Asian Oceanic Bank Ltd., Asian Oceanic Nominees Ltd. and Asian Oceanic Ltd. (all in liquidation) v. Lambang Maju Sdn Bhd (the "Actual 1st Defendant") and Others

HCMP 4151/1993

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 4151 OF 1993

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J U D G M E N T

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This case concerns 6.5 million shares ("the shares") in a listed company called Lucky Man Properties Limited ("LM"). The Plaintiffs ("AOBL" for Asian Oceanic Bank Limited, "AONL" for Asian Oceanic Nominees Limited and "AOL" for Asian Oceanic Limited) are all in voluntary liquidation. AONL and AOL are wholly owned subsidiaries of AOBL. At one stage, AOL was the registered holder of 3 million of the shares whilst AONL was the registered holder of the remainder 3.5 million of the shares. Later AONL became the registered holder of all the shares. According to Mr Gabriel Tam, the liquidator of the Plaintiffs, AOBL, AONL and AOL do not claim any interest in the shares. With regard to the beneficial interest in the shares, the position of AOBL, AONL and AOL is neutral. In other words, the Plaintiffs interplead. In fact, it is the Defendants who have competing claims over the beneficial interest in the shares.

2. During the course of trial, the names of something like two dozen companies incorporated in Hong Kong or abroad were alluded to as having direct or indirect connection with the shares or with the people behind certain transactions involving the shares. But the parties before me cannot agree how the companies and people are related. I do not think I can even begin to unravel the entangled web. There is, however, a paper trail showing how some of the companies involved dealt with the shares. Those companies are Asian Master Enterprises Limited ("AM"), Crownhall Investment Limited ("CIL"), Mandarin Resources Corporation Ltd ("MRC"), Aquiline Pacific Limited ("Aquiline"), Lambang Maju Sdn Bhd ("Lambang"), Top-Text Sdn Bhd ("Top-Text"), Sammy Investment Limited ("Sammy"), Pahang Investment PLC ("Pahang"), Dah Yung Investment Limited ("Dah Yung") and Sun Hong Kee Limited ("Sun Hong Kee").

3. The paper trail ("the Sammy Trail") connecting the shares with the companies mentioned in the preceding paragraph shows the following events in chronological order:-

4. In this matter, Lambang is the 1st Defendant. Sammy is the 2nd Defendant. Sun Hong Kee is the lead 3rd Defendant. As is apparent from the chronology of events, Lambang has effectively relinquished any claim to the shares in favour of Sammy. Lambang did not appear nor made any representation at the trial before me.

5. There is another paper trail linking Sun Hong Kee to the shares. Along this trail ("the Sun Hong Kee Trail"), in addition to Sun Hong Kee, AM, CIL and LM, more companies were involved. Those companies are Broadworld Development Co. Ltd ("Broadworld"), Tomax Investment Corporation ("Tomax"), Asiatic Fortune Co. Ltd ("AF"), Newport Plaza Ltd ("Newport Plaza"), and Lucky Plaza Ltd ("Lucky Plaza"). The sequence of events along the Sun Hong Kee Trail as alleged by the 3rd Defendants is as follows:-

6. Somewhere towards the end of the Sun Hong Kee Trail, an event allegedly happened but there is hardly any document or record pertaining to it. It seems that Gold Eagle Finance Co. Ltd ("Gold Eagle"), another wholly owned subsidiary of Sun Hong Kee, pledged the shares by deposit with the Plaintiffs as additional security for a US$1.5 million facility. Yet Mr Gabriel Tam, the liquidator of the Plaintiffs, states that he has searched exhaustively all the papers of the Plaintiffs in his possession but can find nothing about any outstanding account in this regard.

The Evidence

7. The documents that make up the Sammy Trail and the Sun Hong Kee Trail are too numerous to list here. I have been taken through each and every one of the relevant documents by counsel. I have also gone through them again myself. Assuming the documents are authentic, they do show that on the one trail the shares were acquired by subsidiaries of the 3rd Defendants in trust for Sun Hong Kee or Newport Plaza and on the other trail the shares were sold in succession to Sammy. There is also evidence to the effect that, in cases of purchase, valuable consideration were paid for the shares at each stage of the two trails.

8. In addition, for and on behalf of Sammy, Mr Sun Ying Chung ("Mr Sun") alone gave evidence. Mr Sun identified and formally produced the documents pertaining to the Sammy Trail. Further, Mr Sun testified that in fact Sammy purchased the shares at the suggestion of Mr Chim Pui Chung ("Mr Chim"). Mr Chim negotiated and arranged the purchase on behalf of Sammy. Mr Sun is adamant that Sammy reimbursed Mr Chim the cost of purchase of the shares. However, Mr Swaine for the 3rd Defendants suggests that Sammy and Mr Sun were merely nominees for Mr Chim. The shares were in fact acquired by Sammy for Mr Chim. Mr Swaine, under protest from Mr Mayne, used materials from the judgment of Burrell J in HCCW 348 of 1996 to attack the general credibility of Mr Sun and specifically to discredit the denial by Mr Sun that he was the front man for Mr Chim.

9. Madam Foo Hooi Goh ("Madam Foo") alone gave evidence for the 3rd Defendants. According to her, she and her family are ordinarily resident in Malaysia. She and members of her family held and still hold controlling shares and directorships in Sun Hong Kee and its layers upon layers of subsidiaries. Some of the subsidiaries were incorporated in Malaysia, Liberia, the British Virgin Island, the United Kingdom and Hong Kong. Madam Foo identified and formally produced the documents pertaining to the Sun Hong Kee Trail. In addition, Madam Foo stated that she had the share certificates of the LM shares registered in the name of AM and CIL and a sample of the original share certificates still in her possession has been produced by her. In short, her evidence is that the beneficial interest in the shares and in those represented by share certificates still held by her belong to the 3rd Defendants. By rigorous cross-examination, Mr Mayne was able to demonstrate that Madam Foo in fact had hardly any direct involvement or knowledge with the family business or the dealings in the shares. Apparently Madam Foo's husband and their children ran the family business. One day, the husband gave a stack of share certificates to Madam Foo to keep. She did not even know or remember how many shares were there. Some time later, some of the share certificates were taken from safe deposit. She has no clear recollection of when or why the share certificates were taken away.

The Facts

10. Both Mr Mayne and Mr Swaine agree that the history relating to the shares is punctuated by impenetrable mysteries. Some of the people who might know what happened are either unable or unwilling to testify in court. Perhaps the whole truth will never be discoverable. Nonetheless, the facts necessary for decision in this case can be determined with confidence.

11. First of all, despite a certain degree of doubt at the beginning of trial, as a result of further enquiries made by Mr Gabriel Tam, the liquidator of the Plaintiff, I can safely find that of the 5 million LM shares originally registered in the name of AM in 1984 3 million ended up in the Sammy Trail and of the 5 million LM shares originally registered in the name of CIL 3.5 million ended up in the Sammy Trail. In other words, although the share certificate numbers are different, the shares in the Sammy Trail were part of the 10 million shares under the names of AM and CIL in the Sun Hong Kee Trail.

12. Secondly, in respect of the Sammy Trail, there is clearly documentary evidence to prove that Sammy did purchase the shares and the price for the shares were paid to Top-Text the seller to Sammy. There is, however, no reliable documentary evidence as to payment of US$1 million (the price for the purchase of the shares from Top-Text) by Sammy to reimburse Mr Chim who arranged the purchase. Mr Sun explained that Sammy reimbursed Mr Chim through set-offs or contra accounts in businesses in China. I must say it is very astonishing that Sammy can produce no accounting records to prove that it has paid for the shares. Anyway, as Mr Swaine submitted, it is not necessary to determine whether Sammy and Mr Sun were nominees of Mr Chim although such finding would lend weight to the argument, through some rather tortuous and convoluted route, that the purchase from Top-Text was part of a devious scheme and thus Sammy cannot be regarded as a bona fide purchaser. For present purposes, in the light of the unchallengeable documentary evidence, I find that Aquiline purchased the shares form AONL, Lambang purchased the shares from Aquiline, Top-Text purchased the shares from Lambang, Sammy purchased the shares from Top-Text and all the purchases were for valuable consideration.

13. Thirdly, in respect of the Sun Hong Kee Trail, although Madam Foo does not come across as one who really knew and still does not know the transactions relating to the shares, there is uncontradicted documentary evidence to show and I do believe that the shares were purchased by AM and CIL in trust for Sun Hong Kee and Newport Plaza and that Sun Hong Kee and Newport Plaza had acquired the beneficial interest in the shares in August 1985.

14. The most intriguing part of this case is that, according to the Sammy Trail, in August and September 1985 Pahang pledged with AOL by deposit 3.5 million of the shares registered in the name of CIL and CIL transferred to AONL another 3 million of the shares registered in the name of AM. These "transactions" constituted the root title of the Sammy Trail. The documents evidencing these transactions are reproduced below:-

The Pledge

AOL Memorandum

Date:	August 2, 1985	Ref.:	AOM802/85/0027(2)
To:	CPYH/EY	Unit:	Hong Kong
From:	DL	Unit:	Singapore
Copy:	LWC/SY	Unit:	Hong Kong

Subject : ADDITIONAL SECURITY FOR PAHANG INVESTMENTS

I have, today, taken delivery of 3,500,000 shares in Lucky Man Enterprises Ltd from the above client. These shares are to provide additional cover for its Loan pursuant to your request of July 12, 1985.

Lucky Man is quoted on the Kowloon Stock Exchange and is a company invested only in a luxury apartment block at Fairmont Terrace. In its circular to shareholders recently, Sanmuel Montagu stated that these shares have a net tangible asset value of HK$1.10. It is seldom traded and was quoted on the KSE today at HK$1.20 Bid.

The acceptance of this shock will raise the total value of the securities provided by Pahang to US$5,230,445. This is a security to advance ratio of 164.78% which is above the maintenance provision of 160%.

Recommend acceptance of this deposit of shares. Suggest that shares be kept unregistered for time being.

	Above deposit approved
	____________________ Cary Hsu
	The Transfer
	September 27, 1985

Asian Oceanic Ltd
902, Admiralty Centre,
9/F., Tower I,
18 Harcourt Road,
Hong Kong.

Attn: Mr C C Kwong/Mr L W Chan

Dear Sir,

PURCHASE OF 9,914,500 SHARES IN
MANDARIN RESOURCES CORPORATION LTD
SALE OF 3,000,000 SHARES IN LUCKY MAN PROPERTIES LTD BY DAH YUNG INVESTMENTS LTD (SINGAPORE)

We have been instructed by Dah Yung Investments Ltd of Singapore to deliver to your goodselves certificates and transfers covering 3,000,000 shares in Lucky Man Properties Ltd against payment of the sum of HK$3,870,000.00 (Hong Kong Dollar Three Million Eight Hundred and Seventy Thousand Only) for value October 1, 1985.

As we are to pay you the sum of HK$4,362,380.00 (Hong Kong Dollar Four Million Three Hundred Sixty Two Thousand Three Hundred and Eighty Only) for the delivery of 9,914,500 shares in Mandarin Resources Corporation Ltd for the same day, may we respectfully request that we arrange to exchange the shares on that date, and we will give you a cheque in the sum of HK$492,380.00 (Hong Kong Dollar Four Hundred Ninety Two Thousand Three Hundred Eighty Only) as being full and final settlement for both the above transactions.

Thank you for your kind attention to this matter.

Yours faithfully,
for and on behalf of
CROWNHALL INVESTMENTS LTD

_________________
Authorised Signatory

27 September 1985

Asian Oceanic Limited
902 Admiralty Centre
9/F., Tower I
18 Harcourt Road
HONG KONG

Attention: Mr C C Kwong

Dear Sirs

PURCHASE OF 9,914,500 SHARES IN MANDARIN RESOURCES CORPORATION LIMITED SALE OF 3,000,000 SHARES IN LUCKY MAN PROPERTIES LIMITED BY DAH YUNG INVESTMENTS LIMITED (Singapore)

We have been instructed by Dah Yung Investments Limited of Singapore to deliver to your goodselves certificates and transfers covering 3,000,000 shares in Lucky Man Properties Limited against payment of the sum of HK3,870,000 (Hong Kong dollars three million eight hundred and seventy thousand only) for value October 1, 1985.

As we are to pay you the sum of HK$4,362,380 (Hong Kong dollars four million three hundred sixty-two thousand, three hundred and eighty) for the delivery of 9,914,500 shares in Mandarin Resources Corporation Limited for the same day, may we respectfully request that we arrange to exchange the shares on that date, and we will give you a cheque in the sum of HK$492,380 (Hong Kong dollars four hundred ninety-two thousand, three hundred eighty only) as being full and final settlement for both the above transactions.

Thank you for your kind attention to this matter.

Yours faithfully,
for and on behalf of
CROWNHALL INVESTMENTS LIMITED

_________________
Authorised Signatory

15. There is no explanation from the 3rd Defendants who claim to be beneficial owners of the shares as to how the share certificates of 3.5 million of the shares registered in the name of CIL went into the possession of Pahang to enable Pahang to pledge or how the share certificates of another 3 million of the shares registered in the name of AM went into the possession of CIL to enable CIL to sell. Indeed, there is no explanation from any party at all! I do have evidence from Madam Foo that she cannot recognise the signatures on the CIL letters to AOL both dated 27 September 1985. Apparently, Pahang is not related to or associated with the 3rd Defendants.

16. On the other hand, the 3rd Defendants have asserted that the shares, the same pledged by Pahang and transferred by CIL as noted in the preceding paragraph, were pledged with the Plaintiffs (whether AOBL, AONL or AOL is still unclear) by Gold Eagle which is a wholly-owned subsidiary of Sun Hong Kee. So the case of the 3rd Defendants is, by implication, that Pahang and CIL were not authorized by the 3rd Defendants to deal with the shares in the way shown as the beginning of the Sammy Trail. If the 3rd Defendants' case is believed, it may be, may be, that share certificates of the shares were taken from safe custody of the 3rd Defendants by person or persons not yet identified ostensibly for the purpose of pledging by deposit for facilities to Great Eagle but in fact the person or persons enabled Pahang to pledge 3.5 million of the shares and CIL to sell another 3 million of the shares. Of course, in such scenario, Gold Eagle could not have drawn on any facility purportedly secured by the shares. This would explain why the liquidator cannot trace any record or account in the Plaintiffs' papers relating to Gold Eagle. However, even if I can speculate, the case of Gold Eagle pledging the shares is not acceptable because the 3rd Defendants can neither produce any scrap of paper to show there was such a pledge nor demonstrate why they say Gold Eagle pledged the shares.

17. In the premises, I do not find that Gold Eagle pledged the shares. I find, on the balance of probabilities, that Pahang did pledge and CIL did transfer the shares as already noted.

The Issues

18. There are, formally, ten agreed issues before me:-

1. Whether the 3rd Defendants (the Actual 2nd Defendants) beneficially owned the shares in issue in these proceedings by virtue of trusts constituted in 1985 as alleged by them.

2. Whether 3,500,000 of the said shares were pledged to Asian Oceanic Bank Limited ("AOL") in 1985 as stated in paragraph 10.1 of the Affirmation herein of Gabriel Tam dated the 18th of November, 1993.

3. Whether the remaining 3,000,000 of the said shares were received by AOL in October 1985 as part consideration for the sale of 9,914,500 shares in Mandarin Resources Corporation to Dah Yung Investment Limited as stated in paragraph 10.3 of the aforementioned Affirmation herein of Gabriel Tam.

4. Whether the said shares were sold in law by Asian Oceanic Nominees Limited to Aquiline Pacific Limited as the 2nd Defendant (the Actual Plaintiff) alleges.

5. Whether the said shares were sold in law by Aquiline Pacific Limited to the 1st Defendant as the 2nd Defendant alleges.

6. Whether the said shares were sold in law by the 1st Defendant to Top-Text Sdn Bhd as the 2nd Defendant alleges.

7. Whether the said shares were sold in law by Top-Text Sdn Bhd to the 2nd Defendant as the 2nd Defendant alleges.

8. Whether the said shares were alternatively transferred in law to the 2nd Defendant in the manner pleaded by the 2nd Defendant in paragraphs 13 to 16 of the Amended Statement of Claim herein.

9. Whether the 2nd Defendant was a bona fide purchaser of the said shares for valuable consideration without notice of any third party's claim.

10. Whether, upon the whole of the evidence, the said shares remain beneficially the property of the 3rd Defendants.

However, I gather from closing submissions of counsel that only Questions 1, 9 and 10 need to be addressed.

Question 1

19. In his closing submission, Mr Mayne for Sammy focused on two issues. Although counsel has been careful to say he does not forgo any point, his main thrust is clearly centred on Question 1. Counsel says:

"The [3rd Defendants have] proceeded on the basis that the trusts they rely on has been proved by just the production of documents which purportedly declare a trust. That is not so. There is no presumption or assumption that any trusts exist, nor should there be so. Whether there are any trusts should be subject to the test of credibility and proof like any other fact in this matter.

The only witness called to give viva voce evidence of any trust was Madam Foo. ...... Madam Foo's evidence provides no help whatever."

20. Indeed, there is no place for presumption of trusts. As counsel noted, the 3rd Defendants rely on express trusts. The Sun Hong Kee Trail clearly shows that share certificates for 5 million LM shares registered in the name of AM were forwarded to Tomax with a written declaration of trust by AM in favour of Tomax. Tomax made a similar declaration of trust in favour of Newport Plaza. In relation to the other 5 million LM shares, those registered in the name of CIL, CIL forwarded the share certificates to Tomax with a written declaration of trust by CIL in favour of Tomax. Tomax then wrote to Sun Hong Kee stating that those shares registered in the name of CIL had been acquired on behalf of Sun Hong Kee. Although no written declaration by Tomax in favour of Sun Hong Kee has been produced, the confirmatory letter from Tomax to Sun Hong Kee in effect amounts to an express declaration of trust by Tomax in favour Sun Hong Kee. Tried as Mr Mayne did to query the authenticity of the declarations of trust, there is incontrovertible evidence that AM, CIL and Tomax were at the time wholly-owned subsidiaries within the group of companies led by Sun Hong Kee. In any event, AM, CIL and Tomax have not come forward to deny the trusts. In the premises, I have no difficulty at all to hold that 3 million of the shares that were originally registered in the name of AM were held on trust in favour of, ultimately, Newport Plaza and 3.5 million of the shares that were originally registered in the name of CIL were held on trust in favour of, ultimately, Sun Hong Kee.

21. It is clear that AM and CIL acquired the shares for valuable consideration - shares in Broadworld which had property assets. In the circumstances of this case, it does not matter whether the money used to purchase the property assets actually or nominally came from Newport Plaza or Sun Hong Kee. AM, CIL, Tomax, Newport Plaza and Sun Hong Kee were all in the same group.

22. In short, the answer for Question 1 is in the positive.

Question 9

23. Mr Swaine for the 3rd Defendants focused on Question 9. According to counsel, in order to succeed, Sammy must prove on the balance of probabilities that the 3rd Defendants' equitable ownership of the shares has been destroyed by a bona fide purchaser for value without notice. Yet the onus of proving equity's darling is on the party asserting that an equitable interest has been defeated. See Barclays Bank v. Boulter [1998] 1 W.L.R. 1. There, Mummery LJ delivering the judgment of the English Court of Appeal observed, at p. 8 that:-

"It is well established at this level of decision that the doctrine of bona fide purchaser for value without actual or constructive notice is a defence which can be raised to defeat a claim of an equitable right or interest and that the burden is on the person raising that defence to plead and prove all its elements."

24. It is also important to bear in mind the principle re-iterated by Lord Browne-Wilkinson in Barclay Bank Plc v. O'Brien [1994] 1 A.C. 180 at 195-196 referred to by Mummery LJ:-

"The doctrine of notice lies at the heart of equity. Given that there are two innocent parties, each enjoying rights, the earlier right prevails against the later right if the acquirer of the later right knows of the earlier right (actual notice) or would have discovered it had he taken proper steps (constructive notice). In particular, if the party asserting that he takes free of the earlier rights of another knows of certain facts which put him on inquiry as to the possible existence of the rights of that other and he fails to make such inquiry or take such other steps as are reasonable to verify whether such earlier right does or does not exist, he will have constructive notice of the earlier right and take subject to it."

25. The alleged bona fide purchase for value without notice must prove not only absence of actual notice, but also absence of constructive notice. Moreover, the court assumes, as a matter of principle, that any inquiry ought to have been made would have received an honest answer. In Pillgrem v. Pillgrem [1881] 18 Ch. D. 93, Fry J held, at 102, that:-

"But is Mr Hilliar a purchaser for value without notice? In order to shew that, it must be shewn that he took all reasonable care and made inquiry, and that, having taken that care and made that inquiry, he received no notice of the trust which affected the property. It is not in evidence that he made any inquiry at all. I am bound to assume that, if he had called for an abstract of title, an honest abstract would have been furnished to him, and he would then have seen that the property was affected by a prior trust. In my judgment, a person who shuts his eyes, and takes without inquiry, cannot say he is a purchaser without notice, when, if he had made inquiry and an honest answer had been given, he would have had notice."

The decision of Fry J was upheld on appeal.

26. Since Mr Mayne has no quarrel with Mr Swaine on the principles as noted, I can go straight to applying them to the facts of this case. Here, there is no evidence at all that any of the purchasers along the entire Sammy Trail, i.e. AOL, Aquiline, Lambang, Top-text or Sammy made any enquiry to remove constructive notice. If one goes to the root of title for this trail, seeing that CIL was offering LM shares registered in the name of AM as consideration for MRC shares and Pahang was offering LM shares registered in the name of CIL as security for facility to Pahang, AOL and AONL ought to have felt suspicious and made enquiries. If enquiries had been made, clarification would have been sought from AM and CIL who, I am bound to assume, would have told AOL and AONL that they were, as I have found, trustees for Newport Plaza and Sun Hong Kee.

27. In the circumstances, I have no difficulty in coming to the conclusion that each and every purchaser along the Sammy Trail, from beginning to end, was fixed by constructive notice. In fact, once the title of AOL and AONL in the shares were tainted by constructive notice of the trusts over the shares in favour of Newport Plaza and Sun Hong Kee, they (AOL and AONL) could not have validly passed any title or interest to the subsequent purchasers because of the nemo dat rule.

28. Accordingly, I find that none of purchasers along the Sammy Trail was bona fide purchaser without notice. In short, the answer for Question 9 is in the negative.

Question 10

29. As I see it, although Sammy is not entitled to the beneficial interest in the shares because it is not a bona fide purchaser without notice, it does not necessarily follow that the 3rd Defendants retained or still own the beneficial interest of the shares. The root transactions in the Sammy Trail to AOL and AONL are clearly invalidated by constructive notice but there is the Gold Eagle pledge by deposit of the shares. If indeed as Sun Hong Kee asserts the shares were pledged by Gold Eagle, Sun Hong Kee may have relinquished its beneficial interest in the shares by parting with the share certificates. But Mr Tam, the liquidator of AOBL, AONL and AOL has confirmed that there are no understanding accounts relating to Gold Eagle or the 3rd Defendants. It must be for this reason that AOBL, AONL and AOL through their liquidator stake no claim for the shares. So, even if the shares had been pledged, they are no longer encumbranced and the beneficial interest in them reverts to or is retained by Newport Plaza and Sun Hong Kee.

30. In any event, Mr Mayne for Sammy has argued as his second crucial issue that the Gold Eagle pledge is incredible. And, I have on the evidence found that there was no pledge by Gold Eagle. In the premises, the answer for Question 10 must be in the positive.

Order

31. For the reasons given, there is judgment against Sammy in favour of Sun Hong Kee and Newport Plaza. I declare that the beneficial interest of 3 million of the shares belong to Newport Plaza and the beneficial interest of 3.5 million of the shares belong to Sun Hong Kee. I trust that the parties will agree the precise terms of court order to give effect to this judgment but, just in case, liberty to apply is given. There is no order in relation to Lambang.

32. Costs should follow the event. I order that Sammy pays the costs of the liquidator and the 3rd Defendants in this matter, such costs to be taxed if not agreed.

33. Finally, I thank both counsel for their assistance in making this convoluted case manageable for me.