Fujian Xun Jie Telecommunication Technology Service Ltd, Xiamen Branch v. Chan Wah Tsang David

HCA 2451/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2451 OF 2006

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Before: Mr Recorder A Ho, SC in Court

Dates of Hearing: 3 to 7, 12 and 13 May 2010

Date of Judgment: 30 September 2010

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J U D G M E N T

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Introduction

1.In this Action, the Plaintiff sought to recover from the Defendant the value of 2,200,000 shares of a listed company in Hong Kong, namely, CNPC (Hong Kong) Ltd.

2.The Defendant in this case is a solicitor practising as a sole practitioner under the name of David W T Chan & Co.

3.The Plaintiff claims to be the beneficial owner of the 2,200,000 CNPC shares as a result of an assignment from the assignor, Nanyang Information Technology Development Service Company Limited (南洋信息技術開發服務有限公司) (“Nanyang”). It is the Plaintiff’s case that the assignment was effected by way of a Chinese document dated 3 September 2001 entitled《債權轉讓協議書》(“the Assignment”) and that on 22 July 2004 notice of the assignment was given to the Defendant, being the custodian of the shares.  The Plaintiff claims that as from 22 July 2004 the Defendant has been holding the 2,200,000 shares as trustee for the benefit of the Plaintiff.

4.The Defendant did not claim any beneficial interest in the shares.  At all times, he realized that he was in possession of the relevant share certificates as custodian and, hence, a trustee of the shares.  There is no dispute that he first came into possession of 3 share certificates shortly after 28 June 1999, comprising a total of 2,510,000 CNPC shares.  The circumstances of his becoming the custodian of the share certificates will be set out in more detail later.  At the time, it was desired that new certificates should be issued so that the 2,200,000 shares in question could be held separately from the remaining 310,000 shares.  Eventually, (again there is no dispute) the formality for reissuing the share certificates was completed in January 2003.  Henceforth, the 2,200,000 shares were held in the name of the Defendant under one single share certificate.

5.The Plaintiff alleged that the Defendant had, in breach of trust, disposed of the shares, and had failed to render an account in respect of his dealings with the shares or of the proceeds after their disposal.  The Plaintiff sought equitable compensation from the Defendant, or alternatively, an account for the profits arising from holding and dealing with the shares.

6.The Defendant set up two main defences to the Plaintiff’s claim.  First, it is the Defendant’s case that David W T Chan & Co had provided various legal services to Nanyang and because professional fees had accrued and remained outstanding, he was entitled to a lien over the 2,200,000 shares to secure the payment of such fees.  In this regard, as the Defendant is the sole proprietor of his firm, no distinction is drawn between the Defendant and David W T Chan & Co.

7.The Defendant admitted that on 2 occasions in late July and early August 2005 he had sold a total of 2,140,000 CNPC shares. Part of the proceeds were applied to acquire other shares.  The Defendant contended that the sale of the shares was carried out pursuant to an agreement reached between the parties at a meeting in Guangzhou on 26 July 2005 (“the Guangzhou Meeting”).  He was authorised to apply the proceeds of the shares to offset the outstanding professional fees and to invest in some other shares “with a view to maintaining a balanced and conservative portfolio of shares”.

8.The second aspect of the defence concerned mainly the interpretation and legal effect of the Assignment.  The Defendant, though not a party to the Assignment, contended that the Assignment and the subsequent notice thereof did not satisfy all the requirements of section 9 of the Law Amendment and Reform (Consolidation) Ordinance (“LAR(C)O”), and hence failed to qualify as a statutory assignment.  This in turn, so the Defendant argued, deprived the Plaintiff of the locus standi to bring this Action in its own name.

The Proceedings

9.Before I set out the background of the claim, I should note at this stage that only the Plaintiff had called witnesses to testify at the trial.  The Defendant, on the other hand, had declined to take the witness stand although he was present throughout the trial until the very last stage (just before his counsel’s final address).  No explanation was given why the Defendant chose not to give evidence in the face of the many allegations against him.

10.I note, in this connection, the insertion of the words “without proofreading” against the Defendant’s signature in his witness statement.  This is a most peculiar qualification of a witness statement, and particularly so of a statement by a lawyer-litigant who must be aware of its significance for the purpose of litigation.  Such qualification obviously gives rise to the concern that by seeking to dissociate himself from the statement, the maker was in fact declining to vouch for its contents.  In the event, by electing not to testify at the trial, the Defendant escaped altogether the prospect of being required to affirm its accuracy and be questioned on it.

11.I could only infer that such manoeuvres were designed to avoid the need to vouch for the veracity of his defence.  This will be a material consideration when I come to assess the various factual aspects of the case.

Background – Settlement Agreement and the 2,200,000 CNPC shares

12.I now turn to the background events.  Unless otherwise indicated, the factual narrative below should be taken as matters that I have found to be established on the evidence adduced at the trial.

13.Nanyang was a Mainland company operating in Xiamen. It was a subsidiary of the Xiamen Telecom Bureau (廈門電信局) (“Xiamen Telecom”).

14.It appears that Nanyang was the victim of a fraud perpetrated by one Chen Fang (陳峰).  The funds obtained from the fraud, amounting to more than US$3.8 million, were apparently transferred by Chen to one Liu Qi Ming (劉啟明) (“Liu”) and also to a company called Tin Lung Company (天龍公司) in Hong Kong.

15.With the funds, Liu purchased 6 properties in Hong Kong and a quantity of CNPC shares in the name of himself or his wife, Madam Xi Tong Xu (施通術) (“Xi”).  It would appear that the properties were purchased around 1997 at the height of the market and were partially financed by mortgages obtained from various banks. The details of the fraud and how the funds ended up in the hands of Liu are not material for the purpose of this Action.

16.After discovery of the fraud, negotiations were under way in 1999 between Nanyang and Liu with a view to working out an arrangement for Nanyang to recover both the properties and the shares from Liu and Xi.  However, by 1999 the property prices had declined considerably.  Even though Nanyang realized that the properties eventually would have to be sold to recoup its loss, it was thought unwise to sell the properties in a depressed market.  However, by holding on to the properties, mortgage payments would have to be kept up in the meantime.

17.Nanyang had its own legal advisers in the Mainland, Xiamen Huong Qiusheng Law Firm (廈門洪秋生律師事務所).  Mr Zhu Shu Ting (朱樹亭) and Mr Wang Guang Ming (王光明) (“Mr Wang”) of that firm were responsible for advising Nanyang.  However, since the properties and the shares were Hong Kong assets, it was thought desirable that a lawyer in Hong Kong should be engaged to advise and deal with the matter.  In the event, the Defendant’s firm was engaged.

18.The terms of the Defendant’s retainer were set out in a Service Agreement dated 21 May 1999 (“the Service Agreement”). It was drafted by the Defendant.  According to the Service Agreement, the Defendant’s firm was to provide legal advice in relation to the 6 properties and prepare any related documentation of a non-contentious nature.  It was specifically provided that the Defendant was to deal with the mortgagee-banks regarding mortgage repayments, and also with the estate agents to facilitate the sale of the properties.  The Defendant should protect Nanyang’s interest in the properties and safeguard its interest against any adverse claims by third-parties. The period of service required from the Defendant was stated to be 6 months, and in return he would be entitled to a lump sum fee of $150,000.

19.Soon after the signing of the Service Agreement, a fee note was rendered by the Defendant’s firm for the sum of $150,000.  It is noteworthy that this fee note was issued in Chinese, a fact that distinguishes it from the other disputed Debit Notes to which I shall refer later.

20.The fees of $150,000 was duly settled by Nanyang on about 4 July 1999.

21.In the meantime, on 28 June 1999, agreement was reached between Nanyang on the one hand and Liu and Xi on the other as to recovery of the assets (“the Settlement Agreement”).  In the Settlement Agreement, Liu and Xi acknowledged that funds belonging to Nanyang had been used to acquire CNPC shares and various properties.  The parties agreed that Nanyang was entitled to recover the 2,200,000 CNPC shares held by Liu, together with 4 of the 6 properties acquired with Nanyang’s funds.  Liu and Xi would relinquish all rights in the properties and would execute irrevocable powers of attorney in favour of the Defendant (being Nanyang’s nominee) to vest him with full authority to dispose of the said properties.

22.At the time of the agreement in June 1999, overdue mortgage instalments had accrued on the 4 properties, estimated to be in the region of $2.5 million.  According to the terms of the Settlement Agreement, Nanyang would discharge the accrued outstanding payments, and would continue to keep up future payments until the properties could be sold at satisfactory prices.  It was specifically provided that upon the discharge of the overdue instalments, ownership of the 2,200,000 CNPC shares would be transferred to Nanyang.  In order to facilitate the eventual transfer of the shares, Liu was to deliver the share certificates to the Defendant as custodian.

23.The Settlement Agreement was signed at the office of the David W T Chan & Co.  Indeed, it is the Defendant’s pleaded case that he was the solicitor acting for Nanyang at the time[1].  I have no doubt that the Defendant was fully aware of the terms of the Settlement Agreement and, in particular, his role as Nanyang’s nominee in relation to the properties and as custodian in relation to the shares.

24.In addition, the Defendant was given a power of attorney in respect of the 3 properties under Liu’s name.  Although Xi was not present when the Settlement Agreement was signed, I believe she had subsequently also executed a similar power of attorney.  But, in any event, whether or not she did so has no bearing on the issues in these proceedings.

25.As earlier noted, the 2,510,000 CNPC shares were held by Liu under 3 share certificates.  The 3 certificates were delivered by the lawyers of Liu and Xi to the Defendant shortly after the agreement.

26.Later, on about 30 July 1999, a sum of $3,050,000 was remitted by Nanyang to David W T Chan & Co.  In the ensuing few months, 3 further sums respectively of $980,356.88, $245,089.22 and $490,178.44 were remitted.  In the event, the total sum deposited with the Defendant’s firm amounted to $4,765,624.54.  There can be little doubt that the purpose of the remittance was to put the Defendant in funds to disburse the mortgage payments as contemplated under the Settlement Agreement.  It should be noted that the aggregate of the remittance already far exceeded the estimated overdue mortgage payments of $2.5 million.

27.It was alleged by the Defendant that Nanyang had failed to repay the mortgage loans, which had prompted a meeting of the parties in Xiamen on 7 June 2000[2]. Indeed, according to a memorandum of the meeting – which I accept to be an accurate record of the parties’ discussion – the meeting took place at the office of Xiamen Telecom and was attended by the Defendant, his brother (Dr Chan Hon Tsang, 陳漢增), Mr Li Zhen Qun (李振群) (“Mr Li”) (the then Head of Xiamen Telecom), Mr Huang De Shing (黃德勝) (“Mr Huang”) (the then general manager of Nanyang), as well as Mr Wang (the earlier-mentioned legal adviser of Nanyang).  It does appear from the memorandum that Nanyang was indeed experiencing difficulty with the mortgage payments although the exact details were not apparent from the document.  The real significance of the memorandum, in my view, is that it has recorded the parties’ agreement on matters concerning the Defendant’s management of the 4 properties as well as the CNPC shares under his custody.

28.According to the memorandum, the Defendant had undertaken to procure the rearrangement of the certificates of the shares so that the 2,200,000 shares could be held separately from the remaining 310,000. He had further agreed that within 2 months, he would transfer the certificates relating to the 2,200,000 shares to Nanyang or its nominee.

29.In return, Nanyang agreed to make a further payment of $120,000 to David W T Chan & Co.  In this regard, it is important to note the express reference in the memorandum that Nanyang would not be required thereafter to pay any further sums in respect of the mortgage loans.  The responsibility of dealing with the properties would thenceforth fall upon the Defendant and his brother.  In addition, after disposal of the properties, Nanyang would be entitled to any remaining balance of the proceeds after deduction of all attendant expenses.

30.On 15 June 2000, Nanyang duly remitted the said sum of $120,000 to David W T Chan & Co.  It would thus appear that whatever was Nanyang’s previous difficulty with respect to mortgage repayments, Nanyang was thenceforth relieved from further obligations to finance the mortgage loans.

31.In this connection, insofar as the Defendant has pleaded that the subsequent sale of the properties by the mortgagees was attributable to Nanyang’s failure to repay the mortgage loans, such allegation is not substantiated on the evidence and I would reject the same.

Alleged outstanding legal fees

32.I turn now to one of the issues raised in the Defence concerning the alleged outstanding professional fees incurred during this period, namely, between 31 May 1999 and 15 June 2000.

33.According to the Re-Amended Defence, between 31 May 1999 and 15 June 2000, David W T Chan & Co had had to deal with matters relating to the Settlement Agreement, for which fees aggregating $2,461,200 had been incurred. It is the Defendant’s case that he had issued a total of 16 Debit Notes in relation to the services provided during the period.  At all times these Debit Notes had remained unpaid.  Hence (argued the Defendant) he was entitled to a lien over Nanyang’s properties, including the 2,200,000 CNPC shares and the proceeds realized from their disposal[3].

34.The question relating to the alleged outstanding fees was subject to serious dispute.  The Plaintiff’s case is that the purported Debit Notes were never contemporaneously issued (or delivered to them), but were fabricated solely for the purpose of this trial.  The Plaintiff put in issue the authenticity of the Debit Notes.

35.In considering this issue, first, it is noteworthy that in his first version of the Defence, the Defendant had already raised an issue regarding “outstanding professional costs” (which incidentally was wholly unparticularised)[4]. Yet, when he came to file the List of Documents in December 2007, no reference was made to any of these Debit Notes whatsoever.  Given the importance of this allegation to the Defendant’s case, it is hard to see why these Debit Notes (if they were indeed issued contemporaneously in 1999 and 2000) were not previously identified until September 2008 when the Amended Defence was filed[5].

36.Also importantly, it may be remembered that under the Service Agreement in May 1999, the Defendant was entitled to be paid a lump-sum fee of $150,000 for his service in the coming 6 months (that is, from May to October).  A fee note in Chinese was in fact issued on 24 May 1999 for precisely that sum, $150,000.  Despite this Chinese fee note, one finds however that the first of the disputed Debit Notes (dated 31 May 1999) again demanded payment of $150,000, purportedly for fees covering exactly the same period.  Such duplication would, of course, need to be explained.  None was however forthcoming from the Defendant.

37.In addition, if indeed the series of disputed Debit Notes were contemporaneously issued, on the Defendant’s case the fees would have remained outstanding for a long time.  Yet there was no evidence of any request (not to mention demand) for payment of the $2.4 million – which is by no means an insubstantial sum.

38.Further, as already mentioned earlier, the memorandum of the meeting on 7 June 2000 showed that Nanyang had promised only to make a further payment of $120,000 to David W T & Co and no more.  If $2.4 million in fees were indeed outstanding, the absence of any reference in the memorandum to such fees or to the possibility of offsetting the fees against the proceeds of the properties would have been a surprising omission.

39.Further still, as already noted, the Defendant asserted that by virtue of the agreement reached at the Guangzhou Meeting in July 2005, he would be entitled to offset the outstanding fees against the proceeds of sale of the 2,200,000 shares.  Details of the Guangzhou Meeting will be discussed further.  It suffices at this stage to note that in the Defendant’s letter to Mr Li of 27 July 2005 (one day after the alleged agreement), the only reference to fees deductible from the proceeds was the mere sum of $50,000.  Beyond the $50,000, there was no mention of any other outstanding fees due to the Defendant’s firm.

40.It would have been noticed that the several documents referred to above spanned a period of some 6 years after the fees were supposed to have been incurred.  Yet none of those documents gave the slightest hint that a sum of $2.4 million was due to the Defendant’s firm.

41.Clearly, these queries cry out for explanation but they are met with deafening silence from the Defendant.

42.I wish only to mention, for completeness, that counsel for the Plaintiff had drawn attention to several other aspects of the evidence to support his submission that the Debit Notes should be rejected. One of the criticisms made against the Defendant was the absence of any record to substantiate his claim that legal work referred to in the Debit Notes had actually been rendered by David W T Chan & Co.  Indeed, a point was made that the alleged outstanding $2.4 million would have meant the Defendant’s spending over some 500 hours in dealing with the 4 properties within the period of about a year.

43.In response to the criticism of lack of documentation, the Defendant relied on a faxed letter dated 6 April 2006, which purported to show that all the case files had been returned to Xiamen Telecom.  There appears to be a signature of Mr Li on the fax, suggesting receipt of the files in question.

44.The genuineness of Mr Li’s signature is, in turn, disputed by the Plaintiff.

45.The circumstances surrounding the emergence of the faxed letter of 6 April 2006 deserve careful consideration.  As will be discussed below, after the Guangzhou Meeting in July 2005, a series of letters had been issued on behalf of the Plaintiff and Nanyang to urge the Defendant to give an account of the status of the 2,200,000 CNPC shares.  The Defendant did not respond to any of these enquiries.  Not surprisingly, the Defendant’s complete silence duly prompted a complaint by the Plaintiff and Nanyang to the Law Society against the Defendant for misconduct.  The faxed letter of 6 April 2006 was provided as part of the Defendant’s response to the Law Society’s inquiry.  According to the faxed letter, all documents in the case files, whether originals or copies, had been returned.  This faxed letter prompted a strong response from Mr Li who, in a declaration in May 2006, not only denied any suggestion that Nanyang, the Plaintiff or himself had ever received the case files from the Defendant, also accused the Defendant of fabricating evidence.

46.I have considerable doubts about the Defendant’s suggestion that all the case files, including copies, were returned to the Plaintiff or Nanyang.  One naturally wonders why someone in the Defendant’s position (especially being a lawyer himself) who was being pursued for an account of the shares would simply relinquish possession of all written records in favour of his pursuer.

47.Moreover, if all originals and copies of the documents were indeed returned, then one must immediately query how the Defendant would be able to make disclosure, though belatedly, of copies of the disputed Debit Notes, and how it was possible for him to reproduce in the witness statement[6] a passage verbatim of a letter from the solicitors acting for Liu and Xi. In the event, the Defendant gave no explanation to such queries.

48.On the other hand, I have heard Mr Li’s evidence and I accept that he had already left Xiamen Telecom by the time the letter was allegedly faxed to him on or about 6 April 2006.  I accept that he did not receive the case files.  I also accept his evidence that the signature on the receipt was not his.  There is insufficient evidence to enable me to come to a view as to how Mr Li’s signature came to appear on the purported receipt and I make no finding in that regard.

49.In light of the complete absence of explanation from the Defendant, I would attach no weight to the faxed letter in question. I do not accept the excuse that the failure to provide records to substantiate his firm’s fee-earning works was due to the return of all case files, including copies.  I think it far more likely, and I so infer, that the Defendant’s refusal to provide documentation was because he realised that such records did not support his claim for the outstanding fees.

50.I have, on the other hand, heard evidence from Mr Huang and Mr Wang, both of whom had confirmed that Nanyang had never received the disputed Debit Notes.  I believe their evidence in this regard.

51.It needs hardly be stated that the burden of proving the outstanding fees falls squarely on the Defendant.  Taking into account all the circumstances, I have no hesitation to reject the Defendant’s case that fees aggregating $2.4 million were due to the Defendant’s firm.  It is also my finding that the 16 disputed Debit Notes were not issued contemporaneously by the Defendant or his firm, but were brought into existence solely to bolster the assertion of a lien for the purpose of these proceedings.

Debit Note in 2002 for $350,000

52.There was one other disputed Debit Note dated 31 December 2002 for $350,000.  The Defendant has not testified in relation to how the fees were allegedly incurred under this Debit Note.  My observations in paragraphs 39 and 40 above are also relevant here.  I would reject that fees allegedly covered under this Debit Note were owing to the Defendant.  I also find that this Debit Note was not contemporaneously issued by the Defendant or his firm.

The Assignment

53.I turn now to the next contentious issue in the case, the Assignment.

54.The Plaintiff is a Mainland company and was incorporated on 16 December 1999[7].  Its business involved the supply of telecommunication services to consumers in Fujian.

55.For some years before the end of 2000, Nanyang had been indebted to Xiamen Telecommunication Bureau (廈門市郵電局).  As a result of the reorganization of the Bureau, the right to Nanyang’s indebtedness was apportioned between the Plaintiff and Fujian Telecom Company (福建省電信公司廈門市分公司) (“Fujian Telecom”) respectively.  As recorded in an agreement made by Fujian Telecom and the Plaintiff dated 31 December 2000 (headed《關於南洋公司抵債資產分攤情況》) (“the December 2000 Agreement”), Fujian Telecom would become entitled to a share of over RMB 19 million of Nanyang’s indebtedness, while the Plaintiff would share RMB 9,720,000.  As part of the arrangement, Nanyang would transfer its interest in the 2,200,000 CNPC shares to the Plaintiff.

56.On about 3 September 2001, the Assignment was executed between Nanyang and the Plaintiff.  The recital recorded the reorganisation of the Xiamen Telecommunication Bureau and the apportionment of Nanyang’s indebtedness in favour of the Plaintiff.  It further recited that the Plaintiff would be entitled to the 2,200,000 CNPC shares in satisfaction of Nanyang’s indebtedness.  It is worth setting out the entire Assignment here:

轉讓人： 南洋信息技術開發服務有限公司

受讓人： 福建迅捷通信技術服務公司廈門分公司

基於如下事實：

1. 轉讓人係原廈門市郵電局的債務人，原廈門市郵電局分立後，福建迅捷通信技術服務公司分得該債權的一部分，而成為轉讓人的債權人。

2. 根據受讓人與廈門電信公司達成的協議，受讓人將取得轉讓人在香港的220萬股中國石油股票，以抵償轉讓人的債務。

3. 自1998年8 月以來，與股票有關的信用証詐騙案誘發的大量法律事務全部由王光明律師(下稱辦案律師)承擔。雙方從一開始就約定，律師報酬主要來源於辦案(訴訟、追贓及其它形式)所得的提成。

4. 上述股票尚未完成分割，手續上尚有瑕疵，與香港方面聯繫、協調及跟進工作仍須由原辦案律師承辦，以最終實現股票項下的權益。

鑒此，為明確雙方的權利的義務，保持工作的連續性，雙方協議如下：

一、 轉讓人同意將其於1999年6月28日在香港通過協議接受的220萬股中國石油股票，轉讓給受讓人，用以抵償轉讓人對受讓人的債務。

二、 從即日起，原承辦上述事宜的辦案律師直接向受讓人負責，直至上述股票完整有效地轉交給受讓人為止。為避免香港方面不必要的誤解或節外生枝，相關聯絡及跟進事宜，辦案律師依舊以轉讓人的名義進行。

三、 根據權利義務一致性原則，轉讓人原承擔的該股票項上的義務亦由受讓人承擔，此即指辦案律師的提成及相關費用亦轉由受讓人承擔。此項義務以轉讓人於2001年3月6日給辦案律師的確認函為依據。受讓人可與辦案律師另行書面協議或確認。

四、 本協議係廈門電信與受讓人簽訂的《關於南洋公司抵債資產分攤情況》的補充，以理順法律關係，確保受讓人順利、無瑕疵地實現對上述股票的權益。

五、 未盡事宜，雙方友好協商解決。

本協議一式三份，轉讓人、受讓人各持一份，辦案律師備存一份。

57.The Assignment is central to the parties’ dispute in these proceedings.  The Defendant has raised issues concerning the execution of the document, as well as its interpretation and legal effect.

58.First, a submission was made by counsel for the Defendant that the impression of Nanyang’s seal on the copy Assignment[8] indicated an imperfect seal (with a dent appearing at the “4 o’clock position”), which was different from the ones applied to other documents.  It was submitted that such imperfection gave rise to an issue regarding the authenticity of the seal, and hence, the authenticity of the Assignment.  Counsel further compared the impression of the seal appearing on different copies of the Assignment as reproduced in the trial bundle of documents (for example, only a vague impression of Nanyang’s seal was visible in the authenticated copy of the Assignment[9]).

59.I find such forensic challenge wholly devoid of merits.  First, until the commencement of the trial, no issue regarding the impression of the seal on the copy Assignment was ever raised, whether in parties’ correspondence or the pleadings.  In the Defence, the challenge as to execution of the Assignment focused only on the absence of a signature by Nanyang’s legal representative[10] rather than the “imperfect impression” of the Nanyang’s seal on the copy Assignment.

60.Further, as will be discussed later, the Defendant was first given notice of the Assignment in July 2004.  He asked, in October 2004, for a letter of authorization to be issued jointly by Nanyang, Fujian Telecom and the Plaintiff to authorize him to deal with the shares in question.  In November 2004, an authenticated Letter of Confirmation, executed jointly by the 3 parties was issued to him.  At that time, there was no query regarding the authenticity of Nanyang’s seal on the Assignment, or for that matter, the Assignment itself.

61.Furthermore, the Assignment contained an express statement that the document was executed in triplicate.  The fact that different impressions of the seal appeared in different copies of the Assignment could hardly have given rise to an issue of its authenticity.

62.In my view, counsel’s attempt to take the court on a course of forensic comparison of different impressions of the seal on photocopied-documents is of no assistance to the determination of the authenticity of the seal.  If anything, such a challenge bears the hallmark of an opportunistic move by a litigant.  Furthermore, there are clear procedural rules to be followed if the Defendant wishes to raise an issue of authenticity of a document but I have not been informed that the Defendant has availed himself of the proper procedure.  I do not find anything to cast doubt on the authenticity of the Assignment itself.

63.Counsel for the Defendant made several other points regarding the interpretation and legal effect of the Assignment.

64.The first point was premised upon a challenge to Nanyang’s entitlement to the shares.  The argument was that unless the Plaintiff was able to prove Nanyang’s beneficial interest in the shares in the first place, there was no interest that could be assigned to the Plaintiff.  At the beginning of the trial, I had refused to allow the point to be raised by way of amendment to the Amended Defence.  I had disallowed the amendment because the argument necessarily involved retracting an admission that “Nanyang was the beneficial owner of the 2,200,000 shares in CNPC”[11], and I could see no justification to allow the withdrawal of a material admission when the trial was about to commence.

65.In addition, a number of other arguments were put forward by Defendant’s counsel on the applicability of section 9 of LAR(C)O.  It was counsel’s argument that the subject assignment failed to satisfy the statutory requirements in a number of respects and as a result the present Action was bound to fail because the Plaintiff had no locus standi to issue proceedings in its own name without joining the assignor – Nanyang.  It was contended that section 9 was inapplicable for the following reasons:

(i) The Assignment lacked an assignment clause. It was in truth only an agreement to assign rather than an actual assignment of the shares;

(ii) The Assignment did not qualify as an absolute assignment because at the time the 2,510,000 million CNPC shares were still held under 3 certificates. The Assignment could therefore only take effect as an intended assignment in future when the 2,200,000 shares were “divided” from the remaining 310,000 shares, or that the assignment amounted only to a purported transfer of part of the chose until such division;

(iii) By reason of the need to effect the “division”, the assignment was conditional upon further rectification of the defects;

(iv) The Assignment did not contain the signatures of the legal representatives of the respective parties and therefore did not fulfil the requirement of being executed “under the hand of the assignor”.

66.It may be useful to begin with the purpose of section 9 of LAR(C)O.  In Re Westerton [1919] 2 Ch 104, Sargant J explained section 25(6) of the Judicature Act 1873, now replaced by section 136 of the Law of Property Act 1925 – the equivalent of our section 9 – as follows (at p.111 – 112):

“Prior to the Judicature Act, 1873, a legal chose in action such as this debt could not be transferred at law, and the assignee of the debt could only have sued in the name of the assignor, and in the absence of consent by the assignor or of a binding contract by the assignor to allow the use of his name, the use of the assignor’s name could only have been enforced by filing a bill in equity and so obtaining an injunction in personam to allow the use of the name, ..... But to my mind the effect of s.25, sub-s.6, of the Judicature Act, 1873, has been to improve the position of the assignee of a chose in action who satisfies the words of the sub-section, that is to say, an assignee under an absolute assignment by writing under the hand of the assignor not purporting to be by way of charge only, by enabling that assignee to dispense at law with the use of the name of the assignor and so to dispense with the circuitous process of compelling the assignor in equity to allow his name to be used in proceedings by the assignee. The result of the sub-section is that an assignee who takes under such an absolute assignment as is there mentioned can now sue at law in his own name, and I see no reason why in the present case the assignee should not do so.”

Where an assignment of a legal chose qualifies as a statutory assignment under section 9 of LAR(C)O, the assignee can no doubt avail himself of the procedural advantage of bringing proceedings in his own name. .

67.However, as will be apparent from the discussion below, it does not follow that in cases where not all requirements of section 9 are satisfied, proceedings commenced only in the name of the assignee must necessarily be held to be improperly constituted.  The question as to the Plaintiff’s locus is not answered merely by asking whether the assignment qualifies as a statutory assignment under section 9.

68.However, it may still be useful to analyse some of the Defendant’s challenges as it would bring into focus the true nature of the issues arising in the case.  In the first ground of challenge, Defendant’s counsel argued that the Assignment was merely an agreement to assign.  Emphasis was placed on the heading of the document describing it as “an agreement”《債權轉讓協議書》, and the expression “同意 ....... 轉讓給受讓人” in clause 1 of the Assignment.  The essence of the argument was that pending “division” of the shares, it would not have been the parties’ intention to effect an immediate assignment of the 2.2 million shares until the formality for the “division” was completed.

69.This is essentially a question of interpretation of the Assignment.  It is trite law that the Court should have regard to the surrounding circumstances in construing the relevant provisions, as Lord Hoffmann said in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, at 912:

“Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.”

70.In this case, as was recorded in the Recitals, the beneficial interest in the 2.2 million CNPC shares was to be transferred to the Plaintiff in satisfaction of the indebtedness due from Nanyang.  There is little doubt that the purpose of entering into the Assignment was to implement and give effect to such intention.  Viewed in this light, rather than being an agreement to transfer, the expression in clause 1:

“轉讓人同意將其 ....... 轉讓給授讓人 .... ”

(“the assignor agreed to have [the shares] ........ transferred to the assignee”)

should, in my view, be properly interpreted as a statement of the assignor’s confirmation of its obligations to transfer the shares to offset its indebtedness.

71.Noting also clause 2 which provided that Mr Wang was to become accountable to the Plaintiff immediately from the date of the Assignment, and clause 3 that the attendant liabilities of the shares would thenceforth be assumed by the Plaintiff, it is clear to me that the parties’ intention was to effect to an immediate transfer of all of Nanyang’s beneficial interest in the 2.2 million shares to the Plaintiff.

72.In approaching the question of interpretation, I find support also from the judgment of Sargant J in Re Westerton (supra). That case concerned the interpretation of a letter from the testator to his landlady in the following terms: “You have been very kind to me and I desire to make some return by giving you the amount of 500l. now on deposit at the ..... bank as per receipt enclosed.”  Notwithstanding the expression merely of a “desire” to make a gift, the learned judge said:

“The first question is whether the testator purported to make a clear gift then and there to Mrs Gray or whether he was only expressing a desire to make a gift to her in the future. The letter written by the testator to Mrs Gray, according to the construction which I place on it, amounted to an out and out gift and not to an expression of a mere desire to make a gift.” (emphasis added)

73.Counsel for the Defendant was at pains to point out, as was indeed alluded to in the Assignment itself, that further formality by way of regrouping of the shares and reissuing of the certificates would need to be undertaken – hence the words “agreement to assign” in clause 1.  While there is no doubt that certain formality would be required before the transfer of the shares could be perfected, such formality would not preclude in any way the immediate passing of the beneficial interest in the shares. To articulate the parties’ intention in more familiar language of the common lawyers, the outstanding formality as to reissuing of the share certificates relates only to the legal title of the shares, it is not intended to and does not affect the immediate assignment of the beneficial interest to the assignee.

74.In my view, Mr Wang’s evidence should be understood in this light (bearing in mind that he was not trained in the common law tradition).  I do not consider his evidence inconsistent with such a view.

75.Turning to the second and third ground advanced by the defence.  These grounds, in my view, were premised upon an insufficient appreciation that the subject matter of the Assignment was and had always been the 2.2 million shares, and that the 2.2 million shares were choses-in- action capable of independent assignment.  To argue that the assignment was not absolute because it related only to part of the chose in the 2.51 million shares is to confuse the shares with the share certificates.

76.Furthermore, once it is appreciated that the subject matter of the assignment was the beneficial interest in the shares, the argument that the assignment was merely a conditional assignment pending re-grouping of the shares clearly becomes untenable.

77.In summary, it is my view that the Assignment effected an immediate transfer of Nanyang’s equitable interest in the 2.2 million shares in favour of the Plaintiff.  As regards the beneficial interest in the shares, it was not a mere agreement to do so in future.

78.It follows therefore that the transfer, not being of a legal chose, did not attract the application of section 9 of LAR(C)O. 

79.Thus, it becomes unnecessary to decide whether section 9 would apply to a transfer of the legal title of shares in a company.  It suffices to note that doubt has been expressed as to its applicability: see Snell’s Equity, 31^st edition, para 3-09. 

80.It is therefore also unnecessary to express any view on the fourth ground as to whether the affixing of the seal would have satisfied the requirement that the assignment should be “under the hand of the assignor”.  I would confine myself to saying that having regard to the authorities referred to by Plaintiff’s counsel, I am inclined to the view that it would if section 9 had been relevant: Bennett v Brumfitt (1867) LR 3 CP 28; Electronic Rentals Pty Ltd v Anderson (1971) 124 CLR 27, esp at 42; Max Share Ltd v Ng Yat Chi (No.2) (1997-98) 1 HKCFAR 72.

81.Returning to the central question as to the Plaintiff’s locus in issuing the present proceedings.  As noted already, the validity of the proceedings does not depend solely on the assignment qualifying as a statutory assignment.  Indeed, in relation to equitable assignments or assignment of equitable choses, the authors of Snell’s Equity pointed out that:

“Where the chose is merely equitable and the whole interest in it has been vested in the assignee, equity has always permitted him to sue in his own name without joining the original creditor; for the chose existed only in equity, and so equity was free to hold that the assignee was the sole owner and that no interest remained in the original creditor.” (ibid, para 3-20, with emphasis added)

82.In the present case, there is little doubt that as a result of the Assignment, the whole of the beneficial interest in the 2.2 million shares was transferred to and vested in the Plaintiff. Accordingly, I am of the view that the present Action, even commenced only in the name of the Plaintiff, was properly constituted.

83.Even if I am wrong, a review of the further correspondence in the next section will show that Nanyang had completely relinquished all rights in the 2.2 million shares in question.  Again, adopting the statement of the learned authors of Snell’s Equity:

“This requirement [of having before the court all parties interested in the chose] is only procedural ..... and proceedings will not be treated as a nullity where the assignor and assignee are not both joined. The court may at any stage remedy the defect by ordering that a person be added as a party. In special circumstances (e.g. where it is clear that the assignor has no further interest in the matter) the court may even dispense with the requirement that both assignor and assignee are joined.” (ibid, para 3-21, with emphasis added)

Further correspondence & Notice of the Assignment

84.As noted earlier, on 22 January 2003, a single certificate comprising the subject 2.2 million shares was issued in the name of the Defendant.

85.In the Defendant’s letter to Mr Wang on 19 February 2003, he acknowledged that he was holding the certificate for the 2.2 million shares.  Since then several letters had been written by Mr Wang (between August and October 2003) requesting confirmation from the Defendant that he would, in performance of his duties as trustee, comply with client’s instructions regarding disposal of the shares and remittance of the proceeds. It was suggested that the Defendant might charge a fee of $30,000 for his service in return.

86.After a few reminders, the Defendant eventually confirmed on 23 October 2003 that the shares were held by him on behalf of the client and that he would carry out client’s instructions expeditiously.

87.Subsequently on 4 June 2004, Mr Wang wrote to the Defendant instructing him to sell the shares when the share price reached $1.00 or above (per share), and to remit the proceeds to an account to be nominated.

88.The Defendant responded by requesting an authenticated letter of authorization from the client.  Mr Wang was puzzled by the request.

89.On 21 July 2004, the Defendant reiterated his request in a telephone conversation with Mr Wang.

90.On the following day (22 July 2004), acceding to the request, Mr Wang forwarded the authenticated copies of the following documents to the Defendant: (i) the Assignment; (ii) the December 2000 Agreement; (iii) the certificate dated 22 July 2004 signed by Mr Huang as Nanyang’s former general manager certifying that the interest in the 2.2 million shares had been assigned to the Plaintiff; (iv) a power of attorney dated 22 July 2004 given by the Plaintiff in favour of Mr Wang authorising the latter to represent the former for the purpose of dealing with the 2.2 million shares in question.  Mr Wang further reiterated the instruction that the shares should be sold when the price reached $1.00 or above.

91.There is no dispute that the above-mentioned documents were received by the Defendant.  At this point, while the Defendant clearly realised that he was holding the shares on trust, also had notice of the assignment of interest in the 2.2 million shares from Nanyang to the Plaintiff.  There could not have been any doubt that the 2.2 million shares comprised in the certificate under his name belonged to the Plaintiff beneficially.

92.Yet, the Defendant persisted in his request for an authenticated letter of authorization to be jointly executed by Nanyang, Fujian Telecom and the Plaintiff, to authorise him to dispose of the shares within the prescribed price range.

93.Acceding yet again to his request, on 3 November 2004, a Letter of Confirmation「確認函」was provided jointly by Fujian Telecom, Nanyang and the Plaintiff. The Letter of Confirmation categorically confirmed that the 2.2 million shares had been assigned to the Plaintiff, and that the Plaintiff as the sole beneficial owner of those shares would be entitled to determine the manner of their disposal.  The Letter of Confirmation further authorised Mr Wang to give instructions on the Plaintiff’s behalf.

94.By another document of the same date, the Plaintiff expressly authorised and instructed the Defendant to sell the 2.2 million shares within 5 working days and to remit the proceeds into the account of Mr Wang’s firm after deduction of $30,000 as agreed fee.

95.Yet again, the Defendant refused to accept the Plaintiff’s instructions.  In his letter of 16 November 2004, he indicated that he would consider seeking the directions of the court on the matter, which he never did.

96.In the letter dated 18 November 2004, Mr Wang imposed a deadline for the Defendant to comply with the instructions.  The deadline was ignored by the Defendant.

97.As the correspondence amply demonstrated, this is one of the clearest cases where the assignor, Nanyang, had obviously no further interest in the subject matter of the assignment.  To me, the Defendant’s challenge of the constitution of the present Action on the basis of non-joinder of the assignor is completely devoid of merit.

The Guangzhou Meeting

98.The next contentious issue arises from the Guangzhou Meeting.

99.In July 2005, the Defendant sent two faxes to Mr Wang for onward transmission to Mr Li (who had by then retired from Xiamen Telecom), proposing to meet with him in Guangzhou on 26 July 2005.  There is no dispute that the meeting did take place and among those present were Mr Wei (general manager of the Plaintiff), Mr Li, Mr Huang, Mr Wang and the Defendant.

100.It was the Defendant’s case[12] that at the meeting, agreement was reached that the Defendant should proceed to sell the 2.2 million shares and apply the proceeds to offset the outstanding professional fees incurred by him up to 15 June 2000 (allegedly amounting to over $2.4 million). For the fees incurred after that day it was agreed that the Defendant and Huang would meet again after the sale of shares with a view to agreeing an amount acceptable to both parties.  Further, the balance of the sale proceeds should be used by the Defendant to acquire other listed shares with a view to maintaining a balanced and conservative investment portfolio.

101.As already noted, the Defendant elected not to testify at the trial.  There is no admissible evidence to support his version of the alleged agreement.  I have already found against the Defendant on the issue of the outstanding fees.  Also noted earlier, in the Defendant’s letter to Mr Li on the day following the meeting, the only reference to fees deductible from the proceeds was a sum of $50,000.  The Defendant’s allegation that he was entitled to set off $2.4 million in fees was completely contradicted by his own letter.

102.I further reject the Defendant’s case that he had been authorised to acquire new shares with the proceeds.

103.I accept, on the other hand, the evidence of the Plaintiffs’ witnesses, all of whom affirmed that there was no mention at the meeting of any legal fees being due and owing to the Defendant, and hence there was no agreement to authorise the Defendant to off-set any outstanding fees against the proceeds of the shares.

104.I believe what happened at the Guangzhou Meeting was that the parties had had a discussion regarding the disposal of the shares.  It was agreed that the shares should be sold when the market conditions for their disposal were met, and that after their disposal the Defendant should remit the proceeds to an account of the Plaintiff subject to a deduction of $50,000 for his service.  Indeed pursuant to the agreement, Nanyang issued a letter of authorisation (dated 4 August 2005) to advise the Defendant of the details of the account into which the proceeds of the shares should be deposited.

105.My conclusion from the evidence is that the Defendant, although given the authority to dispose of the shares, was never authorised to deal with the proceeds in any way other than to remit them to the Plaintiff’s nominated account (subject to deduction of $50,000).

106.As noted at the beginning of this Judgment, the Defendant’s pleaded case is that he had sold a total of 2,140,000 shares, and had applied part of the proceeds to acquire other shares[13].  There is some evidence to show that as from 3 August 2005, the Defendant had ceased to be a registered holder of all CNPC shares.  This piece of evidence shows either the Defendant had disposed of all the shares or that he had transferred the balance to his broker pending disposal. 

107.What is clear however is that the Defendant, having disposed of a large part of the shares (on his own case), had never remitted the proceeds to the Plaintiff as directed.  Further on his own case, he had misapplied the funds towards unauthorised transactions, which clearly amounted to a breach of trust on his part, and I so find.

Relief

108.Counsel for the Plaintiff urged me to grant equitable compensation for the loss of the shares, such loss to be calculated on similar basis as an award of common law damages for conversion.  He submitted that the effectiveness of the alternative remedy of an account for the shares and the proceeds would require the co-operation of the Defendant, which was unlikely to be forthcoming.

109.Although I have considerable sympathy for such a submission, I have also taken note that the essence of the breach of trust in the present case lies not so much in the disposal of the shares (provided that the market conditions were met) but rather in the unauthorized application of the proceeds and the failure to account.  What has actually become of the trust properties (that is, the balance of the shares if still un-disposed, and the sale proceeds) and the extent of the loss (or profits) will only be ascertained after an account has been taken of all the dealings of those properties by the Defendant.

110.In considering the choice of remedies, I have taken into account the passages in Snell’s Equity, ibid, paras 18-12 to 18-16.  I am of the view that the most appropriate remedy is not to make an award of monetary compensation at this stage but to order an account with payment upon taking of such account.

111.I would accordingly grant the following relief:

(1) A declaration that the Defendant has since 22 July 2004 held the 2,200,000 CNPC shares upon trust for the Plaintiff;

(2) An order that the Defendant do give an account of all moneys, payments and/or profits now or previously received and/or acquired directly or indirectly as a result of holding the 2,200,000 CNPC shares, whether such shares were held in his own name or by his agent on his account;

(3) In the event of the Defendant having sold or otherwise disposed of any of the 2,200,000 CNPC shares or any part thereof, an order that the Defendant do give an account of the proceeds of such sale, and all moneys, payments and/or profits of whatever form derived from such proceeds;

(4) An order that the Defendant do pay to the Plaintiff all sums found due on the taking of the accounts, plus interest;

(5) Without prejudice to the above and at the option of the Plaintiff, insofar as any part of the 2,200,000 CNPC shares are still held by the Defendant or his agent, an order that the Defendant do transfer or cause such shares to be transferred to the Plaintiff or its nominee;

(6) There be liberty to apply.

112.I would also make an order nisi for costs of the Action in favour of the Plaintiff.

Mr Steven Kwan & Ms Joey Yuen, instructed by Messrs Leland Chu & Co, for the Plaintiff

Mr Hylas Chung & Mr Babani Navin, instructed by Messrs David W T Chan & Co, for the Defendant