BEIJING HANTONG YUZHI CONVENTION CENTRE LTD v. LAO YUAN YI

CACV 210/2018

[2022] HKCA 869

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 210 OF 2018

(ON APPEAL FROM HCA NO 1208 OF 2010)

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J U D G M E N T

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Hon Yuen JA (giving the Judgment of the Court):

1.  This is the appeal of the plaintiff Beijing Hantong Yuzhi Convention Centre Ltd¹ (“Hantong”) from the Judgment of Recorder Linda Chan SC (“the judge”) given on 11 May 2018 (“the Judgment”) dismissing its action against the defendant with costs.

Background

2.1.  On 19 April 1994, a Hong Kong company called Praiseup Ltd² (“Praiseup”) entered into an agreement to purchase all three units on one floor of an office building to be called Ganglu Huangpu Centre³ (“the Properties”) then being constructed in Shanghai at the price of HK$15,848,944.

2.2.  The price was payable in instalments. By the end of September 1994, Praiseup had paid the first 5 instalments (including deposits) totaling $3,962,236. There were 5 more instalments, each of $792,447, to be paid every 3 months between December 1994 and December 1995, and the final balance of 50% (in the sum of $7,924,473) to be paid within 14 days after the developer’s written notice after issue of the occupation permit⁴.

Proposed joint venture

3.1.  A Hong Kong businessman called Alex Chau controlled Praiseup. At that time, he was working with the defendant in another Hong Kong company. Alex Chau approached the defendant personally, proposing a joint venture for the purchase of the Properties, saying that he (Alex Chau) was confident that he could obtain a mortgage loan from a bank in Hong Kong⁵.

3.2.  The defendant (a PRC citizen with residence rights in Hong Kong and the USA) had business interests in the USA, Hong Kong and the mainland, personally and working with mainland entities. Although Alex Chau had originally approached him in his personal capacity to participate in the proposed joint venture, he considered that it would be suitable for the participant to be a PRC company of which he was the managing director and legal representative⁶, Shanghai Investment Service Corporation⁷ (“SIS”⁸).

3.3.  SIS had been established the year before, and was occupying rented offices in Shanghai. It was a wholly owned subsidiary of a company called China Venture Tech Investment Corporation⁹ (“VTI China”) which was controlled by state-owned entities.

3.4.  The defendant considered that the Properties would be suitable for use as SIS’s office[10]. However, SIS had no spare funds to participate in Alex Chau’s proposed joint venture.

3.5.  The defendant was also a vice president and manager of the Shanghai representative office of VTI China. VTI China had funds available to support SIS’s participation in Alex Chau’s proposed joint venture, and at that time, the response from the bank in Hong Kong regarding a proposed mortgage was “very positive”[11]. After the defendant had a discussion[12] with Zhou Xiaohe[13] (“Zhou”) the managing director in charge of finance and accounting and acting president of VTI China[14], the following arrangement was decided, as pleaded in the Re-Amended Defence.

Praiseup Arrangement and Joint Venture

“8(4). As [SIS] had no spare funds therefor[15], the following arrangements were made between [SIS] and VTI China (‘Praiseup Arrangement’):

(a)  [SIS] would enter into a joint venture with Alex Chau and use Praiseup as the corporate vehicle both for the acquisition of the Properties and implementing the joint venture as aforesaid;

(b)  VTI China would finance the same by way of loans to [SIS]; and

(c)  [SIS] would in due course repay VTI China.

(5)  A joint venture was entered into between [SIS] and Alex Chau under which they would become joint owners of Praiseup conditional upon, and in the same proportion as, their contribution towards the purchase price and acquisition expenses of the Properties .... [“the Joint Venture”]

(6)  At the time when the aforesaid joint venture was entered into, it was the expectation of [SIS] and Alex Chau that Praiseup would be able to obtain a bank mortgage loan to finance part of the purchase price of the Properties.

(7)  The agreement and/or common intention and understanding of [SIS] and Alex Chau was that, in return for half ownership of Praiseup, each would contribute half of the purchase price and acquisition expenses of the Properties as well as be responsible for half of the principal and interest of any mortgage loan taken out by Praiseup in connection with its purchase of the Properties.

(8)  To implement the Praiseup Arrangement and for carrying out the joint venture:

(a)  the defendant became a director and shareholder of Praiseup;

...”.

3.6.  In other words,

-   the Praiseup Arrangement was between SIS and VTI China;

-   the Joint Venture was between SIS and Alex Chau, and VTI China was not a party thereto;

-   Praiseup was the corporate vehicle for the Joint Venture;

-   the Joint Venture was on the understanding that SIS and Alex Chau would each contribute half the purchase price and acquisition expenses of the Properties (“the Acquisition cost”), and by such contribution, acquire the corresponding proportion of shareholding in Praiseup; and

-   the defendant became a shareholder of Praiseup to carry out the Joint Venture between SIS and Alex Chau on those terms, and SIS was to be financially supported by VTI China through the Praiseup Arrangement.

Implementation of the Joint Venture and the Praiseup Arrangement   

4.  The defendant became a director of Praiseup on 3 November 1994 and was transferred one of the two shares in Praiseup on 9 December 1994. The documents were backdated to 19 April 1994, the date when Praiseup entered into the agreement with the developer of the Properties.

5.  It is common ground that between 28 September 1994 and 8 July 1995, VTI China provided funds in the total sum of $3,234,375.91 for payment of further instalments[16]. Payments for the Acquisition cost were recorded in Praiseup’s accounts as directors’ loans[17].

Non-payment by VTI China

6.  However, VTI China did not provide further funds after July 1995 when SIS found cheaper office premises[18]. At that time, property prices in Shanghai were falling[19] and Alex Chau did not find a suitable mortgage loan to finance the purchase of the Properties[20].

Confirmation of Share Ownership 2.1.1996 (“1^st Confirmation”)[21]

7.1.  By late December 1995 or early January 1996, the defendant’s relationship with Alex Chau had become strained. Despite requests from the defendant’s staff, Alex Chau did not produce formal documents for the transfer of the share in Praiseup to the defendant, nor did he produce Praiseup’s accounts. The defendant said he therefore instructed Feng Jun (“Feng”), an in-house legal consultant, to “prepare something in writing to bind Alex Chau to the Agreement between him [Alex Chau] and [SIS]”[22].

7.2.  Accordingly, on 2 January 1996, a Chinese document entitled “Confirmation of Share Ownership”[23] was signed by Alex Chau and the defendant as Praiseup’s directors, stating the following:

(1)   the defendant held 50% of the shares in Praiseup;

(2)   in holding the above shares and in being a director of Praiseup, the defendant was acting as representative of SIS;

(3)   Praiseup was the owner of the Properties, and

(4)   without the unanimous written consent of its directors (i.e. Alex Chau and the defendant), Praiseup may not deal with the Properties in any way, including by transfer, charge or rental.

7.3.  The defendant said in his Witness Statement that at that time “I worked on the assumption and belief that [SIS] would be paying up in full its 50% share of the purchase price and related expenses for the Properties ...”[24].

7.4.  The 1^st Confirmation is consistent with the defendant’s case that the Joint Venture was between SIS and Alex Chau, and he was holding 50% of Praiseup shares on behalf of SIS on the understanding that SIS would be paying for 50% of the Acquisition cost.

Completion of the Properties

8.  The development of the Properties finished at the end of June 1996. On 28 June 1996, the developer issued completion notices to Praiseup, requiring payment of the balance on 12 July 1996.

Alex Chau’s demand for payment

9.  On 1 July 1996, Alex Chau sent a fax[25] to the defendant stating the following.

-   The developer’s completion and payment notices had been received. They were annexed as Annexes 1-3, and showed the balance payable to the developer was $9,520,384.14. The portion attributable to SIS was $4,760,192.07[26].

-   There was also a previous sum remaining unpaid of $1,367,101.27 shown in Annex 4[27]. (Annex 4A showed, under a column entitled “CVIC”, payment of $2,838,151.91 and “unsettled balance” of $1,367,101.27. Annex 4B showed interest calculations).

-   Alex Chau requested payment of $6,127,293.34[28] (“the Final Payment”) before 8 July 1996.

10.1.  The defendant said:

-   when he realized that a mortgage loan would not be available, he asked Zhou if VTI China would continue to finance SIS’s payment of the Final Payment, but Zhou was non-committal[29];

-   he “did not want [SIS] to get into trouble with [Alex Chau] forfailing to honour its contributions obligations”;

-   “as I was the one who introduced the investment opportunity to VTI China and [SIS] in the first place, I thought it was only right for me to take over from [SIS] the outstanding contribution obligations for the [Properties] in order to minimize the loss to [SIS]”.

10.2.  The defendant said he arranged for some of his US companies[30] to pay the Final Payment, which was recorded in Praiseup’s accounts (as before) as director’s loan. No documents of such payment by the US companies were produced by the defendant at trial, for his US accountant had died and documents were lost in the 9/11 incident in 2001. However the defendant produced other documents to show his financial worth, including unrelated loans he made to VTI China.

10.3.  Payment by the defendant was also confirmed by Feng[31] who testified that as far as he knew, “SIS failed to make payment for the remainder of the purchase price and then Mr Lao [the defendant] paid on [SIS]’s behalf”[32].

11.  Completion of the Properties took place at the end of July 1996.

Wang’s 1^st Memo 24.8.1996

12.1.  After completion, the Properties remained unoccupied. On 22 August 1996, a SIS staff member Wang Yong (“Wang”) who was “in charge of logistics, fixed assets, general administration and office equipment”[33] sent a memo[34] to the defendant (“Wang’s 1^st Memo”). Wang referred to the Properties as “jointly purchased by our company and Praiseup”, and asked for instructions for payment of management fees, suggesting that SIS should ask Praiseup to pre-pay a sum in advance for management fees.

12.2.  On 24 August 1996, the defendant wrote his reply on Wang’s 1^st Memo. After informing Wang that Praiseup had no assets other than the units, and that SIS held 50% interests in Praiseup, he gave instructions for 50% of the expenses to be allocated to Alex Chau.

12.3.  It would be noted that by this time, as between SIS and Alex Chau, they had each contributed 50% of the Acquisition cost, and so under the Joint Venture, SIS was entitled to 50% of the shareholding in Praiseup. The defendant’s reply in Wang’s 1^st Memo is consistent with this. His evidence was that at this time, he was hoping that, pursuant to the Praiseup Arrangement, VTI China would continue to fund SIS by reimbursing him for the Final Payment which he had paid on SIS’s behalf[35].

Allocation of SIS’s interest in Praiseup (the 1997 Agreement)

13.  However, subsequently (as discussed below), SIS and the defendant made the following agreement.

“... It was agreed between the defendant and SIS (through the defendant as its legal representative and/or Mr Zhou Xiaohe (‘Mr Zhou’) the President of VTI China, the holder of all the equity of SIS) that instead of being entitled to 50% shareholding in Praiseup, SIS would only be entitled to 18.53% shareholding in Praiseup”.

14.  The judge referred to this as the “1997 Agreement”[36]. In the words of the defendant’s leading counsel Mr Bernard Man SC[37], this “crystallized the division of beneficial interest” between SIS and the defendant. In our view, it may be said that whatever the initial state of the beneficial interest in the shareholding, by this Agreement, the defendant held 18.53% of the shareholding by way of resulting trust for SIS. We will discuss later in this Judgment the plaintiff’s claim on trust.

15.  Returning to the facts, the judge noted an inconsistency in the defendant’s case as to when the 1997 Agreement was made. On one version, it was at around the time of completion in July 1996. On another version, it was in or around 1997. The judge did not consider that this inconsistency was material, given the lapse of time (21 years) to the date of trial[38].

16.1.  However, it is quite clear to us from the defendant’s own case and the contemporaneous documents that the 1997 Agreement couldnot have been made around completion in July 1996.

16.2.  First, the defendant said the following[39]:

“It was only in or around 1997 when [Alex Chau] told me that [Wang] and [Feng] were chasing him for the audited accounts of Praiseup on behalf of [SIS] that it occurred to me that I should finalize the issue of the percentage shareholdings that [SIS] had in Praiseup. I (for myself and as the legal representative of [SIS]) therefore had a discussion with Mr Zhou, as president of VTI China, about how to deal with [SIS]’s shareholding in Praiseup. Since it was clear by that time that [SIS] had no interest in acquiring the [Properties] and would not be able to repay me for the [Final Payment] after July 1995, we agreed that instead of being beneficially entitled to 50% shareholdings in Praiseup, [SIS] would only be entitled to 18.53% shareholding of Praiseup, in proportion to its financial contribution to the [Properties], i.e. HK$3,234,375.91 out of HK$17,453,866.76[40].

Once the decision was made, I told [Wang] ... that he should no longer charge the operating expenses of the [Properties] (e.g. management fees, telephone expenses etc) to the account of [SIS]”. (Emphasis added).

16.3.  In other words, in W/S II, the defendant said the agreement was made in 1997.

16.4.  Further, the following contemporaneous documents showed that the agreement could not have been made at around completion in July 1996.

17.  On 26 November 1996, Wang wrote in another memo[41] (“Wang’s 2^nd Memo”) that as instructed by the defendant, 50% of the management expenses should be paid by SIS. If the agreement had been made at completion in July 1996 and the defendant had instructed Wang to stop charging the expenses to SIS “once the decision [see 16.2 above] was made”, Wang would not be charging 50% to SIS.

18.  Further, on 18 March 1997[42], Feng sent a fax to Alex Chau (copied to the defendant) asking for Praiseup’s audited accounts (“Feng’s Fax”). In this fax, Feng referred to the defendant “holding 50% shares in Praiseup as SIS’s representative”. Feng confirmed in his oral evidence that when he sent the fax, the defendant had not told him that SIS’s interests in Praiseup had been reduced but he was told later[43].

19.  Thus, the contemporaneous documents showed that the 1997 Agreement was not made around completion in July 1996, and could only have been after 18 March 1997. This ties in with the defendant’s evidence that it was in 1997[44] that Zhou “turned down” further financial support of SIS for its acquisition of the Properties, which meant there was no longer any hope of the defendant being reimbursed by VTI China for the Final Payment he had paid on SIS’s behalf. However, the 1997 Agreement as such was not recorded in writing.

Closure of VTI China and effect on management

20.  The following year on 22 June 1998, the People’s Bank of China, with the consent of the State Council, ordered the closure of VTI China due to mismanagement and breaches of regulations. The order stated that VTI China’s investments in, and loans to, its wholly-owned subsidiaries (SIS being one) would be managed by a winding-up committee[45] (“the Committee”).

21.  By a notice dated 6 July 1998, the Committee was established[46]. According to Feng, the Committee approached him many times to assist with its investigations[47].

22.  On 17 November 1998, the Committee produced a document entitled “Temporary Measures for the management of VTI China’s group of companies”. In relation to wholly-owned subsidiaries, the legal representative previously appointed by VTI China[48] would continue to manage the subsidiary, but only in accordance with the Committee’s requirements[49]. Further, the Committee’s approval was required for any dealings with VTI China’s assets, and any changes in the shareholdings of its subsidiaries[50].

23.  By a Notice dated 26 October 1999[51], the Committee appointed a group to manage SIS (among other companies). The Notice stated that management of these companies was to be in accordance with the Measures, which were attached in an appendix.[52]

24.  In other words, from 26 October 1999 (if not earlier), SIS was managed by the group appointed by the Committee. SIS has (to date of trial at least) not been wound up.

Set off of SIS’s debt to VTI China by transfer of Praiseup shareholding (the 2001 Agreement)

25.1.  It will be remembered that the defendant’s case is that under the 1997 Agreement between himself personally (of the one part) and Zhou representing SIS/VTI China (of the other part), the 50% shareholding in Praiseup (being one share in that company) was notionally allocated into two parts, i.e.18.53% for SIS and 31.47% for himself, to represent their respective financial contributions.

25.2.  The contribution from SIS was by way of loans made to it by VTI China, which SIS had not repaid.

26.1.  The defendant said that a “set-off” agreement was made whereby the loans SIS owed to VTI China were exchanged for its shareholding in Praiseup.

-   In W/S I, he said[53]:

“on or about 6^th September 2001, at the request of the [Committee], I, as the legal representative of [SIS], agreed to set off the loans owed by [SIS] to VTI China by transferring its 18.53% shareholding of Praiseup to VTI China. The [Committee] of VTI China then prepared a written confirmation to that effect and asked me to sign it in my capacity as the director of Praiseup. I signed the written confirmation on or around 6^th September 2001 ... and returned it to the [Committee] for counter-signing. ... I never saw the ... confirmation again until the plaintiff disclosed it in its List of Documents filed herein on 2^nd February 2011”.

-   In W/S II, he said[54]:

“After VTI China went into liquidation in June 1998, the [Committee] demanded [SIS] to repay the Loans[55] ... Since [SIS] did not have the financial means to repay the Loans, I, as the legal representative of [SIS], offered on behalf of [SIS] to set off the Loans by transferring its 18.53% shareholding in Praiseup to VTI China. This was accepted by the [Committee] who then asked for a written confirmation from Praiseup to that effect. There were several people in the [Committee] with whom I dealt at the time [giving the surnames of three persons]. Due to the lapse of time, I can no longer remember who finally agreed to this arrangement with me. It was against this background that I signed the ... confirmation on about 6 September 2001".

26.2.  It matters not who initiated the discussion for the set-off transaction. What is important is evidence of it in the contents of the following document which was found in 2009 by a staff member of the plaintiff in office premises rented by SIS[56].

Confirmation of Share Ownership 6.9.2001 (“the 2^nd Confirmation”)[57]

27.1.  The document was entitled “Confirmation of Share Ownership”[58] and stated the following.

(1)   Commencing in September 1994, VTI China’s Shanghai representative office had invested USD418,061.91 (HKD3,234,375.91) in 4 instalments to purchase 18.53% of the shares of Praiseup. The shareholding was held by the defendant as representative of VTI China’s Shanghai representative office.

(2)   Praiseup owns the Properties.

(3)   The remittances by VTI China’s Shanghai representative office of the 4 instalments were attached in an appendix.

27.2.  At the bottom of the page were spaces for signature by two parties, Praiseup and VTI China’s Shanghai representative office. The defendant signed as director of Praiseup and wrote the date “2001-9-6”. It was not signed by the other party, VTI China’s Shanghai representative office.

27.3.  It would be noted that SIS was not a party to the document, and the agreement of set-off (of SIS’s debts to VTI China in exchange for SIS’s shareholding in Praiseup) was not referred to in it. Rather, it was assumed in this document that VTI China had already stepped into SIS’s shoes. However, since SIS was a wholly-owned subsidiary of VTI China, and both were controlled by the Committee, it is not surprising that this internal transaction was not recited in this document, which the defendant said was drafted by staff of the Committee.

27.4.  What this document was directed at was the confirmation by the outsider Praiseup (which was not controlled by the Committee) that VTI China (through the defendant) held 18.53% of Praiseup.

27.5.  The significance of this document lay in its reference to only 18.53% of Praiseup. This proportion was supported by attachments showing payment by VTI China of $3,234,375.91, which was the sum corresponding to 18.53% of the Acquisition cost. The document would make no sense if the true position was that SIS/VTI China remained entitled to 50% of the shareholding of Praiseup (the Final Payment being treated as payment by SIS of the Acquisition cost, with the help of a loan by the defendant to SIS). If that were the case, it would be strange that the Committee (which controlled both VTI China and SIS) required Praiseup to acknowledge only VTI China’s shareholding of 18.53% but not SIS’s shareholding of 31.47%. It would be remembered that the 1 share (50%) in Praiseup had remained throughout in the defendant’s sole name.

27.6.  Thus, this document is an acknowledgment by VTI China that the defendant was personally beneficially interested in 31.47% of the shareholding in Praiseup. At the very least, it is an acceptance that VTI China and SIS had no interest in the 31.47%, being the proportion corresponding to the Final Payment.

28.1.  The document was not signed by VTI China or SIS, but it was found among SIS’s papers, in office premises previously rented by SIS, by a staff member of the plaintiff after it had acquired VTI China’s “residuary assets” as set out below[59].

28.2.  Although the plaintiff challenged this document, the judge refused to impugn this document for 5 reasons stated in detail in the Judgment[60]. These reasons included the plaintiff’s own evidence of the manner in which the 2^nd Confirmation was found, i.e. placed together with other related documents in a file, with an index (including reference to the 2^nd Confirmation), which showed that these documents had “undergone a process of collation, review and arrangement” after September 2001.

28.3.  Taking into account the length of time taken by the Committee to investigate VTI China and SIS, the judge was entitled to conclude that there was no proper basis to impugn the 2^nd Confirmation.

28.4.  It is particularly notable that on 4 December 2003, an Auditors Report[61] had been submitted to the Committee (among others) discussing the defendant’s “economic responsibility” as a director of SIS from 22 June 1998 to 31 October 2003 (a period which included his execution of the 2^nd Confirmation some 2 years before the end of that period).

29.  Annex 3 to the Auditors Report listed SIS’s operations and assets. Item (6) Long Term Investments set out corporate share investments, and it did not include any shares in Praiseup[62]. This supports the existence of the “set-off” agreement and the validity of the 2^nd Confirmation. The Report did not suggest that the defendant had engaged in any misconduct.

Background to the plaintiff’s claim

30.  We now come to the circumstances under which the plaintiff came to assert a claim, said to be on behalf of SIS, against the defendant for 50% shareholding in Praiseup.

31.  As indicated above, VTI China was closed down in June 1998 and the Committee set up in July 1998. SIS itself was not wound up, but in October 1999, a working group was appointed to manage it.

32.  On 31 December 2001, the Committee sent a written notice[63] to SIS that with effect from 1 January 2002, China Huarong Asset Management Corporation (“Huarong”)[64] was appointed to conduct the winding up of VTI China (SIS’s parent company).

Committee - Huarong transaction (“the Huarong Agreement”)

33.  On 28 February 2006, the Committee and Huarong executed an “Agreement for transfer of VTI China’s Residuary Assets”[65]. Included in the list of assets for transfer was VTI China’s investment in SIS[66]. In the Confirmation of Transfer executed the same day, VTI China’s shareholding in SIS was transferred to Huarong. It is notable that there was an express statement that the consideration for that specific shareholding was unascertainable[67].

Huarong - Hantong transaction (“the Hantong Agreement”)

34.  Eventually, on 23 October 2007, Huarong and the plaintiff executed an Agreement for the Sale and Purchase of VTI China’s “leftover assets” in Shanghai and Jiangsu[68]. It is notable that the recital stated that the leftover assets contain legal and factual “defects”, and in Clause 2.2 Huarong expressly stipulated that it gave no warranties or guarantees. The Schedule in the agreement[69] included “investment” in and receivables from SIS, and also “investment” in Praiseup with a book value of RMB3,461,385.39. It is notable that Praiseup was listed as an asset of VTI China, not as an asset of SIS. Although the Schedule did not specify VTI China’s quantum of shareholding in Praiseup, one would not have expected shares in Praiseup to be included as a direct asset of VTI China if Praiseup shares had not been transferred from SIS to it.

The plaintiff’s claim

35.  It was on the basis of the Huarong- Hantong transaction that the plaintiff claims that since that date, the defendant has been holding 50% shareholding in Praiseup on trust for it on behalf of SIS. The plaintiff issued a letter before action to the defendant on 15 September 2009, and the writ was issued on 18 October 2010. Between then and 2016, there were proceedings which focused on the plaintiff’s locus standi. (It has not been submitted that any judgments on that issue have any effect on the issues to be determined in this appeal).

36.  The plaintiff issued the claim in these proceedings against the defendant for:

(1)   a declaration that the defendant is holding a 50% shareholding in Praiseup on trust for the plaintiff’s benefit, and consequential relief including transfer of the shareholding, provision of financial statements, account of profits and benefits, and an order for payment of such sums; and

(2)   damages for breach of duty as the plaintiff’s trustee, and/or breach of duty as “officer in charge of [SIS]” arising from his refusal to transfer the 50% shareholding.

The judge’s Judgment

37.  The trial took place over 4 days. A representative of the plaintiff Zhang Liping gave oral evidence, as did the defendant and Feng.

38.  In her Judgment, the judge held the following.

(A)  There was no evidence that an express trust was created.

39.1.  The plaintiff’s trial counsel[70] had submitted that a trust had arisen out of the “resolution” pleaded in §5 Statement of Claim as follows:

“Eventually, it was resolved that the defendant ... should acquire 50% shareholding of Praiseup ... and as a result, the investment plan would thereafter be carried out by Praiseup instead”.

39.2.  The plaintiff first submitted at trial that the trust was created on 19 April 1994 by an SIS resolution. However, no such resolution was produced (Judgment, §48(2)-(3)).

39.3.  The plaintiff then submitted that the trust was created by the Praiseup resolutions dated 19 April 1994[71]. In Praiseup’s backdated minutes of a board meeting, it was resolved that Praiseup purchase the Properties at the stated consideration, and that Alex Chau be authorized to execute relevant documents for the purchase. It is difficult to see how any trust was created by the defendant in favour of SIS in this internal document of a third party (Judgment, §50).

39.4.  The plaintiff did not submit that the 1^st Confirmation constituted a declaration of trust (Judgment, §57). In any event, it was the defendant’s unchallenged evidence that this document was signed on the understanding that SIS would pay the full 50% contribution towards the Acquisition cost (Judgment, §55(3)).

(B)  No trust as alleged was created by the defendant’s “mental decision”.

40.  The judge rejected the plaintiff’s submission that a trust was created by the defendant’s own “mental decision”. The defendant’s unchallenged evidence was that he held the one share in Praiseup pursuant to the Praiseup Arrangement and the Joint Venture, which were made on the basis that SIS’s interest in Praiseup would be proportionate to its contributions to the Acquisition cost (Judgment, §51).

(C)  The judge found that it was the defendant who had paid the Final Payment.

41.  The defendant’s evidence that it was he who paid the Final Payment was supported by other evidence. Apart from Feng’s evidence that it was the defendant who had paid the Final Payment[72], the judge noted that the documents did not show that it was SIS which had paid the Final Payment (Judgment, §67). Praiseup’s accounts did not show any external loans for the Acquisition cost, and the Properties were purchased with loans from the directors (Alex Chau and the defendant) (Judgment, §66). There was no evidence that Alex Chau had paid the Final Payment on SIS’s behalf (Judgment, §68), so that meant it was the defendant who had done so.

(D)  The judge found that, as evidenced by the 2^nd Confirmation, VTI China held 18.53% of Praiseup and the defendant beneficially held 31.47%.

42.  The judge’s reasons for this finding were set out in Judgment §96-100, which have been discussed above[73]. Accordingly, SIS had no shareholding of any kind any more in Praiseup. The plaintiff’s claim was only made purportedly on behalf of SIS for 50% in Praiseup (Judgment, §§103-4). The judge noted that the plaintiff had never pleaded any alternative claim on behalf of VTI China, nor had it pleaded any claim for only 18.53% in Praiseup (Judgment, §129).

(E)  The judge finally found that, in any event, the plaintiff was not entitled to pursue the claim by reason of laches.

43.  SIS was under the control of the Committee and Huarong from 22 June 1998 to 23 October 2007. There was no evidence to explain why these entities did not attempt to assert the present claim during that lengthy period (Judgment, §§116-7). The judge also accepted that the defendant had suffered prejudice from the delay and inaction, including loss of accounting documents, death of his US accountant and Wang (who was in charge of SIS’s general administration), and difficulty in locating banking records (Judgment, §119).

44.  Accordingly, the claim was dismissed in its entirety, and the plaintiff was ordered to pay the defendant’s costs.

Appeal

45.  The plaintiff appealed. Its grounds were contained in a Supplemental Notice of Appeal filed on 6 June 2019.

Discussion

46.  First, it submitted the following.

(1)  In finding that the plaintiff had failed to discharge the burden of proving that a trust had been created over the 50% shareholding in Praiseup, the judge had failed to appreciate the significance of 4 documents:

(a)  the 1^st Confirmation[74];

(b)  Wang’s 1^st Memo[75];

(c)  Wang’s 2^nd Memo[76];

(d)  Feng’s Fax[77].

(2)  The judge was wrong to find that the 1997 Agreement[78] existed.

(3)  The judge was wrong to find that the 2001 Agreement[79] existed.

47.1.  First and foremost, before discussing Ground (1), one must see how the plaintiff’s case was pleaded. It was not pleaded whether the trust was an express trust, an implied trust, a resulting trust, or a constructive trust. The word “trust” appears for the first time in §12 of the Statement of Claim after the words “by reason of the aforesaid”, without any indication which of the facts in the preceding paragraphs are said to have given rise to the creation of a trust, and if so, which type of trust. In the Re-Amended Defence, §12 was denied. Mr Man emphasized that one must start with the “default” position that the beneficial interest follows the legal interest, and it was for the plaintiff to rebut that position, and to set out its case of such rebuttal clearly and precisely in its pleadings.

47.2.  It would appear at trial, the judge did ask the plaintiff’s trial counsel which type of trust he was asserting, and the case was approached as one of an express bare trust. However it would appear from the Judgment that not only did the plaintiff’s trial counsel fail to clarify its pleaded case, “the plaintiff’s case on the creation of the trust has never been made clear and in fact keeps shifting during the trial”[80], the judge giving examples of the prevarication and confusion in the plaintiff’s case, culminating in the unusual submission by the plaintiff’s counsel in closing that the court should not accept Zhang’s evidence on the creation of the trust[81].

47.3.  Even on appeal, the plaintiff has not clarified what type of trust it says was created, and when and how. As it was never pleaded by the plaintiff that the 1^st Confirmation was a declaration of trust, its submission now is that the 1^st Confirmation constitutes an admission by the defendant that, “as at 2 January 1996" (the date of the document), he was holding the 50% shareholding of Praiseup on trust for SIS.

47.4.  However, when a court considers whether a person’s conduct amounts to an admission, one must first see what is the fact or matter alleged that he is supposed to have clearly and unambiguously admitted[82]. Especially in a factually complex case such as this, it is important to specify what is that fact or matter, and it is of little assistance simply to say “a trust”, without analysis of the type of trust, the date and manner of its creation, and its development until trial. Understandably, appellate counsel faced greater difficulty when the trial judge’s findings on issues were predicated upon the case argued before her.

48.1.  Simply looking at the 1^st Confirmation, it was clearly a Praiseup document related to the Joint Venture.

48.2.  And even if one were to read the 1^st Confirmation as containing an acknowledgment by the defendant of some kind of trust in favour of SIS, to be relevant to the proceedings, one must consider what was the type of trust, what were its terms, and was there a subsequent variation?

48.3.  The plaintiff’s trial counsel said that its case was that there was an express bare trust with the subject matter being the 50% shareholding in Praiseup, and that was so even if SIS paid nothing at all towards the Acquisition cost[83]. However, on the defendant’s unchallenged evidence[84], the terms of the Joint Venture between SIS and Alex Chau was that the proportion of shareholding would correspond to the proportion of financial contribution. In other words, this meant that if Alex Chau ended up paying more than 50% of the Acquisition cost, he would end up owning more than 50% of the shareholding in Praiseup. So, when SIS did not contribute the Final Payment and VTI China later would not reimburse the defendant for it, with Zhou agreeing that the defendant would take over the proportion of shareholding corresponding to the Final Payment, the defendant might well be holding 18.53% of the share in Praiseup standing in his name on resulting trust for SIS. However, that was not the plaintiff’s case, which was of an express, bare, fixed trust of 50% in Praiseup held by the defendant for the benefit of SIS, which persisted to trial.

49.  The other 3 documents listed at §46 (b) to (d) do not provide answers to the problems with the plaintiff’s case identified above. These documents were never pleaded in the Statement of Claim either. The defendant’s evidence was that initially in July 1996, he had used his own funds to make the Final Payment on SIS’s behalf, in the belief that VTI China would reimburse him. As discussed above[85], it was only in 1997 that it became clear that VTI China would not do so, and the 1997 Agreement was made with Zhou.

50.  On the evidence accepted by the judge and on the state of the plaintiff’s pleaded and argued case, she was entitled to find that irrespective of burden, the trust alleged by the plaintiff did not arise.

51.  As fairly accepted by Mr Lam, if Ground (1) fails, there would be no point in arguing Grounds (2) and (3). We shall nevertheless discuss them briefly.

52.  First and in any event, Grounds (2) and (3) are appeals against the judge’s findings of fact. It is well-established[86] that an appellate court would not lightly disturb findings of fact made by a trial judge especially one who had the benefit of seeing and hearing witnesses who gave evidence before her.

53.1.  As for Ground (2), we have discussed above[87] the facts which entitled the judge to find that the 1997 Agreement existed. It should also be noted that Feng’s oral evidence was that after his fax in March 1997, the defendant told him that the 50% shareholding has been reduced to 18.53%[88]. This supports the defendant’s evidence that he had informed Feng of that allocation in shareholding[89]. Given the lapse of time between the events and the proceedings, the judge was entitled to find that the inconsistency[90] in the defendant’s case as to exactly when the 1997 Agreement was made did not cast doubt on the credibility of his evidence that the 1997 Agreement in fact existed[91].

53.2.  Mr Lam sought to revive the argument[92] that there was no evidence that Zhou had authority to make the 1997 Agreement on behalf of VTI China. At trial, there was evidence from the defendant as to Zhou’s authority as a managing director and acting president of VTI China[93] (which was not disputed by the plaintiff). There was no expert evidence on PRC law. It is well established law that in the absence of evidence on foreign (PRC) law, the court applies local (Hong Kong) law, and it was not argued before us that under Hong Kong law, Zhou had no authority to bind VTI China.

54.1.  As for Ground (3), we have also discussed above[94] the facts which entitled the judge to find that the 2001 Agreement existed. Mr Lam emphasized that the 2^nd Confirmation was not executed on behalf of VTI China, which by that time was managed by the Committee which had strict procedures in place.

54.2.  The judge was well aware that the 2^nd Confirmation was not executed by VTI China. In addition to her reasons for accepting the validity of that document, it is notable that ex facie this was a confirmation, not an agreement, and there was nothing in the evidence that indicated that the agreement for transfer was conditional upon execution of the confirmation by VTI China. If the 2^nd Confirmation was only a draft document whose validity was pending the Committee’s approval, it is unlikely it would have been collated, indexed and included with other related documents in the file of SIS documents at SIS’s office premises. And if it was pending a decision of approval, one would have expected it to have been made, one way or the other, in the 5 years between its date and the Huarong Agreement. In particular, there was a detailed Auditors Report completed in 2003. Annex 3 listed SIS’s operations and assets. Item (6) Long Term Investments set out corporate share investments, and it did not include any shares in Praiseup[95].

55.  We shall also briefly discuss the other grounds of appeal. As far as Ground (4) on laches is concerned, we take it as the law that one should first see if the plaintiff itself has been guilty of delay, and if so, one then considers the equity of the plaintiff and the equity of the defendant, and at the stage of considering the equity of the defendant, one can consider the delay of the plaintiff’s predecessors[96]. In the present case, the plaintiff itself delayed for nearly 2 years after the Hantong Agreement and before asserting its claim in a solicitor’s letter. This entitled the judge to also consider its predecessors’ delay in considering the defendant’s equity.

56.  Lastly, as to Ground (5), the plaintiff submitted that at least on the defendant’s own case, 18.53% of the shareholding in Praiseup does not belong to him. However, on the defendant’s case, that shareholding belongs to VTI China, not SIS. The plaintiff’s case at trial was that it was bringing the claim on behalf of SIS for 50% of the shareholding, not on behalf of VTI China for 18.53%[97]. No amendment of the Statement of Claim was sought below or on appeal. The Court of Final Appeal has reiterated the importance of pleadings, and that it is not acceptable for unpleaded issues to be raised out of the evidence adduced[98].

Order

57.  For the reasons set out above, this appeal is dismissed. The parties have agreed that costs should follow the event, with certificate for two counsel.