PANG IENG LUN AND ANOTHER v. ZHANG ZHIJIAN

HCA 1224/2022

[2026] HKCFI 2561

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1224 OF 2022

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(by original action)

(by counterclaim)

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________________________

J U D G M E N T

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I.  INTRODUCTION

1.  This is a trial of:-

(1)  The claim of Pang Ieng Lun (“Mrs Lou”) and her husband Lou Kim Neng (“Mr Lou”) against Zhang Zhijian (“Mr Zhang”) based on Clauses 10 and 15.5 of a tripartite shareholders’ agreement entered into by the three of them on 7 August 2017 (the “SHA”), claiming for, among others, transfer of all the shares in a limited company incorporated in Hong Kong known as Cheung Tat Property Investment Limited (the “Company”) registered in the name of Zhang (“Mr Zhang’s Shares”); and

(2)  A counterclaim of Mr Zhang against Mrs Lou, Mr Lou, Ma Kin Kwan (“Mr Ma”) and one of his daughters Ma Ka Ching (“Ms Ma”) based on Clauses 2.1, 2.3, 9.1 and 10.1 of the SHA, claiming for, among others, the reversion to Mr Lou the 20,000 shares in the Company (the “20,000 Shares”) transferred on 24 September 2021 from Mr Lou to Mr Ma who then transferred the same to Ms Ma on 28 September 2021.

II.  BACKGROUND

2.  The Company was at the material times and still is a holding company of NY Global Hong Kong Limited (“NY Global”). Its previous name before 3 November 2016 was NBTY Global Hong Kong Limited (“NBTY”). NY Global in turn held and holds a company incorporated in the PRC, namely, 奧德美生物科技(中山)有限公司 (the “PRC Company”). In the evidence, while it can be seen that Mrs Lou, Mr Lou, Mr Zhang and Mr Ma were described as shareholders of the PRC Company, as a matter of strict law, they were not. But they could be understood as such in loose sense, given that they owned the Company, which in turn wholly owned NY Global or NBTY, which in turn wholly owned the PRC Company.

3.  Mrs Lou, Mr Lou, Mr Zhang and Mr Ma had been acquaintances. In March 2017, Mrs Lou, Mr Lou, Mr Zhang and Mr Ma signed two documents, namely, “收購NBTY股東支付情況表” and “收購NBTY各股東分攤明細表”. The essence of these documents show that Mrs Lou, Mr Lou, Mr Zhang and Mr Ma made contribution to the acquisition of NBTY.

4.  On 7 August 2017, Mrs Lou, Mr Lou and Mr Zhang entered into the SHA in respect of their shares in the Company. It provides that:-

“前言:

…

(C) 張先生 [Mr Zhang]、勞先生 [Mr Lou] 及彭女士 [Mrs Lou]（簡稱為“各位股東”）皆希望通過該公司 [the Company] 而參與奧德美 [the PRC Company] 的投資，基於此原因，各方同意成為該公司股東並以下述方法處理財務、運作及管理。

…

2.1 於本協議的日期，各位股東持股比例如下：

股東	股份數目	持股比例
張先生	20,000	2/6
勞先生	30,000	3/6
彭女士	10,000	1/6

…

2.3 除本協議另有規定外，於本協議生效期間，各股東必須維持第2.1條所述的持股比例。

…

9.1 在受制於本協議第7條的情況下，在本協議有效期內，除非以下各項行動已獲得各股東的一致同意，否則，股東應各自採取一切必要的行動，以確保集團不會採取以下任何的行動:

…

(37) 變更本協議第2.1條所述的持股比例;

(38) 除按本協議的規定外，容許任何人成為任何集團公司的股東…

10.1 除非遵照本條款規定，否則不得處置任何股份。股東出售的股份必須為股份的全部，不可將股份部分出售。股東亦不得處置或抵押其持有的所有或部份股份，或附於股份的任何權益 ：

(1) 當一位股東（ 簡稱為“賣家”）意欲轉讓或捨棄其持有的全部股份（簡稱為“出售股份”）時，賣家首先要向該公司呈交一份書面通知書（簡稱為“出售通知書”），以通知該公司該賣家計劃出售或捨棄股份。在出售通知書內應列明賣家願意出售該出售股份的售價；

(2) 該公司在收到該出售通知書後，應立刻召開股東大會向全體股東宣讀該出售通知書，而召開該等股東大會的日期將被視為為出售通知書發出的日期。在出售通知書發出後，該公司應代賣家在規定時限內（將在下文定義）以規定售價（將在下文定義）出售該出售股份予其他股東。

(3) 若在出售通知書內所述的售價能得到其他全體股東同意，則該售價可視為規定售價。若該售價未能獲得同意，但在出售通知書發出後1個月內，賣家與其他全體股東能就出售股份的售價達成協議的話，則該協議售價可視為規定售價。若未能達成就售價達成協議，該公司的董事將立刻指示當時該公司的核數師用書面確實及證明該出售股份在出售通知書當日的公平價值，而經核數師所確實及證明的價值則視為規定售價。核數師在此項事項上的角色並不是仲裁員而是專家身份，而由他們作出的裁定是最終及對賣家及其他股東有約束力。該出售股份的公平價值是根據該公司的沿用的會計原則計算的該出售股份的淨資産價值 (Net Asset Value), 而淨資產價值 (Net Asset Value) 將是在出售通知書當日該公司的淨資産價值除以該公司當時已分配的股份數目。

(4) 若規定售價能獲得同意，規定時間便由發出出售通知書或由協議日期起開始，而在兩個月內屆滿。若規定售價不能獲得同意，則規定時間由核數師通知董事由他們確實的規定售價開始，而在兩個月內屆滿。

(5) 若只有其中一位股東申請購買該出售股份，該公司應以書面通知賣家及該股東，在該股東支付該出售股份的規定售價後，賣家必須將該出售股份轉讓予該股東。該公司的董事應在發出該通知後28 天內安排該出售股份完成轉讓。本條款所造成的持股比例的變更將不會構成違反本協議第2.3 條及本協議第9.1(37) 條的規定。

(6) 若多過一位股東申請購買該出售股份，董事便應該將該出售股的股份按股東當時持有股份比例轉讓。不過，股東並沒有責任購入數量較他們要求多的股份，該公司的董事必須以書面通知賣家及其他股東，該公司的董事應在發出該通知後28 天內安排該出售股份完成轉讓。本條款所造成的持股比例的變更將不會構成違反本協議第2.3 條及本協議第9.1(37) 條的規定。

(7) 若經過以上的程序後，賣家計劃出售股份也未能全部賣出，在各位股東一致同意的情況下， 賣家可將未能賣出的股份轉售予第三者。然而， 如全體股東就該接納該第三者作為該公司股東的決議未能達成一致，則應在討論該決議的股東會議後三個月再次召開股東會議，以決定是否接納該第三者作為該公司股東。如該決議仍未能經持有不少於該公司三分之二股份的股東同意通過，則賣家不能將股份轉售予第三方。本條款所造成的持股比例的變更將不會構成違反本協議第2.3條及本協議第9.1(37) 條的規定。

(8) 若所有股東以書面同意有關出售股份，上述條款將不會適用。上述條款亦不適用於在此協議生效前生效的關於該公司股份的信託。

…

15.5 若任何一位股東（簡稱為“違約股東”）發生下列的情況，而其餘所有股東以書面通知該違約股東後，本協議便會終止：

(1) 若違約股東被發生破產或清盤申請或法律訴訟/命令/決議有關破產或清盤、無力償還債項、重組、解散或委派破產管理處署長或清盤人；或違約股東向其之債權人停止還款或承認無力償還債項或違例股東的生意或資產被執行，若上述的情況發生而沒有在21天內解除。

(2) 若任何政府部門或機構將違約股東的大部份資產接管、扣押或接收。

(3) 若該違約股東違反了本協議內的責任而在收到其他股東要求糾正的通知書後30天內仍沒有將違約事項糾正。

15.6在收到其他股東根據第15.5條條文的終止通知書後，違約股東便須將其持有該公司的股份根據第10條條文轉讓予其他股東並賠償其他股東因其違約而造成的損失。如因違約股東導致集團公司無法正常經營，違約股東應賠償集團公司的損失。”

5.  On the same day, Mr Lou as trustee and Mr Ma as the beneficial owner entered into a declaration of trust (the “Declaration of Trust”) prepared by Messrs Chan and Cheng in respect of 20,000 out of 30,000 shares in the Company held in the name of Mr Lou. These 20,000 shares in the Company are the very same 20,000 Shares under the counterclaim.

6.  On 26 December 2018, a board meeting of the PRC Company was convened. Mrs Lou, Mr Lou and Mr Zhang all attended the meeting. At the meeting, according to its minutes, it was unanimously resolved, among others, that Mr Zhang had to repay a loan of RMB15,720,000 (the “RMB Loan”) to the PRC Company on or before 1 June 2019. The relevant resolution reads as follows:-

“股東會一致通過關於洛陽項目投資計劃取消，張志建先生[Mr Zhang] 2772萬人民幣私人借款問題：

…

(2) 其中1572萬人民幣借款則由張志建先生私人承擔並承諾在2019年6月1日前還款並按原銀行利息支付利息。

(3) 如2019年6月1日前未能如期還款，則再召開股東會商議。”

7.  On 18 February 2019, Mr Zhang made a payment of RMB1,000,000 to the PRC Company. There is a dispute over the nature of this payment. Mrs Lou and Mr Lou allege that this payment was a partial repayment of the RMB Loan. Mr Zhang alleges that this payment was a loan advanced to the PRC Company upon the request of the legal person (法人代表) of the PRC Company, nothing to do with the RMB Loan.

8.  No repayment or no further repayment of the RMB Loan was made before 1 June 2019. As a result, in late 2019, the PRC Company commenced a claim in Zhongshan Intermediate People’s Court against Mr Zhang for, among others, the repayment of the RMB Loan.

9.  On 24 September 2021, Mr Lou transferred the 20,000 shares in the Company (the “20,000 Shares”) to Mr Ma. On 28 September 2021, Mr Ma transferred the 20,000 Shares to one of his daughters Ms Ma.

10.  On 30 September 2020, the PRC Company’s claim in Zhongshan Intermediate People’s Court was dismissed. The PRC Company appealed to the High People’s Court of Guangdong Province (the “High People’s Court”). By a judgment dated 30 December 2021 (the “PRC Judgment”), the High People’s Court allowed the appeal in respect of the claim for repayment of the RMB Loan, ordering Mr Zhang to make full repayment within 10 days. During the hearing, the PRC Company made the allegation that the RMB1,000,000 payment was a partial repayment of the RMB Loan, and so the amount to be repaid should be RMB14,720,000. Mr Zhang’s response was that the RMB1,000,000 payment was not a repayment of any loan but a loan advanced to the PRC Company upon the request of the legal person of the PRC Company. The High People’s Court, taking a pragmatic approach, did not make any finding on this dispute. In the relevant part of the PRC Judgment, it reasoned:-

“《股東會商議》記載由 “張志建先生私人承擔” 1572萬元，應於2019年6月1日前還款並 “按原銀行利息支付利息”。張志建在《股東會商議》上簽名對此予以確認，應當依約還本付息。奧德美公司主張張志建於2019年2月18日向其匯付的100萬元用於抵扣案涉借款本金，並僅主張剩餘本金從《股東會商議》作出之日起的利息，系對其自身權益的處分，不違反法律法規的禁止性規定，本院予以許可。故張志建應向奧德美公司償還1472萬元，並支付自《股東會商議》作出次日起的利息。”

11.  According to Mr Zhang, the PRC Judgment was sent to the parties’ legal representatives on 16 March 2022. No appeal was made.

12.  Pending the determination of the appeal in the High People’s Court, upon the PRC Company’s application, the High People’s Court made a seizure order and a freezing order (the “PRC Seizure and Freezing Order”) against Mr Zhang’s assets.

13.  On 29 April 2022, Mrs Lou and Mr Lou served on Mr Zhang a notice of termination (the “Notice of Termination”) of the SHA pursuant to Clause 15.5 of the SHA and a notice of transfer of shares pursuant to Clause 15.6 of the SHA (the “Notice of Transfer”) in respect of Mr Zhang’s shares in the Company. As at that point of time, Ms Ma was also a shareholder, but was not a party to the SHA.

14.  No transfer of Mr Zhang’s shares ever took place.

15.  On 7 May 2022, Mr Zhang wrote to the PRC Company to request confirmation of the calculation of the total amount payable (including interest) under the PRC Judgment. There was, however, no reply.

16.  On 25 May 2022, upon the PRC Company’s application, the High People’s Court issued an order of execution (the “PRC Execution Order”). Subsequently, Mr Zhang agreed to repay the RMB Loan by 5 instalments between 26 May 2022 to 27 June 2022 totalling RMB17,139,762.56.

17.  By 27 June 2022, all the instalments had been fully made.

18.  In July 2022, both the PRC Seizure and Freezing Order and the PRC Execution Order were discharged.

III.  THE PLAINTIFF’S CLAIM

19.  Mrs Lou and Mr Lou’s claim is, in summary:-

(1)  Mr Zhang borrowed the PRC Loan;

(2)  Mr Zhang made a partial repayment of RMB1,000,000 towards the PRC Loan on 18 February 2019;

(3)  Mr Zhang ceased to make repayment of the PRC Loan thereafter, despite legal action commenced in the PRC;

(4)  Despite the PRC Judgment, Mr Zhang failed to resume repayment of the PRC Loan within 21 days under Clause 15.5(1); and

(5)  Therefore, Mrs Lou and Mr Lou seek specific performance under Clause 15.5 and transfer of Mr Zhang’s shares under Clause 10.

IV.  MR ZHANG’S DEFENCE

20.  Mr Zhang’s defence is, in summary:-

(1)  Mr Zhang was not indebted to the PRC Company in respect of the PRC Loan;

(2)  Mr Zhang’s payment of RMB1,000,000 on 18 February 2019 was not any partial repayment of the PRC Loan even if the PRC Loan existed;

(3)  Therefore, there was no cessation of repayment of loan under Clause 15.5(1)(a), and the Notice of Termination was thus not valid;

(4)  In any event, the Notice of Termination should have been served by all the other shareholders including those shareholders who were not parties to the SHA (“Non-contractual Shareholders”), or otherwise, the Notice of Termination was not valid;

(5)  In any event, mere cessation of repayment would not be sufficient, and the cessation of repayment must be such that Mr Zhang would be regarded as insolvent; and

(6)  In any event, as protective measure, the PRC Court had frozen Mr Zhang’s assets for the execution of the PRC Judgment, and so there was no question of non-payment.

V.  MR ZHANG’S COUNTERCLAIM

21.  Mr Zhang mounts a counterclaim against Mrs Lou, Mr Lou, Mr Ma and Ms Ma for, among others, an order that the registration of the 20,000 Shares in the name of Ms Ma is null and void in breach of Clauses 2.1, 2.3, 9.1 and 10.1. In particular, Mr Zhang avers that:-

(1)  The transfer of the 20,000 Shares from Mr Lou to Mr Ma on 24 September 2021 (the “24 September Shares Transfer”) was carried out without Mr Zhang’s knowledge and consent in breach of Clauses 2.1, 2.3, 9.1 and 10.1;

(2)  Mr Ma knew that the 24 September Shares Transfer constituted such breach; and

(3)  In the transfer of the 20,000 Shares from Mr Ma to Ms Ma on 28 September 2021 (the “28 September Shares Transfer”):- Ms Ma knew (a) that Mr Ma obtained the 20,000 Shares from the 24 September Shares Transfer; and (b) that the 24 September Shares Transfer constituted breach of the SHA.

22.  Therefore, Mr Zhang claims that the 24 September Shares Transfer and the 28 September Shares Transfer (collectively, the “Share Transfers”) are null and void, and the Register of Members of the Company should be rectified to reflect that. Essentially, the 20,000 Shares should be registered back in the name of Mr Lou.

VI.  DEFENCE TO COUNTERCLAIM

23.  Mrs Lou, Mr Lou, Mr Ma and Ms Ma jointly filed the same Defence to Counterclaim (together with Mrs Lou and Mr Lou’s Reply to Mr Zhang’s Defence). Their Defence to Counterclaim is, in gist:-

(1)  Mr Zhang (as well as Mrs Lou and Mr Lou) all well knew at the time of the execution of the SHA that Mr Lou held the 20,000 Shares on trust for Mr Ma as the beneficial owner under the Declaration of Trust;

(2)  Any share transfer under the Declaration of Trust fell within the exception under Clause 10.1(8) of the SHA and/or was carried out with express and/or implied consent of all the shareholders including Mr Zhang under Clause 9.1 of the SHA, and the 24 September Shares Transfer was such a share transfer; and

(3)  Upon the 24 September Shares Transfer, Mr Ma, not being a party to the SHA, was not bound by the SHA, and was thus entitled to carry out the 28 September Shares Transfer in favour of Ms Ma.

VII.  ISSUES

24.  From the above, the issues in respect of Mrs Lou and Mr Lou’s claim against Mr Zhang are, broadly:-

(1)  Whether Mr Zhang was indebted to the PRC Company in respect of the PRC Loan;

(2)  Whether Mr Zhang’s payment of RMB1,000,000 on 18 February 2019 was a partial repayment of the PRC Loan;

(3)  Whether, as a matter of contractual construction, the Notice of Termination issued pursuant to Clause 15.5 of the SHA should have been served on all shareholders including Non-contractual Shareholders;

(4)  Whether, as a matter of contractual construction, cessation of repayment itself would be sufficient to trigger Clause 15.5; and

(5)  Whether there was any cessation of repayment or failure to make payment in the light of the existence of the PRC Seizure and Freezing Order.

25.  The issues in respect of Mr Zhang’s counterclaim against Mrs Lou and Mr Lou, and Mr Ma and Ms Ma are, broadly:-

(1)  Whether any share transfer under the Declaration of Trust fell within the exception under Clause 10.1(8) of the SHA;

(2)  Whether the 24 September Shares Transfer was a share transfer under the Declaration of Trust;

(3)  Whether the 24 September Shares Transfer from Mr Lou to Mr Ma on 24 September 2021 was carried out without Mr Zhang’s knowledge and consent in breach of Clauses 2.1, 2.3, 9.1 and 10.1, or was carried out with express and/or implied consent of all the shareholders including Mr Zhang under Clause 9.1 of the SHA;

(4)  Whether Mr Ma knew that the 24 September Shares Transfer constituted such breach;

(5)  Whether Ms Ma knew (a) that Mr Ma obtained the 20,000 Shares from the 24 September Shares Transfer, and (b) that the 24 September Shares Transfer constituted breach of the SHA; and

(6)  Whether Ms Ma was a bona fide purchaser for value of the 20,000 Shares.

VIII.  EVIDENCE

26.  For Mrs Lou and Mr Lou as well as Mr Ma and Ms Ma, the witnesses are Mrs Lou, Mr Lou, Mr Wai Wing Fai Desmond (“Desmond Wai”) of Smartlink Business Consultants Ltd., the company secretary of the Company and Ms Ma. Mr Ma filed a witness statement, but just the day before the commencement of the trial, Mrs Lou, Mr Lou, Mr Ma and Ms Ma’s solicitors wrote to the Court that Mr Ma would not attend the trial for cross-examination. No reason was proffered as to his non-attendance. Nor did Mr Vincent Chen, leading Ms Jenny Zhang, counsel for Mr Zhang, ask any of the witnesses for a reason.

27.  For Mr Zhang, he himself and his wife Madam Wang Xiuling (“Mrs Zhang”) are the witnesses.

28.  Although the PRC Judgment is referred to and the effect of the PRC Seizure and Freezing Order are relied upon by Mr Zhang, no expert evidence has ever been sought and filed. I should also say that the PRC Judgment is not relied upon for res judicata or abuse of process, apparently due to a mere plea in §10(3) of Mr Zhang’s defence the by reason of Hollington v F. Hewthorn & Co. Ltd [1943] KB 587, the PRC Judgment is not admissible evidence of the contents thereof. I have serious doubt over whether that case would apply to exclude res judicata or abuse of process in the wider sense when the parties are the same, or when the parties are privies to the same previous parties. Here, the PRC Judgment was between Mr Zhang and the PRC Company, to which Mrs Lou and Mr Lou are arguably privies. In any event, since no res judicata and abuse of process are raised, these are not issues before me.

IX.  WHETHER MR ZHANG WAS INDEBTED TO THE PRC COMPANY IN RESPECT OF THE PRC LOAN

29.  In respect of the issue of whether Mr Zhang was indebted to the PRC Company in respect of the PRC Loan, a substantial part of the evidence in this regard is on how frustrated Mr Zhang felt about how Mrs Lou and Mr Lou treated certain funds initially invested in an investment project in the PRC. He grudged about how Mrs Lou and Mr Lou treated him unfairly (or in his own word, “deceptively” which is not founded on any cogent evidence) so that eventually, the funds or part of the funds were treated as the PRC Loan he owed to the PRC Company.

30.  However, even on Mr Zhang’s own evidence, consistent with the minutes of the PRC Company board meeting on 26 December 2018 (the “2018 PRC Board Minutes”) which he himself signed, he accepted (at §54 of his own Witness Statement filed on 5 July 2023) that he had personal liability to repay the PRC Loan to the PRC Company by 1 June 2019. This acceptance is also consistent with the following contemporaneous documents:-

(1)  The minutes of the Shareholders’ meeting of the PRC Company dated 26 December 2018 was signed by Mrs Lou, Mr Lou, Mr Ma and Mr Zhang himself. As mentioned in §6 above, the minutes recorded a resolution that Mr Zhang would have to bear the PRC Loan personally and to repay it before 1 June 2019.

(2)  In the WeChat group “奧德美董事會溝通群” (which can be translated as the “Communication Group for the PRC Company’s directors”) was set up for the shareholders of the Company to discuss the business of the PRC Company, of which Mr Zhang was a member, on 13 June 2019, Mr Lou sent a message to the group specifically addressing Mr Zhang:-

“張總，關於你個人的借款歸還時間已經超期，現在公司的基礎設施建設嚴重欠款，請回復甚麼時候歸還借款。”

Mr Zhang did not reply to this message, and there is no evidence that Mr Zhang protested against the accuracy of this message.

31.  I therefore find that by 26 December 2018, Mr Zhang was indeed indebted to the PRC Company in respect of the PRC Loan.

32.  On a side note, Mr Chen raised an issue on the payment term of the PRC Loan. He submits that there was no deadline for the repayment of the PRC Loan, and so there was no default of repayment of the PRC Loan. His reasons are that in the 2018 PRC Board Minutes, while Mr Zhang agreed to repay on or before 1 June 2019, the board also resolved that if Mr Zhang failed to repay on or before 1 June 2019, the board would convene a meeting to discuss the matter. He submits, therefore, that there was no deadline, and no default in repayment.

33.  With respect, his such submissions are made to be rejected as completely unmeritorious. First, lack of a deadline for repayment is not pleaded. If Mr Zhang would like to say that the PRC Loan was not due, it is a fact that must be pleaded. Second and in any event, that the board resolved that it would convene a meeting to discuss the matter does not mean that 1 June 2019 was not the deadline. Mr Zhang agreed to pay by that date. If he failed to do so, the board may convene a meeting to discuss how to deal with the default, for example, to commence an action, to extend the deadline, and so on. The objective meaning and purpose of stating the date of 1 June 2019 is plain and obvious – it would be the deadline.

X.  WHETHER MR ZHANG’S PAYMENT OF RMB1,000,000 ON 18 FEBRUARY 2019 WAS A PARTIAL REPAYMENT OF THE PRC LOAN

34.  As found above, by 26 December 2018, Mr Zhang was indebted to the PRC Company in respect of the PRC Loan. About one and a half months later, on 18 February 2019, Mr Zhang made a payment of RMB1,000,000 to the PRC Company. Mr Zhang’s evidence is that this payment was not repayment of the PRC Loan. According to his evidence before me, it was the PRC Company’s finance staff who requested Mr Zhang to advance the RMB1,000,000 as capital to the PRC Company for its operation and business. Apparently, Mr Zhang even suggests (as recorded in the PRC Judgment) that this RMB1,000,000 was a loan he advanced to the PRC Company.

35.  In support, Mr Chen highlights the following evidence for my consideration.

36.  First, in a notice to shareholders (股東告知函) issued by the PRC Company on 22 February 2019 and another on 6 March 2019, it was stated that the PRC Company’s cashflow problem had been alleviated by RMB2,000,000 paid by each of Mrs Lou and Mr Ma described as “提供借款” and the RMB1,000,000 payment by Mr Zhang described as “轉入”. Mr Zhang made no denial and kept silent to this assertion. One would have thought that Mr Zhang would make response if this assertion was not correct. Mr Chen submits that if this RMB1,000,000 payment was meant to be a repayment of the PRC Loan, it would have been described as “還款” or the like. With respect, in my view, such reading is out of context:- 

(1)  In the notice to shareholders issued on 22 February 2019, right after the description of the “提供借款” and “轉入”, it was stated that in respect of the PRC Loan to be repaid by June 2019, the PRC Company had received only RMB1,000,000. In context, it is clear to me that this RMB1,000,000 was the same “轉入”. There is no evidence that Mr Zhang had made two RMB1,000,000 payments.

(2)  In cross-examination, when asked by he did not traverse the suggestion in the said notice that the RMB1,000,000 was payment in respect of the PRC Loan, his answer was that he did not know why.

37.  Second, in the PRC Judgment, it was stated at page 3 that the PRC Company’s case was that the PRC Company “不清楚張志建於2019年2月18日向其汇付的100萬元的性質和用途、也未與張志建確認。因張志建的利害關係人陳文軒將其記載為張志建對案涉款項的還款，法庭應予支持”. Mr Cheng submits that even the PRC Company itself was not sure about the nature of the RMB1,000,000 payment. In my view, such reading of the PRC Judgment is out of context:-

(1)  In the latter part of the PRC Judgment, at page 11, it was mentioned that during the hearing before the High People’s Court, the PRC Company adduced evidence to show that Mr Zhang’s own witness Chen Wenxian (陳文軒) recorded the RMB1,000,000 payment in the PRC Company’s account as repayment of the PRC Loan, and in reliance on this evidence (as well as others), the PRC Company asked the High People’s Court to find, among others, that this RMB1,000,000 payment was indeed a repayment of the PRC Loan.

(2)  Therefore, read in proper context, while the PRC Company had no idea of the nature of the RMB1,000,000 payment, it relied on its own record, prepared by Mr Zhang’s witness, to say that it was a repayment of the PRC Loan. It is clear to me that by the time of the litigation in the PRC, the PRC Company took the stance that it was a repayment, rather than saying that it still had no idea or no case about what this RMB1,000,000 payment was.

38.  Third, while Mr Zhang’s evidence before me is that the RMB1,000,000 was paid to the Company as capital for its business and operation, his evidence in the PRC litigation was, inconsistently, that it was a loan advanced to the Company. There is no written evidence of Mr Zhang’s allegation that the PRC Company requested him to advance money to the PRC Company for its operation and business. While RMB1,000,000 was not a large sum in the overall scheme of things, it was still a significant sum and one would have expected that certain documents should have been prepared when it was intended to be a loan or capital to the PRC Company. Further, even if the PRC Company did request Mr Zhang to advance money (as loan or as capital) to the PRC Company for its operation and business, in my view, in the light of the PRC Loan which Mr Zhang had been indebted since December 2018, Mr Zhang would have voiced out that the payment requested for the PRC Company’s operation and business should be taken as partial repayment of the PRC Loan. That Mr Zhang himself also regarded this payment as repayment is also consistent with his own lack of traversing the allegation in the notice to shareholders issued on 22 February 2019 that it was a repayment and his lack of explanation for such lack of traversing.

39.  Having considered the above evidence and submissions, I find that the RMB1,000,000 payment made by Mr Zhang on 18 February 2019 was a partial repayment of the PRC Loan.

XI.  WHETHER THE NOTICE OF TERMINATION ISSUED PURSUANT TO CLAUSE 15.5 OF THE SHA SHOULD HAVE BEEN SERVED BY ALL THE OTHER SHAREHOLDERS INCLUDING NON-CONTRACTUAL SHAREHOLDERS

40.  For the question of whether the Notice of Termination should have been served by all the other shareholders including Non-contractual Shareholders, it is a question of contractual construction. The legal principles in relation to construction of a commercial contract are well established. The construction is a unitary, iterative, objective exercise to ascertain the parties’ intention with reference to the natural and ordinary meaning of the words in context and bearing in mind the purposes of the provisions and the contract as a whole. The Court should also consider factual matrix know to the contractual parties at the time of contracting, and pay regard to the common and commercial sense especially when the meaning of the provision in question is not clear, but should be cautious against re-writing the contract. In general, pre-contractual negotiation and conduct subsequent to the contract are irrelevant. Further, since it is an objective exercise, what the parties think subjectively are, in general, irrelevant, save and except in mutual mistakes, which is not an issue in the present case.

41.  At the time of the issuance of the Notice of Termination, Ms Ma was the only other shareholder and the only shareholder who was not a party to the SHA. Mr Chen submits that according to Clause 15.5 of the SHA, the Notice of Termination should have been served by all the other shareholders including Non-contractual Shareholders, and because the Notice of Termination was served by Mrs Lou and Mr Lou only, it was invalid. In support of his way of construing Clause 15.5, he submits:-

(1)  In Preamble (C) of the SHA, Mrs Lou, Mr Lou and Mr Zhang were defined as “各位股東”;

(2)  Clause 15.5 requires signature on the notice of termination “其餘所有股東”;

(3)  Clause 10.1(2) requires that after the Company’s receipt of a transfer notice, the Company should “立刻召開股東大會向全體股東宣讀該出售通知書”, and “全體股東” means all shareholders including Non-contractual Shareholders;

(4)  The SHA clearly envisions for there to be other shareholders joining the Company in the future as reflected in Clauses 10.3 and 26.1 of the SHA and the Deed of Guarantee appended to the SHA;

(5)  The sale upon the notice of termination issued under Clause 15 would be a sale open to all shareholders including Non-contractual Shareholders; and

(6)  Therefore, reading Clause 15.5 in proper context, the notice of termination issued thereunder shall be served by all the shareholders including Non-contractual Shareholders.

42.  With respect, I am unable to agree to such submissions, for the following reasons:-

(1)  While Mrs Lou, Mr Lou and Mr Zhang were defined as“各位股東”, it does not follow that “其餘所有股東” includes Non-contractual Shareholders. The word “其餘所有股東” has to be understood with the words “違約股東”. The mechanism provided for in Clause 15.5 is that once there is a “違約股東”, a notice of termination may be served. “違約股東” clearly can only mean any of the“各位股東”, parties to the SHA, because Non-contractual Shareholders cannot breach the SHA. Thus, with the “違約股東” being the target, the words “各位股東” would not be appropriate anymore, and “其餘所有股東” would mean all the other parties to the SHA, rather than only Mrs Lou, or only Mr Lou, or only any other later parties who would sign onto the SHA.

(2)  I also note that under Clause 10, when Non-contractual Shareholders are referred to, the phrase “其他全體股東” is used as distinct from “其他股東”. It is clear that “其他全體股東”, referred to in the context of shareholders meeting convened under Clauses 10(2) and 10(3), means all other shareholders including Non-contractual Shareholders, while “其他股東”, used in the context of sale of a contractual shareholder’s shares under Clause 10(2), refers to contractual shareholders only.

(3)  The articles of association of the Company do not impose any restriction on transfer or sale of the shares in the Company such as that in the SHA. There is no reason why the Non-contractual Shareholders would have to be involved in the Notice of Termination.

(4)  Such understanding is also consistent with the purpose of Clause 15.5. The purpose of Clause 15.5 clearly is that the defaulting shareholder could be asked to leave the Company upon events agreed by all the contractual parties to the SHA as events of default. Such purpose cannot be properly achieved if some other non-contractual parties, who have not contractually agreed to what would constitute events of default, would be required also to join the notice of termination, of if the contractual shareholders would have to procure the Non-contractual Shareholders to do so.

(5)  Further, as the Non-contractual Shareholders are not bound by the SHA, it is likely that Mrs Lou, Mr Lou and Mr Zhang would not have, and did not, intend that for the purpose of Clause 15.5, some non-contractual parties would have to be involved before Clause 15.5 could be invoked.

(6)  Mr Chen submits that Clause 10 related to all other shareholders including Non-contractual Shareholders, and since invocation of Clause 15.5 would lead to the performance of Clause 10 affecting even Non-contractual Shareholders, Non-contractual Shareholders should also sign on the Notice of Termination. In my view, Clause 10 would oblige contractual shareholders to offer to sell the shares to Non-contractual Shareholders does not mean that Non-contractual Shareholders would have somehow be forced to comply with Clause 15, contrary to the doctrine of contractual privity.

(7)  Similarly, Mr Chen also relies on Clause 26.1 stating that all the successors to the contractual parties shall be bound by the SHA, and relying on this, he submits that Ms Ma, being a shareholder succeeding Mr Ma, should also be bound by Clause 15.5. In my view, this Clause is more about imposing an obligation to the current contractual shareholder to procure the succeeding shareholder to sign onto the SHA. If the succeeding shareholder has not signed onto the SHA, I cannot see how Clause 26.1 of the SHA, to which the succeeding shareholder is not a party, could bind the succeeding shareholder.

43.  Having considered the above, not only do I disagree with Mr Chen’s submissions, I find, as a matter of contractual construction, that the Notice of Termination may validly be served by all the other contractual shareholders without Non-contractual Shareholders.

44.  Before I turn to the next issue, I should mention that Mrs Lou and Mr Lou’s alternative case is that before they issued the Notice of Termination, they did notify Mr Ma and Ms Ma. Given my finding above, this alternative case is unnecessary. If necessary, I would find that neither Mr Ma nor Ms Ma was notified of such Notice of Termination, because there is no documentary evidence of such notification and the contradictory evidence between Mrs Lou and Mr Lou: while Mrs Lou said that she and Mr Lou had yum-cha gatherings with Mr Ma from time to time and such notification was made during such gatherings, Mr Lou said that there was no such yum-cha gathering.

XII.  WHETHER CESSATION OF REPAYMENT ITSELF WOULD BE SUFFICIENT TO TRIGGER CLAUSE 15.5

45.  Mr Chen submits that cessation of repayment would trigger Clause 15.5 only if it is related to his bankruptcy or insolvency. In summary, he submits that Clause 15.5(1), Clause 15.5(2) and Clause 15.5(3) are three distinct categories for triggering Clause 15.5, and Clause 15.5(1) is a category about insolvency. Given that cessation of repayment is put under Clause 15.5(1), it must be understood to be related to insolvency. He also submits that the purpose of Clause 15.5 is to prevent paralysing the Company by the defaulting shareholders, and mere cessation of repayment would not have such effect. Bearing in mind that the purpose of the SHA was for the purpose of long-term development of the Company’s business as stated in Clause 3.1, cessation of repayment must be related to insolvency.

46.  It is convenient to quote Clause 15.5 again here:-

“15.5 若任何一位股東（簡稱為“違約股東”）發生下列的情況，而其餘所有股東以書面通知該違約股東後，本協議便會終止：

(1) 若違約股東被發生破產或清盤申請或法律訴訟/命令/決議有關破產或清盤、無力償還債項、重組、解散或委派破產管理處署長或清盤人；或違約股東向其之債權人停止還款或承認無力償還債項或違例股東的生意或資產被執行，若上述的情況發生而沒有在21天內解除。

(2) 若任何政府部門或機構將違約股東的大部份資產接管、扣押或接收。

(3) 若該違約股東違反了本協議內的責任而在收到其他股東要求糾正的通知書後30天內仍沒有將違約事項糾正。”

47.  In my view, it is too general to say that Clause 15.5(1) is in relation to insolvency. It is in my view a category in relation to the defaulting shareholder’s financial position. I take this view for the following reasons:-

(1)  It is a semi-colon with “or” (“；或”) between “違約股東被發生破產或清盤申請或法律訴訟/命令/決議有關破產或清盤、無力償還債項、重組、解散或委派破產管理處署長或清盤人” and “違約股東向其之債權人停止還款或承認無力償還債項或違例股東的生意或資產被執行”. It indicates that these two limbs are distinct and independent, but it is a semi-colon because they both relate to the financial position of the defaulting shareholder.

(2)  Fundamentally, what is meant by Mr Chen’s submissions that the cessation of repayment has to be related to insolvency are unclear. In this regard, in insolvency law, a non-payment, or cessation of repayment, of an undisputed loan itself would not be regarded as insolvency. It is only that a non-compliance with the statutory demand issued under the Bankruptcy Ordinance (Cap. 6) may be regarded as inability to pay debts that justifies presentation of a bankruptcy petition. This “inability to pay” and of course the presentation of a bankruptcy petition would fall within the first limb. If under the second limb, a non-payment, or cessation of repayment, of an undisputed loan itself would have to be related to insolvency, then the only way would be to go through the statutory demand and/or the bankruptcy proceedings. However, this would be matters under the first limb. In other words, if Mr Chen’s submissions are right, the “cessation of repayment” under the second limb would be redundant.

(3)  Mr Chen, in his oral closing submissions, gives me an example where the mere cessation of repayment would amount to insolvency. He suggests a situation where the debtor ceases to make repayment and the debt is not secured or not sufficiently secured. He submits that cessation of repayment in such circumstances would amount to insolvency that could trigger Clause 15.5(1). He suggests that on the contrary, where the debt is sufficiently secured, Clause 15.5(1) does not apply. However, Mr Chen’s such construction would, in my view, stretch the natural and ordinary meaning of “違約股東向其之債權人停止還款” too much, or add too much substance to this phrase. This is unwarranted, especially when the first part of Clause 15.5(1) would already cover the insolvency situation.  

(4)  Further, in the second limb, “違例股東的生意或資產被執行” clearly is not necessarily related to insolvency.

(5)  What would paralyse the Company’s business and/or facilitate the long-term development of the Company’s business was a matter for the contractual parties to define and agree on upon their commercial judgment. I find that it is within the reasonable range for any reasonable commercial persons to agree that a mere cessation of repayment could paralyse the Company’s business and asking such a defaulting shareholder to sell his shares would not be contrary to the long-term development of the Company’s business.

(6)  In any event, the wording is not so vague that I have to resort to whether certain ways of construction of the contract would yield to any unreasonable or absurd result.

48.  Thus viewed, Clause 15.5(1) is not a category related only to insolvency, but more broadly to the defaulting shareholder’s financial position. In the premises, I find that a mere cessation of repayment of a loan would fall within Clause 15.5(1) and could be relied upon to invoke Clause 15.5. In any event, in the light of my finding about the lack of security of the PRC Loan below under Part XIII, even on Mr Chen’s construction, Clause 15.5(1) could still be triggered.

49.  For the sake of completeness, I should mention that Mr Ryan Law, counsel for Mrs Lou, Mr Lou, Mr Ma and Ms Ma, submits that the original Chinese words “停止” simply means “withholding”, not necessarily implying any cessation or stop of some previous action. His reasoning is that “停止” means “cease” or “stop”, and then he refers to the English dictionary for the meaning of “cease” and “stop”. With respect, I should look at the Chinese Dictionary for the meaning “停止”, which, according to 商務印書館(香港)有限公司 – 現代漢語詞典(修訂版), means “不再進行”. This clearly implies some previous action.

XIII.  WHETHER THERE WAS ANY CESSATION OF REPAYMENT OR FAILURE TO MAKE PAYMENT IN THE LIGHT OF THE EXISTENCE OF THE PRC SEIZURE AND FREEZING ORDER

50.  Mr Zhang made a partial repayment of the PRC Loan on 18 February 2019, and did not make any further repayment after that. So much so that the PRC Company had to commence litigation in the PRC for the repayment of the PRC Loan. Mr Zhang’s evidence that he received the PRC Judgment only on 16 March 2022 is not traversed by any positive evidence, and I find no reason not to accept it. But even accepting it, and upon the parties common ground that the PRC Judgment became effective only upon Mr Zhang’s receipt on 16 March 2022, Mr Zhang still did not make any further payment on 26 March 2022 (the date of expiry of 10 days for payment as ordered by the PRC Judgment) or thereafter until the first instalment made on 26 May 2022.

51.  One would have thought that between 18 February 2019 and 26 March 2022, viewed in any sense, there was the cessation of repayment and put to the highest for Mr Zhang, the cessation took place on 26 March 2022. However, Mr Chen submits that there was no cessation of repayment. He relies on the PRC Seizure and Freezing Order to say that given that the repayment by Mr Zhang was secured by these seized and frozen assets, this should be regarded as repayment or regarded as no default of repayment. With respect, I disagree, for the following reasons:-

(1)  What is pleaded is at §12(3) of the Defence and Counterclaim that these were “protective measures” and so there was no question of Mr Zhang being bankrupt or unable to pay his debts. However, there is no expert evidence on the effect of such protective measures provided by a seizure and freezing order on the effect of a PRC judgment. Assuming that the relevant law is the same as Hong Kong law (applying the presumption that in the absence of expert evidence, foreign law is the same as Hong Kong law), a preservation order or a Mareva injunction is not regarded as any satisfaction of a judgment debt and/or absence of non-compliance with a monetary judgment. Execution of the judgment like garnishee orders, charging orders or application for release of assets under the preservation order would still be needed, if the judgment debtor refuses to make the payment on his own.

(2)  Therefore, insofar as Mr Chen would like to rely on this together with argument (which I have rejected in any event) that Clause 15.5(1) would only apply to cessation of repayment of a debt not sufficiently secured, such reliance would be futile and in any event, should not be permitted as the value of the security (if it were security) has not been put in issue by pleadings. What is pleaded at §12(3) is only that these are protective measures, and there was no question of Mr Zhang being bankrupt or unable to pay. The value of such security (if it were security) is not pleaded at all. It is unfair for Mr Chen to say that there is no dispute on the value. Given that this is not an issue pleaded at all, there is no need to dispute this.

(3)  In any event, the PRC Seizure and Freezing Order was made before the PRC Judgment. I cannot see how such a prior order would be regarded as payment or absence of default of a debt subsequently found by the PRC Judgment.

52.  Mr Chen also submits that before the PRC Judgment became effective, Mr Zhang did not make any payment under the PRC Judgment. However, such submissions ignore what led to the PRC Judgment, namely, the PRC Loan, a partial payment thereafter and then cessation of any further payment, necessitating the litigation in the PRC Courts.

53.  In the premises, I find that there was the cessation of repayment under Clause 15.5(1) and put to the highest for Mr Zhang, the cessation took place on 26 March 2022.

54.  The 21-day period for remedying a breach under Clause 15.5(1) expired on 16 April 2022, and therefore, the Notice of Termination, issued on 29 April 2022, was issued after the expiry of the 21-day period.

XIV.  CONCLUSION ON MRS LOU AND MR LOU’S CLAIM

55.  In the circumstances, by the time of the issuance of the Notice of Termination, there was a cessation of repayment by Mr Zhang as defined under the second limb of Clause 15.5(1). Given that the Notice of Termination would only have to be served by all the other contractual shareholders, that is, Mrs Lou and Mr Lou only, the Notice of Termination was validly served. As a result, Mr Zhang should offer to sell his shares in accordance with Clause 10 of the SHA as obligated by Clause 15.6 of the SHA.

56.  Mr Chen submits that the relief sought in the prayer of the Statement of Claim is simply a transfer under Clause 10 within 28 days, and such relief is vague and not something required under Clause 10, because under Clause 10, the transfer of the shares has to be a sale and there is no such time limit as the 28 days sought. He may be right when reading the relief literally. However, it is clear that the relief is a specific performance of Clause 15.5 and Clause 10. So long as the gist of the relief being sought is clear, it is always for the Court ultimately to polish and refine the exact terms of the relief. I do not see any ground to refuse the relief in toto simply because the prayer is drafted as it is in the Statement of Claim.

57.  Therefore, I make an order of specific performance that Mr Zhang shall forthwith sell his shares to Mrs Lou and Mr Lou as “其他股東” in accordance with Clause 10.

XV.  WHETHER ANY SHARE TRANSFER UNDER THE DECLARATION OF TRUST FELL WITHIN THE EXCEPTION UNDER CLAUSE 10.1(8) OF THE SHA

58.  Clause 10.1(8) provides that:-

“… 上述條款亦不適用於在此協議生效前生效的關於該公司股份的信託。”

59.  The meaning of this clause is clear enough – the restrictions on transfer of shares under Clause 10 does not apply to transfer of shares under any declaration of trust made before the SHA became effective.

60.  Both the Declaration of Trust and the SHA were stated to be signed on 7 August 2017. There is no dispute that they were indeed signed on the same day. Mrs Lou and Mr Lou’s evidence is that on 7 August 2017, they, Mr Ma, Mr Zhang and some others attended a meeting in the office of the PRC Company for signing of the two documents. Mrs Lou and Mr Lou’s evidence is that both the Declaration of Trust and the SHA were signed in the presence of Mr Ma and Mr Zhang, and that the Declaration of Trust was signed before the SHA was signed. Mr Zhang’s evidence is that only the SHA was signed in his presence as well as Mrs Lou, Mr Lou and Mr Ma’s presence, and no other documents were signed in his presence.

61.  Clause 10(8), in my view, was added because of the parties’ awareness or expectation of existence of some trust arrangement; otherwise, there would be no point in having this clause. There is no evidence or suggestion that there was any other trust arrangement. At least for Mr Lou, he knew that the Declaration of Trust was the only trust arrangement referred to in Clause 10(8), and for the exception provided in Clause 10(8) to be effective, Mr Lou, and thus Mr Ma being the beneficial owner, would have known that the Declaration of Trust had to be effective prior to the SHA becoming effective.  Therefore, in my view, it is more likely than not, and thus I find, that the Declaration of Trust was signed before the SHA was signed.

62.  In my view, there is no requirement that the trust referred to under Clause 10(8) is a trust known to all the parties to the SHA. If there would be a requirement, it could have been easily set out. In any event, both the Declaration of Trust and the SHA were signed on the same day. While Mr Zhang alleges in his evidence he had no idea of the Declaration of Trust, he did know that Mr Lou would hold the shares on behalf (代持) of Mr Ma. Putting aside the legal terminology of “trust”, clearly he knew that Mr Ma would be the true owner. Therefore, there was nothing to hide from Mr Zhang of any trust arrangement between Mr Lou and Mr Ma. In any event, there was no requirement that the trust arrangement under Clause 10(8) had to be in writing. Given that the two documents were signed on the same day, and that Mr Ma was also present in the meeting for signing the two documents, it is more likely than not, and thus I find, that the Declaration of Trust was signed also in Mr Zhang’s presence and therefore Mr Zhang knew of the Declaration of Trust.

63.  In the circumstances, I find that transfer under the Declaration of Trust would fall within the exception under Clause 10(8) of the SHA.

64.  The question is, was the 24 September Shares Transfer a transfer under the Declaration of Trust?

XVI.  WHETHER THE 24 SEPTEMBER SHARES TRANSFER WAS A TRANSFER UNDER THE DECLARATION OF TRUST

65.  For this question, I should mention that in Mr Zhang’s witness statements, it was raised that the 20,000 Shares in the Shares Transfers were not made under the Declaration of Trust in any event, because according to Mr Zhang’s evidence, in or around May 2019, Mr Ma sold or transferred all his beneficial interest in the 20,000 Shares to Mr Lou. As a result, the beneficial interest merged with Mr Lou’s legal interest in the 20,000 Shares, and Mr Lou became the absolute owner of the 20,000 Shares, and the Declaration of Trust terminated. There was no application for leave to file a Reply to Defence to Counterclaim, and thus this issue has not been pleaded. The agreed list of issues filed by the parties is, with respect, too broad to have any value of assistance. For example, in respect of the Notice of Termination, the agreed issue is only “Whether the Notice of Termination and the Notice of Transfer served by Ps on D are valid and sufficient in accordance with the SHA”. Nothing was mentioned about the parties’ dispute on which shareholders to serve, about the parties’ dispute over whether there was the PRC Loan in the first place, or about the parties’ dispute over whether the RMB1,000,000 was a repayment of the PRC Loan.

66.  At the outset of the trial, I raised a query whether this issue of Mr Ma’s transfer of his interest in the 20,000 Shares to Mr Lou should have been pleaded before Mr Zhang could properly rely on it. In response, Mr Chen submitted that it was Mrs Lou, Mr Lou, Mr Ma and Ms Ma’s case that the 24 September Shares Transfer was carried out under the Declaration of Trust, and thus it was their burden to prove that. Mr Chen effectively submitted that he only raised the evidence to say that their case could not be established. Mr Law did not submit otherwise. He did not hop onto the query I raised, and in fact, during the whole trial, he also engaged in asking questions on whether before the 24 September Shares Transfer, Mr Ma had transferred his beneficial interest in the 20,000 Shares to Mr Lou. Further, his closing submissions take no issue on the pleading issue and engaged in submission on this point.

67.  I also note that in the first round of witness statements, Mr Zhang did raise this point at §83 of his Witness Statement filed on 5 July 2023 that the transfer of the interest from Mr Ma to Mr Lou in 2019 extinguished the Declaration of Trust.  Mrs Lou, Mr Lou, Mr Ma and Ms Ma had sufficient opportunity to respond, and in fact, Mrs Lou did file a supplemental witness statement on 12 December 2023 in reply to Mr Zhang’s Witness Statement, though she was silent on this point. Therefore, in my view, in considering this question, I should also consider Mr Zhang’s case that Mr Ma transferred his beneficial interest in the 20,000 Shares in May 2019 to Mr Lou such that the Declaration of Trust terminated.

68.  There are two preliminary points I need to make.

69.  First, I make it clear that the case of Mrs Lou, Mr Lou, Mr Ma and Ms Ma is that there was no transfer of Mr Ma’s beneficial interest in the 20,000 Shares to Mr Lou at all. Their case is not that there was the transfer, but the transfer was not intended to destroy the trust under the Declaration of Trust by the operation of the doctrine of merger. I make this clear because I can see that there might be argument that a transfer of the beneficial interest to the legal owner would not necessarily mean that the two interests are merged if the parties’ intention is that there would be a sub-sub-trust. If Mr Zhang proves his allegation that Mr Ma did transfer his beneficial interest in the 20,000 Shares to Mr Lou in May 2019, then it would be for Mrs Lou, Mr Lou, Mr Ma and Ms Ma to raise such an argument. Since such an argument is not raised, then if Mr Zhang proves his allegation, there would be merger of the legal and beneficial interest in the 20,000 Shares thereby terminating the Declaration of Trust.

70.  Second, as mentioned above, Mr Ma prepared a witness statement, but only one day before the trial was to commence, the solicitors acting for Mrs Lou, Mr Lou, Mr Ma and Ms Ma indicated that Mr Ma would not be tendered for oral evidence. No explanation was given. When Mrs Lou, Mr Lou, Ms Ma and Desmond Wai were giving evidence, Mr Chen, for Mr Zhang, did not cross-examine any of them as to why Mr Ma did not come to give oral evidence. Without any cross-examination on the reason, it would not be fair for me to draw adverse inference: see Perpetual Wealth (Hong Kong) Limited v Be Solutions Company Limited and Others [2023] HKCFI 2505 at para 37(b) per Keith Yeung J. I do not agree with Mr Chen that I would still be able to draw adverse inference as a matter of common sense. It is, in my view, a matter of fairness: when absence of a proper explanation is, by common sense, a requirement before any adverse inference could be drawn, as a matter of fairness, the relevant parties should be afforded a chance to explain, or at least be put with a statement like “there is no good reason that Mr Ma cannot come”. Of course, if there is no witness who can be asked of such question, that is another matter. Here, there is evidence that Mr Lou and Mr Ma are acquaintances, if not friends anymore, for a long time, and more importantly, Mr Ma’s daughter, Ms Ma, attended the Court for cross-examination. In my view, in such circumstances, the best Mr Chen can put for Mr Zhang is that Mr Ma himself did not give evidence for his own defence to the counterclaim, although this does not carry Mr Zhang’s counterclaim too far.

71.  I now start my analysis. I start with the undisputed evidence, which I accept as facts, that prior to May 2019, there had already been discussions between Mrs Lou, Mr Lou, Mr Zhang and Mr Ma where Mr Ma’s interest in the 20,000 Shares would be transferred to Mrs Lou and Mr Lou and Mr Zhang’s shares would be transferred to Mrs Lou and Mr Lou. In such discussions, one would appreciate that the price must be an important subject matter for discussions.

72.  Then the evidence about the indebtedness between Mrs Lou and Mr Lou on the one hand and Mr Ma on the other. Prior to May 2019, there had been lending and borrowing between Mrs Lou and Mr Lou on the one hand and Mr Ma on the other. From Mrs Lou and Mr Lou’s evidence, sometimes they were indebted to Mr Ma and sometimes, Mr Ma was indebted to them. Mrs Lou’s evidence is unclear whether in May 2019, it was Mr Ma being indebted to Mrs Lou and Mr Lou or the other way round. Mr Ma’s evidence is clearer: around mid-2019, Mr Ma was indebted to Mrs Lou and Mr Lou in the magnitude of tens of millions HKD or RMB, although he does not remember the exact figures. In the light of the vagueness of Mrs Lou’s evidence contrasted with the clearer evidence of Mr Ma in this aspect, I accept Mr Ma’s evidence and find that mid-2019, Mr Ma was indebted to Mrs Lou and Mr Lou in the magnitude of tens of millions HKD or RMB.

73.  The total sum of the above evidence is that there had been discussions on buying out by Mrs Lou and Mr Lou from Mr Ma’s interest in the 20,000 Shares and Mr Ma was indebted to Mrs Lou and Mr Lou in around mid-2019 in the magnitude of tens of millions HKD or RMB.

74.  Then, documentary evidence. Before me, there is no documentary evidence of any sale or transfer of Mr Ma’s interest in the 20,000 Shares to Mr Lou. No text messages, no paper trail of transfer of money, no written agreement of any sort. However, I note that while there is no documentary evidence of any discussion of buy-out or selling-out Mr Zhang’s and/or Mr Ma’s shares, as I mentioned and found above, it is not in dispute that there had been such discussions.

75.  Circumstantial documentary evidence may shed light on whether Mr Ma’s interest in the 20,000 Shares had been transferred to Mr Lou by June 2019.

76.  First, of the the WeChat group “奧德美董事會溝通群” (the Communication Group for the PRC Company’s directors mentioned in §29(2) above), copies of the messages of this group from June 2019 until August 2019 were produced.  While the name of the chatgroup referred to “directors” rather than “shareholders”, Mr Lou would address other members including Mr Ma as “shareholders” in both June and July 2019. Mr Ma remained a member of this chatgroup, when Mr Lou and Mr Zhang were still messaging on the PRC Company’s business. On the other hand, on 26 June 2019, another WeChat chatgroup was set up, as stated in §78 of Mr Zhang’s Witness Statement not under challenge. The name of the chatgroup was “奧德美董事會工作群” (translated as the “Working Group for the PRC Company’s directors”). The members were Mrs Lou, Mr Lou, Mr Zhang and a staff member. Mr Ma was not a member.

77.  In cross-examination, Mrs Lou’s explanation is that the new WeChat group was set up for discussing matters not concerning Mr Ma.  She also explained that by June 2019, Mr Ma felt not happy about the business, and wanted to avoid any conflict between Mrs Lou and Mr Lou on the one hand and Mr Zhang on the other, and so Mr Ma became inactive.  Mrs Lou also mentioned that Mr Ma had had heart surgery and thus due to his health issue, he would like to quit the Company. Ms Ma also confirms in her evidence that Mr Ma did have a heart surgery in around 2018-2019. I do accept that Mr Ma did intend to be less active in the Company and the PRC Company given his health condition. In my view, as he would like to be less active, Mr Ma would be more willing to sell out his interest in the 20,000 Shares rather than still holding the same but get less involved in the business. All the more when he was indebted to Mrs Lou and Mr Lou substantially, as I found above. All the more when he had other family businesses at the same time, as Ms Ma’s evidence confirms. However, in my view, this is not conclusive. There are always investors who would like to be passive investors looking for return on his investments rather than active involvement in the business.

78.  Mrs Lou further explained that Mr Ma was not involved in certain work groups for certain projects, but was still involved in some others. In particular, the WeChat conversation from June 2019 to December 2022 between a staff member of the PRC Company and Mr Ma was produced. In the conversation, Mr Ma was actively involved in certain projects. It appears that if Mr Ma had transferred all his interest in the 20,000 Shares to Mr Lou, he would have no interest and reason at all to remain involved in any aspect of the operation of the PRC Company.

79.  Second, the accountant of the PRC Company emailed “股東報表” (reports to shareholders) to Mrs Lou, Mr Lou, Mr Zhang and Mr Ma (or their respective representatives) regularly from July 2018 to May 2019 inclusive. However, in June 2019, reports to shareholders were not sent to Mr Ma or his representative. From the evidence, the next available email is an email sent on 28 September 2021 attached therewith a report to shareholders for August 2021, addressing Mrs Lou and Mr Zhang only. The next email available in the evidence is an email sent on 28 October 2021 including Ms Ma. This tends to show that Mr Ma was no longer a shareholder of the Company since June 2019.

80.  Third, the minutes of the board meeting of the Company and the PRC Company of 25 November 2020 recorded Mrs Lou and Mr Lou as attendant shareholders and Mr Zhang as absent shareholder. Mr Ma, though absent, was not recorded as any absent shareholder. In fact, his name was not mentioned at all. However, all the board minutes in the past did not specifically name which shareholders attended and which did not. Rather, the minutes in the past were just signed by the shareholders including Mr Ma. Mr Chen draws my attention also to the minutes of a meeting on 28 October 2021, but by that time, Ms Ma was already a shareholder and Mr Ma had no interest, whether beneficial or legal, in the shares. So, that minutes is of little probative value. All in all, the minutes of the board meeting of the Company and the PRC Company of 25 November 2020, though relevant, is not significant in itself.

81.  Fourth, the video recording of the shareholder meeting of the PRC Company on 25 December 2020 was produced. Mrs Lou, Mr Lou and Mrs Zhang and Mr Zhang attended that meeting. The video shows Mrs Lou’s face and Mr Lou’s face, and Mrs Zhang’s back. The gist of that meeting was some quarrel between Mrs Lou and Mr Lou on the one hand and Mrs Zhang apparently on how to run the business. During the meeting, there was the following conversation in Putonghua:-

“…

Mrs Lou: 我們都不想做了。

Mr Lou: 錢錢錢錢呀。馬老闆要我來頂他的股份。

Mrs Zhang: 你現在貸款我們花了4百多萬…

Mr Lou: 我跟妳講，張太，妳，妳這樣說話真的一點、一點道理都沒有。我一分錢都沒有拿過公司的。

…

Mr Lou: 我跟妳講，我不用跟妳說怎麼樣。如果是這樣子大分界，我找回馬老闆回來，拿回他的股份。我不跟你們玩，這麼的鼓譟…

…

Mr Lou: … 我沒有糧出呀。我都是為公司的啊。

Mr Lou: 算了。那，這樣子我就找回馬老闆回來啦。如果風險這麼大，我就把他的股份讓回給他。我們三個人怎麼拼，沒問題。我們大家一起…”

82.  What Mr Lou said about asking Mr Ma to come back to get back his shares, in my view, is neutral. This could be taken to mean that Mr Ma’s beneficial interest in the 20,000 Shares had prior to this meeting been transferred to Mr Lou. This could also be taken to mean simply that Mr Lou would like to have Mr Ma to get back the legal title to the 20,000 Shares. Either meaning would be consistent with the context of the conversation, namely, Mr Lou would not like to take the risk associated in the 20,000 Shares. As an absolute shareholder, Mr Lou would have to take the risk. As a trustee of the 20,000 Shares, he would also have to take the risk given that he was a registered shareholder on paper.

83.  Fourth, on 4 January 2021, Mr Zhang issued a letter to Mrs Lou and Mr Lou titled “盡快商議股東分家事宜之通知書” (a notification letter for discussing shareholders break-apart as soon as possible). In the letter, Mr Zhang set out various disputes on the business of the PRC Company. In response, Mrs Lou and Mr Lou issued a letter dated 2 March 2021. In this letter, Mrs Lou and Mr Lou, when writing about the arrangement of certain works in the past, referred to Mr Ma as “original shareholder” (原股東) at page 4 of the letter. At page 5 of the letter, in explaining that he had made a lot of efforts in the business of the PRC Company, Mr Lou wrote:-

“…但在2019年4月或五月份左右，由於馬建軍先生 [Mr Ma] 個人原因意向退出，將原持有股份轉給勞劍寧先生 [Mr Lou]，而在這段時間，張先生 [Mr Zhang] 也因個人原因…未到公司上班處理事務… 在此情形下勞先生為了公司持續發展…積極推動工程項目開展及完善項目後續事項…” (emphasis added)

84.  The emphasised part, at first glance, means that Mr Ma had already quit and transferred the shares to Mr Lou. In cross-examination, Mrs Lou and Mr Lou explained that what was written here was Mr Ma’s intention (意向) to quit and his intention to transfer the shares to Mr Lou, but the intention was not realised. In my view, either (1) Mr Ma’s intention to quit and his intention to transfer the shares to Mr Lou or (2) Mr Ma’s intention to quit and having already transferred the shares to Mr Lou can explain Mr Ma’s less involvement in context. Further, in my view, Mrs Lou’s explanation is consistent with the emphasised part, so is Mr Chen’s understanding that there was an intention to quit and therefore, there was the transfer of the shares to Mr Lou. That said, one must remember that Mrs Lou and Mr Lou described Mr Ma as the “original shareholder” (原股東). By the natural and ordinary meaning and usage of the word “original” (原), it tends to suggest more that Mr Ma was no longer a shareholder. Neither Mrs Lou nor Mr Lou gave any explanation directly on why the word “original” (原) was used. Their explanation was focused on “intention” only, and that there was discussion of a possible sale of Mr Ma’s interest in the 20,000 Shares to Mr Lou.

85.  Fifth, in response to Mrs Lou and Mr Lou’s letter, Mr Zhang sent a letter dated 9 March 2021. In that letter, Mr Zhang asked whether Mr Ma was still a shareholder of the PRC Company and whether he had completely quit the PRC Company. There has never been a reply. Such documentary evidence is at best neutral in my view.

86.  Sixth, Mrs Lou and Mr Lou refer to various documents which suggest that Mr Ma was still a shareholder as at March 2019. This, however, is consistent with Mr Zhang’s case that Mr Ma transferred his interest in the 20,000 Shares to Mr Lou in June 2019.

87.  In conclusion on the documentary evidence, most of it is neutral, but the lack of emailed reports to shareholders to Mr Ma from July 2019 and the use of the word “original” (原) to describe the shareholding status of Mr Ma in Mrs Lou and Mr Lous’ letter dated 2 March 2021 do tend to show that Mr Ma was no longer a shareholder since July 2019.

88.  Then comes the oral evidence of Mrs Lou and Mr Lou, and Mrs Zhang and Mr Zhang:-

(1)  Mrs Zhang nd Mr Zhang’s evidence is that in May 2019, Mrs Lou, Mr Lou, Mr Zhang and Mr Ma met together to discuss the former two to buy out the latter two’s shares. At the meeting, according to Mr Zhang, Mr Ma agreed to sell out at RMB95,000,000 while Mr Zhang insisted on RMB100,000,000, and Mrs Lou and Mr Lou accepted Mr Ma’s price, and asked Mr Zhang if he would also be willing to sell at RMB95,000,000. Mr Zhang refused, and he left, and did not know what happened after that. However, in my view, his evidence on this meeting falls short of any evidence of agreement between Mrs Lou and Mr Lou and Mr Ma.

(2)  Mrs Zhang and Mr Zhang’s evidence is also that on 10 June 2019 at 2pm, Mrs Lou, Mr Lou, Mr Zhang and Mr Ma met together. The convening of the meeting was evidenced by the WeChat message sent on 7 June 2019 in the Communication Group for the PRC Company’s directors. However, I pause to note that the agenda set out in the message were (a) to report the operation of the company; (b) to confirm how to increase investment in the second phase of production and how to invest and use capital; and (c) to discuss the company’s current progress and need for capital. Nothing was mentioned about any transfer of shares, let alone Mr Ma’s interest in the 20,000 Shares. That said, according to Mrs Zhang and Mr Zhang, at the beginning of the meeting, the PRC lawyer Madam Li gave a piece of paper for Mr Zhang alleging that the paper was related to Mr Ma’s sale of his shares to Mr Lou. Madam Li asked Mr Zhang to sign on it for witnessing, and Mr Zhang did so. When Mr Zhang requested for a copy, his request was refused, and Mr Ma said “我走了，你們自己搞定” (After I leave, you guys would solve the matter) and left the meeting. After that, Mrs Lou, Mr Lou, Mrs Zhang and Mr Zhang discussed raising capital, and there was heated debate. At one point, Mrs Lou slammed on the table, followed by Mrs Zhang’ slam on the table. Mrs Zhang and Mr Zhang left the meeting before it was finished.

(3)  Both Mrs Lou and Mr Lou deny the above. First, they deny having a meeting in May 2019 as alleged or at all. They both admit, as mentioned above, that there had been discussion on buying out and selling out, but they say that the discussions did not come to fruition. Second, they deny that at the meeting on 10 June 2019, Mr Zhang was given any paper or document related to the sale of Mr Ma’s shares. According to them, there had never been any sale or transfer of the shares to Mr Lou from Mr Ma. They stress that any meeting would be minuted, and there was no such documentary evidence or the like of this piece of paper as alleged by Mr Zhang. Mrs Lou stresses that it was impossible that they would be willing to purchaser Mr Ma’s interest in the 20,000 Shares for RMB95,000,000 or even RMB100,000,000, because, according to her, the business at that time was not promising and the PRC Company had been encountering difficulty in its business in the PRC. While there is no financial statement produced to that effect, the various board minutes do show that the PRC Company had been encountering difficulty in its business in the PRC.

89.  In terms of the witnesses’ general credibility, I bear in mind that I have not accepted Mrs Zhang and Mr Zhang’s evidence in relation to whether the RMB1,000,000 payment was a repayment of the PRC Loan. For Mrs Lou and Mr Lou’s, their failure to explain the lack of reports to shareholders emailed to Mr Ma from June 2019 onwards also has a negative impact on their general credibility. I also remind myself not to attach too much weight to the demeanour of the witnesses. Overall, the oral evidence here does not swing the picture either way.

90.  Having considered all the above (the undisputed evidence, the documentary evidence and the oral evidence), in particular, (1) the documentary evidence is more suggestive of a transfer of Mr Ma’s interest in the 20,000 Shares to Mr Lou in June 2019 and (2) the discussions on buying out by Mrs Lou and Mr Lou from Mr Ma’s interest in the 20,000 Shares and Mr Ma’s indebtedness to Mrs Lou and Mr Lou in around mid-2019 in the magnitude of tens of millions HKD or RMB being a reason for selling out to reduce the debt, I am satisfied on balance that Mr Ma did transfer his interest in the 20,000 Shares to Mr Lou in around June 2019.

91.  As a result of this transfer, the beneficial interest in the 20,000 Shares merged with Mr Lou’s legal title to the 20,000 Shares, and the trust under the Declaration of Trust extinguished. It follows that the 24 September Shares Transfer was not a transfer under the Declaration of Trust.

XVII.  WHETHER THE 24 SEPTEMBER SHARES TRANSFER WAS EXPRESSLY OR IMPLIEDLY CONSENTED TO BY ALL SHAREHOLDERS

92.  From §17 of the Defence to Counterclaim, the consent, whether express or implied, to the 24 September Shares Transfer was based on the premise that it was carried out under the Declaration of Trust, which Mr Zhang knew of. Given my finding above that the 24 September Shares Transfer was not under the Declaration of Trust, there was no such consent as pleaded.

93.  For completeness sake, although it has not been pleaded, insofar as there is any suggestion (as apparently now) that Mr Zhang consented, expressly or impliedly, to the 24 September Shares Transfer under Clause 9.1, this must be read together with Clause 10.1(8) which specifically required written consent from all the contractual shareholders for the transfer. The requirement for the consent to be in writing had to be strictly complied with, or else, no consent would be effective: see MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2019] AC 119 at §§10-16 holding effectively that the Court would enforce contractually agreed mode of variation to vary a contract and any other mode would not be effective. I see no difference in respect of the requirement that the consent would have to be in writing. In the present case, there was no such written consent. Therefore, whether Mr Zhang knew of the transfer or not, there was no required consent.

XVIII.  WHETHER MR MA KNEW THAT THE 24 SEPTEMBER SHARES TRANSFER CONSTITUTED BREACH OF SHA

94.  Mr Ma, as the previous beneficial owner of the 20,000 Shares, must have known of the terms of the SHA. In fact, at the meeting on 7 August 2017 as mentioned above, when both the Declaration of Trust and the SHA were explained to the attendants of the meeting, Mr Ma was among them. In the circumstances, Mr Ma knew that the 24 September Shares Transfer constituted breach of Clauses 2.1, 2.3, 9.1 and 10.1 of the SHA.

XIX.  WHETHER MS MA KNEW (A) THAT MR MA OBTAINED THE 20,000 SHARES FROM THE 24 SEPTEMBER SHARE TRANSFER, AND (B) THAT THE 24 SEPTEMBER SHARE TRANSFER CONSTITUTED BREACH OF THE SHA

95.  The plea in relation to Ms Ma’s knowledge of the breach of the SHA by the 24 September Shares Transfer is her relationship with her father Mr Ma (see §24(vi) of the Defence and Counterclaim). No evidence of her knowledge is adduced. In cross-examination, Ms Ma’s answer that she did not know that Mr Lou was holding shares on trust for Mr Ma was not challenged. The overall impression I have obtained from her evidence is that she did what Mr Ma asked her to do without query.

96.  In the circumstances, I am not satisfied that she had the knowledge.

XX.  WHETHER MS MA WAS A BONA FIDE PURCHASER FOR VALUE OF THE 20,000 SHARES

97.  In her evidence, Ms Ma said that she paid no consideration for the 28 September Shares Transfer. The 20,000 Shares were transferred to her for free. It is not clear whether the 20,000 Shares were gifted to her, or transferred to her for trust holding. No pleading on this has been made. Therefore, I refrain from making any finding on this.

98.  However, what is not in dispute is that the 28 September Shares Transfer was not for value.

XXI.  CONCLUSION ON THE COUNTERCLAIM

99.  In conclusion, on the counterclaim, the 24 September Shares Transfer was not carried out under the Declaration of Trust and was in breach of the SHA. Mr Zhang therefore has a right to enforce the SHA by requiring the 20,000 Shares to be transferred back to Mr Lou, subject to the Court’s discretion taking into account whether it would be inequitable to do so: see Pilot International Investment Limited v Ingredients Plus Holdings (Pte) Limited and Others, HCMP 2454/2015, 10 March 2016 at §§24-29 per DHCJ Le Pichon. Given that Ms Ma was not a purchaser of the 20,000 Shares, it would not be inequitable for the Court to order the return of the 20,000 Shares from Ms Ma back to Mr Lou.

XXII.  DISPOSITION

100.  For the above reasons, on Mrs Lou and Mr Lou’s claim, I make the following order:-

(1)  Mr Zhang do sell his shares in the Company to Mrs Lou and Mr Lou in accordance with Clause 10 of the SHA; and

(2)  There shall be a costs order nisi that Mr Zhang shall pay Mrs Lou and Mr Lou the costs of the claim, to be taxed if not agreed.

101.  For completeness, I refuse to grant the order sought by Mrs Lou and Mr Lou that Mr Zhang shall be removed as a director of the Company pursuant to Clause 10.4 of the SHA. First, there is no evidence showing that upon the sale of his shares, Mr Zhang would insist on being a director; second, it is clear that upon the sale and transfer of the shares, the shareholders would be able to remove Mr Zhang as director; and third, the Company is not a party to the proceedings and therefore, I am not able to make an order against the Company.

102.  On the Counterclaim, I make the following order:-

(1)  There be a declaration that the 24 September Shares Transfer be null and void;

(2)  The 28 September Shares Transfer be set aside;

(3)  Ms Ma shall take any necessary steps (including execution of instruments of transfer) to transfer the 20,000 Shares back to Mr Lou, with liberty to apply; and

(4)  There shall be a costs order nisi that Mrs Lou, Mr Lou, Mr Ma and Ms Ma shall pay Mr Zhang the costs of the counterclaim, to be taxed if not agreed.

103.  For completeness, I refuse to grant the order sought in the Counterclaim for the rectification of the Register of Members of the Company for the reason that the Company is not a party. I have also thought about ordering the parties, being the registered shareholders of the Company, to procure the Company to carry out the rectification.  However, this would be complicated by the fact that Mr Zhang is still a registered shareholder of the Company pending the transfer I have ordered on Mrs Lou and Mr Lou’s claim. If necessary, an application may be made properly for rectification of the Register of Members under the Companies Ordinance.

104.  Lastly, I thank counsel for their assistance.