Lctd v. Ckmc
Read the full judgment text of FCMC 6340/2018 on BabelCite. This Family Court judgment was delivered on 28 August 2024 before Deputy Judge Robin Egerton.
Matrimonial Proceedings – Beneficial Ownership – Trust – Shareholding – Preliminary Issue – Burden of Proof – Divorce Proceedings – Ancillary Relief – Family Business – CEC and CL Companies – Wife's Shareholding – Interveners' Claim – Father's Evidence – Credibility – Informal Arrangement – Express Trust – Rule Against Perpetuities – Costs – Party and Party Basis – Adjournment for Case Management Hearing – Petitioner LCTD – Respondent CKMC – Interveners CCSS, CKY, CCLRD, CCLRE – Deputy Judge Robin Egerton – District Court – Judgment Date 28 August 2024 – The proceedings commenced with the Wife's Petition filed on 24 May 2018 and a Decree Nisi of Divorce was pronounced on 19 June 2019. The Husband and Wife have two children over 18 years old. The Wife holds legal title to 35% of shares in CEC and 20% of shares in CL. The Interveners, being the Wife's siblings, claimed the Wife held these shares on trust for them. The Father, who established the companies, did not give evidence. The Court found the Interveners failed to discharge the burden of proof to establish an express trust over the CL shares due to inconsistent evidence and the rule against perpetuities. Regarding CEC shares, the Court found an informal family arrangement more probable than an express trust due to lack of formal accounting and inconsistent evidence. The Husband's positive case that shares were a reward was also not accepted. The Interveners' Points of Claim were dismissed. The Interveners were ordered to pay 75% of the Husband's costs. The case was adjourned for a Case Management Hearing.
Legal issues: Beneficial Ownership of CEC Shares · Beneficial Ownership of CL Shares
Outcome: Interveners' Points of Claim dismissed
Cites 3 cases
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FCMC 6340 / 2018 [2024] HKFC 156 IN THE DISTRICT COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION MATRIMONIAL CAUSES NO. 6340 OF 2018 ________________________ BETWEEN
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________________________ J U D G M E N T ________________________ Introduction 1.These Proceedings began with the Wife’s Petition filed on 24 May 2018. A Decree Nisi of Divorce was pronounced on 19 June 2019. The Husband and Wife have two children, both of whom are over 18 years old. An Order was made on 11 May 2021 as to Joint Custody of the younger child with Care and Control to the Wife and specified access to the Husband. 2.The Wife has 4 siblings who are the Interveners in the Proceedings. 3.The companies CL and CEC, the shares of which are the subject matter of this Trial, were established by the Wife’s Father. The Father and his first wife LHS (the Wife’s Mother) divorced in 1984. The Mother, Wife and the Interveners moved to Canada whilst the Father remained in Hong Kong. 4.The Father married Madam CF (his former secretary) in about 1990. The Mother, Wife and 3 of the Interveners subsequently returned to Hong Kong; the fourth resides in the United States of America. The Father and the Mother now have a cordial relationship with each other. 5.Both the Husband and Wife filed Form Es; the Husband on 16 July 2020, the Wife on 8 January 2021. 6.Between July 2021 and April 2022, the Husband and Wife exchanged Answers to their respective Financial Questionnaires. 7.Following their summons of 3 November 2021, the Interveners were joined as parties to the Proceedings by the Consent Order of 14 January 2022;
The issues to be determined 8.The issues to be determined as identified in the “Agreed List of Disputed Issues” filed on 18 April 2024 are as follows:
Agreed Chronology of CL and CEC shares filed on 18 April 2024 9.On 28 April 1987, the Father incorporated CEC with the following shareholding:
10.Since its incorporation on 15 February 1994, CL’s shareholding has been as follows:
The value of the CEC and CL shares 11.At the beginning of the Trial, the Court was helpfully informed by Counsel for the various Parties that in broad terms, the values could be considered as follows:
The Form Es 12.Form Es are standard documents filed in accordance with Practice Direction 15.11; they are invariably the key and pivotal documents in all applications for Ancillary Relief and on occasion, as in the present case, the precursor to Preliminary Issues. 13.Section 5.5 is a particularly important section to be considered and appropriately completed by a deponent; it states as follows:
14.In his Form E at section 5.5, the Husband referred to what he described as the Wife’s “family business” but he made no mention of shares held by the Wife in CL and or CEC. It was his oral evidence at Trial that he was not aware of the precise amount of shares held by the Wife until he had sight of the Wife’s Form E. 15.In her Form E the Wife stated in section 2.4:
16.And at section 5.5:
17.In her Form E, the Wife did not further elaborate as to why she held the shares in CL and CEC for herself and her 4 siblings. The Pleadings 18.Paragraph 18 of the Interveners’ Points of Claim states as follows:
19.Paragraph 7 (a) of the Husband’s Points of Defence states as follows:
20.Paragraph 11 of the Wife’s Points of Defence states as follows:
21.Before turning to the evidence, I have in mind Ms. Chow’s Opening Submission wherein she helpfully referred to Kwok Chin Wing v 21 Holdings Ltd (2013) 16 HKCFAR 672 §21 per Ma CJ:
22.From the Pleadings, the relevant positions of the Parties can be summarised as follows:
The Evidence 23.It is of note that:
24.The Husband and Wife gave oral evidence, as did the four Interveners. 25.The witnesses gave evidence in the following order:
26.By reason of the fact that they are all Parties to the Proceedings, they were in Court when each gave their respective evidence. 2nd Intervener CKY (K) 27.In her affirmation, she inter alia referred to the following:
28.In her oral evidence, she said the meeting was held in the TST office on 3/4 January 2014; this had not been particularised in the Points of Claim or her affirmation. 29.However, during cross examination she stated:
30.She further stated in re-examination that it was correct that she and her siblings were given shares not because of Madam CF’s divorce; instead, they were given to her and her siblings because the Father was fond of and concerned about her and her siblings. 3rd Intervener CCLRD (RD) 31.His affirmation refers to the CEC share allocation “around the beginning of 2014”:
32.In his oral evidence he placed the meeting around 3/4 January 2014. 33.He believes that the trust was set up to prevent a claim by Madam CF over assets owned by the Father. 34.Whilst CKY was the only one potentially liable for American tax, CKMC held shares on behalf of the siblings because:
1st Intervener CCSS (S) 35.In his second affirmation he stated:
36.In oral evidence he stated that he was not involved in formulating the contents of the Points of Claim, although he had taken a look at the document and signed it. 4th Intervener CCLRE (RE) 37.His affirmation provided no explanation for the distribution of shares in 2014 other than:
38.In oral evidence he claimed that he was “confused” as to why the Points of Claim stated that the trust arrangements were created to ward off potential claims by Madam CF. His understanding was that a document containing the trust arrangements had been “prepared” by the Father and Madam CF, handwritten by the Father with a table/list before the January 2014 meeting. 39.He agreed that he was not certain about whether or not the Father had created a trust in his or his siblings’ favour over the shares held in CKMC’s name, nor did he confirm whether or not he had an interest in the CEC or CL shares held in CKMC’s name. CKMC (Wife) 40.In her 4th affirmation, she stated:
41.In her 5th affirmation, she referred to the following:
42.In oral evidence, she claimed that there were three steps to the creation of the Trust over the CEC shares:
43.She agreed that she did not discuss or consult any of the Interveners when selling F Tower. 44.She stated that the Trust over the CL shares was created when CL was incorporated in 1994. LCTD (Husband) 45.In his 11th affirmation, the Husband put forward his case that the Father had caused the 35% of CEC shares to be allotted to the Wife as an incentive and or reward for the efforts of the Husband and Wife in respect of the crises at CEC in 2003 and 2013/2014. 46.It is his case that the “share arrangement” had never been mentioned and “was simply something concocted for the purposes of these proceedings”. 47.As regards the shares in CL, it is his case that they were allotted to the Wife as an incentive or gift for the Wife to return to Hong Kong. 48.The Husband claimed that he had taken on “a managerial role” in CEC. In his Points of Defence he stated at paragraph 7 that “it is not admitted that the Father manages and makes all the key decisions”. However, in cross examination, he accepted that the word “not” was “inaccurate”. 49.In his oral evidence, he stated that he did not know the exact percentage of the Wife’s shareholding in CEC until seeing the Wife’s Form E. Prior to that, he had believed that the Wife held around 30% of CEC shares. 50.He stated that he had no idea as to the amount of CL shares in the Wife’s name or the reason as to why the Wife had CL shares registered under her name. 51.He stated that he had signed the two Consent Summonses confirming that each party would forgo their claim against the other for Ancillary Relief, and that the circumstances under which they were signed were not unconscionable to the lay person. However, he disagreed that he had signed because he knew the Wife only had 7% of the shares in CEC or that he had signed because he had already embezzled substantial sums of money from CEC. Discussion 52.It cannot be over emphasised that the purpose of this Trial is the determination of the Preliminary Issue as to the beneficial ownership of shares; a discrete matter which does not engage the wide discretion of Section 7(1) of the Matrimonial Proceedings and Property Ordinance (“the MPPO”). 53.The share ownership as recorded in the share registers of CEC and CL show that the legal ownership of the shares in question resides with the Wife. It is common ground that it is the Interveners’ case that the beneficial ownership differs from the legal ownership; that the Father created an express trust over the shares as settlor with the Wife and the Interveners as beneficiaries. 54.It also common ground that the Interveners carry the burden of proof to show the existence of such a trust and their beneficial ownership of shares under such trust, notwithstanding the position recorded in the share registers. 55.An immediate difficulty with the Interveners’ case is that the Father filed no evidence. The intention of a settlor is highly relevant, if not critical, in assessing the existence of a trust. 56.The Father is in his 80s. In her oral evidence, CKY said that the Father’s condition had continued to deteriorate after he was diagnosed with COVID and had a stroke in May 2023, he now rarely goes out as he easily tires after walking, his hearing is not good and he has to take a considerable amount of medication. 57.CKMC said that although he was physically weak, “as to his mind, it is still in operation, it can still work”. CCSS said that the Father was hospitalised on the 3rd day of the Trial. CCLRE said that he had returned home from the hospital the next day and was taking some rest. 58.Other than the above information, there were no medical or other reasons of substance presented as to why the Father did not file evidence to corroborate the Interveners’ case as to the existence of the trusts relating to the shares of CEC and CL. 59.The Interveners’ case therefore relies solely on their own evidence supported by that of the Wife; there is no evidence from any non-sibling, third party or expert in relation to the references to the potential impact of American tax on CKY holding shares in CEC. 60.To state the obvious, the Interveners have a vested interest in a positive outcome to their application, as does the Wife. In the event it is held that part of the shares were held on trust for her siblings, the Wife’s resources would be significantly reduced, which in all probability, would reduce the assets available for distribution in the Ancillary Relief Proceedings. 61.The Husband has a vested interest in opposing the Interveners’ application, as in the event the beneficial interest mirrors the legal title, the assets available for distribution in the Ancillary Relief Proceedings, would in all probability, be considerably larger. 62.In summary, the evidence of all the witnesses in the main is self-serving in support of their own interests; the Court has not been assisted with any evidence from any disinterested third party. No contemporaneous evidence was provided as to the establishment of the Trusts and or the Husband’s case that the shares were awarded to the Wife as a reward and or incentive. 63.The Court is therefore being asked to determine the issue on the basis of credibility of the witnesses. In this context, I have in mind the Judgment of Hon Harris J in Moorthy Selvaraj v Karupayee Amal & other [2024] HKCFI 403:
CL 64.The undisputed facts are as follows:
65.The Interveners’ Points of Claim do not differentiate between the trust arrangements for CEC and CL. In their affirmations and oral evidence they did not elaborate on the circumstances pertaining to the shareholding in CL. None of the Interveners suggested that CL was mentioned at the meeting in January 2014. 66.The Interveners’ evidence therefore falls well short of proving on a balance of probability that the Wife held the CL shares on trust for them. 67.In her Points of Defence [§9(4)] and her 4th Affirmation [§41] the Wife stated that despite the registered shareholding, the Father was the sole and real owner of CL until 2014, and that she was holding the shares on trust for her Father. 68.However during cross examination, the Wife stated as follows:
69.The Wife’s oral evidence is therefore inconsistent with her Defence to the Points of Claim and her Affirmation evidence, as in her oral evidence, she puts the establishment of the CL trust for herself and her siblings in 1994, the year of the purchase of the F Tower, whereas in her Defence and Affirmations she states the trust was established in 2014. 70.In any event, as regards the rule against perpetuities, the Court has not been provided with sufficient particulars as to terms, purpose and powers of the Trust to demonstrate that it does not contravene the rule against perpetuities. As fairly recognised by Mr. Wong on behalf of the Interveners in his Closing, if the trust arrangements for CL shares were, as on the Interveners’ and or the Wife’s case, set up in 1994, such trust would have to comply with the rule against perpetuities to be valid and or enforceable at law. 71.In the circumstances, in light of the Interveners’ paucity of evidence as to the establishment of a trust in relation to the CL shares, the inconsistent evidence of the Wife and the rule against perpetuities, I conclude that the Interveners have not sufficiently carried the burden of proof to establish their beneficial ownership in the CL shares. CEC 72.The company was incorporated by the Father on 28 April 1987. The history of its shareholding is as set out above in paragraph 9; in particular from 30 December 1996 until 26 April 2014, the Father and Madam CF were the only shareholders. 73.This changed when on 26 April 2014, the Wife became the registered owner of 35% of the shares, thereby becoming the single largest shareholder in CEC. 74.In his helpful submissions lodged on behalf of the Interveners, Mr. Wong framed the issue as follows:
75.The evidence as a whole describes the Father as a traditional patriarch who had a firm control of his commercial interests, in particular CEC and CL. This was accepted by the Husband in cross examination when he corrected paragraph 7 of his Points of Defence so as to read:
76.From the evidence, it is also common ground that the Father would speak at family gatherings and, on occasion, to a wider audience of relatives and colleagues as to the Wife’s possession of the shares. 77.In this context, the Husband said in cross examination that he had heard the Father say:
78.It is the Interveners’ and Wife’s case that since 2014 the Wife made payments to the Interveners; however, it is of note that:
79.As regards a trustee’s duty to account, Ms. Chow for the Husband suggested in her Closing and Reply that it is “an irreducible core of obligations owed by the trustees to the beneficiaries”: Underhill & Hayton law of Trusts and Trustees (20th ed.) §59.2, and that “A trustee who was not liable to account to anyone for his dealings with the ownership of the trust assets would in substance be a beneficial owner of them”: Snell’s Equity (34th ed.) §§21-005, 22-028. On the other hand, Mr. Yim for the Wife suggested that the duty to keep accounts and produce such accounts was contingent on being required to do so: Snell’s Equity (34th ed.) §29-024. 80.Cases of this nature are fact sensitive. I do not consider that the lack of formal accounting or reporting is fatal to the Interveners’ case. However, I consider it to be a relevant circumstance in the overall assessment of the case. 81.The characteristics of the arrangements described by the Interveners and the Wife are consistent with an informal arrangement whereby family members are financially supported from a family business rather than a formal and specific trust arrangement which, by its nature, creates legal rights and obligations as between the trustee and the beneficiaries. 82.The share register shows that in April 2014, the Father ceased to be the controlling shareholder of CEC. At the same time, the Wife became the major shareholder of CEC and gained importance and status within CEC as the owner of the largest single shareholding in the company. 83.It is consistent with this change that the Wife became responsible for the distribution of financial support to the Interveners and indeed the Mother (who was not a purported beneficiary of any CEC shares). 84.In view of the inconsistencies between the Points of Claim, the evidence of the Interveners and the Wife, and my overall consideration of the evidence as a whole, I find the above informal arrangement more probable than the Father having created an express Trust with the Wife as the Trustee and the Interveners and the Wife as beneficiaries. 85.I therefore find that the Interveners have failed to carry their burden as to establishing a beneficial interest in the shares of CEC. The Husband’s ‘positive case’ 86.For the purposes of the Preliminary Issue, the fact that the Interveners have been unsuccessful in establishing the existence of an express trust means that the Husband’s positive case is no longer directly relevant. However, by reason of the evidence and time incurred, I consider it appropriate that it should be addressed. 87.In his Points of Defence, the Husband referred to two crises that he had had to deal with on behalf of CEC; namely a 2003 fatal accident in one of the properties owned by CEC in the Mainland and a 2013 issue of unauthorised building works in another property owned by CEC in the Mainland. 88.The Husband claimed that the Father was grateful to him and the Wife for working in the company and resolving the above crises, which was the reason why the Father gave the 35% shareholding to the Wife in 2014 as a reward and or incentive for them both. 89.In his 11th affirmation in support, he stated:
90.In his oral evidence, he stated:
91.It is also of note that in his Form E the Husband does not mention the Wife’s shareholding; nor did he suggest that the shares in CEC had been given to the Wife and himself as a reward and or incentive. 92.The Wife on the other hand claimed that the Husband did not play a significant role in the 2003 fatal accident, as the matter was swiftly settled by agreeing a RMB200,000 payout. 93.In relation to the 2013 incident, she claimed that the Father would not have rewarded the Husband because:
94.Having considered the evidence, I do not accept the Husband’s contention that the Wife’s shareholding in CEC was by reason of any reward and or incentive to him and the Wife. However, for the avoidance of doubt, in the context of the forthcoming Ancillary Relief Proceedings, this is not a determination of any “contribution” the Husband may or may not have made. Miscellaneous Embezzlement 95.The Wife and Interveners each gave their account of the Father confronting the Husband in relation to his alleged embezzlement of RMB45 million. 96.I do not consider this allegation relevant to the issue to be decided in this Trial, and it is in any event post the re-arrangement of shares in 2014. Consent Summonses 97.It is said the Husband signed two Consent Summonses in May and November 2018 to the effect that each party would forgo their claim against the other for Ancillary Relief. 98.There was no mention of the Consent Summonses in the Pleadings, nor were they produced in evidence. 99.In reply to the Husband’s 11th affirmation in which he stated that the Trusts were “an attempt to decrease the value of the assets of the Respondent available for distribution”, the Wife in her 5th affirmation stated “the Petitioner knew the trust arrangements well and he signed the 2 Consent Summonses in May and November 2018, both confirming that there would be no claim for ancillary relief against the other party”. 100.The Consent Summonses were not mentioned by any of the Parties in their respective Openings. 101.The Husband was cross examined on the Consent Summonses and admitted signing them and he agreed that they were not unconscionable to a layman’s understanding of the term. However, he did not accept that he signed them because he knew the Wife only had a 7% interest in CEC or because he had already embezzled substantial sums of money. 102.Only the Wife mentioned the Consent Summonses in her Closing in the context of:
103.The Parties’ positions as to the Consent Summonses were clear from their respective Form Es:
104.If the enforceability of the Consent Summonses was to be argued, it should have been well before the determination of the Preliminary Issue. In any event, I do not consider they assist the Court in determining the Preliminary Issue particularly when they were not pleaded either by the Interveners or the Wife. Costs 105.The Interveners have been unsuccessful. In the circumstances, subject to what is said below, I see no reason why they should not pay the Husband’s costs on a party and party basis with certificate for two counsel. 106.In broad terms, the Parties’ respective costs arising from the Interveners’ summons filed on 3 November 2021, the orders and the M-FDR are as follows:
107.The Husband unsuccessfully put forward his own “positive” explanation for the Father granting 35% of the shares in CEC to the Wife resulting in significant time and costs being incurred. 108.I therefore consider that it is only fair and reasonable that this aspect of the Trial should be reflected in the award of costs. In the circumstances, and on a broad brush basis, the order of costs shall be that the Husband recovers 75% only of his party and party costs, including costs reserved with certificate for two counsel. 109.For the avoidance of doubt, there shall be no order as to costs so far as the Wife is concerned. 110.The Order for costs nisi shall become absolute on 20 September 2024,which will provide an opportunity for the Parties to be heard on costs if they so wish. Summary of Orders 111.The Interveners’ Points of Claim filed on 7 April 2022 shall be dismissed. 112.The Interveners shall pay 75% of the Husband’s party and party costs of and incidental to the Preliminary Issue including costs reserved with certificate for 2 counsel such costs to be taxed in default of agreement. 113.The costs order shall become absolute on the 20 September 2024. Way Forward 114.The case be adjourned to 25 October 2024 at 2:30p.m. for a CMH (2 hours reserved) at Court 53. 115.The Husband and the Wife do lodge and exchange their written submissions (each limited to 5 pages) on or before 14 October 2024 as to their respective proposals for the further conduct of the Ancillary Relief Proceedings. 116.Last but not least, I thank Counsel for their considerable assistance at the Trial.
Ms Theresa Chow and Mr Ian Yu instructed by Ip & Heathfield for the Petitioner Mr Eugene Yim instructed by K.L. Chan & Co. for the Respondent Mr Martin Wong and Miss Kelly Cheng instructed by Hart Giles for 1st-4th Interveners |
Cases cited in this judgment
Further hearings and rulings under FCMC 6340/2018