Yu Man Fung Alice v. Chiau Sing Chi Stephen

HCA 1584/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1584 OF 2012

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J U D G M E N T

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1.The application before me is the plaintiff’s application by summons dated 5 May 2014 (“the summons”) for leave to file and serve the re‑amended writ of summons indorsed with a re‑amended statement of claim in green (“the RASOC”).

2.The writ was issued on 3 September 2012.  The statement of claim was amended on 4 October 2012(“the ASOC”).

3.The present defendant Chiau Sing Chi Stephen (“the defendant”) was the 1^st defendant in the ASOC.  The 2^nd defendant in the ASOC was The Star Royale Limited (“Star Royale”).

4.Both defendants applied to strike out the ASOC.

5.Star Royale’s application came before Deputy High Court Judge Burrell and by his order dated 7 February 2013, the judge dismissed its application to strike out the plaintiff’s claim against it.

6.The defendant’s application came before Chung J.  By his order dated 25 March 2013, Chung J ordered that:

(1) the ASOC against the defendant be struck out;

(2) the plaintiff’s action against the defendant was to be dismissed unless the plaintiff filed and served a re‑amended statement of claim within 42 days; and

(3) the plaintiff’s application to re‑amend the ASOC by summons dated 14 March 2013 be dismissed.  

7.Star Royale appealed against the order of Deputy Judge Burrell in CACV 50/2013.  The plaintiff appealed against the order of Chung J in CACV 69/2013.

8.Both appeals were heard together by the Court of Appeal (Lam VP, Barma JA and Poon J) on 25 March 2014.  Judgment was given by the Court of Appeal on the same day.

9.As regards the appeal from the order of Deputy High Court Judge Burrell in CACV 50/2013, the Court of Appeal allowed Star Royale’s appeal and ordered, inter alia, that the plaintiff’s claim against Star Royale be struck out and the action against Star Royale be dismissed.

10.As regards the appeal from the order of Chung J in CACV 69/2013, the Court of Appeal dismissed the plaintiff’s appeal against Chung J’s order save that Chung J’s order was varied by giving leave to the plaintiff to apply to a Judge of the Court of First Instance for leave to re‑amend the ASOC within 42 days.

11.Reasons for the Court of Appeal’s judgment (“the reasons”) were given on 4 April 2014.

12.The plaintiff had applied to re‑amend the statement of claim as per the proposed re‑amended statement of claim in green (“the previous RASOC”) annexed to her summons dated 14 March 2013 which was considered by Chung J and the Court of Appeal.

13.The plaintiff failed in her application to file and serve the previous RASOC before Chung J and the Court of Appeal.  The Court of Appeal, however, gave her an opportunity to apply to a Judge of the Court of First Instance for leave to re‑amend the ASOC within 42 days.

14.It is plain from paragraph 44 of the reasons that the Court of Appeal varied Chung J’s order so that a properly formulated draft amendment could be placed before the court.  Thus the court said:

“... leave to amend should only be granted where a properly formulated draft amendment has been put forward for the other party’s, and the court’s consideration. Where no properly formulated draft is available at the hearing, the appropriate order to make is one striking out the defective pleading, but giving leave for an application to amend to be made within a stated period of time, failing which appropriate consequences should follow.”

15.As there was no properly formulated draft amendment before the Court of Appeal, the court made the order varying Chung J’s order and gave the plaintiff an opportunity to make an application for leave to re‑amend the statement of claim with a properly formulated amendment.

16.The summons is the application made by the plaintiff pursuant to the order of the Court of Appeal.

17.For a background of the parties involved, I gratefully adopt the background given in the reasons:

“9. The [defendant] is a well‑known actor and movie producer. The plaintiff, who claims to be an experienced and skilled investor in finance and property development, was the [defendant’s] girlfriend between 1997 and 2010.

10. The [defendant] and the Ryoden Group were involved in a property development known as the Skyhigh Project. A 50/50 joint venture between the [defendant] and the Ryoden Group, the Skyhigh Project involved the redevelopment of No.10 Pollock’s Path into four houses, Houses 10, 12, 16 and 18, between 2004 and 2007. After their completion, each of the four Houses was registered in the [Star Royale’s] name.

11. [Star Royale] is the corporate vehicle for the Skyhigh Project. It was incorporated in Hong Kong on 10 November 2000 with the two sisters of the [defendant] as subscribers and first directors. After the transfer of their shares by the [defendant’s] sisters and further allocation of shares by [Star Royale], Create Magic Limited, a BVI company (‘Create Magic’), became the sole shareholder of [Star Royale] as of 31 May 2004.

12. As for Create Magic, it was incorporated in March 2004 for the purpose of the Skyhigh Project. As of June 2004, it was equally held by Sharp United International Ltd, a BVI company (‘Sharp United’) and Allied Top Development Limited (‘Allied Top’). Sharp United, renamed as Whiskey Investments Limited (‘Whiskey’) in 2007, is held by a discretionary family trust in which the [defendant] has an interest. Allied Top is a wholly owned subsidiary of Ryoden Property Development Company Limited (‘RPD’).

13. A diagrammatic representation of [Star Royale’s] corporate structure appears thus:

14. The directors of [Star Royale] are Mr Raymond Hu and Mr Herman Hu, sons of the founder of the Ryoden Group, Mr Hu Fa Kuang, Ms Kelly Chow, sister of the [defendant] (‘Ms Chow’), and a Mr Lam Chi‑wah.”

18.The plaintiff’s case is that by a written agreement dated 1 April 2002 entered into between the defendant’s company and the plaintiff’s company, the plaintiff became the defendant’s personal financial consultant providing overall strategic planning and corporate financial advisory services to the defendant.  There was a contractual relationship between the defendant and the plaintiff for the plaintiff to provide personal investment advisory services to the defendant (paragraph 2 of the RASOC).

19.It was a term in the written agreement that the defendant would pay the plaintiff through the plaintiff’s company a monthly remuneration.

20.It is further pleaded at paragraph 3 of the RASOC that there was a verbal agreement (“the commission agreement”) between the plaintiff and the defendant in about 2002 or early 2003 that:

“… on top of the monthly remuneration the [defendant] would pay the plaintiff commission in terms of profit sharing at ten per cent (10%) after tax profits on the successful investment”.

21.As pleaded at paragraph 5 of the RASOC, there had been a number of successful investments in landed properties and stocks and pursuant to the commission agreement the defendant had been paying the plaintiff the agreed commission from May 2007 to January 2010 as particularized therein.  The defendant paid the plaintiff a total of $19,525,101.44 out of which $14,942,001.10 was paid in respect of the Skyhigh Project.

22.The Skyhigh Project was in respect of the property at No 10, Pollock’s Path, The Peak.  The plaintiff learnt in 2004 that the Skyhigh Project would be put up for sale by auction.  On the plaintiff’s advice the defendant successfully bid for the Skyhigh Project.  The plaintiff also introduced Mr Raymond Hu of the Ryoden Group to the defendant as his partner in developing the Skyhigh Project (paragraph 6 of the RASOC).

23.As set out above, the defendant’s partnership with the Ryoden Group in the Skyhigh Project was a 50‑50 venture through Star Royale.  The plaintiff devoted time and effort to make the Skyhigh Project successful.  The Skyhigh Project was completed in May 2007 and a total of four single houses were built on the land.

24.Under the agreement the defendant had with the Ryoden Group, Houses 16 and 18 were sold to the market in July and October 2009 and the profits were split equally between them.  The proceeds of the sale of the two houses had covered the costs of the Skyhigh Project with profits.  The defendant paid the plaintiff her commission under the commission agreement of 10% of half of Star Royale’s after tax profit on the sales of Houses 16 and 18 in the sum of $14,942,001.00 (paragraph 7 of the RASOC).

25.As for the remaining two houses, it is pleaded at paragraph 8 of the RASOC that:

“ The ownership of the remaining two houses namely number 10 and House No.12 was split between Ryoden Group and the Defendant respectively and house number 10 was subsequently sold by Ryoden Group at a price of HK$800 million, leaving the Defendant the sole beneficial owner of House No.12 through his beneficial interest in Star Royale.”

26.Paragraph 9 of the RASOC pleads:

“ House No.12 is still registered in the name of the Star Royale and the Defendant is its entire beneficial owner by virtue of his beneficial ownership of the Star Royale. By reference to the price of HK$800 million obtained for house number 10, the estimated value of House No.12 would be no less and probably more. Hence, the Agreed Commission payable to the Plaintiff would be at least HK$80 million.”

27.Paragraph 10 of the RASOC is important as it pleads the plaintiff’s case as to when it is said that the cause of action for the unpaid commission arose.  It pleads:

“ The Plaintiff avers that her cause of action against the Defendant for the unpaid House Commission arose on 1^st February 2011 or immediately thereafter by virtue of the following facts and matters:

(i) by email dated 1^st February 2011 from Charles Mung of Ryoden Property Development Limited to the Plaintiff (on behalf of the Defendant) Mr Mung set out the cost adjustments in respect of House 10 and House 12 and identified the amounts that should be borne by ‘the owner of House A’ and ‘the owner of House B’, being Houses 10 and 12 respectively;

(ii) the amounts to be borne by the respective owners were agreed between the respective owners and/or their representatives, and all accounts between themselves and/or Star Royale were settled;

(iii) thereupon the Defendant’s profit arising from his beneficial ownership in House No.12 crystallized;

(iv) thereupon the Defendant treated House No.12 as his own, as evidenced by his allowing the Plaintiff to take up residence therein in April 2011; by his mortgaging of House No.12 in May 2011; and by his taking up residence there himself at the end of 2011;

(v) the Ryoden Group treated House No.10 as their own subsequent to 1^st February 2011, as evidenced inter alia by their entering into a sale and purchase agreement in respect of House No.10 in June 2011.

(vi) in the premises the split of the ownership of Houses 10 and 12 between the Ryoden Group and the Defendant, as referred to in paragraph 8 above, was complete on or immediately after 1^st February 2011.”

28.Paragraph 11 of the RASOC asserts that the defendant owes the plaintiff a sum calculated to be 10% of the after tax profit based on the sale value of House 12 on 1 February 2011 (“the House Commission”).

29.It is also pleaded that on 1 March 2012 the defendant caused to be paid to the plaintiff $10 million as part payment of the House Commission (paragraph 15 of the RASOC). 

30.The plaintiff claims the balance remaining of the House Commission to be assessed with interest and with credit to be given to the defendant for the $10 million paid.

31.It is clear that the Court of Appeal gave the plaintiff an opportunity to properly formulate and plead its case against the defendant and made the order that it did.  As Lam VP indicated to counsel for the plaintiff at the hearing of the appeal (Transcript page 23R to T):

“… we would give reasons for our decision and, in the reasons, it will be made clear what we consider to be areas which might be arguable provided they are properly formulated and what are areas which are not arguable.” (Emphasis added)

32.At paragraph 34 to 36 of the reasons, the Court of Appeal identified the two crucial issues.  The first was when did the plaintiff’s cause of action against the defendant for the balance of the House Commission accrue.  The second was whether the plaintiff has a proprietary claim against the defendant at all.  If not, the plaintiff cannot possibly assert any proprietary claim against House 12 or Star Royale.

33.The Court of Appeal considered that the plaintiff’s pleading was defective and embarrassing.  In dealing with Issue 1, the accrual of the plaintiff’s cause of action against the defendant, at paragraphs 37 and 38 of the reasons the court said:

“37. On the plaintiff’s pleadings, her claim against the [defendant] for the unpaid House Commission is contractual. It is based on the profit realized by the [defendant] in respect of House 12. In other words, her entitlement to payment of commission only arose when the [defendant] realized his profit in respect of House 12. However, her case as to when that happened, whether it is based on the ASOC or the [previous] RASOC, is confusing. Several possibilities were alluded to in the course of Mr Sarony’s submissions, including when Ryoden Group and the [defendant] divided Houses 10 and 12 (February 2008), when the [defendant] caused [Star Royale] to take out the mortgage in favour of Whiskey (May 2011) ; and when the [defendant] went into occupation of House 12 (end of 2011).

38. The inability on the plaintiff’s part to plead exactly when her cause of action against the [defendant] for the unpaid House Commission arose has rendered her pleadings defective and embarrassing.”

34.In determining the second issue, the court said at paragraph 39 of the reasons that the plaintiff does not have any proprietary claim against the defendant in respect of the House Commission.  Her claim is purely contractual.  The court also determined that the plaintiff has no proprietary claim whatsoever in respect of House 12 or against Star Royale.

35.At paragraph 43 of the reasons the court made it plain that any proposed re‑amendment to be put forward by the plaintiff should only be limited to the accrual of her contractual claim for the House Commission and not for any proprietary claim against the defendant or Star Royale.

36.Mr Bell SC, with Mr Kim, for the plaintiff, submitted that the defects in the previous RASOC have now been cured by the RASOC and that the court should give leave to re‑amend.  This was strenuously disputed by Mr Whithead SC, for the defendant.

37.The plaintiff’s case is that her cause of action for the unpaid House Commission in respect of House 12 arose on 1 February 2011 or immediately thereafter by virtue of the pleaded facts at paragraph 10 of the RASOC.  In effect it is said that all accounts between the Ryoden Group and Star Royale were settled on 1 February 2011 and that “thereupon the defendant’s profit arising from his beneficial ownership in House 12 crystallised.”

38.There is no dispute that upon the division of Houses 10 and 12, House 10 went to the Ryoden Group and House 12 went to Star Royale. 

39.Paragraph 8 of the RASOC makes it plain that the plaintiff’s case is that when Houses 10 and 12 were split, the defendant became the sole beneficial owner of House 12 through his beneficial interest in Star Royale.  However, by paragraph 1(e) of the RASOC the plaintiff pleads that the defendant was and is only the 50% ultimate beneficial owner of Star Royale, not the sole beneficial owner.

40.House 12 is still registered in the name of Star Royale.  It is an asset of Star Royale.

41.It is trite law that a shareholder in a limited company has no rights to the assets of a company.  The assets belong to the company.  The shareholder’s rights are to the shares of the company not to the assets of the company. 

42.The bald assertion made at paragraph 8 of the RASOC that the defendant is the sole beneficial owner of House 12 through his beneficial interest in Star Royale is repeated at paragraph 9 of the RASOC where it is pleaded that the defendant is the entire beneficial owner of House 12 “by virtue of his beneficial ownership of Star Royale”.

43.As set out in the background facts above, Create Magic became the sole shareholder of Star Royale as of 31 May 2004.  Create Magic was incorporated in March 2004 for the purpose of the Skyhigh Project.  Create Magic as of June 2004 was equally held by Sharp United and Allied Top.  Sharp United, renamed Whiskey in 2007, is held by a discretionary family trust in which the defendant has an interest.

44.The defendant was not a shareholder of Star Royale.  He was not even a shareholder of Create Magic.  The defendant’s interest is as a beneficiary of the discretionary family trust.  

45.As Mr Whitehead submitted, the assertion in the previous RASOC at paragraph 8A that the corporate veil should be lifted has been abandoned in the RASOC.  

46.In the previous RASOC at paragraph 8A it was pleaded:

“ Further and in the alternative, the interposition of Sino Star, TUT, Whiskey and [Star Royale] between the [defendant] and House No.12 is a façade which disguises the fact that the [defendant] directs and controls [Star Royale] with regard to House No.12 behind which façade the [defendant] seeks to shelter so as to prevent the Plaintiff from securing her interest in the outstanding Agreed Commission by way of registering a lis pendens, which circumstances justify lifting the corporate veil.”

47.There are no material facts pleaded in the RASOC in support of the bald assertion that the defendant was the sole beneficial owner or the entire beneficial owner of House 12.  Mr Bell submitted that it does not matter whether the defendant has a 100% or 50% or only 1% interest in House 12 and that as long as he has an interest he is liable to pay the House Commission.  I am unable to accept this submission.  It is pleaded that the defendant became the sole beneficial owner or the entire beneficial owner of House 12.  There is no alternative case pleaded. 

48.The assertion that the defendant is the sole beneficial owner or the entire beneficial owner of House 12 by virtue of his beneficial ownership of Star Royale is unsustainable in my view.  It follows that the assertion in paragraph 10(iii) of the RASOC that the defendant’s profit arose from “his beneficial ownership in House No 12” cannot be maintained and is also unsustainable.

49.Paragraph 3 of the RASOC clearly pleaded the plaintiff’s case that under the commission agreement the defendant was to pay the plaintiff 10% commission on “after tax profits” on the successful investments.

50.Mr Bell confirmed that the plaintiff’s case is that the cause of action for the unpaid House Commission arose on 1 February 2011 or immediately thereafter as there was a realization of the profits in respect of House 12 as pleaded at paragraph 10 of the RASOC and hence the 10% commission on after tax profits was payable.  

51.It seems to me that the assertion that by settling the accounts there was a realization of the profits in respect of House 12 is also unsustainable.

52.In Nice Cheer Investment Ltd v Commissioner of Inland Revenue [1014] 2 HKC 112 Lord Millett NPJ said at paragraph 21:

“There are two cardinal principles of tax law (i) the word ‘profits’ connotes actual or realized and not potential or anticipated profits; and (ii) neither profits nor losses may be anticipated.”

53.I would observe that under the commission agreement, the House Commission is payable on after tax profits.  It is in the context of taxation that the word “profits” is used.  It is plain that profits are not taxable until they are realized and that profits may not be anticipated (Nice Cheer).

54.Mr Whitehead pointed out that in fact in respect of the commission that had already been paid to the plaintiff as particularized at paragraph 5 of the RASOC, the commission was paid after the sale of the investments.  Although under the commission agreement the investments need not be sold before commission is payable, there must, however, be a realisation of the profits before the commission is payable.

55.That there has to be a realization of profits before commission is payable was emphasized by Lam VP at the hearing when he said to counsel (Transcript page 12 G–H):

“… if you go back to paragraph 3, I think it must be implicit in your plea that the profits are profits realized because you use the words ‘after tax.”

56.This was confirmed by counsel at the hearing of the appeal.  It has also been confirmed by Mr Bell that the plaintiff’s case is that the profits were realized as pleaded at paragraph 10 of the RASOC.

57.The plaintiff also pleaded that upon demand on 1 March 2012 the defendant caused the plaintiff to be paid $10 million as part payment of the House Commission. Mr Bell submitted that amounted to an acknowledgement by the defendant of his liability to pay the House Commission.  

58.It is not disputed that the plaintiff will be entitled to the House Commission upon the realization of the profits of House 12 but until there has been a realization of the profits the cause of action for the House Commission has not yet accrued.  The fact that $10 million has been paid does not affect the question of whether or not the profits have been realized and hence, whether or not the cause of action has accrued.  

59.Mr Whitehead fairly accepted that the defendant will have to pay the House Commission when the profits are realized but the profits have not yet been realized.  The trigger to the plaintiff’s entitlement to the House Commission has not yet occurred.

60.I accept Mr Whitehead’s submission that the plaintiff’s cause of action for the House Commission has not yet accrued.  It only accrues when there has been a realization of the profits.  The proposed amendments in the RASOC are still defective and embarrassing.

61.I dismiss the summons.  

62.I also make an order nisi that the costs of the summons be costs to the defendant to be taxed, if not agreed.