LAM WAI TUNG v. LEE SHING AND OTHERS

CACV 236/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 236 OF 2009

(ON APPEAL FROM HCA NO. 1610 OF 2006)

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BETWEEN

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REASONS FOR JUDGMENT

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Hon Tang Acting CJHC:

1.  I have had the advantage of reading Kwan JA’s judgment in draft and I agree with it.

2.  In fairness to the 1^st Defendant, I will add a few words.

3.  The Plaintiffs claim against the 1^st Defendant was put on two bases.

4.  First, a conspiracy by the Defendants (or any two or more of them together) to “wrongfully and with the sole or predominant intention of injuring the Plaintiff and/or causing damage to the Plaintiff ...” para 4 of the Statement of Claim.

5.  Secondly, that the Plaintiff had not signed any of the share transfer documents (para 6 Statement of Claim) and that the authorization was a sham (Para 4 of the Amended Reply to the Amended Defence).

6.  I am satisfied on the primary findings made by the learned Deputy Judge, namely, that the share transfer documents relating to the Plaintiff’s 60,000 shares were not signed by the Plaintiff and that what purported to be an authorization signed by the Plaintiff in favour of his brother, the 3^rd Defendant (who has absconded) had been signed in blank and was not meant to be an authorisation, that the orders appealed from were rightly made and the appeal must be dismissed.

7.  However, with respect to the learned Deputy Judge, I cannot agree with his finding of a conspiracy.  I agree with Mr Alfred Fung who appeared for the 1^st, 2^nd and 4^th Defendants on appeal that there were indications that 1^st Defendant (and through him the 2^nd and 4^th Defendants), was the 3^rd Defendant’s victim and not the 3^rd Defendant’s co-conspirator. 

8.  I appreciate that the learned Deputy Judge was not impressed with the evidence of the 1^st Defendant and his witness Ren, and he took the view that the 1^st Defendant’s conduct was consistent with the 1^stDefendant being doubtful about the genuineness of the authorization, but that is not a sufficient basis for a finding of conspiracy.  Mr Paul Wu, quite sensibly, has not sought to rely on the finding of conspiracy. 

9.  A party can only appeal against the orders of the court and not its reasons, since the appeal must be dismissed, I say no more than that if it had been necessary to do so, I would have overturned the learned Deputy Judge’s finding of conspiracy.

Hon Yuen JA:

10.  I agree with the Reasons for Judgment of Kwan JA.

Hon Kwan JA:

11.  This is the appeal of the 1^st, 2^nd and 4^th defendants against the judgment of Deputy Judge L Chan.  The 3^rd defendant had given notice earlier that he did not intend to contest the proceedings.  After an eight-day trial, the Judge found in favour of the plaintiff that the signatures purportedly made by the plaintiff in the ten documents in question are not his but were forged.  He rejected the case of the 1^st, 2^nd and 4^th defendants that these documents were executed pursuant to a genuine power of attorney (“the Authorisation”) that bore the plaintiff’s signature.  We dismissed the appeal with costs to the plaintiff at the end of the hearing and these are the reasons for judgment.

12.  The background matters relevant to this appeal, taken largely from the judgment, may be stated as follows. 

The background

13.  Before the disputed transfer of shares in these proceedings, the plaintiff and his brother the 3^rd defendant were the only shareholders of Asia Well Industrial Limited (formerly known as Creation Shell Limited, referred to hereinafter by its former name “Creation Shell”), holding 60,000 and 40,000 shares respectively. The plaintiff was the company secretary and they were the only directors.

14.  The 1^st and 2^nd defendants are husband and wife.  The 4^th defendant is a company controlled by the 1^st defendant.

15.  In March 1991, Creation Shell acquired the development rights of a piece of land (“the Land”) in Fangmapu, Guanlan Town, Boan District, Shenzhen from the village committee of Guihua Village, Guanlan Town.  In December 1992, Creation Shell entered into a joint venture agreement with Yinxin Industrial Company (“Yinxin”), which is a wholly owned subsidiary of the Xiangtan branch of the Bank of China in Changsha City, Hunan Province. Pursuant to this agreement, Yinxin advanced RMB 11 million to Creation Shell for one year for developing the Land, in return for a profit cum interest liquidated at 28% of the capital plus return of the capital.  The development of the Land was not successful.  Yinxin was only paid RMB 1 million and the principal and interest were outstanding.  Creation Shell had a cash flow problem and stopped work on the Land in 1994.  In 1995, the plaintiff left for Chongqing to run some other business.

16.  The date of the Authorisation was 10 September 1996.  This purported to be an irrevocable power of attorney granted by Creation Shell and the plaintiff to the 3^rd defendant authorising the latter to, inter alia, (1) resolve the contractual obligations of Creation Shell to Yinxin regarding the outstanding sums and the Land mortgaged to Yinxin as security; (2) handle the transfer and letting of the Land and settlement with the builder; (3) handle the transfer of the plaintiff’s 60,000 shares in Creation Shell.  It also authorised the 3^rd defendant to sign all documents for transferring the plaintiff's shares, to receive all benefits therefrom and to bear all responsibilities thereof.  The plaintiff alleged that the Authorisation was not given by him but was created without his knowledge and consent from a letterhead of another company, Asia Well Development Limited (“AW Development”), which he had previously signed in blank.

17.  In October 1996, the 3^rd defendant purportedly made an agreement and supplemental agreement on behalf of Creation Shell with Yinxin to transfer the mortgaged development rights to Yinxin in settlement of the outstanding sums to the latter.  In return, Yinxin agreed to pay RMB 1.5 million owed by Creation Shell to the builder.  These agreements were disavowed by the plaintiff, who claimed they were made without his knowledge and consent.  Yinxin did not make any payment under these agreements.  In December 1996, the 3^rd defendant issued a letter to Yinxin purportedly on behalf of Creation Shell declaring that these agreements ceased to have effect as Yinxin had failed to pay the builder.

18.  In early 2002, there was a short meeting between the plaintiff, the 3^rd defendant and the 1^st defendant in Shenzhen, in which the 1^st defendant expressed his interest to acquire the development rights of the Land.  The plaintiff told the 1^st defendant to negotiate with the 3^rd defendant. 

19.  On 3 February 2002, the 3^rd defendant purportedly signed an agreement on behalf of Creation Shell with the 4^th defendant (“the Sale Agreement”), by which Creation Shell agreed to sell the Land to the 4^th defendant for RMB 1.5 million.  It was provided that if Creation Shell should be able to assist the 4^th defendant to raise a loan of RMB 20 million, the purchase price would be increased to RMB 2 million.  The 4^th defendant also agreed to assume responsibility for the management fee of RMB 2 million payable to the village committee, the outstanding fees to the builder of RMB 1.5 million, and the loan and interest owed to Yinxin. 

20.  On 16 March 2002, again purportedly on behalf of Creation Shell, the 3^rd defendant signed an agreement with the 4^th defendant and Yinxin (“the Tripartite Agreement”), by which Yinxin agreed to receive RMB 2 million from the 4^th defendant in discharge of the loan of RMB 11 million and interest of RMB 5 million odd owed by Creation Shell, and for the transfer to the 4^th defendant of all its rights in the Land and the development project in the Land.  At the time of the Tripartite Agreement, the loan was managed by the Changsha office of a state financial institution known as China Eastern Assets Management Company (“China Eastern Assets”), which was set up by the government to take over irregular loans of national banks.

21.  The plaintiff claimed that the Sale Agreement and the Tripartite Agreement were made without his knowledge and consent.  He denied he had received any part of the RMB 1.5 million payable by the 4^th defendant to Creation Shell under the Sale Agreement.

22.  The disputed share transfer and related documents were dated June and September 2002 and some were undated.  By these documents, the plaintiff’s 60,000 shares were purportedly transferred to the 1^st defendant; the board of directors of Creation Shell purportedly approved the transfer of the plaintiff’s shares to the 4^th defendant and the transfer of the 3^rd defendant’s shares to the 1^st defendant, the plaintiff’s resignation as a director and the company secretary, the appointment of the 1^st and 2^nd defendants as the directors, and the appointment of the 2^nd defendant as the secretary; the plaintiff  and the 3^rd defendant purportedly confirmed to the Stamp Duty Office the plaintiff had sold his shares to the 1^st defendant and the 3^rd defendant had sold his shares to the 2^nd defendant.

23.  There was a mix up in the identities of the purchasers of the shares in the documents aforesaid, as the purchaser of the 60,000 shares was changed from the 4^th to the 1^st defendant, and the purchaser of the 40,000 shares was changed from the 1^st to the 2^nd defendant.  The Judge found that this was due to the fact that someone had mistakenly used the documents prepared earlier for a different scheme which was not implemented, as borne out by the unsigned documents produced by the plaintiff at trial.  Hence, the board of Creation Shell has not yet approved the transfer of the 60,000 shares to the 1^st defendant and the 40,000 shares to the 2^nd defendant. 

24.  The plaintiff denied that he had transferred his shares to any one, that he had received any part of the $60,000 allegedly paid by the 1^st defendant for his shares, or that he had resigned the offices of director and company secretary.

25.  The 1^st, 2^nd and 4^th defendants accepted at trial that the purported signatures of the plaintiff in the ten documents in issue were not signed by him personally, but alleged they were signed by the 3^rd defendant on his behalf by virtue of the Authorisation. 

26.  The plaintiff had complained to the Companies Registry of forged signatures and took his complaint to the Commercial Crimes Bureau.  After investigating the matter, no prosecution was brought by the Commercial Crimes Bureau.

The analyses and findings by the Judge

27.  The analyses and findings appeared in paragraphs 63 to 109 of the judgment and may be summarised as follows.

28.  The 1^st defendant claimed he had contributed $1.6 million towards the purchase of the development rights of the Land in 1991, and this was denied by the plaintiff.  The Judge did not think this issue important except perhaps on the question of credibility and declined to make any finding on this.

29.  Regarding the plaintiff’s evidence that Yinxin had not demanded repayment of the loan of RMB 11 million and interest, the Judge thought the plaintiff might have overstated his case.  Notwithstanding this, there remains the fact there was no evidence of Yinxin having sued Creation Shell, the plaintiff or the 3^rd defendant for payment, and this could be because the loan was irregular, which was why China Eastern Assets was involved in the Tripartite Agreement.  Further, even if Yinxin was making vigorous demands for repayment, the Judge did not think it necessary for the plaintiff to have made the Authorisation which was expressed to be irrevocable.  Also, the plaintiff would not have made the Authorisation on the wrong letterhead and allowed the second character of his name to be typed wrongly. 

30.  According to the plaintiff, he only learned about the Authorisation when Ren Qiaofu, a former employee of the 1^st defendant, showed him a copy of this document at their meeting in November 2002.  The Judge accepted the plaintiff’s evidence on his two meetings with Ren in 2002 and rejected Ren’s evidence insofar as his version conflicted with the plaintiff’s testimony. 

31.  The Judge regarded the evidence of the 1^st defendant and Ren on the casual manner of passing the share transfer documents to the 3^rd defendant for signatures as problematic.  Ren does not understand English and could not read those documents.  He claimed to have released $60,000 to the 3^rd defendant upon the telephone confirmation of the 1^st defendant, who did not have sight of the documents as signed when the money was released.  Ren did not obtain a receipt from the 3^rd defendant for $60,000.  The Judge found Ren of poor credibility and did not believe his evidence that the 1^st defendant had asked him to pass the share transfer documents to the 3^rd defendant for signature.

32.  The Judge remarked that he has not overlooked the evidence of Qiao Xinming, a manager of China Eastern Assets called by the defendants, that the Authorisation was produced on 16 March 2002 and relied on by China Eastern Assets when the Tripartite Agreement was executed.  However, this does not necessarily mean the Authorisation was genuine or that the 1^st defendant had believed it to be genuine.The 3^rd defendant did not sign the share transfer documents on the plaintiff’s behalf by relying on the Authorisation.  The purported signatures of the plaintiff bore a striking resemblance to his signatures.  The Judge saw no reason why an agent or attorney would have signed the share transfer documents in such a deceptive manner to make a reader think the signatures were made by the plaintiff personally. 

33.  The Judge noted there were imperfections and non-essential inconsistencies in the plaintiff’s evidence, which could be explained by the long lapse of time.  Looking at the plaintiff’s evidence as a whole and in the light of the above analyses, the Judge accepted the plaintiff has proved his case on a balance of probability, and found that he had not made the Authorisation and it was fabricated on a letterhead of AW Development which he had signed in blank previously for the use of the 3^rd defendant in or before 1995.  The 3^rd defendant used it to make the Authorisation without the knowledge or consent of the plaintiff.

34.  The Judge found that the 1^st defendant had not acted bona fide in his dealings with the 3^rd defendant or his acquisition of the plaintiff’s shares in Creation Shell.  He had not confirmed with the plaintiff on the existence or validity of the Authorisation or the terms of the Sale Agreement or the Tripartite Agreement, when he was going to invest substantial sums of money pursuant to these documents.  He could not give any or any credible explanation why he had not done so, despite his acquaintance with the plaintiff and the plaintiff was just a telephone call away.  The Judge found that the 1^st defendant’s failure to contact the plaintiff only reflected that the 1^st defendant was aware the Authorisation was not genuine and that the plaintiff was not aware of the terms of the Sale Agreement and the Tripartite Agreement.

35.  The Judge found the RMB 1.5 million was to pay for the development rights of the Land as well as the transfer of the shares in Creation Shell.  There was no separate payment of cash of $40,000 and $60,000 as alleged by the defendants.  It was not known who made the forged signatures of the plaintiff on the ten documents, but the Judge found both the 1^st and the 3^rd defendants knew about their making, both knew the Authorisation was not genuine, and the forged signatures were made pursuant to the conspiracy of these defendants to enable the 1^st defendant to take over Creation Shell and the development of the Land. 

The points taken on appeal

36.  This being an appeal on findings of fact, the defendants have a heavy onus to discharge that the trial judge had erred to such an extent to warrant interference on appeal.

37.  Mr Alfred Fung, who appeared for the appellant defendants, took three main points.  Firstly, he argued that the Judge overlooked the standard of proof in a fraud case and took no account of the serious nature of the allegations of dishonesty when he weighed up the evidence.  Secondly, the Judge had apparently proceeded on the basis he must accept the evidence of either the plaintiff or the 1^st defendant.  Thirdly, in any event, the Judge’s order declaring that the share register of Creation Shell be rectified regarding the transfer of the 3^rd defendant’s 40,000 shares to the 2^nd defendant cannot stand.

The standard of proof

38.  Mr Fung pointed out the Judge did not set out in his judgment of 44 pages the correct approach regarding the standard of proof applicable to allegations of fraud in a civil case (Re H (Minors) (Sexual Abuse: Standard of Proof) [1996] AC 563 at 586D to F), and submitted that the Judge had failed to apply the correct approach.  He contended that there was no evidence showing that the 1^st defendant had a propensity to commit fraud and the Judge should have approached this case on the basis that all parties other than the 3^rd defendant were to be assumed to be honest unless and until the contrary was proved by cogent evidence.

39.  Although the Judge did not mention in his judgment the applicable approach and the relevant authorities, counsel on both sides had covered these matters adequately and repeatedly in their opening, closing and supplemental closing submissions, citing the relevant passages from well-known authorities.  There was no disagreement on the standard of proof and the correct approach in weighing up evidence in respect of serious allegations of fraud.  As mentioned in the outset of the judgment, this action is about forged signatures.  It is extremely unlikely that the Judge would have overlooked the correct approach when he came to analyse the evidence and make findings. 

40.  In any event, there is nothing in the judgment to suggest that the Judge had not applied the correct approach, insofar as the finding of forgery is concerned.  The  finding that the Authorisation was a forgery so were the documents purportedly exercised pursuant to the Authorisation was made after the Judge had subjected the conflicting evidence to a critical and thorough analysis from paragraph 63 onwards.  He had most carefully weighed up the evidence and considered the evidence on both sides in the entirety before he arrived at that finding. 

41.  Mr Fung submitted that the finding of conspiracy against the 1^st defendant should not be upheld, applying the proper approach on the evaluation of evidence mentioned above. And if the finding of conspiracy could not be supported, the plaintiff’s claim must fail as the allegation of forgery was not a stand-alone basis for the plaintiff’s claim on his case as pleaded.  He also sought to raise a case of estoppel for the 1^st defendant and submitted that a re-trial should be ordered.

42.  Mr Paul Wu and Mr Eric Yao, who appeared for the plaintiff on appeal, did not seek to uphold the judgment on the finding of conspiracy.  It is not necessary for them to go as far as that, as it is clear from the Statement of Claim that the claim was pleaded on two bases, conspiracy (paragraphs 4, 5 and 7) and forgery (paragraph 6), and each is a separate basis for the plaintiff’s claim.  Hence, even if it was not proved that the 1^st defendant had conspired with the 3^rd defendant to injure the plaintiff by ousting him as a shareholder, director and secretary of Creation Shell, as found by the Judge, the plaintiff would clearly be entitled to succeed on the finding of forgery.  As for the estoppel contended by Mr Fung, this has not been pleaded in the Re-amended Defence of the appellant defendants and does not arise for consideration on the pleading ground and for the reason to be mentioned. 

43.  Mr Fung criticised some of the findings of the Judge in an attempt to support his contention that the Judge did not apply the correct approach.  These matters were canvassed in paragraphs 17.1 and 17.2 of his submissions.  I do not consider his criticisms well founded, as they were premised on whether too much or too little weight was given to various aspects of the evidence considered by the Judge.  What weight to give to a piece of evidence is undoubtedly a question for the trial judge. Besides, the evidence cannot be looked at in isolation.  There is simply no basis for interference by an appellate court.

44.  The Judge had found in paragraph 95 of the judgment there was an element of deception in the way the plaintiff’s signatures were signed in the relevant documents and remarked that if the 3^rd defendant had been exercising an authority under the Authorisation in a bona fide manner, he would not have signed in such a deceptive way to make the reader think the plaintiff had signed personally.  Mr Fung submitted that the Judge had made an error of law here, citing London County Council v. Agricultural Food Products Ltd. [1955] 2 QB 218.  The relevant dicta at 223 stated that although it is bad practice and misleading for an agent to sign without adding the letters “p.p.” to indicate that the signature was by proxy, the signature would still be valid if it was done with authority.  For this proposition, Mr Fung developed his argument that a finding or inference of dishonesty should not be made merely because an agent had failed to write the letters “p.p.”.

45.  I am unable to see what error of law was made by the Judge.  The Judge was making a point of plain common sense.  The purported signatures were signed in such a way to resemble the plaintiff’s signatures in a striking manner and the resemblance was the result of “efforts of forgery” (paragraph 109 of the judgment).  There was no reason why the signatures should be signed in this deceptive manner if they were affixed in a bona fide manner pursuant to a genuine power of attorney.

The Judge’s approach to rival versions of events

46.  Mr Fung submitted the Judge had made a fundamental error in that he appeared to have proceeded on the basis he was faced with two rival versions and must choose between them and the Judge had overlooked a number of other possibilities.

47.  That the Judge had proceeded on the basis he must choose between one of two rival versions is just counsel’s surmise and supposition.  As for the “other possibilities” canvassed in Mr Fung’s submissions, I see no reason why the Judge should be concerned with any speculative theory with no or no solid evidential basis.  The further submissions made by Mr Fung in relation to forgery and ostensible authority on the possibility that both the plaintiff and the 1^st defendant were victims of the 3^rd defendant’s fraud do not arise for consideration on the findings made by the court.  The Judge had rejected the evidence of the 1^st defendant and Ren.  The Judge had found that another set of share transfer documents for a different scheme was prepared with the knowledge and consent of the 1^st defendant, see paragraph 84 of the judgment.  Even if the 1^st defendant’s knowledge and what he did were not sufficient to make him a party to a conspiracy with the 3^rd defendant, given the Judge’s findings on the extent of his knowledge and that he did not go about the business of acquiring the shares in a bona fide manner, an estoppel could not be applied in the 1^st defendant’s favour.

48.  That is sufficient to dispose of the arguments on this point.

The 3^rd defendant’s 40,000 shares

49.  Because of the mix up in the identity of the purchasers, there are no minutes of the board approving the transfer of the 40,000 shares to the 2^nd defendant.  The Judge made a declaration that the board of directors of Creation Shell has not approved the transfer of its 40,000 shares from the 3^rd defendant to the 2^nd defendant and further ordered that the register of members be rectified accordingly. 

50.  Mr Fung submitted that the above orders cannot stand regardless of the Judge’s findings in respect of the plaintiff’s shares because there was a valid transfer of the 3^rd defendant’s shares to the 2^nd defendant and a purchaser of shares in a private company is prima facie entitled to specific performance.  He pointed to paragraph 103 of the judgment in which the Judge found that the 2^nd defendant knew almost nothing, so he argued equity would not refuse specific performance to her.

51.  The Judge has found that the RMB 1.5 million was to pay for the development rights of the Land as well as for the transfer of the shares in Creation Shell and there was no separate payment of $40,000 and $60,000 in cash for the purchase of the shares as alleged by the defendants.  Other than that, the Judge made no ruling on the validity of the transfer of the 3^rd defendant’s 40,000 shares to the 2^nd defendant.  He made no declaration that the transfer of the 40,000 shares was invalid.  The declaration made was quite simply that the board of directors has not approved the transfer of the 40,000 shares to the 2^nd defendant, and that is correct on the facts as found by the court.

52.  As for the order to rectify the register of members in respect of the 40,000 shares in the 2^nd defendant’s name, the reason for the rectification was not so much the validity or otherwise of the transfer of these shares to the 2^nd defendant.  The register of members cannot be altered without an act of the company, either acting by its board of directors, or the unanimous resolution of its members.  Because of the mistake in using the minutes prepared for different transferees, the transfer of shares to the 2^nd defendant was not put before the board of directors.  As found by the Judge, there was no act of the company by its board of directors approving the transfer to the 2^nd defendant.  This is quite apart from the usual restriction which is found in the articles of association of Creation Shell that the directors may, in their absolute discretion and without assigning any reason therefor, decline to register any transfer of any share, whether or not it is a fully paid share.

53.  The declaration and order for rectification of the share register are correctly made.  The contentions of Mr Fung on this point must also fail, as he has conceded after this court has pointed out to him the above matters.