TSANG WING KWAI AND ANOTHER v. THE PERSONAL REPRESENTATIVE OF THE ESTATE OF CHAN CHUNG HAN, THE DECEASED

HCMP 1912/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1912 OF 2013

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(By Original Writ and Order to carry on dated 29^th November 2013)

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JUDGMENT
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1.  This is the trial of an Amended Originating Summons (“OS”) by which the 1^st applicant (“Kwai”) seeks to, firstly, challenge the validity of 2 documents : (a) a Return of Allotments filed with the Company Registry on 19 January 2012 (“Return of Allotments”) in respect of the shares of the 2^nd applicant (“Company”) by which 9,998 shares had been allotted (“Allotments”) to the 2 shareholders of the Company, namely, himself and his mother, Madam Chan Chung Han (“Mother”); and (b) the Annual Return of the Company filed with the Company Registry on 8 August 2012 (“Annual Return”) which reflects the Allotments. A rectification is sought in respect of the Annual Return to restore the shareholding to the position prior to the Allotments.

2.  Secondly, Kwai asks for (a) a declaration that the 1 share in the Company held by Mother pursuant to a Declaration of Trust dated 29 July 1998 (“Said Share” and “Declaration of Trust”) is held on a bare trust for his benefit; and (b) the vesting of the Said Share in him.

3.  Although the Company is the 2^nd applicant in these proceedings, it has played no real part in the same.  The protagonists are Kwai and the respondent (“Fai”), who is Kwai’s elder brother and the executor of Mother’s estate. 

Background

4.  The following background facts are not in dispute.  The Company was incorporated on 15 July 1988 and acquired by Kwai and Mother on 19 July 1988.  Upon acquisition, Kwai and Mother each held 1 share of the Company and they became its only directors.  In addition, Mother also became the secretary of the Company.  Both she and Kwai were signatories to the Company’s bank account(s). 

5.  It is common ground that Mother had very limited command of the English language. 

6.  The Company has 2 properties : (a) Shop F on G/F of Kar On House at Fort Street (“Shop”) and (b) Flat 8 on 9/F of Kent Mansion at Tin Hau Temple Road (“Flat”).  The Shop was purchased in August 1988 and has been rented out.  The Flat was purchased in May 1991 and has been occupied by Kwai and his family.

7.  By the Return of Allotments, the Registrar of Companies was notified that the allotted shares of the Company had been increased by 9,998 shares on 16 January 2012.  Half of those shares (4,999 shares) were allotted to Kwai and an equal amount to Mother, resulting in the Company having a total of 10,000 issued shares.  The Return of Allotments was signed by Mother as a director of the Company.

8.  By the Annual Return, the Registrar of Companies was notified that, inter alia, Kwai and Mother were each holding 5,000 shares of the Company.  The Annual Return was signed by Kwai as director.

9.  Mother passed away on 20 August 2012.  She left a will dated 16 June 1997 (“Will”), naming Fai as executor.

10.  Kwai claims that the Said Share is held on trust for him.  He says that he discovered only in about October 2012 that the allotted shares of the Company had been increased without his knowledge; that the Return of Allotments was filed without proper approval by the Company; and the Annual Return was signed by him under mistake.  Kwai therefore issued the OS on 7 August 2013 seeking to set aside the Return of Allotments and to rectify the Annual Return.

11.  At the time the OS was issued, probate of Mother’s estate had not been granted.  By Order of Master J Wong dated 29 November 2013, Fai was appointed to represent the personal representative of the estate of Mother and it was directed that these proceedings be carried on.  The probate in question was granted on 5 December 2013.

12.  The OS was amended by consent on 22 May 2015 to include a declaratory relief and a vesting order in respect of the Said Share (see para 2 above).

Kwai’s case

13.  Kwai said in his affirmation that the Company was acquired to hold properties.  Both the Shop and the Flat were purchased with his own funds.  Mother was only a nominee shareholder and director of the Company.  She became a nominee in order to fulfil the requirements under the prevailing legislation that a company should have 2 directors.  She was never involved in the Company’s operation or finance. 

14.  Kwai said that Mother executed the Declaration of Trust (a document in English) on 29 July 1988 to acknowledge that she was holding the Said Share on his behalf.  The Return of Allotments was a total surprise to him, and it was his mistake in not checking the contents of the Annual Return before signing it. 

15.  Kwai only noticed the filing of the Return of Allotments in about October 2012.  At that time, he heard through his wife that Fai had said that Mother’s estate included half of the interests in the Company and half of the interests in the properties which it was holding.  When Kwai asked the secretarial service provider, Ready Secretaries & Nominees Ltd (“RS”), to report the appointment of his wife as a director of the Company in place of Mother, the Allotments and the Annual Return were brought to his attention.

16.  Kwai said that he enjoyed a good relation with Mother and there was no reason to believe that she had caused the filing of the Return on Allotments without letting him know.

17.  Kwai’s evidence also explained the source of finance for the Company’s purchase of the Shop and the Flat.  Those acquisitions were basically funded by his savings, investment gains and rental income.

Fai’s case

18.  Fai stated in his affirmation that his parents had been investing in properties since 1962.  They had acquired a company called United Kesvick Ltd in 1986 as their investment vehicle.  They were both shareholders and directors of that company.  Kesvick is currently holding 5 properties, the purchases of which were all financed by his parents.  His father retired in 1994, and he passed away in June 1998.

19.  Fai said that he was told by Mother that the Company and the properties it held were acquired by her.  Out of her love and care for Kwai, his brother was allowed to hold 1 share in the Company so that he could obtain half of the interests in the properties held by the Company. Fai was told by Mother that there was a signed trust document between her and Kwai in relation to Kwai’s 1 share in the Company.  Kwai was worried that as a junior civil servant he might be investigated by the ICAC for holding half of the shares in a highly valuable company.  He therefore arranged for the creation of the trust document which stated that he was holding his 1 share on behalf of Mother so that it might be relied upon in the event of such investigation (“ICAC Story”). 

20.  Fai said that Kwai made use of the ICAC Story to mislead Mother into executing the Deed of Trust.

21.  Further, Fai queried Kwai’s ability to finance the purchase of the Shop and the Flat given his modest income working as an eyeglass salesman and later a junior public officer.  Fai said that he was told by Mother that the Flat was purchased with a down payment made by her and a mortgage.  He has produced evidence that a loan of HK$150,000 was obtained by his parents on 4 July 1988.  He suggested that the money was used for the purchase of the Shop. 

22.  Finally, Fai disputes his brother’s case on the Return of Allotments and the Annual Return.

Issues

23.  There is no dispute on the issues to be determined in this action.  Mr Tsui, who appeared for Kwai and the Company, formulated them as follows :

(1) Whether the increase of 9,998 shares as reported in the Return of Allotments had been validly allotted;

(2) Whether the Said Share is held on trust for Kwai.

24.  The resolution of these issues turns solely upon a fact finding exercise.  Although Mr Tsui’s written opening and written closing submissions relating to the first issue are peppered with various legal arguments, he has fairly accepted that if the factual disputes are resolved against Kwai there is little left in his case on that issue.

Witnesses

25.  Both brothers gave evidence at the trial.  Kwai was cross-examined at some length.  Fai less so because he has little personal knowledge of the matters in dispute.  Evidence has also been adduced from a cousin, Ms Sylvia Tsang, on behalf of Kwai to the effect that he enjoyed a good relationship with Mother. It was agreed that Ms Tsang’s affidavit be received by the court without calling her. 

26.  Kwai was a poor witness.  He was very anxious in the witness box and was unable to focus on the questions asked of him and to provide simple or short answers despite repeated advice by the court.  Much of his answers took the form of a rambling speech the contents of which are very difficult to understand.  However, with respect, it appears that he is not a quick thinker and it may be difficult for some witnesses to change his disposition to one more appropriate for the witness box, especially for an older person[1]. I prefer to place little weight on how Kwai gave evidence but to rely on what he has said.

27.  The analysis of Kwai’s evidence below will show that he was in difficulty under cross-examination on all the major subjects. 

28.  I do not find Fai to be a good witness either. It strikes me that he harbours a sense of animosity against his brother.  In particular, he said that he spent 30 minutes talking to Mother trying to dissuade her from going to an annual trip in 2012 with Kwai and his family.  It appears to me that he was trying to hint that Kwai is to be blamed for Mother’s death.  She died from a heart attack during that trip.  Further, Fai had to resile in cross-examination from his allegation that Kwai and Mother had a poor relationship. 

29.  Perhaps more importantly, Fai has a financial interest in the outcome of this action.  Under the Will, he is apparently entitled to 2/5 of Mother’s estate and his 2 sons are entitled to another 1/5 jointly. 

30.  However, Fai has little personal knowledge of the matters in dispute.  For the reasons stated above, I shall evaluate the relevant evidence from him with care.

The Declaration of Trust 

31.  For reasons which will become apparent below, the resolution of the 2 factual issues in this case is not unrelated.

32.  I should make a general observation here that the evidence adduced in this case is far from comprehensive.  A glaring example is that no effort has been made to contact the person who allegedly witnessed the execution of the Declaration of Trust by Mother.  Given that it is accepted that the burden of proof in respect of the 2^nd issue rests on him, such deficiency in the evidence cannot be advantageous to Kwai’s case.

Financing the Company’s acquisitions 

33.  This is the right place to start the analysis of the evidence because the purchase of the Shop gave rise to the acquisition of the Company.  Kwai’s case is that Mother was a mere nominee who became a shareholder and director of the Company simply to fulfil legal requirements. Such a case is very much premised upon the foundation that the Company was used as Kwai’s investment vehicle and all the money for the acquisitions came from him. 

34.  In addition to the Shop and the Flat, there were 2 other acquisitions which are relevant for consideration.  In 1986, Kwai purchased a shop at Tsat Tsz Mui Road (“TTM Shop”) for HK$525,000 in his own name.  He agreed in evidence that the entirety of his savings was exhausted with this purchase. 

35.  The Shop was purchased 2 years later in 1988 at HK$639,000.  Kwai said that he financed the initial deposit of HK$239,000 and the balanced was paid with a mortgage.  The deposit came from his savings, profits from his investment in shares and the rental from TTM Shop.  Kwai was taken to the details under cross-examination in respect of the funding for the deposit payment, and the following picture emerged. 

36.  Kwai’s 2 sources of income during the period were (a) rental from the TTM Shop (HK$5,500 p.m.) and (b) his salary as a clerical assistant (HK$2,700 p.m.) making a total of just below HK$100,000 per year.  He claimed to be able to save up about 90% of his income which provided HK$90,000 a year or HK$180,000 over two years.  His investment gains would have topped up his income by 30% according to his own evidence, ie, an additional income of HK$30,000 per year (or HK$60,000 over two years). 

37.  Whilst mathematically it is possible for Kwai to have come up with HK$240,000 over two years (HK$180,000 + HK$60,000), it would have been highly unusual, firstly, for a person of low income to manage to save 90% of his income.  Secondly, Kwai had exhausted all his savings to purchase a property two years ago.  It would be quite unusual for a person in that position to embark upon another investment within 2 years with every cent he had.

38.  The evidence suggests that Kwai is a frugal person, and I assume for his benefit that he was a good investor with the stock market (there is a complete absence of documentary proof in respect of the investment gains, not to mention a stock market crash in 1988).  However, it is inherently unlikely for Kwai to be able to come up with the deposit payment of HK$239,000 by himself. Further, there is a good reason for disbelieving this part of his case.

39.  The evidence suggests that Mother probably had contributed at least to the deposit payment.  There was a loan in the sum of HK$150,000 taken out on 4 July 1988 based on a charge of one of the properties she jointly owned with her husband. I have no doubt that the parents were frugal people and keen to invest what they had on properties.  HK$150,000 was a large sum of money in those days. Kwai was living with his parents at that time and he could not offer any reason as to why his parents needed to obtain a large sum of money.  They did not purchase any property at that time (their last purchase was made in 1987). 

40.  Importantly, the timing of the loan coincided with the date when the agreement for the purchase of the Shop was signed, 11 July 1988.  The size of the loan bears some relationship to half of the deposit payment.  I should add that Kwai’s evidence is that he was told by Mother to acquire the Shop.  Indeed, his parents had acquired shop D in the same development in 1986.

41.  In light of the above evidence, it is more likely than not that Mother had contributed to the purchase of the Shop.

42.  It is right to say that Mr Chang, who appeared for Fai, has not been able to contradict Kwai on his evidence concerning the finance of the purchase of the Flat in May 1991.  However, this does not mean that this part of Kwai’s case must be accepted, especially when there is hardly any documentary proof in support of the same. 

43.  The Company made another purchase in 1994 at Coral Court, Cloud View Road (“CC Flat”) for the price of HK$3.95 million[2].  Kwai’s explanation of the funding for this acquisition is highly unsatisfactory. 

44.  On the first day of trial, he identified three sources of funds for the purchase : (a) HK$1.8 million mortgage with a bank; (b) his personal savings of about HK$200,000; and (c) further charges on both the Shop and the Flat.  He was unable to recall the amount obtained under the charges due to the passage of time.

45.  In the morning of the second day of trial, Kwai volunteered further evidence on this issue.  He said that after reflection overnight and with the aid of some calculations, he recalled that his wife and her family also contributed a sum of HK$450,000 (as an interest free loan) to the acquisition of CC Flat, whereas the loans from the re-financing of the Shop and Flat were HK$500,000 and HK$1,000,000 respectively.

46.  When cornered in cross-examination that only HK$3.95 million had been accounted for against the total cost of acquisition of HK$4.125 million (including the stamp duties and other expenses), Kwai came up with yet a further source of fund, namely, a loan of HK$200,000 from a colleague with whom he has lost contact for many years. 

47.  Kwai accepted that normally one would look to his own family for financial support before asking the family of his spouse. He sought to explain that his parents were in a tight financial position and he did not want to put pressure on them.  At the same time, the family of Kwai’s wife was not well-off.  The sum of HK$450,000 had to be pooled together with contributions from his brothers-in-law.  I do not accept Kwai’s explanation, especially when the loan was allegedly interest free.

48.  Equally, it is too convenient a co-incidence that he had a loan from a person who has emigrated.  I do not believe in the truthfulness of such evidence. As Mr Chang submitted, it is extraordinary for Kwai to have borrowed such substantial sums from his friend and his wife’s family when he had at his disposal the TTM Shop which was unencumbered.

49.  The only reasonable inference to be drawn from such truthful evidence is that Kwai is concealing the fact that Mother had contributed to the acquisitions of properties[3] by the Company, and to booster his case that she had nothing to do with the Company but a mere nominee of his.  More likely than not, she had contributed to the acquisitions made by the Company. 

Mother’s positions with the Company

50.  Mother was a director, shareholder and company secretary of the Company.  In addition, she was a signatory to the Company’s bank account(s).  She held such positions for 24 years until she passed away in 2012.  When Kwai was asked why he had taken no step to relieve Mother from her positions with the Company or to replace her with his wife despite claiming that Mother was suffering from dementia and her health condition had worsened in early 2011, he said that he was too busy to do so.  Such an answer is difficult to accept.

51.  Although it may be said that Mother did not participate in the running of the Company, the number of positions she held and the fact that she held them from inception until she passed away are more consistent with her status as an equal owner of the Company.

Discovery of the Allotments

52.  Kwai’s evidence on his discovery of the Allotments is confusing and lacks credibility.  In his affirmation, he said Ms Chan of RS told him about the Allotments when he rang her in about October 2012 to ask her about the procedure to replace Mother with his wife as company secretary.  In cross-examination, he said that he also told Ms Chan that he wanted to replace Mother with his wife as shareholder.  Later on, he claimed that he wanted to add his wife as a shareholder of the Company. Assuming that Kwai did say to Ms Chan that he would like to replace Mother with his wife as company secretary and/or shareholder, it is difficult to understand why such requests would have prompted a reply that it was impossible to “remove Mother as director”.  The answer had nothing to do with his enquiries.

53.  I agree with Mr Chang that it is telling that, despite being “completely shocked” by the Allotments, when Kwai attended Ms Chan’s office he did not confront her as to why the Annual Return had wrongly stated the number of issues shares to be 10,000[4].

54.  I also agree that Ms Chan is clearly a material witness who is capable of giving relevant evidence on the Allotments.  Kwai has confirmed that she is still working for RS and can be contacted.  He made no attempt to call her as a witness.  His belief that it is unnecessary to do so was based on a letter he had obtained from RS.  That letter suggested that the Return of Allotments was not filed by RS and that it had not produced nor seen any board minutes in respect of the Allotments.  

55.  I do not accept that there is a good reason not to call Ms Chan.  The letter from RS did not touch upon the question of Kwai’s knowledge of the Allotments.  How Ms Chan came to know about the Allotments and whether she had ever discussed the matter with Kwai are relevant to the issues in this trial.  In any event, no weight can be given to the letter when its contents are untested and Ms Chan is in fact available to give evidence.  The failure to call Ms Chan does not assist Kwai’s case.

Return of Allotments 

56.  This document bears the signature of Mother.  It is common ground that she was not in a position to produce that document by herself.  It must be said, however, that she was not unfamiliar with allotment of shares because the records suggest that such an exercise was carried out on 2 occasions in respect of her own property holding company.  Further, Mother was an experienced property investor and therefore not an unsophisticated person.

57.  It was suggested in cross-examination of Fai that Mother was forced or tricked by him into signing the Return of Allotments as part of his plan to increase the size of Mother’s estate for the benefit of himself and his sons.  Quite rightly, those allegations were withdrawn by Mr Tsui in his final submissions, probably with the benefit of careful analysis of the evidence adduced in this trial. 

58.  I should say briefly that I find the allegations inherently improbable in any event.  The allegations must be premised upon 2 assumptions, namely, that Fai knew about the Declaration of Trust as well as the contents of the Will at the relevant time.  There is no evidence in support of either.  Further, I agree with Mr Chang that the Allotments could not possibly be concealed from Kwai given that he was running the Company. 

59.  In his final submissions, Mr Tsui said that it is a mystery as to who prepared the Return of Allotments.  It has been pointed out that the document was not filed by any professional but by the Company itself, which is an unusual feature.  I agree that this is a pointer that the creation of the document was not caused by Kwai because the corporate matters were normally taken care of by RS. 

60.  On the other hand, it is very difficult to see who would have created that document apart from Kwai.  There was no other candidate. The fact that the Allotments could not have been kept from him is a powerful pointer that he caused the Allotments to be made and the filing of the Return of Allotments.  He was perfectly capable of filling-up the standard form document and could have decided to deal with the matter himself. 

61.  For completeness, I have considered the possibility that Mother had caused the Allotments to be made with the assistance of someone.  I reject that possibility for 2 reasons : (a) no such case has been advanced before the court and (b) no reason can be identified for the old lady to have done so.

62.  I agree with Mr Tsui that there is no apparent reason for the Allotments but I do not see it as a factor in favour of Kwai’s case.  There could be many reasons for the Allotments.  The absence of evidence here does not assist either case.

Annual Return

63.  The Annual Return was dated 15 July 2012, exactly 6 months after the Allotments.  That document was filed by RS.  Hence, it must have known about the Allotments.  The Annual Return was signed by Kwai. 

64.  Kwai was asked about the circumstances under which he signed the Annual Return.  His evidence is highly unsatisfactory.  He tried to explain that it was a routine document in which he expected no changes made, and he therefore signed it without reading.  Pressed further, he said that he did turn the corners of some pages and he was very busy at the time.  In re-examination, Kwai said that he did flip through the Annual Return before he signed it, including the second page which showed the total number of issued shares at 10,000. 

65.  I have no doubt that Kwai has not been candid with the court.  The Company was holding 2 of his 3 properties.  I do not accept that he signed the Annual Return without paying much attention to its contents.  Kwai has lied to try to explain why he had signed a document which was consistent with the Allotments having been made with his knowledge and consent. 

Board minutes

66.  There is a set of board minutes (“Minutes”) in English signed by Mother and dated 16 January 2012 in respect of the Allotments.  It was found shortly before trial by Fai inside a drawer of Mother’s dresser table in which documents were kept. 

67.  Mr Tsui suggested that the Minutes were produced late in the day to ambush Kwai.  I am unable to agree given the existence of the Annual Return, which constitutes strong support for the Allotments.  The Minutes, not signed by Kwai, adds little to Fai’s case. 

68.  Kwai said that he did not take any leave on 16 January 2012, the date of the board meeting referred to in the Minutes, and therefore it is not a genuine document.  I see little in this point.  According to Kwai’s own evidence, the usual practice was that the corporate documents would be produced by RS and then given to him for execution.  He acknowledged that some of the minutes of AGM of the Company were simply signed without a meeting of the shareholders on the day and at the place stated therein.  Whilst such practice is not to be endorsed, it is quite widespread in Hong Kong in respect of small private companies.

69.  In light of the evidence as analysed above, I have little doubt that Kwai knew and consented to the Allotments.  More likely than not, he was the person who procured the same.

Declaration of Trust

70.  This presents a very difficult factual question to be resolved.  On its face, that document was properly executed before a witness, and it was duly stamped.  A finding that the Declaration of Trust was obtained by improper means requires evidence of sufficient cogency commensurate with the gravity of the allegation. 

71.  Kwai said that the Declaration of Trust was prepared by RS and explained by the manager, Mr Lau, to Mother in his presence.  The 3^rd paragraph of that document referred to a transfer document duly executed by the trustee and attached to the Declaration of Trust.  Kwai said that no transfer document was ever produced. 

72.  It has been submitted with considerable force by Mr Chang that it is incredible that Mr Lau would have failed to realize that the transfer document was missing in the course of explaining the 1-page Declaration of Trust to Mother. Indeed, it may be added that Kwai would have realized the oversight himself. Mr Chang submitted that the only inference to be drawn is that the Declaration of Trust was never explained to Mother by Mr Lau as alleged.

73.  It is common ground that Mother was unable to understand the Declaration of Trust without explanation.  It follows, said Mr Chang, that Mother must have signed the Declaration of Trust without knowing its contents if Kwai’s evidence is rejected.  Further, it is to be inferred, based on the ICAC Story, that she signed the Declaration of Trust under a serious misapprehension that it was to the opposite effect, ie, Kwai was to hold his 1 share in the Company on trust for her and that the document was created to fend off any investigation by the ICAC against her son.

74.  Although I find that there is a ring of truth to the ICAC Story, I am reluctant to accept a piece of pure hearsay to condemn Kwai for having cheated his mother. 

75.  However, I accept that the absence of the transfer document casts considerable doubt on the veracity of the Declaration of Trust and Kwai’s evidence on how it was made. 

76.  When I look further and consider why the Declaration of Trust was created, the only reason, according to Kwai, was that Mother was a mere nominee of his in respect of the Said Share and that Mr Lau suggested that the document be made to reflect Mother’s position as a trustee.  In the analysis above, I have rejected Kwai’s case that Mother was a mere nominee.  It must follow that the foundation of his case on the Declaration of Trust becomes very shaky. 

77.  Furthermore, I take the view that the Allotments constitute another blow to Kwai’s case here.  As analysed above, more likely than not the Allotments were caused to be made by Kwai with his eyes open. They reflect a 50/50 shareholding in the Company and are inconsistent with his case on the Declaration of Trust.  I see no reason why Mother, given her age and lack of participation in the running of the Company, should be allotted more shares in the Company if she was merely a nominee. 

78.  I have not overlooked Mr Tsui’s submission that the Declaration of Trust supports Kwai’s case on the Allotments.  However, that argument is premised on the assumption that this court accepts the veracity of the Declaration of Trust.

79.  Finally, Mr Tsui agreed that the burden of proof on the Declaration of Trust is on Kwai.

80.  Doing the best I can with the available evidence, I am in doubt whether the court has been told the truth in respect of the creation of the Declaration of Trust and I am reluctant to hold that Kwai had cheated his mother.  On the other hand, the burden of proof here is on Kwai and I am certainly not convinced on the veracity of the Declaration of Trust.  Mr Chang must be right that if Kwai’s case is rejected (as indicated above), there is no alternative basis whereby this court can uphold the veracity of that document.

Conclusions

81.  By reason of the aforesaid, the OS is dismissed.  I make an order nisi that the costs of and occasioned by the OS, including the costs of the Company, be borne by Kwai, to be taxed if not agreed. 

82.  Last but not least, I am grateful to counsel for their assistance to the court.