Chen Mei Lan and Another v. The Registrar of Companies and Others

HCMP 894/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 894 OF 2015

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J U D G M E N T

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Introduction

1.Family members of the Plaintiffs transferred Shares in D2 (“the Company”) to D5 (“Korchina”) allegedly under a Trust for stated purposes.  The transfer was secured by an undated instrument of transfer and undated bought and sold notes executed by Korchina (“the Security Documents”).  The purposes allegedly were not fulfilled.  The Security Documents were utilized to transfer the shares to the 1^st Plaintiff.

2.Korchina denied the existence of the Trust and alleged that the Security Documents were forged.  Meanwhile, Korchina has changed the registered information as to the registered office and directorship of the Company.

3.The Plaintiffs sought orders pursuant to section 42 of the Companies Ordinance, Cap 622 (“the Ordinance”) to rectify or remove the registered information.  To decide the application, the court needs to decide who the true beneficial owners of the Shares are.

4.D1 (“the Companies Registrar”) took a neutral stance.  The Company was joined for the judgment to bind it.  The main protagonists at the trial were the Plaintiffs on one side, D3 (“Wang"), D4 (“Liu”) and Korchina on the other. 

5.There was another person called Gu Zhuoheng 谷卓恒 (“Gu”) who featured prominently in the evidence.  The Plaintiffs claimed that he was the beneficial owner of Korchina.

Undisputed facts

6.The 1^st Plaintiff (“the Mother”) has 2 daughters, Huang Pin Ching (黃品靜) (“HPC”); and Huang Yi Chen (黃怡甄) (“HYC”) (collectively “the Sisters”).  She also has a son, the 2^nd Plaintiff (“the Brother”).  They were from Taiwan. 

7.The Company has a Mainland subsidiary called “新豐縣阿里山味食品有限公司” (“the Subsidiary”).  The Subsidiary used to hold a piece of land and the buildings thereon in Mainland China at 深圳市龍崗區坪山 with Land Parcel No. G11201-1739 and Registration Number 深房地字第6000334782 (“the Land”).

8.The Land is currently the subject of litigation in广东省深圳市龙岗区人民法院案号 (2015) 深龙法民三初字第408号 and (2015) 深龙法立保字第32号 (collectively “the Mainland Proceedings”).

9.As of 18 July 2013, the Sisters were the only shareholders of the Company.  The Brother was the only director.

10.On 5 December 2013, the Sisters transferred all of their 10,000 shares of and in the Company (“the Shares”) to Korchina (“the 2013 Transfer”).  Since then, Wang has been the sole registered shareholder of the Company until the Mother became a shareholder in January 2015 in disputed circumstances. 

11.Since 4 December 2013 Wang has been a registered director and from 19 June 2015, Liu became one of the directors.

The Plaintiffs’ case

12.According to HPC, there was problem over sale of the Land, as part of it was occupied by third parties/triads.  In 2013, she came to know Wang and Gu. As Gu suggested to HPC that it would be more convenient for people based in the Mainland to handle the problem and the sale of the Land, the Trust was therefore created for those purposes.  The 2013 Transfer was effected, but the Shares were to be returned to the Sisters or their nominee upon fulfilment of the purposes or on demand. 

13.The Trust was reflected in a 代持股協議 (“the Declaration of Trust”) dated 5 December 2013.  It was executed by Gu on behalf of Korchina, in the presence of the Sisters and Wang.  Gu claimed to be the beneficial owner of Korchina.

14.At the same time, on the Sisters’ request and as security, Wang executed the Security Documents, which were prepared by Ms Trista Yu of a secretarial company. 

15.HPC had taken a photo of the Declaration of Trust and Security Documents using her mobile phone, after their execution.  The Original Declaration of Trust had been torn up by Gu in 2014 when HPC was having a discussion with him.

16.Wang, Gu and Korchina refused to return the Shares to the Sisters despite demand at the end of 2014.  Realizing the “fraudulent” intent of Gu to take over the Land, the Brother, then as the sole director of the Company, commenced the Mainland Proceedings on 22 January 2015 against the Subsidiary and中國港澳新聞傳媒控股有限公司 (“News Media”) (to whom the shares in the Subsidiary were transferred).  News Media was related to Gu.

17.On 27 January 2015, the Sisters dated the Security Documents and transferred the Shares to the Mother solely. The Companies Registrar has not yet registered the change in shareholder because of this case.

18.A month later, on 27 February 2015, the subject forms (“the 2 Forms”), signed by Wang, were filed at the Companies Registry:

(a)   Form NR1 showing the registered address of the Company to be Unit A, 19/F, Tung Yip Commercial Building, 248 Des Voeux Road Central, Hong Kong;

(b)   Form ND2A showing the director to have been changed from the Brother to Liu.

19.The present case for rectifying the information in the 2 Forms was commenced by originating summons (“the OS”) on 16 April 2015, which was later converted to a writ action. 

The Defendants’ case

20.The Defendants denied the existence of the Trust or that Gu had the authority to execute the Declaration of Trust on behalf of Korchina.  They claimed that the transfer of the Land was to repay a loan of RMB95 million (“the Debt”) owed by the Subsidiary to深圳航美房地產開發有限公司 (“Shenzhen Hang Mei”), a company of which Wang was the legal representative.  In any event, all the shares in the Subsidiary had been validly transferred to News Media on 1 April 2014, at a consideration of US$500,000.

21.Wang also claimed that her purported signatures and the company chop of Korchina on the Security Documents were forged.

22.The Defendants counterclaimed for a declaration that the transfer to the Mother was void and an injunction restraining the Mother and the Brother from representing that they were shareholder or director of the Company.

The issues

23.The issues are:

(1)  Whether the Trust existed;

(2)  Whether Gu had authority to sign the Declaration of Trust on behalf of Korchina;

(3)  Whether Wang’s signatures and chop of Korchina on the Security Documents were forged; and

(4)   Whether there was a resulting trust in favour of the Plaintiffs.

24.There was a plea of fraud against Wang and Liu, without particulars.  The Plaintiffs did not pursue this plea.

The Witnesses

25.As stated by Stock JA (as he then was) in Esquire (Electronics) Ltd v Hong Kong and Shanghai Banking Corp Ltd [2007] 3 HKLRD 439, at §135:

“Comparison with contemporaneous documentation is always an aid to reliability of oral testimony, unless there is reason to believe that the documentation is contrived or materially incomplete. … the truth, in so far as one is able to reach it or, … can best be tested by reference to contemporaneous documentation where it exists, or to its absence where one would expect it to have been created, as well as to inherent probabilities (though bearing in mind that there may be occasions where the truth may run against that particular grain) having regard to the all the facts that are known.”

26.The Plaintiffs’ case was primarily based on a copy Declaration of Trust and original Security Documents.  HPC was the only witness in the whole case.  Material evidence kept emerging whilst she testified.  She was wholly discredited under cross-examination.  I find her to be untruthful and unreliable.  From the letter before action, to her affirmations in support of the OS, pleadings and documents (or the lack of them), the Plaintiffs’ case was fraught with inherent improbabilities and inconsistencies.

27.The Defendants had no witness at all since Wang was imprisoned in Mainland China.  They only adduced an expert report on handwriting.  This meant the defence could be disregarded except that part about forgery of Wang’s signature on the Security Documents.

28.None of the parties called Gu as a witness.  The Plaintiffs regarded him as a dishonest fraudster who was wanted by the Mainland police.  Wang declined to plead to anything relating to him. 

Issue 1 – Whether the Trust existed

29.It is trite law that beneficial interest follows the legal title.  The burden is on the party (in this case, the Plaintiffs) asserting that the beneficial interest is different from the legal title to prove to the contrary: Stack v Dowden [2007] 2 AC432, §§4-5, Lord Hope; §68, Baroness Hale.

30.The letter before action dated 13 March 2015 from the Plaintiffs’ solicitors to Wang and HPC-1^{st [1]} filed on 27 April 2015 simply alleged that the 2 Forms were false.  They did not assert the existence of a trust or indeed any cause of action.  It did not mention Gu or Wang.  It did not describe how the Mother came to be the shareholder. 

31.That letter and HPC-1^st was made at a time when the Mainland Proceedings were already on foot, ie after the alleged “fraud” was discovered.  The Mainland Proceedings only mentioned Gu but not Wang.  Again, there was also no mention of the Trust or any matter relating to shareholding of the Company.

32.The Plaintiffs’ case on the Trust and Security Documents only emerged in HPC-2^nd dated 22 September 2015.

33.The circumstances under which the Trust arose were peculiar.  The Land was worth about RMB26 million in 2015.  See the statement of claim in the Mainland Proceedings signed by the Brother.  HPC’s own estimation (without valuation) was RMB1 billion.  And yet the Trust was created at nil consideration from Gu or Korchina when the Sisters had only known Gu and Wang for about 1-2 months by then.

34.In the witness box, HPC added that Gu represented that he had a military background.  Gu said that the military party would buy the Land at RMB800 million and that she would be paid in 1-2 months.  This was new evidence of an unpleaded contract.  The only hint of it was clause 4 of the Declaration of Trust which the Plaintiffs never relied on.

35.There were no lawyers involved in the preparation of the Declaration of Trust, notwithstanding the huge amount at stake.  No due diligence was done on the background of Gu, Wang or Korchina.

36.HPC said that Gu would pocket the difference between the sale price and the RMB800 million.  Such new evidence was inconsistent with her statement to the police on 30 March 2015 that Gu would receive a commission instead.

37.I am unable to accept that HPC, a university graduate in International Trade, aged 35 in 2013 and having worked in her father’s company for 14 years since the age of 21, would have been so naïve in handling such valuable assets.  She wanted the court to believe that she reposed blind trust in 2 strangers.  Her story was inherently incredible.

38.Insofar as documentary proof was concerned, there was a paper napkin (admittedly in existence and mentioned for the first time in HPC’s oral evidence) handwritten by Gu in November 2013 which allegedly contained the draft terms of the trust.  HPC did not produce it.

39.On its face, the Declaration of Trust was a suspicious document.  Party A was the Company instead of the Sisters. HPC said that it was a “mistake”.  However, HPC and Gu had been negotiating since November 2013.  I find it odd that Party A had to be handwritten and not typed like other parts of the Declaration of Trust.

40.Further, there was no reason why the Declaration of Trust was signed by Gu but the Security Documents (allegedly executed at the same time) were signed by Wang.

41.What happened after creation of the Trust? The “purchase price” for the Land was not forthcoming as Gu had promised.  HPC also witnessed Gu tear up the original Declaration of Trust in October 2014 (a date which HPC remembered by reference to the Taiwan “National Day”). She discovered Gu to be a “fraudster” at the end of October 2014.

42.Gu’s conduct would not have left any doubt in HPC’s mind that he would not honour the Trust.  And yet HPC did nothing to wrest back control of the Company.  She blindly relied on the bare words of Gu that money would arrive soon and that there were formalities to go through.  It took her another 3 months to make the Mother a shareholder.

43.Further still, the Brother filled up Form NR1 on 10 October 2014, purporting to change the registered office to a place of Gu’s choice.  Form NR1 was filed by the secretarial company on 24 October 2014.  Even if the Declaration of Trust was torn up in October 2014 (and not August as pleaded), there was no reason why HPC or the Brother would not have revoked the change in the 2 weeks before Form NR1 was filed.

44.On the other hand, there was no evidence from the Defendants’ side to contradict HPC. There was no document to prove set off of the huge Debt.  Shenzhen Hang Mei was incorporated on 18 December 2013, after the 2013 Transfer.  The court was left with the unanswered questions as to why Korchina obtained the Shares in the first place and why HPC dared to fabricate a claim of trust and security, and to forge documents.

45.Mr Lam (counsel for the Plaintiffs) referred to one rhetorical question asked by HPC in her evidence, “He [Gu] did not give me a penny for the Land.  Why would I just gift the Land to him for free?”  With respect, that was an over-simplification of the Plaintiffs’ case. 

46.InKao Lee & Yip v Koo Hoi Yan & Others [2003] 3 HKLRD 296 at §34, Ma J (as he then was) says,

“None of the defendants gave evidence. In these circumstances, adverse inferences may be more easily drawn against them and correspondingly, any inferences favourable to KLY can more confidently be drawn as well. … This is of course providing that the rest of the evidence allows such inference to be drawn and that such evidence is credible in the first place.” (underline added)

47.A judge is not bound always to make a finding one way or the other with regard to the facts averred by the parties.  It is open to him the 3^rd alternative of saying that the party on whom the burden of proof lies has failed to discharge that burden.  No judge likes to decide cases on the burden of proof if he can legitimately avoid having to do so.  There are cases, however, in which, owing to the unsatisfactory state of the evidence or otherwise, deciding on the burden of proof is the only just course for him to take.  See Rhesa Shipping Co Supplemental Agreement v Edmunds [1985] 1 WLR 948, 955H-956A, Lord Brandon of Oakbrook; Big Island Construction (HK) Ltd v Wu Yi Development Co Ltd & anor, HCA 1957/2005, 28 July 2011, at §§15-21, Poon J (as he then was)[2].

48.The case of there being a Trust simply begged belief in view of the inherent improbabilities and inconsistencies in HPC’s evidence.  Her new evidence in the box was but her recent invention. I am not satisfied that the Trust existed on a balance of probabilities.

Issue 2 – Whether Gu had authority to sign the Declaration of Trust on behalf of Korchina

49.Since I have doubts as to the existence of the Trust, I deal with this issue only for the sake of completeness.

50.Under Section 36 of the Companies Ordinance (Cap 32) as it stood on 5^th December 2013, a document requiring authentication by a company may be signed by a director, secretary or other authorized officer of the company, and need not be under its common seal.

51.Assuming I had accepted HPC’s evidence, Wang was present at the time of execution of the Declaration of Trust.  Gu must have been an authorized officer of Korchina in signing the Declaration of Trust and applying the chop.

Issue 3 - Whether Wang’s signatures and Korchina’s chop on the Security Documents were forged

52.The party alleging forgery bears the evidential burden of adducing evidence sufficiently cogent and probative to raise the issue of forgery. The party relying on the disputed document bears the legal or persuasive burden of proving its authenticity. The standard is still on balance of probabilities but such standard is to be applied flexibly. The person bearing the burden of proving the allegation is to prove it with evidence of a commensurate cogency. The more serious the allegation, the less likely it is that the event occurred, and hence, the stronger should be the evidence needed to prove it.  See Nina Kung v Wong Din Shin (2005) 8 HKCFAR 387,at §§171-172, 180-184, Ribeiro PJ.  The court prefers direct evidence of a witness to expert evidence: Nina Kung, at §393, Ribeiro PJ.

53.Given my finding on Issue (1), it follows that I am not satisfied that there was a need for security or that the Security Documents were created as alleged.

54.If that is not sufficient, I have considered other evidence pertaining to the Security Documents. Each expert has given an opinion favourable to the party engaging him.  The Plaintiffs’ direct evidence, however, was not satisfactory.

55.Firstly, there was no witness signing on the Security Documents.  Ms Trista Yu could have been asked to testify as to the preparation of the Security Documents, her seeing Wang’s signature and Korchina’s chop appearing on them and how the “amendment” in paragraph 57 came by.  She was available but no subpoena was served on her.  The Plaintiffs never tried to ascertain from her if her email enclosing the draft Security Documents still existed.  The inference was that Trista Yu’s evidence was not favourable to the Plaintiffs.

56.Secondly, contrary to the pleaded case, HPC’s statement to the police and HPC-2^nd, it was firmly established in cross-examination that HPC had already filled in the English (but not Chinese) name and address of the Mother as transferee even before Wang was asked to sign.

57.Thirdly, allegedly Ms Trista Yu emailed the draft Security Documents to HPC, who printed them out at Gu’s office for execution.  The Instrument of Transfer (which formed part of the Security Documents) stated that “5,000 Ordinar (sic) shares” were transferred from Wang to the Mother.  HPC claimed in the witness box that the mistake was discovered there and then but the computer had been switched off.  She called Ms Trista Yu in the presence of Gu.  Trista Yu told her to just “amend” it.  HPC admitted that she amended 5,000 to 10,000 (“the amendment”) “during those few days after the execution”. 

58.Ms Lam fairly accepted that the number of Shares had been correctly identified in the Instrument of Transfer as being “nos. 1-10000”.  I was also unable to see why HPC had wanted only 5,000 Shares to be re-transferred to her if there really was a trust.  However, the amendment was never shown to have been brought to Wang’s attention.

59.Fourthly, HPC’s oral evidence was that she took photos of the undated Security Documents (and the Declaration of Trust) only after she had brought the originals home. Since she had the originals, there was no reason for her to make copies.  Even if she needed a copy, there was a photocopying machine at Gu’s office but she never made copies there.

60.HPC’s evidence was incredible.  I am not satisfied that the Security Documents were genuinely created for the purpose or in the circumstances described by HPC, or that Wang’s signature was genuine.

Issue 4 - Resulting trust

61.In his closing submission, Mr Lam submitted that the Plaintiffs were not seeking to enforce the terms of the Declaration of Trust.  They just used that document to show that the transfer to Korchina must be subject to a trust of some sort, and it did not matter what the exact terms of the trust were.  If the Plaintiffs failed for any reason other than uncertainty, but Korchina paid nothing for the Shares, and the Shares could not possibly have been gifts, the legal consequence (by mere operation of law)would be a resulting trust in favour of the Sisters.  They could procure a transfer to the Mother as their nominee.  These would apply despite absence of a plea on resulting trust.  Mr Lam relied on Ng Man Sun v Peckson Ltd & anor (unreported, ECSC CA, 22 May 2015) §§78-94, Kentish-Egan, QC, JA (Ag) in support of his propositions.

62.I am unable to agree with Mr Lam.  A party should not be allowed to depart from his pleading: Kwok Chin Wing v 21 Holdings Limited (2013) 16 HKCFAR 663, at §§21-27. The Plaintiffs’ case was one of express trust.  There was no hint of reliance on resulting trust in their opening submission.  The express trust and provision of security did not come up to proof.  This was distinguishable from Ng Man Sun in that the court there did not disbelieve the claimant’s evidence.

63.Even if there was a trust, it was doubtful if the condition for utilizing the Security Documents was met.  The Brother had executed a Share Transfer Agreement (股權轉讓協議) dated 1 April 2014 on behalf of the Company to transfer the shares in the Subsidiary (effectively transferring the Land) to News Media.  The purpose of the Trust was purportedly fulfilled.  The Plaintiffs’ case on this was inconsistent.  In the Mainland Proceedings, they did not dispute the validity of the Share Transfer Agreement but simply alleged that the consideration was not paid.  In the present case, the pleaded case was that Gu allegedly told HPC that a re-transfer could be effected at nil consideration, again not disputing validity.  HPC’s oral testimony, however, was that the Brother had signed on the Share Transfer Agreement without intending it to take effect.  She was somehow “mistaken” that Gu had taken away the original from her house, only to discover it sometime later when she moved.  I do not consider it appropriate to find there to be a resulting trust on the Plaintiffs’ inconsistent evidence.

Conclusion

64.I am not satisfied as to the existence of the Trust, the circumstances under which the Security Documents came into existence or that Wang’s signature on the Security Documents was genuine.  Even if the Security Documents were genuine documents signed by Wang, I am not satisfied that the condition for utilizing them was met, or that a resulting trust had arisen.  The claim against Wang and Korchina is not established.

65.Liu could not have been liable in any way.  Save for a brief mention of him in the pre-action letter, Liu simply did not feature in HPC’s evidence. 

66.I order as follows:

(1)   That the claim be dismissed.

(2)   That there be a declaration that the purported share transfer by the 5^th Defendant to the 1^st Plaintiff on 27 January 2015 was null and void;

(3)   That there be an injunction restraining the 1^st and 2^nd Plaintiffs, who by herself or himself, her or his servants, agents, employees or otherwise, from representing to any one that she/he was the 2^nd Defendant’s shareholder or director;

(4)   On a nisi basis, costs of the claim and counterclaim be paid by the Plaintiffs to the Defendants, to be taxed if not agreed, with certificate for Ms Rachel Lam alone;

(5)   On a nisi basis, costs of the summons to expunge the Mainland Judgment from the evidence should be to the Defendants to be taxed if not agreed.

67.I thank counsel for their assistance.

Mr Kenneth Lam and Ms Melinda Chiang, instructed by Tsang, Chan & Woo, for the plaintiffs

Ms Rachel Lam and Mr Joseph Wong, instructed by Wong & Lawyers, for the 3^rd, 4^th and 5^th defendants