LIN SAN JIH AND OTHERS v. CHAI ZHEN ZHONG AND OTHERS

CACV 211/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 211 OF 2011

(On Appeal from HCMP No. 1197 of 2005)

____________

BETWEEN

____________

________________________

REASONS FOR JUDGMENT

________________________

Hon Cheung JA:

The background

1.  The 5^th defendant had transferred to it by Success Fortune International Development Enterprise Company Limited (‘Success Fortune’) a majority interest in a golf club in Guilin in the Mainland.  The 1^st, 3^rd and 4^th plaintiffs were the three shareholders and directors of the 5^th defendant.  The 2^nd plaintiff is the wife of the 1^st plaintiff and the legal representative of the golf club.

2.  The 1^st and 3^rd plaintiffs entered into an Equity Transfer Agreement dated 2 December 2003 (‘ETA’) and a Supplemental Equity Transfer Agreement (‘SETA’) with the 4^th defendant whereby the 1^st and 3^rd plaintiffs agreed to transfer 80% of the equity which they owned in the 5^th defendant to the 4^th defendant.  The 1^st, 2^nd and 3^rd defendants were the three directors and shareholders of the 4^th defendant.

3.  Clause 4 of the ETA provided that :

‘ 4.1 Party A [i.e. the 1^st and 3^rd plaintiffs] shall be responsible for convening the board meeting of Party A’s company [i.e. the 5^th defendant] within a month of this agreement and shall appoint the 3 persons designated by Party B [i.e. the 4^th defendant] as company directors. The new board of directors shall consist of 5 members. The board chairman shall be from Party B. The board of Guilin Lijiang Golf Clubhouse Enterprise Co. Ltd [i.e. the golf club] shall consist of 7 members, with its position of Chairman being filled by Party B.’

4.  Pursuant to the ETA, the 4^th defendant was allotted 80,000 shares of the 5^th defendant.  The 1^st, 2^nd and 3^rd defendants were appointed as directors of the 5^th defendant and the 1^st, 3^rd and 4^th plaintiffs retired as its directors.  The 1^st defendant also replaced the 2^nd plaintiff as the legal representative of the golf club.

5.  The plaintiffs claimed that they were induced to enter into the ETA and SETA by reason of, amongst other things, fraudulent misrepresentation on the part of the 1^st, 2^nd and 3^rd defendants. They commenced the present action to seek, amongst other things, rescission of the ETA and SETA. 

The judgment below

6.   Yam J after a 29-day trial found for the plaintiffs and made the following orders :

‘ 1) There be rescission of the [ETA] and [SETA] dated 2^nd December 2003;

2) It is declared that the 1^st Board Resolutions of the [5^th defendant] dated 1^st December 2003 and 2^nd Board Resolutions of the [5^th defendant] dated 2^nd December 2003 are void and consequently:

(a) A declaration is hereby made that the purported retirement of 1^st plaintiff, 3^rd plaintiff and 4^th plaintiff as directors of the [5^th defendant] is void and invalid;

(b) A declaration is hereby made that the purported appointment of 1^st, 2^nd and 3^rd defendants as directors of the [5^th defendant] is void and invalid;

(c) A declaration is hereby made that the allotment of the 80,000 shares in the [5^th defendant] to the 4^th defendant is void and invalid, and that such allotment be cancelled;

3)   The register of members of the [5^th defendant] be rectified by removing the name of the 4^th defendant;

4)  The Companies Registrar does record paragraphs 2 and 3 above, and shall rectify the Companies Record accordingly;

5)  The 1^st defendant do pay into Court the sum of US$830,000 within 21 days from the date hereof, i.e., on or before 5 October 2011;

6)  There shall be an order nisi on costs as follows :

(a) The 1^st to 4^th defendants do pay to the 1^st to 4^th plaintiffs the costs of this action to be taxed if not agreed;

(b) No order as to costs between the 1^st to 4^th plaintiffs and the 5^th defendant; and

(c) The 1^st to 4^th plaintiffs do pay the costs of the 6^th defendant which shall be indemnified by the 1^st to 4^th defendants to be taxed if not agreed.’   

The appeal

7.  The 1^st to 4^th defendants appealed against the judgment.  The 1^st and 3^rd defendants were represented by one firm of solicitors (CACV 211/2011) while the 2^nd and 4^th defendants were separately represented by another firm of solicitors (CACV 212/2011).  However, before the hearing of the appeal, the 2^nd and 4^th defendants reached terms with the plaintiffs and abandoned their appeal in CACV 212/2011.  The terms were made an order of the Court on 7 August 2012.  The 1^st and 3^rd defendants continued with their appeal and were represented at the hearing by Mr. Edward Chan SC and Mr. Lawrence Cheung.

8.  The plaintiffs (represented by Mr. Warren Chan SC, Mr. Laurence Li and Mr. Wayne Hariman) applied to strike out the 1^st and 3^rd defendants’ appeal relating to the rescission of the ETA and SETA, the declarations and order for rectification granted by the Judge.  We acceded to the application and struck out the 1^st and 3^rd defendants’ appeal on these matters.  We, however, allowed their appeal in respect of the order requiring the 1^st defendant to pay US$830,000 into court.  I now give reasons for our judgment.

Striking out: academic appeal

9.  The sole ground relied upon by the plaintiffs in striking out the appeal is that the appeal is academic and the 1^st and 3^rd defendants would not be able to obtain substantial relief.  The position of striking out an appeal on this ground is summarised in Civil Appeals : Principle and Procedure by Leabeater and others at paragraph 17‒076 as follows :

‘ In a number of cases, by the time the appeal is to be heard, the underlying issue has become academic. The question may arise as to whether it is appropriate for the appeal to proceed. This is addressed in detail in Chapter 2. The position is summarised below:

(1)  An extant dispute is normally considered a prerequisite for an appeal: “There should exist between the parties a matter in actual controversy.” 

(2)  Where there is no purpose in the appeal continuing the Court of Appeal is likely to decline jurisdiction. Different considerations will apply where the case is a test case, a “friendly action” or involves issues of public importance.

(3)  Where the case involves issues of public importance the Court of Appeal can with the consent of all parties entertain an appeal even though the dispute between the parties has been compromised at the time of the hearing.  This is likely to take place where third parties have intervened on discrete issues such as points of statutory construction.’

10.  This Court (Rogers VP and Le Pichon JA) in Tele-Art Inc. (In Liquidation) v. Tam King Ching Kenny and others CACV 234/2007 stated that

‘ 21. …… It would be quite wrong for any party to come to this court simply to ask for a declaration or statement from this court that a judge in the Court of First Instance had erred in some statement.

22.  This court has made clear in at least two judgments namely Gay v Yip Shut Yuen [2004] 1 HKC 615 and Kuok Hong Neng v Yuen Sic Wah [2004] 1 HKC 618 that where an appeal is academic, this court should not entertain such an appeal and that the argument that an appellant might benefit from an order as to costs did not suffice as a reason to permit the bringing of such an appeal.’

11.  In this case the parties to the ETA and SETA were the 1^st and 3^rd plaintiffs on the one hand and the 4^th defendant on the other hand.  The 1^st and 3^rd defendants were not parties to these agreements.  The only party who could challenge the rescission of these agreements was the 4^th defendant.  Since the 4^th defendant had chosen to abandon its appeal, the 1^st and 3^rd defendants have no standing to challenge the order for rescission.  To allow them to pursue an appeal challenging the rescission is clearly academic and they would not be able to obtain any substantial relief.

12.  In respect of the appeal against the declarations, again the allotment of shares to the 4^th defendant is of no concern to the 1^st and 3^rd defendants.  In respect of the removal of the 1^st, 3^rd and 4^th plaintiffs as directors and the appointment of the 1^st, 2^nd and 3^rd defendants as directors, this must be pursuant to Clause 4 of the ETA.  As accepted by Mr. Edward Chan, the 1^st and 3^rd defendants did not seek any independent right to be appointed as directors.  Again their appeal on these matters is academic once they are barred from challenging the rescission. 

13.  In respect of the order for rectification, it is of note that the Judge held that

‘ 148. Following the rescission the Companies Registrar should be rectified to restore D5 to its status before the ETA and SETA. I emphasise that the rectification was a result of the rescission of the agreements, but not the results of finding that the signatures on the board resolutions were forged.’

14.  The 1^st and 3^rd defendants have a counterclaim to the plaintiffs’ claim.  The Judge had deferred adjudication of the counterclaim.  This being the case, the 1^st and 3^rd defendants’ counterclaim would not be prejudiced by the striking out of their appeal which focused on the plaintiffs’ claim.

15.  In respect of the 1^st and 3^rd defendants’ appeal against costs, this Court had also said in Tele-Art Inc. (In Liquidation) that :

‘ 24. In these particular circumstances, one thing that can be said with certainty is that this court did not overlook those passages in giving judgment in the 2 cases referred to above. In so far as there may be an issue as to costs, Lord Bridge was no doubt referring to a situation where there was an appeal as to costs because there was said to be an error in the making of or not making of a costs order. Such an appeal is a special situation. It was a situation which arose for example in the case of Ch’ng Poh v Cheng, Teung & Co. [1998] 2 HKLRD 571 see the judgment of Liu J at page 580E.’

16.  A party cannot appeal solely against a costs order without obtaining leave from the Court.  If the 1^st and 3^rd defendants’ appeal is academic, the fact that they might benefit from an order as to costs is not a sufficient reason to permit them to proceed with the appeal.  In any event, the 1^st and 3^rd defendants had strenuously opposed the plaintiffs’ claim for rescission and failed.  There is no material provided in the Amended Notice of Appeal or submission as to why the costs order below was wrong.

17.  Accordingly, the 1^st and 3^rd defendants’ appeal on these specified issues was struck out.

Application to dismiss appeal based on the 1^st defendant’s contempt

18.  Initially the plaintiffs had issued a further application to dismiss the 1^st and 3^rd defendants’ appeal on the ground that the 1^st defendant is in contempt of court by failing to comply with the order on payment.  Based on this failure, the plaintiffs issued contempt proceedings against the 1^st defendant. To J convicted the 1^st defendant for contempt but gave him 28 days to purge the contempt.  This further application was not pursued by the plaintiffs at the hearing of the appeal.

Appeal against the order for payment

19.  Before the ETA and SETA were entered into, the plaintiffs paid US$830,000 to the 1^st defendant which was paid into the account of a company controlled by him namely, Yoky Filters Company Ltd.  Without going into details, the background is that Success Fortune had borrowed money from a fund managed by the 6^th defendant.  Armed with a letter of authorisation from the 6^th defendant, the 1^st defendant asked the plaintiffs to repay the loan.  The plaintiffs paid back US$830,000.  The Judge found that the 6^th defendant had authorised the 1^st defendant to collect the US$830,000 and pay it into Yoky Filters’ account.  However, the Judge went on to hold :

‘ 153. On 19 June 2008 the Fund transferred the Loan to one Renmen Kingdom Investments Corp., and thus D6 is no longer interested in the Loan. Since the Loan was transferred to a third party not involved in these proceedings, I order D1 to pay into Court the sum US$830,000 within 21 days hereof, which was paid by the plaintiff to Yoky Filters, which in turn is controlled by D1. Any party (including D1) considering that he is entitled to this sum of money or part of it, may apply to Court for payment out in a separate application. In this respect, D1 should inform Renmen Kingdom Investments Corp. about my aforesaid order.’

20.  The 1^st and 3^rd defendants appealed against the order for payment.  At the beginning of the appeal, we allowed them to amend the Amended Notice of Appeal to include the following :

‘ 26. The Plaintiffs’ claim for the refund of US$830,000 was made under paragraphs 11 and 23 of the Amended Statement of Claim. The sum was paid before the ETA and not in pursuance of it. There could be no dispute that at the time of payment D1 had the authority from D6 to receive repayment. Payment to the order of D1 would discharge the debt. Whether D1 had properly accounted to D6 was not of concern to the Plaintiffs.’

If, and in so far as, the order for payment is in the nature of an interlocutory judgment, we also granted leave to the 1^st and 3^rd defendants to appeal against that order.

21.  Although the plaintiffs had sought the return of US$830,000 in their claim, they were clearly not entitled to it because they were not paid pursuant to the ETA.  Mr. Warren Chan properly conceded that the plaintiffs have no standing to challenge this particular aspect of the appeal.  No other party had sought the repayment of US$830,000.  In view of the Judge’s own finding, there was no basis for him to order the 1^st defendant to pay this sum into Court.  Accordingly we allowed this aspect of the appeal and set aside the order on payment.

Judgment on Costs

1)  Costs of striking out appeal

22.  As the plaintiffs succeeded in striking out the appeal, they are entitled to the costs of the striking out application against the 1^st and 3^rd defendants.

2)  Costs of application to dismiss appeal based on contempt

23.  As the plaintiffs abandoned this application, the 1^st and 3^rd defendants are entitled to the costs of the application against the plaintiffs.

3)  Costs of the appeal on the order for payment

24.  As the 1^st and 3^rd defendants are successful, they are entitled to the costs on this aspect of the appeal against the plaintiffs who had opposed the appeal until the concession made at the hearing.  I will not disturb the costs below despite allowing this part of the appeal.

4)    Costs of the re-amendment of the Amended Notice of Appeal

25.  The 1^st and 3^rd defendants have to pay the plaintiffs’ costs of the application to amend the Amended Notice of Appeal.

5)   Costs of the 1^st defendant’s new affirmation

26.  The 1^st and 3^rd defendants abandoned their application to rely on the new affirmation of the 1^st defendant. The plaintiffs are entitled to the costs thereof.

6)   Costs of the 6^th defendant

27.  The 6^th defendant was absent at the appeal. We made no order in respect of the 6^th defendant’s costs.

28.  I will grant certificate for two counsel.

Hon Yuen JA:

29.  I agree.

Hon Chu JA:

30.  I agree and have nothing to add.