a copy of the Register of Members from the Company Secretary in order to ascertain the position as regards the Company’s present shareholding.

22.  Copies of the following documents were then made available to the court: (i) the Register of Members, showing the defendant as the sole shareholder of the Company holding 10,000 shares; (ii) the Company’s register of directors showing the defendant as the sole director of the Company; and (iii) the Annual Return of the Company dated 25 July 2019 (filed with the Companies Registry on 2 January 2020) also showing the defendant as the sole director and sole shareholder of the Company holding 10,000 shares.[1]  

23.  Therefore, it appears from the totality of the evidence before this court that the legal title to the Shares has not yet been transferred to the plaintiff by the defendant, and the defendant still remains as the registered shareholder of the Company.

24.  For the above reasons, I am of the view that the defendant’s case that the Shares (including the legal title thereof) have already been transferred to the plaintiff is no more than a mere assertion (which as mentioned above, was only stated for the first time in the defendant’s affirmation in opposition to the Summons) in respect of which he has failed to condescend upon particulars nor provided any contemporaneous documents in support.  The defendant has thus failed to show a real or bona fide defence on the plaintiff’s claim for the order sought in paragraph (2) of the prayer for relief pleaded in the ASOC, or any other reason why such claim should proceed to trial.

25.  In fact, the defendant confirmed to this court at the hearing that insofar as there may be additional documents which he may be required to sign, or additional steps which he may be required to take in order to effect the transfer of Shares to the plaintiff, he was willing to cooperate in signing such documents and/or in taking such steps. Had this concession been made earlier by the defendant, the Summons (and the costs incidental thereof) could well have been obviated.

D.     CONCLUSION

26.  I therefore grant the following orders:-

(1)  Judgment be entered against the defendant for an order that the defendant do transfer the Shares to the plaintiff or the plaintiff’s designated persons and sign all such documents necessary to effect such transfer (including but not limited to an instrument of transfer and board resolutions) and that the plaintiff or his designated persons’ name (as the case may be) be entered into the register of members of the Company.

(2)  Costs of the plaintiff’s claim herein against the defendant for the transfer of the Shares and the relief sought at paragraph (2) of the prayer for relief pleaded in the ASOC, and the costs of and incidental to the Summons, be paid by the defendant, to be taxed if not agreed, with certificate for counsel.