Nicholas V.A. Schebek-fuerstenberg v. Yip Wai Sang and Another

CACV 400/2020

[2021] HKCA 325

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 400 OF 2020

(ON APPEAL FROM HCA NO. 221 OF 2017)

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Before : Hon Lam VP, Cheung and Au JJA in Court

Date of Hearing : 5 March 2021

Date of Judgment : 15 March 2021

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J U D G M E N T

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Hon Cheung JA (giving the Judgment of the Court) :

I. The appeal

1.1The plaintiff claimed that he was defrauded of the sum of $2.8 million by Li Wai Ying, Zenia (‘Zenia’).  He paid the money into an account from which $1.7 million was transferred to the 1^st defendant’s account and another $500,000 was transferred to the 2^nd defendant’s account.  The plaintiff claimed that the $2.8 million was imprinted with a trust because of the fraud or alternatively by way of Quistclose trust. He sued the two defendants who claimed to be bona fide recipients/purchasers for value without notice of the respective sums received by them.  He did not sue Zenia. She died in 2018 after the action had commenced.  He did not also sue Great Birch Limited which is also featured in the transaction that the plaintiff had with Zenia.

1.2B Chu J dismissed the plaintiff’s claims against the defendants.  She found that the $2.8 million was not subject to any trust.  She also found that the 1^st defendant was not a bona fide purchaser for value and, therefore, he must return the money to the plaintiff if liability was established.  She found the 2^nd defendant was a bona fide purchaser for value.  The plaintiff now appeals against the judgment.   The 1^st defendant abandons his respondent’s notice in which he sought to challenge the Judge’s decision against him.   

1.3The focus of the appeal is whether the plaintiff was a victim of fraud and whether the $2.8 million was held by Zenia on trust for the plaintiff.  

II.    Background

2.1The pleaded case of the plaintiff is that in March 2013, Zenia presented him and his wife with an opportunity to jointly develop four plots of agricultural land which she claimed to own in Sai Kung (‘the development scheme’).  The plaintiff pleaded that in reliance on the following claims of Zenia, he decided to invest in the development scheme :

1)   she was an expert in the Hong Kong real estate business having decades of experience in the field;

2)   she was in an advantageous position to identify and take advantage of property‑related investment opportunities to generate profit; and

3)   she owned the four plots of agricultural land (‘the Lots’).

2.2Unbeknownst to the plaintiff at the time he decided to invest in the development scheme, Zenia did not own the Lots and the development scheme was a sham.

2.3On 8 May 2013, the plaintiff together with his wife signed as Party A a ‘Memorandum of Joint Residential Development Scheme Agreement’ (‘the Memorandum’).  In the Memorandum Party B was described as Zenia and the Owner of Great Birch Limited (‘Great Birch’).

2.4The terms of the Memorandum were as follows :

‘ 1. Whereas both Party A and Party B have unanimously agreed to enter into a Joint Residential Development of Lots Nos. 137s.A., s.B., s.C. and RP in D.D. 230, Siu Hang Hau, Clear Water Bay, Sai Kung, New Territories, Hong Kong, hereinafter mentioned as ([‘]the Property[’]).

2. Party B, the Great Birch Limited is the owner of the above‑mentioned agricultural lots as shown on the Lot Index Plan at Appendix 1.

3. Party A has agreed to deposit HK$2.8 Million (HK$2,800,000.00) to Great Birch Limited for joining the Joint Residential Development Scheme as proposed by Party B and Ms LI Wai Ying, Zenia, being the guarantor.

4. Both [p]arties are also aware even that planning approval is given to change the site from Zone “CA” to “RC3”, modification of the lease conditions by way of land exchange from agricultural land use status to building and garden land use status is required and always subject to payment of land premium to Government.

5. Party A has the absolute right to demand the refund of the Deposit from Party B with Ms LI Wai Ying, Zenia as guarantor in the sum of HK$2.8 Million (HK$2,800,000.00) in full amount but without interest after the expiry of four years from the date of this Memorandum of Agreement should there be no development has been made.  Party A may elect his discretionary right to extend the period of Joint Residential Development for further period, as the case may be if he so wish voluntarily.

6. Should government approval be granted to develop the Property of residential development, both Party A and Party B agree the following terms :

(a) to pay and share HK Two Million (HK$2,000,000.00), the Planning Consultancy fees equally (each pay HK$1,000,000.00) for the rezoning case on successful basis;

(b) to share the land premium, government fees, construction costs, professional fees and legal charges and any other charges and fees incidental to the Joint Residential Development Scheme equally.

7. It is expressly mentioned hereto that the Party A’s deposit of HK$2.8 Million (HK$2,800,000.00) is not to be accounted in the sharing of the cost, and it is the so benefits of Party B once the Joint Development Scheme is kick‑off.  The criterion of refund of the Deposit is stated in paragraph 5 of this Memorandum.

We understand and agree the above terms.’

2.5On the same day of the execution of the Memorandum, Zenia gave the plaintiff a piece of paper bearing an HSBC account number and instructed the plaintiff to deposit $2.8 million into the account. 

2.6On 9 May 2013, the plaintiff deposited the money into the account.  He was given a deposit slip.  Under the ‘Remarks’ column of the deposit slip, the words ‘GREAT BIRCH LTD JOINT RES DEV’ were printed. 

2.7The plaintiff then described the discovery of the fraud.  Between 9 May 2013 and March 2016 Zenia and Great Birch took no steps in furtherance of the development scheme.  In March 2016, he became suspicious that he may be the victim of a fraud.  He conducted research into Zenia, Great Birch and the development scheme, and found that it was a sham.  He found that Zenia was not a director of Great Birch.  The two directors were Lee Kin Chiu who is Zenia’s brother and another person called Wing Yee Chan.  Lee Kin Chiu was also the sole shareholder of Great Birch.  The Lots were owned by a Lo Lo Louisa and were never owned by Zenia or Great Birch.  He claimed that he would not have deposited the money into the HSBC account had he known the Lots were owned by Lo Lo Louisa and not Zenia or Great Birch.   The HSBC account that he deposited the money was not held by Zenia or Great Birch.  It was held by a company called Digital Financial Technologies Limited (‘Digital’).  The plaintiff claimed that he would not have deposited the money into the HSBC account had he known it was held in the name of Digital.  The sole shareholder of Digital was Ms Law Fung Sin and she is the mother of Zenia.  The directors of Digital were Zenia and her mother.  The plaintiff claimed that he had never consented to the transfer of money to the 1^st and 2^nd defendants and he had not authorised Digital to transfer the money to them.  

III.     The plaintiff’s appeal on the fraud

3.1Mr Brown for the plaintiff focused his argument on the terms of the Memorandum in respect of the ownership of the Lots in support of the plaintiff’s case on fraud.  He argued that at the heart of this matter is whether Zenia was the owner of the Lots either directly or indirectly through Great Birch.  If Zenia was not the Lots’ owner, either because Great Birch did not own the Lots or Zenia did not own Great Birch, then the development scheme under the Memorandum was manifestly a fraud.  This submission is a repetition of the plaintiff’s case advanced before the Judge as can be seen from the following paragraph of the judgment :

‘ 132. Mr Brown submitted that the Memorandum set out verifiable false statements by Zenia inducing P to make payment of the HKD 2,800,000 and that P relied on Zenia’s following 3 representations in the Memorandum (collectively “3 Representations”), which turned out to be false:

(1)   Representation that Zenia was owner of Great Birch – 1^st Representation;

(2)   Representation that the Lots were owned by Great Birch (see clause 2) – 2^nd Representation;

(3)   Representation that the sum of HKD 2.8m was to be deposited to Great Birch (see clause 3) – 3^rd Representation.’

3.2The Judge ruled against the plaintiff on the threerepresentations. Dealing with the first two representations, the Judge held :

‘ 136. It was not disputed that as at 1 August 2011, Zenia was not registered as a shareholder of [Great Birch]. However, even though she was not registered as a shareholder of the company as at 1 August 2011, this does not necessarily mean that she was not the shareholder or the owner on 8 May 2013. As there had been no annual returns available, I do not find that there was sufficient evidence to say whether Zenia was or was not the owner of Great Birch as of 8 May 2013.

137.  Further, the 1^st Representation is relied on by P as being a false and fraudulent representation, but this was not even mentioned in the Demand Letter.  In the Demand Letter, all P alleged was that he discovered that, in serious and repudiatory breach of the Memorandum, the statement in clause 2 of the Memorandum that Great Birch was the owner of the Lots was “utterly false” and that Great Birch was not and had never been the owner of the Lots, and that P accepted the repudiation as bringing the Memorandum to an immediate end.  It was not P’s case in the Demand Letter that the statement that Zenia was the owner of Great Birch was false or it resulted in any repudiatory breach.

138.  As for the 2^nd Representation, it was not disputed that Zenia was not the registered legal title owner of the Lots, nor was Great Birch.   As mentioned earlier, he was asked during cross examination whether it had occurred to him that when he found out the Lots were owned by Lo Lo Louisa, this Lo Lo Louisa could be holding the Lots on behalf of Zenia, and P’s answer was he did not know.

139.  P did not raise any queries regarding why the Lots were owned by Great Birch instead of Zenia prior to signing the Memorandum, and he said that he thought it was for tax purposes that Great Birch was used.  As I have found earlier, there was no reasonable basis for him to assume that Great Birch was the corporate vehicle used for tax purposes by Zenia to hold the Lots.

140.  P was also asked during cross examination whether it had occurred to him that maybe Zenia was right and that she was waiting for the government approval, and P’s answer was “sure”.  The fact was that there was no sufficient evidence as to the efforts, if any, which had been made by P to find out whether Zenia had made any applications to the District Lands Office for planning approval to change the zoning and the use of the Lots or for the modification of the lease conditions of the Lots.

141.  Further, as seen earlier, in Jonathan’s case, there was a Chinese document by which the property was transferred by the Land Licence holder to Zenia, which did not appear to have been registered in the Land Registry and further as seen later, in Zenia’s transactions with D1, interests in her DD 221 Property were first acquired by Zenia through a subscription agreement which was not registered in the Land Registry.  Thus, it was not improbable that there could have been documents signed by with Lo Lo Louisa whereby Zenia and/or Great [Birch] acquired certain rights and interest in respect of the Lots and which were not registered in the Land Registry.  In other words, I do not find that the fact that Zenia or Great Birch was not the legal title owner was sufficient evidence that the 2^nd Representation was false.

142.  In any event, on P’s own evidence, Zenia’s representation that she owned the Lots was made on the 2^nd Occasion.  It was also P’s evidence that during Site Visit that Zenia had talked about her vision and plans as to how the Lots would be developed, and Zenia’s brother Derek, the sole shareholder and a director of Great Birch, was also present during the Site Visit.  As said earlier, it was during the Site Visit that P and his wife made the decision to enter into the Development Scheme and agreed to pay the HKD 2.8m which they found reasonable.

143.  As I had said earlier, there were no other witnesses called by P as to what was said during the Site Visit which led to P and his wife deciding and agreeing to invest HKD 2.8m in the Development Scheme, and in any event this was prior to the signing of the Memorandum.  Even after P found out that the Lots were registered in the name of Lo Lo Louisa, there were no allegations of fraud on part of Zenia made in the Demand Letter at all, and P only claimed was that P claimed that Zenia was in serious and repudiatory breach of the Memorandum, and that Great Birch was not and had never been the owner of the Lots.’

3.3In respect of the third representation, the plaintiff maintained that Zenia did not tell him that the HSBC account was held by Digital and she told him that it was an account of Great Birch.  The Judge held that prior to his deposit of $2.8 million into the HSBC account, he already knew that the account was held in Digital’s name.  The Judge referred to the ‘Remarks’ section of the transaction advice which stated that ‘GREAT BIRCH LIMITED JOINT RES DEV’.  The Judge held that this remark must have been stated by him.  The Judge also held that on the transaction advice underneath the account number of the plaintiff’s personal account and the number of the HSBC account, it was stated ‘D F T L T/A TKI’.  DFTL were the initials of Digital Financial Technologies Limited, and the evidence showed that ‘D F T L T/A TKI’ was referring to Digital trading as Ten Ku Izakaya.  Izakaya is a type of Japanese bar which serves food and drinks.  The evidence showed that Zenia was introduced to the plaintiff by his colleague as the owner of the Sushi Tenku Restaurant and the Memorandum was signed at the Sushi Tenku Restaurant.  Digital operated the Ten Ku Izakaya at the same address of Sushi Tenku Restaurant. 

3.4The Judge held that :

‘ 76. There was no reason why Zenia would not have told P that the HSBC Account was held in the name of Digital in order for P to deposit the amount. It did not make sense since if P had gone to the bank and told the bank that he was transferring the sum into an account of Great Birch, no doubt he would have been told by the bank that he was mistaken and he would have found out then and there the HSBC Account was not held by Great Birch. As I have said earlier, if P indeed had thought the account was Great Birch, there was no need to state the name again under the “Remarks” section. I do not find P’s evidence credible in this respect, and it is my finding that he did know the HSBC Account was held in Digital’s name prior to the deposit of HKD 2.8m. Even if he did not know of Digital at the time, he would have found out the HSBC Account was not held in the name of Great Birch upon his being provided with the Transaction Advice. I also do not find that there was sufficient evidence that he would not have deposited the sum of HKD 2.8m into the HSBC Account at the time had he known that the account was held by Digital, as on his own evidence, it could also be a corporate vehicle used by Zenia for tax purposes.’

3.5The Judge concluded that the plaintiff had not discharged the burden of establishing fraud :

‘144. Fraud is a serious allegation and as pointed out on behalf of D1 by Mr Cheung, cogent evidence is required to establish an allegation of fraud. When the Demand Letters were sent to Zenia and Great Birch, there were no allegations of fraud on part of Zenia even though by then P knew clearly that Zenia was not the registered shareholder nor director of Great Birch and neither Zenia, nor was Great Birch the registered legal owner of the Lots, and that the 1^st and the 2^nd Representations in the Memorandum were said to be false.

145.  Having considered all the evidence of this case, I am not satisfied that P has discharged the burden on him in establishing that there had been fraud on the part of Zenia, or that he was a victim of fraud committed by Zenia.  I find that he was only disgruntled about his investment in the Development Scheme which had turned sour due to Zenia’s subsequent deteriorated and poor financial conditions.’

3.6Mr Brown submitted that the reasons given by the Judge in rejecting the plaintiff’s case on these three representations were wrong.  He argued that the Judge’s finding that the plaintiff is not a victim of fraud necessarily entails a finding that Zenia/Great Birch somehow beneficially owned the Lots.  This is contrary to the registration document.  The Judge’s holding that it was not improbable that there could have been documents giving Zenia rights and interests in the Lots that would not be registered in the Land Registry is mere speculation.  It defeated the actual evidence and required the plaintiff not only to provide the typically conclusive registration documents but also to prove the negative.  There is that no other document existed also suggested as long as it was technically possible that Zenia owned the Lots the fraud was not established.  Mr Brown also referred to the other circumstantial evidence which showed that Zenia did not own the Lots. 

3.7Mr Brown also submitted that the Judge adopted a similar approach to Zenia’s claim that she owned Great Birch.  The documentary evidence shows that she was not the owner but the Judge relied on the fact that the annual returns had not been filed to give rise to the possibility that Zenia was the owner of Great Birch. He submitted that ‘this favours hypotheticals over real evidence and would require the plaintiff to prove the negative’.   He submitted that while it is correct that the plaintiff knew that Zenia did not own the Lots directly (the Memorandum made clear it was Great Birch), the plaintiff believed Zenia owned Great Birch (the Memorandum also makes this clear), it is wrong to suggest therefore the plaintiff was unconcerned as to who owned the Lots.  There is a world of difference between the Lots being owned by Zenia but through her company Great Birch, and where that company is a party to the Memorandum, and the Lots being owned by a total stranger.

3.8In respect of the payment of $2.8 million, Mr Brown submitted that the plaintiff’s evidence was that he was not aware the HSBC bank account belonged to Digital.  The Judge made unsupported assumptions as to what happened at the HSBC counter when the plaintiff made payment to what he believed was Great Birch’s account, which actually belonged to Digital, by concluding that the HSBC teller would have informed him of the error.

3.9Further, the Judge was unfair to the plaintiff in concluding that when the plaintiff received the transaction advice, he reviewed it and must have recognised that the notation ‘DFTLT/A TKI’ stood for Digital Financial Technologies Limited trading as Ten Ku Izakaya (i.e. Zenia’s sushi restaurant) and known that the account did not belong to Great Birch.  The plaintiff had no knowledge of Digital, and as such the letters ‘DFTLT/A TKI’ would have been meaningless, and even if noticed by the plaintiff, it looks more like a bank code than the initials of an account holder’s name. 

IV.   Our view on fraud

4.1In our view Mr Brown’s focus that fraud can be established simply by reference to the terms of ownership of Great Birch and ownership of the Lots in the Memorandum is a blinkered approach.  The fraud as pleaded is not confined to the issue of ownership of Great Birch and that of the Lots by reference to the terms of the Memorandum but also includes the matters identified in [2.1] above.  Before the Judge dealt with Mr Brown’s submission on the plaintiff’s case of fraud based on the terms of the Memorandum, she had already addressed the events leading to the signing of the Memorandum.  She dealt with the plaintiff’s evidence on how the development scheme was broached.

‘ 40. As said earlier, P’s evidence was that (i) Zenia first broached the idea of developing agricultural land in about October 2012, and that she claimed that the potential profit was very promising and that she had completed similar transactions numerous times before (“1^st Occasion”), and (ii) on another occasion in about March 2013, while having drinks in Aqua Plus, Zenia claimed that she owned 4 plots of agricultural land in Sai Kung that could be developed into residential buildings and that it would take 2 to 4 years to complete the development of such properties and that a corporate vehicle should be used to own and hold the properties. (“2^nd Occasion”). Further, according to P’s written evidence [i]t was at that juncture that Zenia invited P and his wife to view the plots of land.’

4.2In respect of the Memorandum, the Judge referred to clause 1 which stated that the parties ‘have unanimously agreed to enter into a Joint Residential Development of the Lots’.  She held that the plaintiff and his wife had already agreed to enter into the development scheme prior to the execution of the Memorandum.  The evidence of the plaintiff on forecast of profits for the development scheme was that the sale price of a house in that area would be $25 million or above, and that the plan was to build two houses, which could be sold for $50 million.  He then said the joint venture was on a 50/50 sharing basis between him and Zenia.  He also said his understanding was that Zenia owned the land 100% and that she was to supply the land, and that construction costs would be approximately $15 million for each house.  He said the profits and costs were to be shared 50/50.  The Judge found that the Memorandum did not contain the terms described by the plaintiff in his evidence :

‘ 57. However, the Memorandum did not contain any provisions described by P during the trial in relation to forecast of profits, or any 50/50 sharing of profits, or indeed any sharing of profits. In fact, it was not even stated that Great Birch was to provide the Lots for the Development Scheme. It was also not clearly stated as to what obligations Great Birch or Zenia had under the Memorandum, or who was to apply for the planning approval for the change of zoning of the Lots, or the modification of the lease conditions or use of the Lots. All it stated was that should there be no development made after the expiry of 4 years from the date of the Memorandum (which was not dated), the sum of HKD 2.8m was to be returned.’

4.3The Judge found that the plaintiff’s evidence that the sale price for each house was $25 million and the construction cost $15 million for each house was not credible. 

4.4In respect of the ownership of the Lots, the Judge held that :

‘ 68. Anyway, notwithstanding that P had said that on the 2^nd Occasion Zenia had claimed that she owned the Lots, it was clear from the Memorandum that she was not, and that it was Great Birch which was said to be the owner. It was P’s evidence in his 1^st affidavit filed in support of his application for the 1^st Injunction Order, that during the 2^nd Occasion, Zenia noted that for tax purposes, the Lots should be owned by a company. In his witness statement, he had said that for tax purposes, Zenia recommended that a corporate vehicle should be used to own and hold the properties and that P’s explanation was that although it was stated in the Memorandum that Great Birch was the owner of the Lots and not Zenia, he did not raise any queries regarding Zenia’s ownership of the Lots because Zenia had told him that the Lots were better off held in the name of a corporate vehicle for tax purposes.

69.  It was not P’s evidence that prior to signing the Memorandum, P had sought any clarification from Zenia as to why it was stated that Great Birch was the owner and not Zenia herself, or whether it was for tax purposes that Great Birch was used.  Further, it was not even clear what tax purposes P was referring to.  Further, if it was represented to him by Zenia during the Site Visit that she was the owner, then it did not seem to make sense as to why she should incur additional costs to transfer the Lots from her to Great Birch.  In any event, I find there was no reasonable basis for P to assume that Great Birch was the corporate vehicle used by Zenia for tax purposes to own the Lots.’

4.5The Judge also held that the plaintiff by signing the Memorandum agreed that if there was no development after expiry of four years from the date of the Memorandum, then the sum of $2.8 million was to be returned without interest subject to the plaintiff’s right of election as to whether to extend the deadline.   The deadline should be 8 May 2017, namely four years from 8 May 2013.  The Judge held that :

‘ 61. As set out in clause 6, it was only when government approval was granted to develop the Lots, then P (and his wife) had to share equally with Zenia (i) the “Planning Consultancy fees” of HKD 2m (each party HKD 1m) for the rezoning case on success basis and (ii) the land premium, government fees, construction costs, professional fees and legal charges and any other charges and fees incidental to the Development Scheme.

62.  P accepted during the trial that the sum of HKD 2.8m was paid as deposit for joining the Development Scheme, and he was not buying a share or interest in the Lots, and that the HKD 2.8m was not intended to be used for costs in the future for the project.

63.  Thus, even on P’s own case, the sum of HKD 2.8m was no more than a right to join / to participate in the Development Scheme and this is also my finding.  In other words, it was a “joining fee” or a “participation fee”.  However, apart from clauses 6 and 7 providing for his paying 50% of the costs therein stated, as said earlier, there was no mention of any proportion for profit sharing.  According to P’s evidence that profits were to be shared 50/50, and if Zenia or Great Birch indeed owned the Lots, and that the Lots were to be provided by Zenia or Great Birch for the Development Scheme, then there was no reason as to why no value was attached to the Lots as being Zenia’s contribution towards the Development Scheme.  It did not seem to make any commercial sense that Zenia or Great Birch (if they were indeed the owner) would agree to provide the Lots free.’

4.6After reviewing the evidence the Judge found the plaintiff’s evidence to be inherently incredible :

‘ 71. To summarise, I do not find P’s evidence in respect of the circumstances leading to his signing the Memorandum inherently probable or credible. His evidence was vague as to what was actually discussed between him and Zenia in relation to the Development Scheme and how the agreement to pay HKD 2.8m was arrived at prior to the signing of the Memorandum, and in any event, at the time of signing, he was clearly aware that Zenia was not the owner of the Lots.’

4.7The Judge’s rejection of Mr Brown’s submission of the alleged three representations by reference to the Memorandum as constituting fraud must be understood in such a context.  The Judge was saying that cogent evidence must be established by the plaintiff on the serious allegation of fraud.  She had reviewed all the circumstances including how the plaintiff’s response after his discovery of the alleged fraud.  She found that the plaintiff was not able to establish the scheme was a sham and he was defrauded because of the unsatisfactory nature of the plaintiff’s evidence.

4.8What was said in the Memorandum in terms of the ownership of Great Birch and the Lots may well be part of the evidence in support of the plaintiff’s case on fraud but they by themselves cannot be sufficient evidence to show that the development scheme was a fraud because of the way the plaintiff framed his case, particularly having regard to the threshold for the serious allegation of fraud.  Even if, for the purpose of argument, the Judge’s view on ownership may be described as speculative, she did not reject the plaintiff’s case on fraud simply because she held that Zenia was involved with Great Birch or that she might have some indirect interest in the Lots.

4.9Further, Mr Brown’s submission in relation to the deposit slip had not addressed what the Judge said about the name Great Birch appearing under the ‘Remarks’ column.  In any event the Judge did not simply say that the bank staff of HSBC must have informed the plaintiff that the account belonged to Digital.  On the contrary, the Judge was merely addressing the situation that had the plaintiff informed the bank staff that he was making payment to Great Birch, the staff would have told him that it was mistaken and he could have found out there and then that the account was not held by Great Birch. 

4.10We do not understand Mr Brown’s case that there was a difference between the Lots owned by Zenia but through her company Great Birch and where the company is a party to the Memorandum and the Lots being owned by a total stranger.  As apparent from the judgment the Judge was not impressed by the plaintiff as a credible witness.  She found his evidence on the development scheme was patchy and was inherently improbable. 

4.11Mr Brown had also relied on some other matters to challenge the Judge’s finding but in essence these challenges are merely challenges to the findings of fact by the Judge who had the benefit of trying the case.  Again, the plaintiff had not satisfied the high threshold that her findings must be plainly wrong before this Court would intervene and overturn them. 

V.   The plaintiff’s case on trust

5.1It is the plaintiff’s case that because of the fraud, the $2.8 million was imprinted with a trust which arose by way of constructive trust.  However, he also relied on the case that even if he failed to prove fraud, the $2.8 million was subject to a resulting trust and the nature of the trust was that of a Quistclose trust.  There is no dispute by Mr Hingorani that the principles of Quistclose trust are applicable in such a case.  It is sufficient for the purpose of this appeal to refer to two of the principles identified by Lord Millett in Twinsectra Limited v Yardley & Ors[2002] 2 AC 164 :

‘ 73 A Quistclose trust does not necessarily arise merely because money is paid for a particular purpose. A lender will often inquire into the purpose for which a loan is sought in order to decide whether he would be justified in making it. He may be said to lend the money for the purpose in question, but this is not enough to create a trust; once lent the money is at the free disposal of the borrower. Similarly, payments in advance for goods or services are paid for a particular purpose, but such payments do not ordinarily create a trust. The money is intended to be at the free disposal of the supplier and may be used as part of his cashflow. Commercial life would be impossible if this were not the case.

74  The question in every case is whether the parties intended the money to be at the free disposal of the recipient: In re Goldcorp Exchange Ltd [1995] 1 AC 74, 100 per Lord Mustill.  His freedom to dispose of the money is necessarily excluded by an arrangement that the money shall be used exclusively for the stated purpose …’

5.2The issue in this appeal is whether the parties intended that Zenia was free to use the $2.8 million.  The relevant clauses in the Memorandum on the $2.8 million are :

1)  clause 3 which dealt with the ‘deposit’ of $2.8 million by the plaintiff for ‘joining’ the development scheme.

2)  clause 5 which provided that the plaintiff’s right to demand the return of the $2.8 million without interest after the expiry of four years from the date of the Memorandum ‘should there be no development has been made.’

3)  clause 7 which provided that $2.8 million is not to be accounted in the sharing of costs and it is the ‘so[le] benefits of Party B once the Joint Development Scheme is kick‑off.  The criterion of refund of the Deposit is stated in paragraph 5 of th[e] Memorandum.’

4)  clause 6 (which has already been reproduced earlier) dealt with the sharing of the costs for a successful rezoning and other fees and costs.

5.3The Judge had held the payment of by the plaintiff of the $2.8 million was no more than a right to join or participate in the development scheme or in other words, it was a joining fee or a participation fee.  The Judge further held :

‘ 163. The sum of HKD 2.8 [million] was clearly not a part-payment for acquisition of any interests or ownership in the Lots, nor part-payment of any consideration for the acquisition of any interest or ownership in the Lots. ... Here, the sum of HKD 2.8m was not expressed to be paid to secure P’s obligations under the Memorandum and it was expressly stated in the Memorandum that the sum of HKD 2.8m was not to be accounted in the sharing of the costs of the Development Scheme and the said sum was the [sole] benefit of Zenia, save that if there was no development after the Deadline, the sum was to be refunded without interest.

164.  As mentioned earlier, there was no express provision or requirement that Zenia or Party B had to set aside the sum during the term of the Memorandum, or that the Zenia could not use or apply the sum or any part of it whether towards the Development Scheme or not.  In fact, there was no sufficient evidence that Zenia did not use the sum or part or it whether towards the Development Scheme.

165.  In any event, on my reading of the provisions of the Memorandum, Zenia was free to use it for whatever purposes, save that after the Deadline, if there was to be no development, she had to refund it to P as provided in the Memorandum.  P’s evidence that the understanding he had with Zenia that the sum was to be used solely towards the Development Scheme was not supported by the terms of the Memorandum although he did refer to the Development Scheme under “Remarks” section in the Transaction Advice.  There was further no evidence from P as to how the sum was to be used towards the Development Scheme by Zenia.’

5.4The Memorandum did not expressly provide that Zenia was free to use the $2.8 million.  However, clause 7 provided that it was for ‘the so[le] benefit’ of Zenia after ‘kick off’ lends support to the argument that before ‘kick off’ Zenia was not free to use it.  Otherwise this ‘sole benefit’ provision for Zenia after kick off would be superfluous.  The issue then turns to what was the meaning of ‘kick off’ and whether there was any ‘kick off’. The Judge referred to the plaintiff’s evidence that his understanding of ‘kick off’ was after the rezoning of the land from agriculture to residential.  The Judge held the term ‘kick off’ was not clearly defined and she did not reach any view on its meaning.  Mr Hingorani for the 1^st defendant (together with Mr Cheung) submitted that ‘kick off’ could equally mean the application being made for rezoning of the Lots for residential purpose. 

5.5Construing the Memorandum as a whole, bearing in mind the context and purpose of the provision, the kick off event referred to under clause 7 is clearly a different event from the actual development of the Lots or the obtaining of re‑zoning approval because,

1)   ‘Kick off’ is a different expression from ‘development’, the criterion adopted in clause 5.  In its natural meaning ‘kick off’ simply refers to the taking of any steps in relation to the project.  It is wide enough to embrace preparatory works including the making of an application to the Government for re‑zoning;

2)   The context of the Memorandum was that it was within the contemplation of the parties that the applications for approvals might take a few years to process and actual physical works on the development could only be undertaken after the approvals for re‑zoning as well as lease modification were obtained and the premium being assessed and paid (see clause 4); 

3)   Immediately after its reference to kick off, clause 7 reiterated the provision for refund in clause 5.  It, therefore, envisaged that even though the project had been kicked off, it would still be possible that development could not be made within the four-year time limit under clause 5;

4)   The ‘development’ in clause 5 could either mean the grant of approvals or the actual commencement of construction works.  Under clause 6, approvals from the Government (such approval could include planning approval and approval for lease modification as envisaged under clause 4) was used as the delineation reference point.  After such approval, the parties would have to share the following costs and expenses equally: planning consultancy fees, land premium, government fees, construction costs, professional fees and legal charges, other charges and fees incidental to the project.  There was no provision for the refund of such shared costs and expenses under clause 5.  Hence, construing in context, the ‘development’ in clause 5 should mean the obtaining of requisite approvals from the Government.  If such approvals were obtained within four years, there was no further right on the part of the plaintiff to pull out from the project even though construction works could not be commenced within the four‑year period and he was committed to share the costs and expenses of the project;

5)   As discussed above, under the scheme of the Memorandum, the kick off event in clause 7 was intended to be an event earlier than the development under clause 5. We tend to agree with Mr Hingorani that the application for re‑zoning approval (which had to be the first step in the project) can be regarded as the kick off of the development under clause 7. 

5.6But be it the approval for rezoning or application for rezoning, the problem faced by the plaintiff was that he had not shown that there was never any kick off event which would allow Zenia to freely use the $2.8 million.  As the burden was on the plaintiff to show the $2.8 million was imprinted with such a trust, he must show that no lifting event had occurred.  In this case, according to the Judge, all that the plaintiff could say was :

‘ 65. ... there was no movement on the Development Scheme because Zenia had not presented to him any further information in her communications with him and that nothing could be seen on the Lots. ...’

5.7As can be seen from [140] of the judgment below which is reproduced in [3.2] of this judgment, the Judge found that there was no sufficient evidence to the efforts made by the plaintiff to find out whether Zenia had made application to the District Lands Office for rezoning.  On this basis the plaintiff had failed to establish that the $2.8 million was still subject to the restriction as to use by Zenia and was imprinted with a Quistclose trust.

VI.    Conclusion

6.Accordingly the appeal is dismissed.

VII.   Costs

7.There will be an order nisi that costs of the appeal be to the 1^st defendant.

Mr Toby Brown, instructed by Payne Clermont Velasco, for the plaintiff

Mr Jeevan Hingorani and Mr Lawrence Cheung, instructed by Leung, Tam & Wong, for the 1^st defendant

The 2^nd defendant, absent