Choi Gain Chee and Another v. Kowloon Development Co Ltd and Others

CACV 371/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 371 OF 2005

(ON APPEAL FROM hca nO. 761 OF 2005)

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BETWEEN

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Before:  Hon Woo VP & Yeung JA in Court

Date of Hearing:  2 June 2006

Date of Judgment:  13 June 2006

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J U D G M E N T

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Hon Woo VP:

1.I agree with Yeung JA’s judgment and the orders he proposes.  I wish only to give a brief summary of my own observations on the claim that World Tower has a proprietary or beneficial interest in the property, the subject matter of the redevelopment project (“the property”).

2.The submission of Mr Warren Chan SC before us is to the effect that under all the surrounding circumstances in which the Consultancy Agreement came into being, there is an arguable case that all the transactions were in substance, as opposed to in form, arrangements made by Choi and Lo of the one part and Uncle Chang of the other part for Uncle Chang to provide financing to the redevelopment project and for Choi and Lo to provide security for the financing.  The arrangements included the Heads of Agreement which was subsequently cancelled, the assignment by various companies owned and controlled by Choi and Lo of the various old units in Nos 31 and 31A-G of Robinson Road (“old units”) to King’s City so as to unify the ownership of all old units in King’s City alone, the sale of the entire shareholding of King’s City (as the developer) to Uncle Chang’s camp which would provide the financing, and the Consultancy Agreement that restricted the power of King’s City to deal with the property, ie, by imposing obligations on King’s City to build a new building, to sell the new units upon its completion not below a certain price and to apply the proceeds in discharge of the loans and interest, with the remaining proceeds going to World Tower (owned and controlled by Choi and Lo).  Based on all these, Mr Chan submitted that the Consultancy Agreement conferred a proprietary right in the property on World Tower.

3.Mr Chan is in effect asking the court to unravel all the transactions and to re-write all the written agreements, and in particular, the Consultancy Agreement, for the parties.  However, not only has he failed to show to this Court any authority in support of such a proposition, but for achieving the course he proposed, the corporate personality of the various companies concerned as well as the clear purposes and intentions as expressed in the written agreements would also have to be totally disregarded.

4.Granted (a) that it was Choi and Lo who first hatched the idea of acquiring all the old units for the purpose of redevelopment, (b) that they had the financial backing by way of loans obtained from Uncle Chang for the purpose, (c) that they acquired all the old units and sold them to King’s City at an alleged undervalue, (d) that they sold the entire shareholding in King’s City to Uncle Chang’s camp, and (e) that they made all other arrangements for the purpose of carrying out the redevelopment project with the assistance of the financial backing, it is plain, in my judgment, that all these do not make the Consultancy Agreement an instrument that conferred on World Tower a proprietary interest in the property which was being redeveloped as asserted by Mr Chan. 

5.Although not pleaded in so many words in the statement of claim, Mr Chan argued that the Consultancy Agreement was in substance, albeit not in form, a mortgage of the property, giving rise to a beneficial interest as if it were an equitable right of redemption in favour of World Tower.  That was despite the absence of any writing to evidence such beneficial interest, in apparent contravention of sections 3 and 5 of the Conveyancing and Property Ordinance, Cap 219.  Mr Chan’s contention was that the court is permitted to look at extrinsic evidence so as to get to the true meaning and substance of a written agreement by way of interpretation and the extrinsic evidence in this case formed the matrix of facts to be looked into by the court for the purpose.

6.I do not think that even by the route of construction in order to avoid the parol evidence rule, the claim of proprietary interest can be salvaged.  First, as Mr Anthony Neoh SC has submitted, there is no express plea of a mortgage made by World Tower in favour of King’s City, being the substance of the Consultancy Agreement now relied upon by Mr Chan.  Secondly, even if this pleading defect could be rectified, there was nothing for World Tower to mortgage to King’s City under the Consultancy Agreement.  One cannot go behind the corporate personality in disregard of the fact that it was the companies (albeit owned or controlled by Choi and Lo) who had acquired the various old units before selling them to King’s City.  As was held by Deputy Judge Gill and Deputy Judge Muttrie, and Mr Chan did not challenge this holding, Choi and Lo as shareholders and directors of those companies did not have any proprietary or beneficial interest in the old units held by the companies.  The same applies to World Tower (as owned and controlled by Choi and Lo), which cannot be in a better position than Choi and Lo.  Thirdly, one cannot say that even if World Tower had nothing to mortgage to King’s City, King’s City had created a beneficial interest in the property in favour of World Tower, because the creation or disposition of a beneficial interest in land, as opposed to World Tower transferring an interest in land to King’s City and reserving some interest in the land to itself (such as in a mortgage), must be evidenced in writing, and the requirement of sections 3 and 5 has not been satisfied.

7.Moreover, the option clause in the Consultancy Agreement gave an option to World Tower to buy the entire shareholding in King’s City.  Whatever the effect of this option, the intention of the parties to the Consultancy Agreement is clear beyond argument that World Tower was not to be given any interest in the property.

8.This is a plain and obvious case that the claim of World Tower to have a proprietary or beneficial interest in the property cannot be sustained.  The appeal should therefore be dismissed.

Hon Yeung JA:

Background

9.On 19 October 2005, Deputy High Court Judge Muttrie (“the judge”) struck out the plaintiffs’ claim of their having a proprietary interest in, and ordered the vacation of the lis pendens registered against, Nos 31 and 31 A-G, Robinson Road, Hong Kong (“the land”).

10.The plaintiffs appealed against the judge’s decision. The defendants served a respondents’ notice, seeking to uphold the judge’s decision on an additional ground.

11.The dispute between the parties concerns the development of the land. Units in the existing buildings on the land, acquired in 1994 to 1998, were demolished and a new building with new units was to be erected (“the project”). The 3^rd defendant – King’s City Holdings Ltd (“KC”), who acquired the old units and therefore the title to the land through various corporate vehicles, was the named developer.

12.The 1^st plaintiff (“Choi”) and Lo Por Kit (“Lo”), an architect who was declared a bankrupt on 19 April 2004, are the shareholders of the 2^nd plaintiff, World Tower Properties Ltd (“World Tower”).

13.The 2^nd defendant (“Roe”), a moneylender, is the wholly owned subsidiary of the 1^st defendant, (“KDCL”), a listed property development company.  KC, formerly owned by Choi and Lo, became Roe’s wholly owned subsidiary on 27 July 1998.  Mr Ng Siu Chang, “Uncle Chang” was the chairman of KDCL and its subsidiaries. They are collectively referred to as “KDCL”.

14.The undisputed evidence indicates that Choi and one Irene Lo (daughter of Lo), by a Sales of Shares Agreement dated 25 May 1998, agreed to sell the entire issued capital in KC to Roe. At that time, 36 units in the existing buildings on the land were registered in the name of other individuals and companies.

15.On 27 May 1998, Choi, Lo and Irene Lo entered into a Heads of Agreement with Roe and covenanted to procure those individuals and companies to sell their units to KC.

16.Subsequently KC purchased the 36 units, including one from Ford System Investment Ltd controlled by Lo and Irene Lo and a Consultancy Agreement, whereby KC appointed World Tower as a consultant for the project, was entered into to replace the Heads of Agreement.

17.Under the Consultancy Agreement, KC agreed to sell units in the new building upon completion of the project at such time and in such manner as might be advised by World Tower and that the parties would share the proceeds in accordance with certain formulae. World Tower was further given an option to repurchase the share capital in KC.

18.Choi and Lo claim to be the beneficial owners of the project and/or the land by their own rights or through World Tower by reason of the written and/or oral agreements with KDCL.

The Previous Proceedings

19.In June 2003, Choi, Lo and World Tower commenced HCA 192 of 2003 against the defendants. Choi and Lo sought to establish beneficial/proprietary interests over the land/project whereas World Tower claimed damages for breach of contract. They also sought specific performance of various agreements allegedly made with KDCL together with certain declaratory relief. Their writ was registered against the land as a lis pendens.

20.In paragraph 19 of the Statement of Claim in HCA 192 of 2003, Choi, Lo and World Tower averred:

“By reason of the aforesaid paragraphs, Choi and Lo were and are at all material times by themselves or through World Tower the true beneficial owners of the Project Site, the Project Property, the Development Project and/or the net proceeds of sale derived therefrom upon the true and proper construction and meaning of the Project Agreement.”

21.There was no pleaded fact or sufficiently pleaded fact to justify the aforesaid averment and on 5 September 2003, Rogers VP, sitting as an additional judge of the Court of First Instance, struck out the aforesaid paragraph 19. Rogers VP made the following comment:

“Whereas it seems that there are grounds for considering that the plaintiffs could plead a case on the basis argued, there would have to be a substantial amendment to the pleading in order for the plaintiffs to show that they had a valid claim to a proprietary right in the land.”

22.Rogers VP, having struck out the claim for beneficial/proprietary interest over the land/project by Choi and Lo, ordered the vacation of the lis pendens, but he suspended the order for 21 days to allow Choi, Lo and World Tower time to amend their Statement of Claim. Rogers VP took the view that there might be merits in the claim for beneficial/proprietary interest in the land/ project if it was properly pleaded.

23.Choi, Lo and World Tower sought to amend their Statement of Claim by averring that Choi and Lo were beneficial owners and controllers of the units as they were directors and/or shareholders of KC and various other companies when the units were purchased in the names of the companies.

24.They further averred that despite the transfer of the units to KC and/or the transfer of KC’s shares to KDCL, Choi and Lo retained a beneficial/proprietary interest in the shares and/or the units until the completion of the project when their interests would be attached to the proceeds of the sales of the new units. They claimed that their transfer of the shares in KC to KDCL was in substance and in equity just a security for the funds provided by KDCL for the project.

25.On 16 December 2003, Deputy Judge Gill dismissed the application to amend by Choi, Lo and World Tower. He took the view that a company owning land did not confer on its shareholder a beneficial interest in the land. Deputy Judge Gill further took the view that Choi, Lo and World Tower did not have a beneficial interest in the land/project in the first place and there was therefore no question of them retaining any beneficial/proprietary interest. Deputy Judge Gill disallowed the amendments and uplifted the stay of the vacation of the lis pendens.  Choi, Lo and World Tower did not take the matter any further.

The Present Proceedings

26.Seventeen months later in April 2005, Choi and World Tower commenced the present proceedings against the defendants. Lo did not take part as he had been declared a bankrupt in April 2004. Choi and World Tower have registered the writ against the land as a lis pendens.

27.In their lengthy Statement of Claim, Choi and World Tower set out the history pertaining to the acquisition of the units in the existing buildings and how the project was financed.

28.They suggest that as security for KDCL’s financing the project, Choi and Lo transferred all the issued shares in KC to KDCL with an option of repurchase at the price sufficient to reflect KDCL’s loans together with interest. They further aver that KDCL, through Uncle Chang, had accepted that Choi and Lo were the beneficial owners of the project.

29.Choi and World Tower point out that the Consultancy Agreement was to make World Tower a consultant to the project with a consultancy fee equivalent to the net sales proceeds of the project after repayment of KDCL’s loan with interest, and that World Tower could buy back KC’s entire share capital at an amount sufficient to repay KDCL’s loans. They further point out that KC had to complete the project and apply the sales proceeds in accordance with World Tower’s direction.

30.The suggestion is that in substance, the Consultancy Agreement was in effect a mortgage arrangement and conferred beneficial interest in the land/project on World Tower.

31.Choi and World Tower therefore suggest that they are the beneficial owners of the land/project, or alternatively they should have a proprietary interest.

The Plaintiffs’ Contention

32.It is readily apparent that Choi and World Tower’s claims against the defendants should and could have been included in their claims in HCA 192 of 2003 if they had not already done so. Mr Warren Chan SC, for Choi and World Tower, does not argue otherwise.

33.However, it was suggested that the action was taken on counsel’s advice and a fresh action is justified because World Tower had a reasonable cause of action for beneficial or proprietary interest, which was not pleaded, or not pleaded in the same way as in HCA 192 of 2003.

34.Instead of saying that such beneficial or proprietary interest arise out of Choi and Lo’s shareholding in KC and various companies that originally purchased the units, Choi and World Tower now rely on the purported oral agreements and the Consultancy Agreement they had made with KDCL.

35.It was suggested that pleadings in HCA 192 of 2003 could be further amended, but a fresh action was commenced to avoid the difficulties caused by Lo’s bankruptcy.

36.Choi and World Tower had undertaken to discontinue HCA 192 of 2003 and hence there would be no duplication of proceedings and no abuse of process.

The Judge’s Decision

37.The judge emphasized the legal persona of limited companies and that as shareholders of companies that had acquired the land, Choi and World Tower did not have and beneficial/proprietary interest in the land/project. The judge pointed out that Uncle Chang did not have such interest either and could not therefore confer upon Choi or World Tower any such interest.

38.The judge rejected the defence’s contention that the orders of Rogers VP and Deputy Judge Gill operated against Choi and World Tower as an issue estoppel. The judge did not find it necessary to decide if the raising of present action whilst HCA 192/2003 was pending in order to register a lis pendens constituted an abuse.

Grounds of Appeal/Respondents’ Notice

39.It is the original contention of Choi and World Tower that the Consultancy Agreement, in view of the other oral agreements and/or arrangement with KDCL, has in true effect and/or in substance conferred upon Choi and World Tower beneficial/proprietary interest in the land/project and that the judge should have accepted their undertaking to discontinue HCA 192/2003.

40.Mr Chan, however, concedes that he cannot advance the same argument on behalf of Choi and would confine the claim for beneficial/proprietary interest over the land/project to that of World Tower.

41.Mr Chan emphasizes that the court should look at the commercial reality of the transactions, in particular the undervalued transfer of the 36 units to KC. Mr Chan further suggests that the Consultancy Agreement, when considered together with the factual matrix arising out of the agreements between Choi and Lo on the one part and KDCL on the other part, is in effect a mortgage agreement, thus conferring beneficial/proprietary interest in the land/project on World Tower. Mr Chan seeks to rely on Lavin v Johnson [2002] EWCA Civ 1138 and Common Luck Investment Ltd v Cheung Kam Chuen [1999] 2 HKC 719.

42.Mr Chan further emphasizes that a claim should only be struck out in plain and obvious cases and that World Tower’s claim for beneficial/proprietary interest does not fall within such category.

43.Mr Chan suggests that the court should view the present action as Choi and World Tower’s further attempt to amend the pleading and that such amendment was expressly approved by Rogers VP and that the view was adopted by the judge as the basis for rejecting the application of issue estoppel.

44.By their Respondents’ Notice, the defendants argued that Choi and World Tower are bound by the doctrine of issue estoppel in the wider sense, and therefore they should beprecluded from raising the same or substantially the same issues based on the same or substantially the same facts as in HCA 192/2003.

Issue estoppel

45.Mr Chan has carefully taken us through the Statement of Claim in HCA 192/2003. It is clear that World Tower had not in fact made any claim for beneficial/proprietary interest over the land/project. The issue is a separate and distinct cause of action and was not before Rogers VP or Deputy Judge Gill. It had, therefore, not been determined, let alone finally.

46.I do not agree with the submission of Mr Anthony Neoh SC, for the defendants, that issue estoppel in its wider sense, namely that parties who are involved in litigation are expected to put before the court all the issues relevant to that litigation, applies.

47.No doubt it is in the public interest that there should be an end of litigation and that no one should be proceeded against twice for the same cause (see the judgment of Wigram VC in Henderson v Henderson (1843) 3 Hare 100 at 115 and the judgment of Woolf CJ in Taylor v Lawrence [2003] QB 528 at p 535). However, the present case is still at a very early stage, the pleading stage.

48.As pointed out by the judge, if Mr Neoh’s argument is carried to its logical conclusion, no amendment to the pleading is possible once it has been struck out.

49.When Rogers VP struck out part of the Statement of Claim in HCA 192/2003 and when Deputy Judge Gill refused the defendants’ application for amendment, what they did was simply an exercise of discretion in an interlocutory proceeding and it can hardly be said that there had been a final determination of an issue giving rise to an issue estoppel.

50.The problem of the application of res judicata/issue estoppelin an interlocutory proceeding can be problematic as recognized in Mullen v Canoco Ltd [1998] QB 382. Evan LJ set out the difficulties at p 390 to 391:

“I would hold as follows. First, that the circumstances in which an interlocutory ruling can give rise to an estoppel are always problematical. Similar considerations were discussed as regards issue estoppel in the leading authority, Carl Zeiss Stitung v Rayner & Keeler Ltd (N0 2) [1967] 1 AC 853. For example, a defendant may allow a particular claim or action to go by default not just in literal sense but as a result of a conscious or even unconscious decision not to raise certain defences which he might raise if, for example, the claim was larger than it was. He might decide, in effect, it was not worth raising them in the circumstances of a particular case. Another example, although it can be distinguished on logical grounds, is the preliminary ruling as to the merits of the case on an Order 14 summons. It can never be suggested that the court’s ruling that a defendant should have leave to defend is in any way decisive of the ruling which the court thereafter reaches on a full consideration of the issue at trial. A further aspect which should be mentioned is that at the stage of the interlocutory ruling it is unlikely that any, or certainly not full, discovery has been given and in those circumstances it is correspondingly more difficult for the court to be confident before making a ruling on the merits. Those are just example of what I would call the problems which always arise when considering whether any interlocutory ruling can give rise to any estoppel whether on strict legal or discretionary grounds.”

51.I also wish to repeat the words of Lord Denning in McIlkenny v Chief Constable of the West Midlands and Anro [1980] 1 QB 283 at 321 to 322:

“The doctrine of ‘finality’ grew up in the time when people had in their minds ‘cause of action estoppel’ and were inclined to overlook ‘issue estoppel’. Now that the House of Lords has recognised the validity of issue estoppel we have to think afresh…I think, all be solved if issue estoppel is applied in this way: when an issue has been decided by a competent court against a party in an earlier proceedings, it should only be regarded as final if he has had a full and fair opportunity of defending himself therein and the circumstances are such that it would not be fair or just to allow him to re-open it in subsequent proceedings.”

52.The interlocutory rulings of Rogers VP and Deputy Judge Gill were not so clear and so specific as regards World Tower’s claim of beneficial/proprietary interest over the land/project and there were no other special factors so that it could be said that an estoppel should arise.

53.Indeed if issue estoppel,in its wider sense, were to apply against World Tower, the result will be unfair and unjust when it had not been given a full and fair opportunity to argue the issue. The judge was right to reject the defence’s case on issue estoppel.

54.We therefore only have to decide if World Tower’s claim for beneficial/proprietary interest over the land/project is arguable and whether there has been an abuse of process.

Proprietary Interest

55.In his attempt to persuade us that the Consultancy Agreement is in substance a mortgage agreement, Mr Chan pinpoints the peculiar nature of its terms, namely that KC, as the developer, will only be entitled to the repayment of the loan plus a fixed amount of interest whereas World Tower, as the consultant, is entitled not just to a fee, but to the remaining balance; that KC does not have complete freedom on the fees payable to the project manager; and that World Tower can have a say on the manner of the sales and the selling prices of the completed units.

56.Though peculiar, the terms of the Consultancy Agreement are comprehensive and clear, and their purposes obvious. Through KC, KDCL would get back the loans advanced for the project plus interest and a bonus if the sales proceeds exceed $1 billion. Through World Tower, Choi and Lo are entitled to the net profit, if any, derived from the project. They have the option to repurchase the shares in KC by repaying the loans plus interest.   

57.The undervalued transfers of the old units, if they were indeed undervalued transfers, emphasized by Mr Chan, can be easily explained. The prices for acquiring the old units are part of the costs of the project and the “undervalued” amount will be compensated by an identical amount as part of the net profit derived from the project.

58.Hence, it made no difference to Choi and Lo if the units were transferred at a profit or at a loss. A more convenient way to deal with the matter is by transferring the old units to KC at costs, which was what the parties did.

59.The Consultancy Agreement, no doubt, is a form of security, both for KC and KDCL on the one part and for Choi, Lo and World Tower on the other part. However, it is purely and simply a contractual document. None of its terms is consistent with the suggestion that it is a mortgage agreement.

60.A mortgage consists of two basic elements, a disposition or charge of the mortgagor’s estate or interest as security for the repayment of debt to the mortgagee. Every mortgage implies a debt and a personal obligation by the mortgagor to pay it (Sutton v Sutton (1882) 22 ChD 511 at 515). Incident and inseparable to every mortgage is the right of the mortgagor to redeem (Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269).

61.World Tower did not purchase any of the old units and never had any estate or interest over the land. World Tower did not obtain any loan and has no obligation to repay any. Word Tower has no right of redemption relating to the estate or interest in the land/project. Whatever right of redemption that can be exercised by World Tower/Choi relates only to the share capital of KC.

62.In so far as it may be suggested that somehow, there were oral agreements supporting a mortgage arrangement conferring upon World Tower any beneficial interest in the land/project, I agree with Mr Neoh’s submission that the requirement of s 3 of the Conveyancing and Property Ordinance, Cap 219 has not been complied with.

63.I am satisfied that World Tower’s claim for beneficial/proprietary interest over the land/project is completely unarguable.

Abuse of process

64.Further I am of the view that in bringing the present action whilst HCA 192/2003 is still pending is an abuse of the process.

65.Prima facie, it is an abuse of the process of the court to bring two actions against the same defendants in respect of the same cause of action. “The public interest in avoiding any possibility of two courts reaching inconsistent decisions on the same issue is undoubted and this alone would suggest that two actions based on the same cause of action should never be allowed” (per Sir J Donaldson MR in Buckland v Palmer [1984] 3 All E R 554 at 558j).

66.Mr Chan emphasizes the difficulties faced by Choi and World Tower arising out of the bankruptcy order against Lo. With respect, whatever difficulties there might, they could be easily overcome. Choi, Lo and World Tower could have appealed against Deputy Judge Gill’s decision in December 2003 if they wished. They could have applied to further amend their Statement of Claim in HCA 192/2003.

67.After Lo was declared bankrupt in April 2004, Choi and World Tower could have applied for an order to proceed without Lo or to make him a defendant if his trustee in bankruptcy unreasonably refuses to co-operate.

68.Mr Chan also emphasizes that as World Tower has commenced, and has incurred time and expenses in pursuing, the present action, it will be more convenient and fairer to allow it to continue instead of forcing it to proceed with its claim for its beneficial/proprietary right by applying to amend the pleadings in HCA 192/2003.

69.Firstly, the waste of time and expenses is of its own making. World Tower should not have commenced the present action. Secondly, I am not persuaded that the time, expense and difficulty (as alleged) in starting this action and discontinuing HCA 192/2003 would be less than those that might be incurred for applying to amend the pleading in HCA 192/2003 and deal with Lo’s bankruptcy in that action. Thirdly, convenience and/or saving of time and expenses are not an excuse, let alone justification for not adopting a proper procedure in civil litigation.

70.I can find no justification for Choi and/or World Tower to commence the present proceedings at all.

71.Further when it comes to the question of inconvenience and unfairness, we cannot overlook those caused to the defendants.

72.By allowing the present action to proceed, the defendants would have to face two actions over the same subject matter. An undertaking by Choi and World Tower to discontinue HCA 192/2003 will not get rid of the case as Lo remains. How the cases will progress is purely conjecture.

73.The claim for beneficial/proprietary right over the land/project was rejected in HCA 192/2003 and the associating lis pendens was discharged. The lis pendens can only berevived if World Tower successfully amends its Statement of Claim. However, by commencing the present action, World Tower was able to again register a lis pendens.

74.As the judge had rightly observed, “What is really at stake here is the registration of the lis pendens”. World Tower should not be allowed to steal a march on the defendants or to avoid the supervision of the court.

75.In my view, what Choi and World Tower try to do is a clear abuse of the process of the court.

Conclusion

76.I accept that pleadings are only struck out in plain and obvious cases. I am satisfied that World Tower’ claim for beneficial/proprietary interest over the land/project is unarguable and that the commencement of the present proceedings is clearly an abuse.

77.I would therefore dismiss the appeal with a costs order nisi against Choi and World Tower, save that they do have the costs of the Respondents’ Notice.

Mr  Warren Chan, SC and Mr Patrick Sezto, instructed by Messrs Gallant Y.T. Ho & Co., for the 1^st and 2^nd Plaintiffs/Appellants

Mr Anthony Neoh, SC, Mr K.M. Chong and Ms Emma Wong, instructed by Messrs So, Keung, Yip & Sin, for the 1^st, 2^nd and 3^rd Defendants/Respondents