Wong Kam San and Others v. Zhao Kai Investment Ltd and Others
Read the full judgment text of CACV 166/2006 on BabelCite. This Court of Appeal judgment was delivered on 31 January 2007 before Tang VP, Cheung JA and Poon J.
Civil appeal – beneficial ownership of shares – resulting trust – express trust – burden of proof – credibility of witnesses – appellate review of findings of fact – directors – injunction. Civil law – trusts – resulting trust where transferee gives no value – express oral trust supported by explanation that written declaration would prejudice listing. Beneficial ownership of 75 of 100 shares in Hawkins Development Limited, which held 80% of a Liaoning iron-mining joint venture; shares transferred on 27 March 2000 to the 1st and 2nd defendants, allegedly to enable listing on the GEM Board. Whether the trial judge was plainly wrong to find the 1st plaintiff proved the 75 shares were held on trust for him – held, no; decision plainly right, applying Whisprun Pty Ltd v Dixon [2003] 200 ALR 447 and Ting Kwok Keung v Tam Dick Yuen & Others [2002] 5 HKCFAR 336. The 1st plaintiff's evidence was preferred as honest; the 2nd defendant's account was inherently improbable and parts of it were found to be lies; the alleged investor Zhao never appeared or funded the joint venture; the 2nd defendant, a sophisticated MBA graduate, produced no documentary record of the alleged agreement either, undermining his case. Handwritten notes by the 1st plaintiff on a restructuring fax did not invalidate the trust finding, given his modest knowledge and reliance on the 2nd defendant. Whether the 5th and 7th defendants (wife and sister of the bankrupt 2nd defendant) should be restrained by injunction from acting as directors of Hawkins – held, yes; injunction upheld, no evidence from them and a continuing risk they would purport to act as directors. Appeal dismissed; plaintiffs to have costs of the appeal (order nisi).
Legal issues: Whether trial judge's finding on beneficial ownership of 75 Hawkins shares was plainly wrong · Whether injunction restraining 5th and 7th defendants as directors of Hawkins should stand
Outcome: Appeal dismissed. The trial judge's findings that the 75 Hawkins shares were held on trust for the 1st plaintiff and the injunction restraining the 5th and 7th defendants were upheld.
Cited by 2 cases · Cites 1 case
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CACV 166/2006 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO. 166 OF 2006 (ON APPEAL FROM HCA NO. 1653 OF 2004) ______________ BETWEEN
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Before: Hon Tang VP, Cheung JA and Poon J in Court Date of Hearing: 16 January 2007 Date of Judgment: 31 January 2007 _______________ J U D G M E N T _______________
Hon Tang VP (giving the judgment of the Court): Introduction 1.The principal protagonists in this action are the 1st plaintiff and the 2nd defendant. The 2nd defendant is a bankrupt, and was not represented at the trial and did not appear as a party. Only the 1st, 5th, 6th and 7th defendants were represented at the trial. The 2nd defendant was, however, the only witness for the defence. The appellants are the 1st, 5th and 7th defendants, and they are represented by Mr Horace Wong SC, who did not appear below. The 5th defendant is the wife and the 7th defendant the sister of the 2nd defendant. The 1st plaintiff was the only witness for the plaintiffs. 2.The 2nd defendant holds a MBA degree from the University of California at Santa Barbara, and at the material time, controlled two companies, which were listed on the Main Board in Hong Kong. On the other hand, the 1st plaintiff was a county level government official in the Mainland with only junior secondary education. 3.The dispute is over the beneficial ownership of 75 shares in the 8th defendant, Hawkins Development Limited (“Hawkins”). 4.At the material time, Hawkins had an issue capital of 100 shares of $1 each. They were held as to 80 shares by the 2nd plaintiff, Wong Lai Ching, who is the 1st plaintiff’s wife, in trust for the 1st plaintiff. The remaining 20 shares were held by Liu Yong, the 3rd plaintiff, an employee, in trust for the 1st plaintiff. 5.Hawkins, in turn, owned 80% of a joint venture company, Liaoyang Shunfeng Iron and Steel Company Limited (“the JV Company”). The JV Company had interests in an iron mine in Liaoning Province. Hawkins had invested over RMB¥28.8 million in acquiring and running the JV Company. 6.On or about 27 March 2000, the 100 shares in Hawkins were transferred to the 1st defendant, Zhao Kai Investment Limited, the 2nd defendant and the 4th plaintiff, Trengei Development Limited, as follows:-
7.The trial judge’s (Deputy Judge Louis Chan) summary of the parties’ respective cases are uncontroversial:
8.After a trial which lasted 3½ days, the judge delivered his judgment in the afternoon of the fifth day. 9.The judge found in favour of the plaintiffs and made the necessary declarations and ordered the transfer of the 75 shares to the 1st plaintiff or his nominee. 10.He also made an order that:
The appeal on fact 11.The appeal concerns both the beneficial ownership of the 75 shares as well as the injunction order against the 5th and 7th defendants. 12.The judge accepted and preferred the evidence of the 1st plaintiff. 13.It was part of the 1st plaintiff’s case that the 2nd defendant told him that it was important to make the 2nd defendant the registered major shareholder of Hawkins because of his reputation in the financial market. But that when asked for a declaration of trust, the 2nd defendant told him that it “was inadvisable to confirm the trust relationship in writing because of the listing rules”. The 1st plaintiff accepted the explanation because he trusted the 2nd defendant (see para. 17 of the judgment). 14.The case of the 2nd defendant, the judge described as “inherently improbable” (para. 61 of the judgment), and the judge also described part of the 2nd defendant’s evidence as “lies” or “a blatant lie” (paras. 62 and 65 of the judgment). 15.Although Mr Wong submitted that the judge in rejecting the evidence of the 2nd defendant, made no express reference to his demeanour, it does not follow that demeanour or credibility played no part in his finding. 16.That being the case, both Mr Warren Chan SC, who appeared for the plaintiffs, and Mr Horace Wong cited a number of authorities on the jurisdiction and power of this court in such circumstances. In particular, Mr Wong reminded us of the well-known words of Kirby J in Whisprun Pty Ltd v Dixon [2003] 200 ALR 447, at paras. 90 to 100 of his judgment. The judgment of Kirby J provides helpful guidance and we accept that findings of fact, even when based on credibility of witnesses, does not mean that we could “close the appeal books”. 17.We find guidance also from the authorities surveyed by Bokhary PJ in Ting Kwok Keung v Tam Dick Yuen & Others [2002] 5 HKCFAR 336, and in particular, what he said in para. 42:
18.Bearing those authorities in mind, we say at the outset that far from being satisfied that the judge is plainly wrong, we are of the view that the decision is plainly right. Discussion 19.An important aspect of the 2nd defendant’s case, the “main theme” as Mr Wong called it, is that the 1st plaintiff was in direful straits in March 2000 because his attempts to raise capital had failed, there were arrears of wages of about RMB¥3.8 million and the workers were about to strike. This is what the 2nd defendant said in para. 22 of his affirmation (the parties’ affirmations were used in lieu of witness statements):
20.However, the judge did not accept that the workers were about to go on strike, at para. 49 of his judgment, he said:
21.The evidence of the 1st plaintiff was that the situation was not desperate, or that there was a strike was imminent. Indeed, he said, owing wages was common in the Liaoning Province. At page 111 of the transcript, he said:
22.He then explained that wages were owed to those who had ceased working, but that those workers who continued to work were paid. That the workers who continued working were being paid off slowly, he would “pay off some and owe some”:
23.The evidence showed a deplorable state of affairs, but they did not show that the workers were about to go on strike. 24.As for the risk of the joint venture partners closing down the mines, he said in transcript page 113 R to U that they had no power to do so. Also, as will be seen although no operation funding was provided by the 2nd defendant after March 2000, the mines had not been closed. 25.It was on the basis of such evidence that the judge asked at para. 50 of the judgment:
26.At para. 60, the judge concluded:
27.The 2nd defendant’s evidence on the agreement is tenuous. Essentially, there was only his bare statement. We are not surprised that the judge found the 2nd defendant’s version inherently improbable. 28.There was no evidence from the 2nd defendant on how much money the listing at the GEM Board could raise. Nor what would happen if the listing was unsuccessful. As for the future operation costs of the JV Company, there was no evidence on the duration or size of such funding. 29.That led the judge to say in para. 61:
30.We should add that it was the 2nd defendant’s case that the agreement summarised in para. 6 of the judgment and quoted in para. 7 above, was the result of a counter-offer by the 1st defendant. The initial offer he made on behalf of Zhao was that, Zhao “agreed to bear the said listing expenses in return for acquiring 75% of the shares of Hawkins and 60% of the shareholdings of (the JV Company).” Para. 13(k) Defence and counterclaim. 31.In the 2nd defendant’s first affirmation, he said:
32.That makes the supposed agreement to the counter-offer all the more surprising since there was no evidence that there was any consideration of the likely size or duration of the future operation costs. 33.As for the 2nd defendant’s claim that the plaintiff was in urgent need of funds to pay the continuing operation costs of the JV Company, the evidence was that apart from a loan of HK$4.2 million for the wages in arrears, no further payment was made in relation to the future operation costs of the JV Company. Thus the judge said:
34.The judge was also rightly sceptical about the 2nd defendant’s evidence on the likely listing expense. The 2nd defendant asserted that the listing expenses “may cost over HK$5 million to HK$10 million”. Para.13(h) Defence. 35.The 2nd defendant purported to support the listing expenses by relying on a payment of HK$5 million to one Robert Lee. The judge said at para. 55:
36.Mr Wong, rightly in our view, did not contend that the judge’s criticism of the evidence of the 2nd defendant was entirely misplaced. He had to accept that insofar as the judge rejected the evidence of the 2nd defendant, he could not show that the judge was plainly wrong. 37.However, Mr Wong submitted that the judge was wrong to have accepted the evidence of the 1st plaintiff. Since the 1st plaintiff had the burden of proof that there was an express trust relating to the 75 shares, the 1st plaintiff should fail. 38.We do not agree. As Mr Wong accepted, the 1st and 2nd defendants would be holding the 75 shares on a resulting trust for the 1st plaintiff unless they had given value for those shares. Their case on value having been rejected by the judge, and in our view, rightly so, the judge was correct to declare that they held the shares on trust for the 1st defendant and order their transfer. 39.In any event, we do not believe the judge was wrong to find that the 1st plaintiff has proved his case. 40.Mr Wong pointed to the cross-examination of the 1st plaintiff, where he seemed to have said at one stage, that the negotiation was conducted not by him with the 2nd defendant, but by the 3rd plaintiff. However, we do not believe that to be a fair reading of the 1st plaintiff’s evidence. We accept that in many parts, his evidence was unclear. That may be the result of his age and lapse of time. (Para. 60 of the judgment) 41.But the 1st plaintiff, in chief, adopted what he had said in para. 20 of his first affirmation:
42.Under cross-examination, his evidence was to similar effect. For example, at page 126E of the transcript. He said he had asked the 2nd defendant to give him a receipt as evidence that he was holding the 75 shares for him.
43.Mr Wong also relied heavily on what the 1st plaintiff had written on a fax sent by the 2nd defendant to him in New York. The fax sent was in Chinese:
44.The fax was about the restructuring of Hawkins. The new shareholders were to be two overseas companies. One associated with the 2nd defendant holding 75 shares, and another overseas company associated by the 1st plaintiff owning 25 shares. 45.Mr Wong made the valid point that as a result of the restructuring the 1st plaintiff would be in the minority on the board as well as being a minority shareholder. But that is not inconsistent with the 1st plaintiff’s case. 46.However, Mr Wong’s strongest point arose out of the words written by the plaintiff on the fax, in particular the following:
47.That was followed by a calculation by the 1st plaintiff of the benefit in monetary terms, which seemed to have put a notional value on the JV Company of $1.5 billion. Hence, Hawkins’ 80% share was equivalent to HK$1.2 billion, thus, 25% of HK$1.2 billion was HK$300 million, and 75% was HK$900 million. It is not clear from the evidence of the 1st plaintiff, whether he was then thinking in terms of RMB or US dollars. 48.Mr Wong submitted that these remarks of 1st plaintiff were inconsistent with any trust over the shares to be transferred. They were consistent only with the 2nd defendant’s case that the plaintiff had agreed to give up 75% of the shareholdings of Hawkins. 49.The 1st plaintiff’s evidence on what he had written on the fax is confused and confusing. 50.In para. 22 of his first affirmation, he said:
51.He explained his handwritten remarks in his evidence-in-chief. He was cross-examined extensively, the judge also asked him questions. In paras. 21 and 59 of the judgment, this is what the judge said:
52.The remarks on the fax were not in complete sentences. The language used was not so clear and unambiguous, that the 1st plaintiff’s explanation must be rejected as being incompatible with it. Nor do they invalidate the judge’s conclusion on the credibility of the 1st plaintiff’s case. 53.Mr Anderson Chow SC, who appeared for the defence below made all possible points against the 1st plaintiff arising out of the fax with great force and clarity. The judge had them fully in mind. The judge was entitled to put such weight on the fax as he considered appropriate. 54.So far, Mr Wong’s criticism of the judge’s judgment are concerned with the weighing of the evidence. The weighing of the evidence is quintessentially the task of the trial judge. In any event, we see no reason to disagree. 55.Mr Wong then submitted that the 1st plaintiff never satisfactorily explained why there was no written record that the 2nd defendant would hold the shares in trust for the 1st plaintiff. We do not agree. The 1st plaintiff had an explanation. The explanation made sense. He said he was told that that in order for the listing to be successful, the 2nd defendant had to be shown to be the beneficial owner of a majority of the shares in Hawkins. That being the case, there should be no written record that the 2nd defendant was not the beneficial owner, but was the trustee of the 1st plaintiff. Nor do we believe that fact that he agreed to appoint the 2nd, 5th and 7th defendants onto the board of Hawkins inconsistent with the 1st plaintiff’s case. If he trusted the 2nd defendant with the 75 shares, it was not unnatural for him to agree that the 2nd defendant should appear to control the board as well. 56.The 1st plaintiff explained why he trusted the 2nd defendant, and why he was satisfied with the answer of the 2nd defendant to his request for written evidence, and the judge believed him. We see no reason to differ. Indeed, we regard the 1st plaintiff’s explanation to be highly probable. 57.On the other hand, we share the judge’s scepticism as to why there was no written record of the 2nd defendant’s case. Mr Wong accepted there is no documentary record in support of the 2nd defendant’s case, that the 1st plaintiff had agreed to transfer the beneficial interest of the 75 shares in Hawkins to the 1stand 2nd defendants. 58.One would have thought that the 2nd defendant being a person who, according to the judge and we agree, was much more sophisticated in financial matters, would have required a written record of the agreement he said he had reached with the 1st plaintiff. 59.As it was, all the 2nd defendant had, were the instruments of transfer of the 75 shares and related board meetings, showing the transfer of the shares for “value received” which had been backdated to January 1998, presumably to facilitate listing, together with an untrue statement to the stamp duty office that Hawkins had no trading and assets since incorporation. 60.Furthermore, there was no or no sensible explanation from the 2nd defendant why, if his version be true, he should not have asked for the transaction to be recorded in writing. 61.Moreover, the agreement relied on by the 2nd defendant is woefully incomplete, for example, whether the obligation to fund the operation cost was open-ended, or that it would end if the listing was successful. It was so vague that it was probably unenforceable. We are not concerned with enforcement. However, the incompleteness of the alleged agreement casts doubt on whether there was ever such an agreement. 62.Moreover, as the judge has pointed out, when in May 2004, the 1st plaintiff instructed the solicitors to ask for the re-transfer of the 75 shares on the basis that the shares were held in trust for the 1st plaintiff, there was no reply from the 2nd plaintiff. The explanation by the 2nd defendant as to why there was no reply was rightly rejected by the judge. 63.Anyway, all these go to the weighing of the evidence and we see no reason to disagree with the judge. 64.Another attack made by Mr Wong on the judge’s findings, related to what the judge said in paras. 51 and 52 of his judgment, namely that the 1st plaintiff had continued to make capital injections into the JV Company, in the sum of RMB¥3.3 million between September and December 2003, and RMB¥4.14 million between January and May 2004. The judge took the view that such evidence was inconsistent with the defendant’s case, as there was no reason why the 1st plaintiff should have continued to inject capital into the JV Company after the share transfer. 65.Mr Wong said the judge made two important mistakes in relation to this finding. 66.First, there was no reliable evidence of injection of funds by the 1st plaintiff after March 2000. The document (document C100, according to the designation at trial), which was produced to support such injection, was of extremely doubtful reliability. We must say that the transcript of evidence of the cross-examination of the 1st plaintiff, in relation to document C100, supported Mr Wong’s submission. 67.Secondly, the judge wrongly thought that this evidence of capital injection by the 2nd plaintiff “has not been challenged and the 1st plaintiff was not cross-examined on it” (para. 52 of the judgment). 68.We believe this criticism of the judgment is justified. However, that was just one of the many reasons given by the judge for preferring the 1st plaintiff’s evidence. 69.The judge gave his judgment the day following the conclusion of the trial, when the impression of the witnesses was fresh on his mind. This single lapse does not invalidate his overall conclusion. Injunction 70.Mr Wong submitted that since the 5th and 7th defendants had been properly appointed as directors of Hawkins, the fact that the 1st and 2nd defendants held those shares on trust for the 1st plaintiff, does not mean that the 5th and 7th defendants should be restrained from acting as such directors. Mr Wong also made the point that the 5th and 7th defendants were not parties to any trust. From the records available to us, it is not known whether the 5th and 7th defendants are still directors of Hawkins. 71.Mr Wong, however, does not rely on the fact that in July 2005, that is about 1 year after the commencement of this action, Hawkins purported to issue 9,900 further shares. It is not known whether the allottees were bona fide purchasers without notice. The validity of this allotment is the subject of separate proceedings. Having regard to the result of this action, it is probable that the allotment was made in breach of trust. 72.In any event, Mr Wong does not rely on the allotment of 9,900 shares, so we are entitled to proceed on the basis that the 1st plaintiff is the beneficial owner of all the shares in Hawkins. There was no evidence from the 5th and 7th defendants on why they should be allowed to carry on as directors of Hawkins. Nor that they were not aware that they were appointed to facilitate the listing of Hawkins. Since there is a continuing risk that the 5th and 7th defendants would purport to act as directors of Hawkins, we see no good reason not to uphold the injunction. 73.Mr Wong did not make any separate submission regarding the restraint in relation to the JV Company. We see no reason to disagree with the judge, especially having regard to the reasons given by him on 31 August 2006 when refusing to stay the injunction pending the appeal. Disposition 74.For the above reasons, we dismiss the appeal. 75.We also make an order nisi that the plaintiffs are to have the costs of the appeal, to be taxed if not agreed.
Mr. Horace Wong, SC & Mr. Bernard Yuen instructed by Messrs Tso Au Yim & Yeung for the 1st, 5th and 7th Defendants. Mr. Warren Chan, SC & Mr. Paul Lam instructed by Messrs C.L. Chow & Macksion for the Plaintiffs. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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