WAN WAI HEI WESLEY AND ANOTHER v. GOLDEN LAKE DEVELOPMENT LTD AND OTHERS

HCA 22/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 22 OF 2007

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J U D G M E N T

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1.  This is an appeal by rehearing from a Master’s order that the 1^st plaintiff pay into court as interim payment a sum of money as anticipated damages, on account of his use and occupation of a house in Horizon Drive, Chung Hom Kok, for the period January 2007 to June 2008, and thereafter monthly.

Corporate Ownership of Family Homes

2.  A common feature of home ownership in Hong Kong by married couples is that instead of buying and becoming owners jointly, they incorporate or buy a shell company.  They split the share capital and appoint themselves as directors.  The company then takes title to the property and thereby becomes the legal and beneficial owner.  It is said of this procedure that there are beneficial tax implications.  Implicit in this form of ownership is that the couple have licence to occupy together with any other family member who comes along as if they themselves are the owners.  Inevitably, a feature of any mortgage required to raise the purchase price is that its repayment will be guaranteed by the couple, who fund the cost of owning and maintaining their home in consideration for their occupying it.

History

3.  The 1^st plaintiff (Mr Wan) and 2^nd defendant (Ms Tong) having married in 1989 bought their first matrimonial home at 69A Repulse Bay Road in this way.  As it happened, the vendor was a company incorporated for the purpose of buying and owning the property, being the 1^st defendant (Golden Lake).  The couple completed the purchase by each buying half the shareholding in Golden Lake of two shares each and appointing themselves the two directors.

4.  The purchase price of $4.1 million was funded by moneys provided by Mr Wan’s parents and a mortgage advance from HSBC.

5.  In 1994 the couple decided they needed more space with the arrival of their second child, and in early 1995 caused Golden Lake to buy and then complete the purchase of the house in Chung Hom Kok which is central to this dispute.  It cost $27 million.

6.  Whether by gift or advance is disputed, but what is not is that $21 million of the purchase price was provided by Ms Tong’s parents, her mother the 3^rd defendant (Madam Tong) and her father now deceased (Mr Tong) and companies owned and controlled by them, and an advance or personal loan from Standard Chartered Bank.  The balance of $6 million was raised by mortgage from the Shanghai Commercial Bank (SCB) secured over the Horizon Drive house in usual form.

7.  In early 1996 the Repulse Bay Road property was sold for $12 million.  It is disputed as to whether the sale proceeds (presumably net of what was needed to clear the HSBC mortgage) was used to repay any moneys advanced by Ms Tong’s family to purchase Horizon Drive.

8.  In 1998 the mortgage to SCB fell into arrears, and early in the following year the parties caused Golden Lake to refinance with UBS AG (UBS). 

9.  Throughout the period there is dispute as to whether Ms Tong’s family were continuing to support the financing of the Horizon Drive Property.  To the extent that they did, there is the further dispute as to whether this was by gift or advance.

Restructuring of Ownership of Horizon Drive

10.  This is where the dispute began, erupting into this litigation.  It all happened in 2002. 

11.  Mr Wan says he was persuaded by his wife and mother-in-law to engage in what he calls the “Low Interest Financing Arrangement”, to the effect that by way of a restructure of the ownership of the property, more favourable facilities would be forthcoming from UBS.  It required participation by the 4^th defendant (Future Wealth), a company whose shareholding is owned by Ms Tong and her mother Madam Tong.

12.  Then they undertook the following steps:

·  Golden Lake’s share capital was increased from four shares to 10,000 shares;

·  the new shares were allotted to Fortune Wealth;

·  Golden Lake assigned Horizon Drive to Fortune Wealth;

·  Mr Wan was made a director of Fortune Wealth;

·  no money changed hands as consideration for the allotment of shares or subsequent assignment;

·  the existing UBS mortgage from Golden Lake was replaced by a new mortgage from Fortune Wealth.

13.  It is Mr Wan’s case that this exercise was solely for the purpose of enabling access to more favourable borrowing terms; that there was never any intention either to dispose of or diminish Golden Lake’s interest in Horizon Drive, or to water down his half share interest in Golden Lake, and thus, effectively, a half share interest in the equity in Horizon Drive.

14.  Ms Tong’s case, supported by her mother, is poles apart.  This was not a device to achieve more favourable borrowing terms, it was an assignment of Golden Lake’s legal and equitable interest in Horizon Drive, what she called the “Transfer and Forgiveness Agreement”.

15.  It was founded on the premise that Madam Tong, the late Mr Tong and their various companies had over the years paid considerable amounts of capital for the purpose of buying and maintaining Horizon Drive.  The effect of this restructure was, with knowledge of all affected, to relieve Golden Lake and Mr Wan and Ms Tong from repayment of this indebtedness and as well as that due to UBS, in consideration for Fortune Wealth taking title and thus assuming ownership of Horizon Drive. 

16.  Since September 2002, Ms Tong and Madam Tong have met all moneys secured by the new UBS mortgage.

The Divorce

17.  In 2006 the marriage came to an end.  By then there were three children.  It is said by Mr Wan there was a row following revelations that Ms Tong was in an adulterous relationship.  However, there was no contest in the petition.  Ms Tong left the home taking the children with her.  She was awarded custody.  Mr Wan remained in occupation, exercising access to the children at the home, and remains there to this date.

18.  Curiously, though as it has transpired there is a major contest as to issues of proprietary rights and other interests in Horizon Drive, this was not the subject of ancillary relief litigation, and a decree absolute issued in October 2006.

A New Advance

19.  Post the divorce there were further developments.

·  Ms Tong and Madam Tong caused Mr Wan’s removal from the office of director in Golden Lake and Fortune Wealth;

·  Fortune Wealth obtained further facilities from UBS of about $25 million;

·  By letter of 28 December 2006 Messrs Johnson Stokes & Master (JSM) representing Fortune Wealth wrote to those representing Mr Wan, inter alia stating:

“Further, we are instructed that your client is in wrongful occupation of the Property without the consent of Fortune Wealth.  Take notice that unless your client vacate and deliver up vacant possession of the Property to our client within 7 days from the date hereof, legal proceedings will be instituted against your client without further notice.”

20.  Mr Wan took no steps to vacate, and remains in occupation.

This Action

21.  The writ was filed in July 2007, initiated by Mr Wan, suing on his behalf as P1 and as shareholder of Golden Lake as P2 in a derivative action.

22.  Essentially the claim is for orders to unravel the restructuring of 2002, thus to restore Horizon Drive to Golden Lake and parity of ownership in Golden Lake between its original shareholders, with an accounting of the unauthorized UBS advance of $25 million.

23.  The defence advanced by all defendants is to promote the existence and terms of the Transfer and Forgiveness Agreement which ultimately came to vest the legal and beneficial ownership of Horizon Drive in Fortune Wealth, denying Mr Wan any interest therein on his own behalf and in the derivative action for Golden Wealth.

24.  There is also a counterclaim; it is from this that emerges the claim for interim payment of damages that is the matter before me.

25.  It is that Mr Wan is trespassing upon property owned by Fortune Wealth having failed on or by 5 January 2007 to comply with the notice sent on 28 December 2006 (the letter from JSM) to vacate Horizon Drive, with that trespass continuing.

26.  Damages are prayed for as a result of that trespass.

The Issues for Trial

27.  These include the following:

·  Should the restructuring be set aside?

·  Is Golden Lake the beneficial owner of Horizon Drive?

·  Who owns Golden Lake and in what shares?

·  Should there be an accounting of the borrowed $25 million?

·  Is Mr Wan a trespasser, and liable to Fortune Wealth in damages?

The Application for Interim Damages

28.  This was made by Fortune Wealth against Mr Wan in his capacity of P1, and flows from the allegation that Mr Wan is a trespasser and has been since 5 January 2007.

29.  The amounts claimed amount to a surveyor’s assessment of what was and now is a fair market rental from 5 January 2007.

30.  The Master made an order in terms to 30 June 2008, with damages thereafter fixed at $150,075 per month accruing.

The Legal Principles

31.  The application is made under O.29 r.10 RHC.  Rule 11(1) applies also.

32.  The court is empowered with a discretion to make an interim payment on account of damages prior to trial of the issues if the following requirements are met:

(a) the Applicant has a substantive claim for damages (PR.9 & 11);

(b)    the Respondent has admitted liability for the damages claimed or been adjudged so liable (in the absence of quantification) or “if the action proceeded to trial, the [Applicant] would obtain judgment for substantial damages against the respondent …” (R.11(1));

(c) “… the Court may, if it thinks fit … order the respondent to make an interim payment of such amount as it thinks just not exceeding a reasonable proportion of the damages which in the opinion of the Court are likely to be recovered by the [Applicant] after taking into account any relevant … set-off [or] cross-claim … on which the respondent may be entitled to rely” (R.11(1)).

33.  The applicant specifically relies on Rule 12(b) and (c).  That rule states (substituting plaintiff for defendant and vice versa):

“12.   If on the hearing of an application under rule 10, the Court is satisfied:

   …

   (b)   that the defendant’s action includes a claim for possession of land and, if the action proceeded to trial, the plaintiff would be held liable to pay to the defendant a sum of money in respect of the plaintiff’s use and occupation of the land during the pendency of the action, even if a final judgment or order were given or made a favour of the plaintiff; or

   (c)   that if the action proceeded to trial, the defendant would obtain judgment against the plaintiff for a substantial sum of money apart from any damages or costs,

The court may, if it thinks fit, and without prejudice to any contentions of the parties as to the nature or character of the sum to be paid by the plaintiff, order the plaintiff to make an interim payment of such amount as it thinks just, after taking into account any set-off, cross-claim or counterclaim on which the plaintiff may be entitled to rely.”

34.  The rationale is that it gives the court power to make an interim award ahead of the trial of the issues, but in circumstances where there is an admission of liability or it is satisfied, applying the civil standard of proof, that the applicant will obtain a monthly judgment for a sum at or more than the interim award.

35.  In British Holdings Plc v Quadrex Inc [1989] 1 QB 842, Sir Nicholas Browne-Wilkinson VC referred to a two-stage approach, requiring the court to be satisfied it has jurisdiction before its discretion is brought into play.  He says at p.863:

“Under Ord.29, r.11, the court is required to approach the matter in two stages.  At the first stage, the court has to be ‘satisfied’ that the defendant has admitted liability for damages or that a judgment for damages to be assessed has been obtained or (and this is the present case) ‘that, if the action proceeded to trial, the plaintiff would obtain judgment for substantial damages.’  Only if the court is so satisfied at the first stage can the court proceed to the second stage where it assesses the reasonable interim payment ‘not exceeding a reasonable proportion of the damages which in the opinion of the court are likely to be recovered.’  The question is whether the court can, at the first stage, be ‘satisfied’ that the plaintiff will obtain judgment at the trial when the same court has already reached the view that there is a triable issue entitling the defendant to unconditional leave to defend.”

In Shearson Lehman Brothers Inc v Maclaine Watson & Co. Ltd [1987] 1 WLR 480, Lloyd LJ said at p.864:

“It is perfectly correct, as Ralph Gibson L.J. points out, that the question arises in a different context under Order 14 (where the decision is final) and under Order 29 (where the conclusion is provisional and can be corrected at trial if the provisional conclusion proves to be wrong).  But Order 29 (as construed by this court in the Shearson Lehman case [1987] 1 W.L.R. 480) requires the court, at the first stage, to be satisfied that the plaintiff will succeed and the burden is a high one; it is not enough that the court thinks it likely that the plaintiff will succeed at trial.  For myself, I find it an impossible concept that the same court can be simultaneously ‘satisfied’ that the plaintiff willsucceed at trial and at the same time consider that the defendant has an arguable defence sufficient to warrant unconditional leave to defend.  If there is a distinction between the two concepts which I have failed to detect, such distinction must in my judgment be the result of ‘an uncommon nicety of approach’ which the requirements of certainty in the law would make it undesirable to recognise.  In my judgment, therefore, it is impossible to make an order for interim payment where unconditional leave to defend has been given.”

36.  It is apparent from these extracts that it is recognized there is a certain contradiction where on the one hand a court has to be satisfied of the success of an applicant’s claim yet on the other the respondent has an unconditional right of defence.

37.  In this case there has been no application for summary judgment; thus there is reserved to the respondent an unconditional right to defend the counterclaim.

38.  There is a case in point in Hong Kong argued before the Court of Appeal; Lee Shu Man v Chu Wing Hung & Ors [1996] 3 HKC.  This was a vendor purchaser dispute.  The purchaser took possession of the property by agreement ahead of completion, then remained in possession as a dispute on title erupted.  At first instance the judge awarded an interim payment to the vendor, which represented mesne profits.  The purchaser appealed.

39.  The appeal was allowed.  If in the event the purchaser was to win his claim for specific performance he would not have been held liable for mesne profits.  At most he might have been liable to pay interest on the unpaid purchase price, which was not for “use and occupation of the land”. 

40.  Clearly with the issue of title at large the right to seek an interim order fell at the first stage.  Godfrey JA said at p.92 that:

“… this claim for an interim payment to be made by the [purchaser] to the [vendor] in respect of his use and occupation of the land was manifestly ill-founded.”

Analysis

41.  It is quite apparent from the pleadings that the primary matter for resolution at trial is whether the true beneficial owner of Horizon Drive is Golden Lake, in its original format, or Fortune Wealth. 

42.  If Fortune Wealth succeeds after trial then clearly a claim in damages will lie and Mr Wan will no doubt be required to settle up for his time in occupation following his failure to comply with the notice to leave.

43.  But that will be after trial, or not at all.  It is not for me to gainsay the result of that, nor is it possible.  Suffice to say that Mr Wan’s claim that he was the victim of trickery by a scheming wife, soon to be ex-wife, and her mother-in-law, whereby without monetary consideration he lost his interest in the equity of a valuable property, needs to be tested.

44.  It is not enough to argue, “Well, Mr Wan is living apparently rent-free with Fortune Wealth picking up the tab.  He surely cannot do so indefinitely”. 

45.  That may well be so.  Mr Wan has no proprietary claim nor can he make one.  But if at the end of the day Golden Lake is found to be the rightful owner, then there will probably need to be an accounting, but qua licensor and licensee, not as between owner and trespasser.  It is only Fortune Wealth which has made a claim against Mr Wan, for trespass, and seeks interim damages on that claim.

46.  That is enough for me to find the application fails at the first hurdle. 

47.  In any event, if it came to the exercise of a discretion, there is the issue of what happened to the $25 million, a sum large enough to swamp any contra for which Mr Wan may be found liable.

The Result

48.  For the reasons given I allow the appeal and dismiss the 4^th defendant’s application.

49.  Costs, nisi, here and below, are to the 1^st plaintiff in any event.