Choi Hong Ying and Another v. Tsoi Kwok Wai and Another
Read the full judgment text of HCA 82/2024 on BabelCite. This High Court CFI judgment was delivered on 28 March 2025.
1. This is the substantive hearing for the Summons for summary judgment (“ O14 Summons ”) issued by the Plaintiffs (respectively “ P1 ” and “ P2 ”, and together “ Ps ”) against the Defendants (respectively “ D1 ” and “ D2 ”, and together “ Ds ”) seeking declarations that Ps’ transfer on 24 October 2013 of their shareholdings (“ Shares ”) in Kong Yang Investment Limited (“ Company ”) to Ds gratuitously i.e. with no money or assets in kind changing hands (“ 2013 Transfers ”) be declared null
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HCA 82/2024 [2025] HKCFI 1279 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE HIGH COURT ACTION NO. 82 OF 2024 ________________________ BETWEEN
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________________________ J U D G M E N T ________________________ A. OVERVIEW 1.This is the substantive hearing for the Summons for summary judgment (“O14 Summons”) issued by the Plaintiffs (respectively “P1” and “P2”, and together “Ps”) against the Defendants (respectively “D1” and “D2”, and together “Ds”) seeking declarations that Ps’ transfer on 24 October 2013 of their shareholdings (“Shares”) in Kong Yang Investment Limited (“Company”) to Ds gratuitously i.e. with no money or assets in kind changing hands (“2013 Transfers”) be declared null, void, and/or no legal effect on grounds of common mistake (and consequential orders to reverse the same). 2.Immediately prior to the 2013 Transfers, the shareholding of the Company was held by P1 (50%), P2 (10%), and D1 (40%). As a result of the 2013 Transfers, Ps no longer hold any shares in the Company and the shareholding of the Company is held by D1 (80%) and D2 (20%), with D2 being a nominee of D1. 3.In essence, Ps’ case is that the Company holds a vast tract of land in the Mainland known as “港洋工業區” (“KY Industrial Zone”) and receives rent from the same (“Rent”), but the 2013 Transfers were effected pursuant to the fundamental common mistaken assumptions that:-
4.On behalf of Ps, Mr Christopher Chain SC submits that Ps’ argument is straightforward. In gist, Ps rely on a Chinese written agreement signed by P1, D1 and P2 on 10 December 2013 (in particular the Preamble and Clause 4 thereof) which stated that each of them owned the interests in the KY Industrial Zone in the proportion of 50% (P1), 10% (P2), and 40% (D1) (“2013 Agreement”). He submits that such common assumptions could only be mistakes given the true state of affairs, namely the findings made by the Mainland Chinese courts in the first instance judgment in August 2022 (“1st Mainland Judgment”) as confirmed by the second instance judgment in May 2023 (“2nd Mainland Judgment”, and collectively “Mainland Judgments”), based on D1’s assertion, that the interests in KY Industrial Zone in fact belonged to the Company. As Mr Chain SC stresses in his oral submissions, Ps and Ds are laymen who clearly laboured under the misapprehension that the transfer of the Shares did not affect their rights as they personally owned the KY Industrial Zone and were entitled to the Rent, which turns out to be erroneous as found by the Mainland Judgments. 5.On behalf of Ds, Mr Martin Ho submits that the present action is not about Ps’ claim for the Rent, but only a claim for return of the Shares. In short, he says it is not that Ds seek to gain unfair advantage, but that the present action is simply the wrong route – instead Ps should pursue the Company instead. He says there is a triable issue whether Ps can establish Ps’ alleged (i) mistakes and (ii) true state of affairs. As elucidated in his oral submissions, Mr Ho’s real focus is not really that there are substantial factual disputes to be tried. The crux of his argument is that, on the proper construction of a “Shareholding Confirmation” dated 30 November 2005 (“2005 Confirmation”) and the 2013 Agreement, (i) there can be no alleged mistake as the parties had confirmed that the Company is the owner of the KY Industrial Zone, and (ii) the alleged true state of affairs could not be established because Ps may have a claim in trust or contract for the KY Industrial Zone and the Rent against the Company and, in any case, even if Ps are shareholders, they are not entitled to the same as it is trite that shareholders are not the owners of the assets of the Company. 6.Further, the parties made submissions on other matters which the Court have also considered, but it is apparent from the parties’ oral submissions that the key arguments are along the lines summarised above. 7.At this juncture, I should make some preliminary observations on Ds’ stance. On the one hand, Ds accept that they are not seeking to take unfair advantage or deprive Ps’ interests in the KY Industrial Zone or the Rent. Yet, on the other hand, neither Ds nor the Company (under Ds’ control since the 2013 Transfers) have ever paid any part of the Rent to Ps or otherwise accounted for the interests in the KY Industrial Zone and/or the Rent since March 2016 (i.e. for 9 years). When questioned by this Court, Mr Ho seems to accept that the parties’ common objective or goal is that the interests in KY Industrial Zone and the Rent should be enjoyed by P1 (50%), P2 (10%) and D1 (40%), but there are alternative routes (viz. a claim in contract or trust against the Company) which could attain such objective or goal, and the present action against Ds is not the right route. 8.Nevertheless, it does appear somewhat artificial for Ds to hide behind the Company when, all along, Ds have been the only shareholders of the Company since the 2013 Transfers. If it were Ds’ stance that notwithstanding the Company’s (legal) ownership and entitlement to the KY Industrial Zone and the Rent, Ps are entitled to claim the same either in trust or contract, there is no apparent reason or plausible explanation being proffered as to why the Company (in Ds’ control) did nothing to pay or account to Ps for the same. As this Court asks Mr Ho rhetorically, if that were indeed the common objective or goal to be attained irrespective of the route, what is the point of wasting the time and costs of the Court and the parties in the present litigation (or indeed the Mainland litigation)? 9.During the hearing, Mr Chain SC has asked Mr Ho to confirm if it is Ds’ stance that the Company holds KY Industrial Zone and the Rent on trust for P1 (50%), P2 (10%) and D1 (40%). Mr Ho says he is unable to say so on behalf of Ds, and he is merely advancing legal submissions as to the potential construction and effect of the 2005 Confirmation and the 2013 Agreement. However, throughout the hearing, it is fair to say that Mr Ho only mentioned Ps’ potential claim in trust or contract against the Company (but not any other possibility), whilst maintaining it is not Ds’ intention to claim sole (beneficial) interests in the KY Industrial Zone and the Rent. In my view, such stance seems rather detached from reality. Despite Ds’ professed stance not to take unfair advantage, Ds oppose Ps’ claims in the Mainland as well as the present claim in Hong Kong vigorously, whilst the Company (at Ds’ control) did nothing to pay or account to Ps for the interests in KY Industrial Zone or the Rent for 9 years. Actions speak louder than words. It would appear that if Ps do mount a claim against the Company, it is likely to be met with opposition – indeed Mr Ho did hint that the Company might have various defences. Therefore, it does appear (at least on the face of it) that Ds’ argument that Ps may claim against the Company in trust or contract is a half-baked one, and has been put forth by Ds so as to defeat Ps’ “common mistake” claim and stop Ps from getting back the Shares and yet, if Ps are to pursue a claim against the Company, Ds will probably shift the goalposts and the Company (under Ds’ control) will in all probability resist such claim strenuously. 10.For the avoidance of doubt, the above are merely preliminary observations, and no conclusive or definitive findings are made by the Court one way or another. Importantly, this Court is not concerned with any claim by Ps against the Company in these proceedings. Instead, this Court will focus on Ps’ claims herein for the Shares against Ds. B. SALIENT BACKGROUND 11.The parties have filed Affirmations and exhibits pertaining to the history of the KY Industrial Zone. Nevertheless, given the parties’ submissions as outlined above, I should focus on the salient background and documents (taken largely from the parties’ submissions) which are most relevant and not seriously in dispute. 12.The Company holds a vast tract of land in the Mainland known as “港洋工業區” (i.e. KY Industrial Zone). 13.P1 and D1 are founders of the Company. P1 and P2 are father and daughter. 14.Since 1995 (until October 2013), the shareholding of the Company was held by P1 (50%), P2 (10%), and D1 (40%). 15.On 30 November 2005, P1 (as Party A), D1 (as Party B) and P2 (as Party C) executed the 2005 Confirmation. It is a document in Chinese entitled “股份确认协议书”. Among others, the Preamble and Clauses 1 and 2 of the 2005 Confirmation provide as follows:
16.On 24 October 2013, P1 and P2 transferred their shareholdings in the Company to D1 and D2 gratuitously (i.e. 2013 Transfers), resulting in the shareholding being held by D1 (80%) and D2 (20%) which remains the case today. D2 is a nominee of D1. 17.Shortly thereafter, on 10 December 2013, P1 (as Party A), D1 (as Party B) and P2 (as Party C) executed the 2013 Agreement. It is a Chinese agreement entitled “协议书”. The execution of the 2013 Agreement was witnessed by a lawyer in a Mainland Chinese law firm. Among others, the Preamble and Clause 4 of the 2013 Agreement provide as follows:
18.From 2004 to February 2016, at D1’s arrangement the Rent from the KY Industrial Zone was paid to Ps and D1 in the proportion of 60% (P1 50% and P2 10% combined) and 40% (D1). In particular:-
19.In early 2016, due to a family dispute and P1 undergoing divorce proceedings, P2 (who is P1’s daughter) requested D1 to pause payments of the Rent to P1, and such payments were then paused. 20.In July 2019, P1 and P2 along with P1’s ex-wife jointly informed D1 that their family disputes and divorce proceedings had been resolved and requested for resumption of payment of rental income. There was no response from D1. 21.From September 2019 to May 2023, P1 and P2 pursued legal proceedings in the Mainland against D1 for the outstanding Rent. In response, D1 asserted that the interests in KY Industrial Zone and the Rent belonged to the Company. In the 1st Mainland Judgment in August 2022, it was held inter alia as follows:
22.In the 2nd Mainland Judgment in May 2023 (which affirmed the 1st Mainland Judgment), it was held inter alia as follows: “蔡汉英、蔡伟芳明确其诉请的合伙收益，系基于其与蔡国伟共同投资的港洋工业城。在蔡汉英、蔡伟芳、蔡国伟于2005年11月30日三方订立的《股份确认协议书》中，三方明确约定港洋工业城的投资包括土地、厂房、宿舍等物业及收益归港洋投资有限公司。在蔡汉英、蔡伟芳未能举证证明港洋投资有限公司已进行合伙清算，且清算收益已由蔡国伟接收的情况下，蔡汉英、蔡伟芳诉请蔡国伟支付收益，缺乏事实依据及法律依据，一审判决驳回蔡汉英、蔡伟芳的诉讼请求并无不当。” 23.Against the above background, Ps commenced the present action and took out the O14 Summons, claiming that the 2013 Transfers were effected pursuant to the Mistake of Ownership and the Mistake of Rental Entitlement. 24.For completeness, it is not in dispute that the Company is also the owner of a Mainland-Hong Kong cross-border license plate, which is to be enjoyed by Ds (or D1) absolutely. On behalf of Ds, Mr Ho is not relying on such fact itself to oppose the O14 Summons but he says it can serve as a useful cross-check. On the other hand, Mr Chain SC says he can confirm and undertake on behalf of Ps that, if the Court grants summary judgment, Ps will procure the Company to transfer such license plate to Ds, as it is never the intention of Ps to take advantage of the same. C. RELEVANT PRINCIPLES C1. Summary Judgment 25.The relevant principles on summary judgment are trite. On behalf of Ps, Mr Chain SC refers to the summary in Guanghua SS Holdings Ltd v Lim Yew Cheng [2022] HKCFI 1052 (20 April 2022) at §§11-13 per Ng J:-
26.On behalf of Ds, Mr Ho does not dispute the above, but he emphasizes the following:
27.Further, Mr Chain SC points to examples from common law jurisdictions where claims asserting common mistake were decided on a summary basis (e.g.Saga Group Ltd v Paul [2017] 4 WLR 12 at §§22-24, 54-55 per DHCJ Hodge QC). On the other hand, Mr Ho prays in aid cases refusing summary judgment for such claims, e.g. Chu Wen Jing Jennifer v Sin Hon Wai, HCA 121/2016 (14 November 2016) at §38 per Recorder Stewart Wong SC, where he said the line between a mistaken conscious belief, a mistaken tacit assumption, and ignorance, is difficult to draw, and it requires a finding of fact based on evidence, and that summary judgment could not be granted unless he can find on the materials before him without a trial and cross-examination that the plaintiff made gifts under a conscious belief or tacit assumption rather than a mere ignorance. 28.In my view, it is not particularly helpful to go into the facts or the application of principle to the facts of different cases which would be inherently fact-sensitive. What I can gather from these cases is that, whilst the Court could order summary judgment in common mistake cases, the Court has to approach the matter with care, bearing in mind that unless the materials are sufficiently clear, there may well be a need for trial and cross-examination, in which case summary judgment should not be granted. C2. Common Mistake 29.On behalf of Ps, Mr Chain SC relies on Bank of China (Hong Kong) v Keen Lloyd Energy Ltd (unrep., CACV 132/2011, 23 March 2012) at §27, where Cheung JA summarises the elements of common mistake as follows:-
30.Mr Chan SC further submits that:-
31.On behalf of Ds, Mr Ho does not seriously dispute the above principles. Nevertheless, he emphasizes the following:
32.As it will become apparent in the analysis below, the outcome of this case does not really turn on any material dispute on the relevant legal principles. Instead, the thrust of Ds’ defence is that:
D. ANALYSIS D1. Overview – Three Scenarios 33.As an overview, I have discussed with Counsel during the hearing that, assuming Ps and Ds did labour under the common assumption that P1, P2 and D1 personally have both legal and beneficial ownership in the KY Industrial Zone and the Rent (“Assumption”), there are 3 scenarios to test whether Ps can make good their case of common mistake, namely:
34.It would appear that, as long as the Assumption can be established, Ps could likely establish common mistake under each scenario:
35.However, the above is predicated upon the Assumption being made out. If, contrary to the Assumption, the parties effected the 2013 Transfers on the basis that (i) the Company is the legal owner of the KY Industrial Zone and (ii) Ps and D1 are beneficial owner of the KY Industrial Zone, then insofar as Ds can make good a case of trust under Scenario 3, there will not be essential and radical difference – and hence no common mistake. For the purpose of the O14 Summons, Ds need only show a real or bona fide defence in this regard. 36.Whilst the above serves only as an overview and the Court will consider the arguments as articulated by the parties, it demonstrates that one should examine the assumption or basis upon which the parties effected the 2013 Transfers, before moving on to consider the effect of the Mainland Judgments. D2. Ps’ pleaded case 37.During oral submissions, both Mr Chain SC and Mr Ho have focused on the pleadings. In particular, they make references to §§25(1) and 35 of Ps’ Statement of Claim (“SOC”), which I quote as follows: “25. By reason of the matters aforesaid:-
38.Whilst it may be said that Ps could have pleaded their case more clearly if the “Common Assumptions” mean that the Company held no legal and beneficial interest in the KY Industrial Zone, it seems fair to say that, considering the plea at §§25(1) and 35 of the SOC as a whole, Ps have sufficiently pleaded that the Common Assumptions include inter alia that the Company held no interest (i.e. whether legal or beneficial) in the KY Industrial Zone – which is why Ps plead further at §35 of the SOC that, by reason of the Mainland Judgments, it became clear to Ps that the Common Assumptions were false in that the Company all along held an interest in the KY Industrial Zone, which includes (at least) legal interest. 39.For completeness, Ps have pleaded alleged “Representations” at §25(2) of the SOC. It is apparent from Ps’ submissions that, for the purpose of the O14 Summons, Ps are not relying on such allegation (which is fact-sensitive). D3. Mistake of Ownership 40.In line with the above pleadings, Ps submit at §14 of their submissions that the 2013 Transfers were made pursuant to the fundamental common mistaken assumptions that:-
41.In response to Ps’ first mistake, i.e. the Mistake of Ownership, Mr Ho submits essentially as follows:
42.In relation to the first point, it has been articulated in §2(2) of Ds’ submissions as follows: “The Alleged Mistake of Ownership is factually incredible. It is against the weight of contemporaneous evidence, including most importantly [the 2005 Confirmation]signed by P1, P2 and D1. Clause 1 expressly states and acknowledges that the Company enjoys ownership interest in the KY Industrial Zone (even though it is not the registered owner of the same). That being the case, Ps could not even begin to argue that they operated under the Alleged Mistake of Ownership at the material time of the 2013 Share Transfers. It is not possible for the Court to ascribe to Clause 1 of the 2005 Confirmation a meaning that it cannot bear, at least at this summary stage of proceedings.” 43.The totality of Mr Ho’s submissions is that, properly construed, the 2005 Confirmation and the 2013 Agreement provide that the Company is the owner of the KY Industrial Zone although it holds such interest for and on behalf of P1, P2 and D1. Mr Ho concedes that this would give rise to a trust claim and indeed a proprietary claim, but hints that the Company might have defences to such proprietary claim such that Ps are left with contractual claims. I must confess that I have difficulty understanding how such construction would give rise to a contractual claim as opposed to a trust. Be that as it may, Mr Ho’s point is that the Alleged Mistake of Ownership cannot stand as the parties have acknowledged the Company’s (legal) ownership in such interest, whilst it is open to Ps to claim against the Company in trust (for beneficial ownership). 44.As mentioned above, the Preamble and Clauses 1 and 2 of the 2005 Confirmation provide as follows: “甲、乙、丙叁方经平等协商，就共同投资位于东莞市樟木头镇樟洋村民委员会东深公路旁港洋工业城(暂名)的地土房屋及收益等有关事宜，自愿达成以下协议：
45.It would appear from Clauses 1 and 2 of the 2005 Confirmation that Ps and D1 confirmed among themselves at the time that the Company was the owner of the KY Industrial Estate, although P1, D1 and P2 had actual ownership and operation rights (实际所有权、经营权) in accordance with their respective shareholdings in the Company. Read in conjunction with Clause 1, it does seem arguable that Clause 1 acknowledges the Company’s legal ownership in the KY Industrial Estate, whilst Clause 2 provides that the actual ownership, which appears to be a reference to beneficial ownership, nevertheless vests in Ps and D1 in accordance with their shareholding ratio in the Company. 46.Ps’ pleaded case on Clause 1 of the 2005 Confirmation (at §22 of the SOC) is that “Clause 1 was only included in the [2005 Confirmation] for the avoidance of any unnecessary dispute in the event that it transpired that the Company did hold (or was capable of holding) an interest in the KY Industrial Zone; all parties were under the impression that the Company did not own such interest at the time the [2005 Confirmation] was executed”. With respect, this seems to be a rather convoluted way of reconciling Clause 1. On the face of it, the objective meaning of Clauses 1 and 2 are clear. At least for the purpose of the O14 Summons, I would proceed on the apparent objective meaning as I have alluded to above. 47.Having said that, whilst this should represent the state of mind of the parties in 2005, it may not remain so by the time of the 2013 Transfers. In this regard, the Preamble and Clause 4 of the 2013 Agreement provide as follows: “甲、 乙、 丙三方合作建设樟木头港洋工业区，三方一致同意对该工业区物业及收费享有的权益分配如下:
48.On behalf of Ps, Mr Chain SC places heavy reliance on Clause 4. He submits that Clause 4 expressly confirms that P1, P2, and D1 each personally have both the ownership rights (i.e. reflecting the Mistake of Ownership) and income rights (i.e. reflecting the Mistake of Rental Entitlement) of the KY Industrial Zone as follows:- “三方一致确认甲方享有港洋工业区产权及收益的50%，乙方享有港洋工业区产权及收益的40%，丙方享有港洋工业区产权及收益的10%” [Emphasis added] 49.It is fair to say that, based on the clear wordings of Clause 4, Ps and D1 have confirmed that they are entitled to both the ownership rights and income rights (or the Rent) in respect of the KY Industrial Zone. Indeed, given the fact that the 2013 Agreement was executed on 10 December 2013, when Ps were no longer shareholders of the Company (the 2013 Transfers having taken place 1.5 months ago on 24 October 2013), it seems clear that Clause 4 is expressly acknowledging the 60% beneficial interests of Ps (more precisely 50% for P1 and 10% for P2) in the KY Industrial Zone. However, it is not entirely clear or unequivocal that Clause 4 provides, in addition, that Ps and D1 are the legal owner of the KY Industrial Zone. To some extent, the words “享有” in both the Preamble and Clause 4 of the 2013 Agreement may arguably suggest that Ps and D1 merely enjoy beneficial interests, and do not necessarily hold legal interests (which may, perhaps, be expressed by words such as “持有” instead). 50.Further, one must also take into account the fact that, at the time of executing the 2013 Agreement, the same parties had previously executed the 2005 Confirmation. Therefore, the 2005 Confirmation should form part of the context and factual matrix which would be relevant in the proper construction of the 2013 Agreement. Given my views on the potential construction of Clauses 1 and 2 of the 2005 Confirmation above, it seems to lend further force to the potential construction that, by Clause 4 of the 2013 Agreement, the parties merely agreed that Ps and D1 should enjoy beneficial interest in the ownership rights and income rights (or the Rent) of the KY Industrial Zone, without superseding what the parties had confirmed in Clause 1 of the 2005 Confirmation. Indeed, the Mainland Judgments also rely upon Clause 1 of the 2005 Confirmation in concluding that the Company is the (legal) owner of the KY Industrial Zone. 51.Moreover, as mentioned above, there is no dispute that the Company holds a Mainland-Hong Kong cross-border license plate which is to be enjoyed by Ds (or D1) absolutely. This tends to suggest that the Company is the legal owner of such license plate, but the beneficial interest thereof vests in Ds. If so, and at least in the context of the Company, it is not anything unusual or extraordinary if the actual arrangement is for the Company to hold the legal interest in the KY Industrial Zone (and the Rent) whilst the beneficial interest of the same vests in someone else (Ps and D1). 52.I should mention that Ps also rely on the continued payment of the 2013 to 2016 Rental Payments arranged by D1, and the commercial and practical context (e.g. the Rent of about HK$2.8M per annum suggests that the gratuitous transfer of the Shares can only be explained by the common Mistake of Ownership and/or Mistake of Rental Entitlement). Nevertheless, it seems to me that this is not inconsistent with a construction that the Company is the legal owner of the KY Industrial Zone but it holds such interest on trust for Ps and D1. 53.Therefore, for the purpose of the O14 Summons, I would proceed on the basis that the Common Assumptions only go so far to the extent that Ps and D1 should enjoy beneficial interest in the ownership rights and income rights (or the Rent) of the KY Industrial Zone. This is not the end of the matter because, even on such limited basis or assumption, there can still be a case of common mistake. I would now move on to consider the effect of the Mainland Judgments. 54.On behalf of Ps, Mr Chain SC contends that the Mainland Chinese Courts made a finding to the effect that the Company is both the legal and beneficial owner of KY Industrial Zone and the Rent, whereas Mr Ho disagrees and argues that the Mainland Chinese courts made no definitive findings on the beneficial ownership of KY Industrial Zone and the Rent. If Mr Chain SC is right, then Ps can still make good their case of common mistake because the findings of the Mainland Judgments would contradict the Common Assumptions that Ps have beneficial interest in the ownership rights and income rights (or the Rent) of the KY Industrial Zone. 55.Having considered the Mainland Judgments, I take the view that Ps have a compelling case that this is the effect of the Mainland Judgments based on D1’s assertions, although I am unable to say that there is no room for contrary argument. 56.First of all, whilst the Mainland Judgments made no explicit findings that the Company is the beneficial owner of the KY Industrial Zone and the Rent, there are pointers in favour of Ps’ argument. In the 1st Mainland Judgment, it was held inter alia as follows:
57.Similar reasoning is expressed in the 2nd Mainland Judgment: “蔡汉英、蔡伟芳明确其诉请的合伙收益，系基于其与蔡国伟共同投资的港洋工业城。在蔡汉英、蔡伟芳、蔡国伟于2005年11月30日三方订立的《股份确认协议书》中，三方明确约定港洋工业城的投资包括土地、厂房、宿舍等物业及收益归港洋投资有限公司。在蔡汉英、蔡伟芳未能举证证明港洋投资有限公司已进行合伙清算，且清算收益已由蔡国伟接收的情况下，蔡汉英、蔡伟芳诉请蔡国伟支付收益，缺乏事实依据及法律依据，一审判决驳回蔡汉英、蔡伟芳的诉讼请求并无不当。” [Emphasis added] 58.The premise of both judgments is that the income (收益) of the KY Industrial Zone (i.e. the Rent) belongs to (属于) the Company, and Ps could only claim interest if they are shareholders of the Company but even in such scenario, Ps could only look to the payment of dividends or distribution in the event of a winding-up. This seems to affirm indirectly that, other than an interest (if any) qua shareholder, Ps do not have any other interest (legal or beneficial) in the KY Industrial Zone or the Rent. 59.Secondly, it may be said that Ps have in effect claimed in the Mainland proceedings that Ps and D1 are beneficially entitled to the KY Industrial Zone and the Rent on the basis that they are partnership income (合伙收益), i.e. the Rent belongs to Ps and D1 like income of a partnership. That said and as mentioned below, the concept is not entirely clear. 60.Thirdly, even putting aside the effect of the Mainland Judgments, there is a compelling argument that it was D1’s stance and assertions in the Mainland proceedings that the Company is both the legal and beneficial owner of the KY Industrial Zone and the Rent. It is true that, in the Mainland proceedings, D1 did argue that he is not the proper defendant and, instead, Ps should have sued the Company. However, the way D1 put his argument is that D1 has no obligation to pay dividends, and if Ps have any claim for dividends Ps should have sued the Company instead. Hence, D1’s argument presupposes that the Company is the legal and beneficial owner of the KY Industrial Zone and the Rent, and Ps are at most entitled to claim dividends qua shareholder. 61.In this regard, there is some force in Ps’ argument that, having taken such stance in the Mainland proceedings, it would be an abuse of process and thus not open to Ds to argue in the present proceedings that somehow Ps may have a claim in trust against the Company, so as to defeat Ps’ “common mistake” claims. 62.Notwithstanding the foregoing, the matter cannot be said to be entirely clear. Among others, I take note of the following:
63.Therefore, whilst Ps have a compelling argument, there is still room for Ds to say that nothing in the Mainland Judgments bars them from arguing, in the present proceedings, that Ps may have a claim in trust (or contract, although it is difficult to appreciate how a contractual claim may arise) against the Company for the beneficial interest in the KY Industrial Zone and the Rent. If so, and provided that the parties merely effected the 2013 Transfers on the basis that the Company remains the legal owner but holds the beneficial interest on trust for Ps and D1, there would not be any common mistake which is “essentially and radically different from the subject matter which the parties believed to exist”. 64.In my view, this will afford a shadowy defence for Ds. As explained, whilst the defence may be open to Ds, there is a compelling argument that the Mainland Judgments already ruled to the contrary based on D1’s own assertions. 65.Importantly, although Ds are in full control of the Company since 2013 up to now, Ds are not forthcoming as to whether the Company holds the interest in the KY Industrial Zone and the Rent on trust for Ps and D1. Indeed, as this Court has pointed out, it would appear that the issue boils down to the proper construction of the 2005 Confirmation and the 2013 Agreement, and there should only be one correct answer in a question of construction. Yet, Mr Ho is cautious to emphasise that he is merely advancing legal submissions on the question of construction and that the construction of a trust is a “distinct possibility”, but without committing the position of Ds (or the Company) on such construction. 66.This dovetails what I said at the outset, that Ds merely suggest that Ps may have a claim in trust against the Company (but without committing to any position) so as to defeat Ps’ “common mistake” claims. With respect, if Ds genuinely do not seek to take unfair advantage, there would practically be two scenarios, either of which would result in Ps recovering interest in the KY Industrial Zone.
67.Plainly, Ds must realise that if they are to confirm that the Company holds the interest on trust, then the parties can simply enforce the trust without dragging on with this litigation – which is why Mr Chain SC asks Mr Ho to confirm the same at the hearing (which Mr Ho is unable to). At the same time, Ds must also realise that if they are to say that the Company does not hold the interest on trust (and hence Ps have no beneficial interest), then Ps could likely succeed in their “common mistake” claim. It appears that, caught in such dilemma, Ds are advancing the possibility of a trust claim as a halfway house to forestall Ps’ claim in this action. To say the least, this does appear to be a rather evasive stance. 68.As Mr Chain SC put it, however one looks at the matter, it is quite apparent that the 2013 Transfers were done gratuitously by Ps in favour of Ds because the parties are ad idem that this would not affect their interests in KY Industrial Zone and the Rent – indeed they executed the 2013 Agreement to ensure that. However, it is now pronounced in the Mainland Judgments, at the behest of D1, that the Company owns the KY Industrial Zone, but without any recognition that the Company holds such interest on trust for Ps and D1. D4. Mistake of Rental Entitlement 69.As regards the Mistake of Rental Entitlement, i.e. Ps’ rights and entitlement to receive the Rent from the KY Industrial Zone were not dependent on their shareholding in the Company, Ps pray in aid similar arguments. Specifically, Ps rely on Clause 4 of the 2013 Agreement, the continued payment of the 2013 to 2016 Rental Payments arranged by D1, and the commercial and practical context (e.g. the Rent of about HK$2.8M per annum suggests that the gratuitous transfer of the Shares can only be explained by the common Mistake of Ownership and/or Mistake of Rental Entitlement). 70.In my view, whilst Ps have formulated their case based on two mistakes and Mr Ho has sought to deal with them separately, the arguments relied upon by Ps are rather similar. At the end of the day, it boils down to whether the parties effected the 2013 Transfers on the common assumption that Ps and D1 are both legally and beneficially entitled to the KY Industrial Zone and the Rent. For similar reasons as I have expressed above, for the purpose of the O14 Summons, I proceed on the basis that, properly construed, the 2005 Confirmation and the 2013 Agreement seem to suggest that the parties proceeded on the assumption or basis that the Company is legally entitled to the Rent even though it holds the same on trust for Ps and D1. 71.It follows that the next question is whether, on such limited assumption or basis, there is a common mistake. One would then need to consider the effect of the Mainland Judgments based on D1’s assertions. Again, for similar reasons as I have expressed above, whilst I take the view that Ps have a compelling argument, I am unable to say there is no room for any defence. On the whole, I consider Ds have a shadowy defence. 72.For completeness, on behalf of Ds, Mr Ho has put forward a number of arguments in response to the Mistake of Rental Entitlement. I will deal with them in turn. 73.First, Mr Ho argues that the alleged Mistake of Rental Entitlement is actually a correct belief. Even if Ps were shareholders, they would not have entitlement to rental income that belongs to the Company. It is trite law that shareholders (even sole shareholders) have no entitlement to the company’s assets. Shareholders are only entitled to dividends. Not only is this true as a matter of Hong Kong law; the Mainland Chinese courts have actually recognised this in its judgment on Ps’ failed action against D1 in the Mainland. 74.In my view, Ds’ argument has missed the point. In a nutshell, Ps’ plea is based on a common assumption that Ps are personally interested in the Rent. It does not really matter even if Ps would not have legal entitlement anyway as shareholders, as long as they are mistaken in their belief that they are personally interested. Reading the matter in context, what Ps actually mean is that, by virtue of the Mainland Judgments, Ps could only share the Rent through payment of dividends or distribution in a winding-up. Either way, it is predicated upon Ps’ status as shareholders. 75.Whilst the above should suffice, I can explain in more details by reference to the pleadings. The crux of Ps’ case, as pleaded at §§25(a) and 35 of the SOC, is that they transferred the Shares on the common assumption that the Company held no interest in the KY Industrial Zone and Ps were entitled to the same (and the Rent) even if they held no shares in the Company and yet, contrary to such assumption, their entitlement was dependent on their capacity qua shareholder. As explained above, if Ps can establish a common assumption that they have both legal and beneficial entitlement to the Rent (which Ps may not necessarily establish), they would likely succeed in their claim of common mistake because the Mainland Judgments held that the Company is entitled (at least legally) to the Rent. Nevertheless, on the basis that Ps can only establish a common assumption that they have beneficial (but not legal) entitlement to the Rent, Ps still have a compelling case that the effect of the Mainland Judgments (based on D1’s assertions), contrary to such assumption, is that Ps do not have any entitlement (legal or beneficial) but could only claim dividends or distribution in winding-up qua shareholders, i.e. Ps’ entitlement is dependent on their shareholding in the Company in this sense. 76.Properly understood against the context of the Mainland Judgments, Ps’ complaint is that, contrary to alleged common assumption, their entitlement is limited to payment of dividends or distribution in winding-up qua shareholder. Ds’ Submissions accept that shareholders are entitled to dividends – hence this is common ground. It is thus beside the point for Ds to say that shareholders have no entitlement to the Company’s assets (which is never a point in dispute) – precisely Ps’ complaint is that, contrary to alleged common assumption, they are at most shareholders who have no entitlement (legal or beneficial) to the Rent. 77.Second, Mr Ho argues that, if Ps had a right to the Company’s Rent, that would only be because Ps have a personal claim against the Company. That entitlement has nothing to do with their shareholding in the Company, and that is in fact what D1 had been saying all along (as recorded in the Mainland judgments), as well as what actually happened between 2013 and 2016 (where Ps continued to receive their share of the Rent despite not being shareholders of the Company). If Ps want to assert a right to the Rent, they should sue the Company for it (which they have not done). 78.Again, this seems to be harping on the same string. It is not correct to suggest that Ps could only have a personal claim against the Company. First, Ps’ primary case is not that they need to claim against the Company, but that the parties proceeded on the common assumption that Ps and D1 were personally entitled (legally and beneficially) to the Rent. If Ps can establish this, they would likely succeed in claiming common mistake. Second, even if Ps could only establish a common assumption that Ps and D1 were beneficially entitled to the Rent, Ps still have a compelling case given the Mainland Judgments. It is in the latter aspect that I consider Ds could mount the defence (albeit a shadowy one) that there is no mistake if the Company holds the Rent for Ps and D1 – but that would be a result of a trust, as opposed to a claim in contract. 79.Third, Mr Ho argues that because Ps had never sued the Company, there is no way for the Court to determine (at least at this stage) whether Ps’ claim against the Company would or would not succeed. If Ps succeed, their original belief would obviously be correct (and there would be no relevant mistake). As I have explained, this is why I say there is still room for a defence if Ps could only establish a common assumption of beneficial entitlement to the Rent, but it is only a shadowy one given Ps’ compelling argument on the effect of the Mainland Judgments, and the evasive stance of Ds. In Ds’ own words, if Ps succeed in their claim against the Company, there would be no relevant mistake. The corollary should also be true:- if Ps fail in their claim against the Company, there would be relevant mistake. Either way, Ps should be able to recover their interest in the KY Industrial Zone and the Rent – if so it begs the question why, particularly given Ds’ professed claim not to take unfair advantage, neither Ds nor the Company (in Ds’ control) did anything to pay or account to Ps for the Rent (for 9 years, or nearly 6 years even counting from July 2019 alone). 80.Fourth, Mr Ho argues that the alleged mistake is at best a misprediction of future events, in the sense that Ps had a mistaken belief as to what would happen in the future once they had transferred their shares in the Company away. With respect, the relevant issues are the assumption or basis of the 2013 Transfers, and the true state of affairs in terms of the ownership (legal or beneficial) of KY Industrial Zone and entitlement (legal or beneficial) to the Rent at the time of the 2013 Transfers, i.e. the then state of affairs. The fact that such state of affairs continues afterwards does not mean the mistake is only about future events. 81.Fifth, Mr Ho argues that the evidence is also consistent with a belief on the part of Ps that they would still be entitled to the Rent of the Company because of D1’s promise. As a matter of fact, Ps did receive their share of the Rent between 2013 and 2016 despite not being shareholders of the Company, and that means that Ps’ belief is correct and there is no operative mistake. 82.With due respect, the gravamen of Ps’ complaint is that they were not in fact entitled to the Rent (legally or beneficially), contrary to the alleged common assumption. On Ds’ argument, there is only “D1’s promise”, and there is no suggestion that this amounts to an entitlement to the Rent. In any case, Ds are not saying this is an actionable promise by Ps against D1 – as a matter of fact Ps’ claim against D1 in the Mainland proceedings were dismissed and this is binding on the parties. 83.In the circumstances, I do not think that the arguments advanced by Mr Ho add much to Ds’ defence. D5. Conditions to be Imposed 84.For all these reasons, I remain of the view that Ds only have a shadowy defence to Ps’ claim. Accordingly, Ds should be given conditional leave to defend. 85.During the hearing, I have discussed with Counsel the conditions which may be imposed in the event this Court reaches the view that Ds only have a shadowy defence. 86.On behalf of Ps, Mr Chain SC suggests that the Court may impose a condition requiring Ds to make payment of the outstanding Rent into Court. With respect, I do not agree. As I have explained during the hearing, Ps only seek the return of the Shares in the present action. Recovery of the outstanding Rent does not fall within the relief sought by Ps in this action. There is no sound basis for Ps to seek conditions beyond that. In a similar vein, Mr Ho has referred to Hong Kong Civil Procedure 2025, Vol.1, pp.372-373, §14/4/16A (citing Finsbury Building Society v Pearce (1890) 89 LT Jour 81, where it was held there was no power to impose payment into court of an amount equal to the rent in arrears as a condition to leave to defend, when the claim was against a tenant for recovery of possession and mesne profits but without a claim for rent in arrears) for the proposition that the conditions imposed should not go beyond the relief claimed. 87.Indeed, it appears that, if Ps succeed in getting back the Shares, Ps may pursue fresh claims qua shareholder against the Company. Further or alternatively, if Ps get back the Shares and thus majority control of the Company, Ps may procure the Company to pursue fresh legal action as may be appropriate. It may also be open to Ps to pursue these (or other) claims without awaiting the outcome of this action. In my view, it is ultimately a matter for Ps to decide whether to pursue parallel proceedings in respect of the KY Industrial Zone and the Rent. Irrespective of the foregoing, one thing is clear – it is not for this Court to impose any conditions beyond the subject matter in the present action, i.e. the Shares. 88.During the hearing, I have enquired with Counsel whether the Court may impose conditions to restrain Ds from taking any steps to dispose of the Shares or otherwise diminish the value of the Shares. Mr Chain SC is receptive to such possibility, whilst Mr Ho says he would leave it to the Court’s discretion. Having considered all relevant factors and circumstances, I am of the view that such proposed conditions are appropriate and should be imposed as conditions for granting leave to Ds to defend. E. CONCLUSION 89.For all these reasons, I grant Ds conditional leave to defend, on the conditions that, pending the determination of this action or further order, Ds should not take any steps to dispose of the Shares or otherwise diminish the value of the Shares. 90.Further, whilst I have not granted summary judgment, I come to the view that Ds only have a shadowy defence and should only be granted conditional leave to defend. In the circumstances, I consider that the appropriate costs order is for the costs of the O14 Summons to be Ps’ costs in the cause, with certificate for two Counsel, to be taxed if not agreed, and I make a costs order nisi to such effect. 91.It remains for this Court to thank Mr Chain SC and Mr Lai for Ps and Mr Ho and Mr Sik for Ds for their assistance to the Court.
Mr Christopher Chain SC and Mr Lai Chun Ho, instructed by S.Y. Wong & Co, for the plaintiffs Mr Martin Ho and Mr Sik Chee Ching, instructed by Patrick Chu, Conti Wong Lawyers LLP, for the defendants |
Cases cited in this judgment