CHEUNG AU YUEN ROSALIND AND ANOTHER v. WONG KAN KIU AND ANOTHER

HCA 850/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO. 850 OF 2011

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JUDGMENT
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1.  This is the mutual claims by the estates of 2 former partners in business and property investments, one for repayment of loan and the other for account of co-investment returns.

BACKGROUND

2.  Cheung Ka Kui Kenneth (“Cheung”) and Chow You (“Chow”) were long time business partners running a number of companies in Hong Kong. Kin Shing Construction Co Ltd (“Kin Shing”) was one of them.  It was incorporated in April 1992.  Cheung and Chow respectively held 51% and 49% of the shares in Kin Shing.  Both were directors.

3.  Cheung and Chow were also investment partners[1]. Amongst them, there were 11 properties situated at Yin Chong Street, Kowloon, which were let for rental income.  The two held each of these properties as equal tenants in common.

4.  In January 2003, Chow’s son, Chow Kwong Yuen (“KY”) was appointed as a director of Kin Shing.  Chow passed away later in the same month.  His widow, the defendant (“Madam Wong”), became the administratrix of Chow’s estate.  KY left Kin Shing in mid-2009, subsequent to certain business dispute between Kin Shing and KY’s own company[2], which is neither relevant to the present dispute nor really challenged by Madam Wong’s side.

5.  Cheung passed away in February 2010.  His widow (“Madam Au”) and son (collectively “the Plaintiffs”) were the executors by his will.

6.  In May 2011, the Plaintiffs commenced this action against Madam Wong in her personal capacity and alternatively in her capacity as the administratrix of Chow’s estate for the repayment of an alleged loan in the sum of HK$3,000,000 advanced by Cheung on 15 June 2006.

7.  Madam Wong denies the sum as a loan, and avers that that was payment of part of Chow’s dividends from Kin Shing.  She further complains that Cheung owed her an account of Chow’s share of rental income from the properties co-owned by them. Hence her counterclaim.

THE ISSUES

8.  The issues are:

(1) the nature of the sum of HK$3,000,000 received by Madam Wong on 15 June 2006; and

(2) the question of account for Chow’s share of rental income from the Yin Chong Street properties.

WITNESSES

9.  Madam Au gave evidence in respect of what she learned about the payment of the HK$3,000,000 sum in question.  The Plaintiffs also called Choi Mung Lan (“Choi”), the account clerk of Kin Shing at the material time, as a witness.

10.  Madam Wong gave evidence.  KY, who was on the board and an authorised signatory of Kin Shing’s bank accounts, was not called as a witness.  Her other son, Chau Kwong Wing (“Chau”) was called.

THE SUM OF HK$3,000,000

11.  The plaintiffs contend that this was a loan by Cheung to Madam Wong.  On the contrary, Madam Wong contends that this was Kin Shing’s distribution of part of her late husband’s share of dividends declared by the company.

12.  Mr Dawes refers to the well known principle of Seldon v Davidson [1968] 1 WLR 1083.  In the absence of circumstances giving rise to presumption of gift or proof that it was in settlement of an existing debt, a sum undisputedly paid to and received by the payee is prima facie repayable to the payer on demand: see also Mak Ka Hing v Pang Ming Chung [2011] 1 HKLRD 347.

13.  In the present case, the payment and receipt of the sum of HK$3,000,000 is not disputed.  It is the burden of Madam Wong to establish what she says the sum represented, which was a state of affairs not presumed.  In the event that the court is not satisfied that the sum represented what Madam Wong alleges, the principle in Seldon v Davidson operates so that even if the quality of proof of the alleged loan is also questioned, the sum paid is nevertheless repayable on demand.

14.  Determination of the dispute on the basis of the burden of proof, when both sides have their respective positive cases, should probably be the last resort.  However it is not difficult to understand why Mr Dawes refers to the principle.  As far as witnesses are concerned, the plaintiffs are admittedly unable to adduce direct oral evidence on what happened when the payment of the HK$3,000,000 sum was made.  Other evidence, some circumstantial, will have to be relied on.

15.  Mr Lam submits on the admissibility of circumstantial evidence.  The acts or declarations of a party before or at the time of the transaction, or so immediately after it as to constitute a part of the transaction, are admissible in evidence either for or against him, but subsequent acts and declarations are only admissible in evidence against him and not in his favour: see Shephard v Cartwright [1955] AC 431 at 445, per Viscount Simonds and Watson v Smith [1998] 3 HKC 461 at 465F-G, where Godfrey JA applied it.  Mr Lam also refers to Overseas Trust Bank Ltd v Lee See Ching John & Anor [1999] 3 HKC 197 at 201H-202B; 204F-I and 206I; and Ip Man Shan Henry v Ching Hing Construction Co Ltd & Ors (No 2) [2003] 1 HKC 256.

16.  The above cases cited by Mr Lam invariably involved dispute as to the nature of certain transactions, specifically whether or not they were gifts.  The issue was therefore one of intention of the person doing the deed.  The operation of presumption of gift or advancement on the one hand and the presumption of resulting trust on the other hand dictated the starting point of the consideration of what evidence was admissible to establish the intention behind the act or transaction in those cases.

17.  However, in the absence of presumption of advancement or gift, the principle in Seldon v Davidson (above) indeed operates so that it is for the alleged donee to prove the gift.  This happened in Watson v Smith.  When the presumption of gift applies, the party seeking to prove to the contrary is not entitled to adduce as evidence of the intention of the alleged donor subsequent to his act or transaction in question except against him.  This happened in Overseas Trust Bank Ltd.  There Rogers JA made it clear (at 204F-I) that reliance on the post-transaction evidence to show absence of evidence in support of the intention of gift would be tantamount to reversing the burden of proof so fixed by the presumption of gift.  See also Ip Man Shan Henry (above) where DHCJ Lam (as he then was) discussed (at §§178-185) the context in which the principle in the above cases came to be applied.

18.  In the present case, there is no issue of gift or presumption to that effect.  The dispute between the parties in respect of the nature of the payment of HK$3,000,000 sum does not involve the issue of the subjective intention of Cheung but a matter of agreement or understanding of both parties.  In the circumstances, the only presumption of intention that could possibly apply will be that in Seldon v Davidson.  In the context of the present dispute, the question of admissibility of evidence as to the intention of Cheung regarding the payment seems to have been over-emphasized, if not misplaced.

19.  Now the facts.  The evidence shows that prior to the payment of the sum, Kin Shing had declared the following dividends:

20 May 2003	HK$18,000,000
31 May 2004	HK$12,000,000
2 June 2006	HK$6,500,000

20.  The evidence also shows that before Madam Wong was appointed to the board of Kin Shing, there were the following payments to Madam Wong:

19 January 2004	HK$3,275,271
15 June 2006	HK$3,000,000
28 August 2009	HK$1,200,000
29 March 2010	HK$247,300.70

21.  The first and the third payments above were made by cheques of Kin Shing whereas the second payment was made by Cheung’s cheque to Madam Wong.  The last sum was withdrawal from Kin Shing’s bank account.

22.  Madam Wong’s case is that Cheung had the habit of mixing his own money with that of Kin Shing, and that Cheung had unilaterally withdrawn substantial sums of money from Kin Shing from time to time without Chow’s knowledge.  Such background, she contends, explains why Cheung drew his personal cheque for paying what was said to be Chow’s share of dividends from Kin Shing.  It follows from what Madam Wong contends that Cheung was not making the payment out of his own money but money that he knew he had previously withdrawn from the company that belonged to Chow.

23.  Madam Au gave evidence in respect of what her husband had told her about the payment of the sums of HK$3,275,271 and HK$3,000,000.  At the material time, she was residing in Canada.  She recalled the frequent telephone conversation, almost daily, with Cheung.  One of the topics was the idea of winding up the business of Kin Shing with a view to enabling Cheung to spend more time with her in Canada.  She recalled that Cheung had mentioned having taken money from Kin Shing for Madam Wong because she needed money, and specifically recalled having been told about a loan of HK$3,000,000 to Madam Wong because she needed the money for her late husband’s estate duty purpose.

24.  In assessing the weight of Madam Au’s evidence, I do note its hearsay and self-serving character.  Madam Au was admittedly not involved in the operation of the business of Kin Shing.  Madam Au also admitted that at the time when she was so told by Cheung about the loan to Madam Wong, she had no idea if Kin Shing owed Chow any money.  After taking up appointment to the board of Kin Shing subsequent to her husband’s passing, Madam Au had to rely on the company staff, including Choi, with respect to the company’s account.

25.  Madam Wong gave evidence as per her witness statement.  However it soon transpired during the trial that she did not actually live up to proof of what she stated.  She had to concede as to her lack of knowledge about her late husband’s business and dealings with Cheung.  Nor could she really tell the rental collection arrangement in respect of the properties co-owned by her late husband and Cheung.  In essence, she left all the matters concerning Kin Shing and Chow’s estate to her son Chau.  She even described this as her son’s fight with the plaintiffs.  She had no clear idea about the allegations now made against Cheung.  Her evidence in court came to a point where she could not be sure if her statement was explained to her.  In the circumstances, it is unrealistic to expect any meaningful weight to be placed on the evidence of Madam Wong.

26.  The evidence from Madam Wong’s side boils down to that of Chau.  Chau is a university professor in real estate and construction.  By his statement[3] and in court, he admitted that the instructions in respect of his mother’s side of the story, including her statement, came from him.  Specifically in respect of the circumstances surrounding the payment and receipt of the HK$3,000,000 sum, it was according to her statement the mutual understanding of Cheung and her that it represented part payment of what Kin Shing owed to Chow.  Her case was left at that until Chau added himself to be a witness some 4 months later.  According to him, he became a witness to respond to the statement of Choi.  But there indeed came his evidence in respect of what Cheung allegedly said to him about the nature of the payment of that sum.

27.  Mr Dawes submits that how the above evidence came about should be treated with circumspection, particularly where Cheung would not be here to contradict what Chau now added.  Observation of that sort was made in Yung Shu Wu v Vivienne Sung Wu (2011) 14 HKCFAR 39 at §73, per Lord Walker; Re Silver Bell Uniform Ltd [2012] 1 HKLRD 719 at §§27-28 per Fok JA (as he then was)[4]. Caution is the key.

28.  What does the contemporaneous evidence tell?

29.  Upon the first payment of HK$3,275,271, Madam Wong signed an acknowledgement confirming that the sum was to be deducted from the interest of the shareholdings of Chow in Kin Shing.  The company voucher and ledger also booked such payment as a loan to Madam Wong.  Even according to Chau’s statement[5], all that happened was that the cheque was handed to Madam Wong without actual mention of either loan or dividends, but specific mention by Cheung that the amount would have to be deducted from Chow’s interest in the company.  That remark was consistent with the written acknowledgement and would be consistent with either a loan or payment of dividends.

30.  I then turn to the 2 payments subsequent to the payment of the sum HK$3,000,000 in question.

31.  HK$1,200,000 was paid by Kin Shing by its cheque on 28 August 2009.  In his opening, Mr Lam suggests that the sum of HK$1,200,000 possibly represented partial distribution of profit by Kin Shing.  He invites the court to make a finding as to the true nature of the payment.  He cannot do so, for the reason that despite substantial amendment, his clients’ current pleaded case never contains assertion to the effect as he now suggests.  Quite to the contrary, it is admitted[6] that the distribution of the rental income resumed in August 2009, which could only be referring to the sum of HK$1,200,000.

32.  The fact was that Cheung and Madam Wong each withdrew such a sum of HK$1,200,000 from Kin Shing’s bank account for the rental income from the Yin Chong Street properties as a matter of consensual arrangement.  The balance of such account was subsequently split between Madam Au and Madam Wong in March 2010[7] with each withdrawing a sum of HK$247,300.70.  Hence the fourth and last payment mentioned above.  Upon that, that bank account of Kin Shing was also closed.  There is no dispute that a new bank account was subsequently opened for the receipt of rental income from the properties for the benefit of both sides.

33.  As shown, the payment of HK$3,275,271 and the subsequent payments of HK$1,200,000 and HK$247,300.70 were made by Kin Shing and out of its account for their respective reasons.  What about the payment of HK$3,000,000 in between?

34.  Subsequent to the first payment of HK$3,275,271 and prior to the payment of HK$3,000,000 in question, Kin Shing had declared dividends twice, once in April 2004 and once in June 2006, in the total sum in excess of HK$18,000,000.  Madam Wong’s case is that the payment of HK$3,000,000 was in the same nature as the first payment.  Yet unlike the prior and subsequent payments, which for their respective reasons came from Kin Shing, this payment came from Cheung personally.

35.  Further the payment of HK$3,000,000 did not come with an acknowledgement for the purpose of Kin Shing.  Nor was it recorded in the ledger or record of the company.  In other words, there is no contemporaneous evidence in support of the payment being that by Kin Shing.

36.  As mentioned, much is said about the habit of Cheung in mixing[8] his money with the funds of Kin Shing.  Chau and Mr Lam are also at pain seeking to establish that Cheung had made substantial unauthorised withdrawals from Kin Shing, which allegedly ate into Chow’s share of interest and entitlement.  Again this came from Chau, apparently based on his study of the accounting documents of the company.  He found matters about the accounts calling for explanation.  In court, Chau said that his late father’s share had clearly been taken away by Cheung.  For that matter, Choi was extensively cross-examined.

37.  Choi started to work at Kin Shing as accounts clerk (會計出納) since 1992 until February 2011.  She was reappointed by Madam Au in April 2011 to assist the forensic accountant to examine the books and accounts of Kin Shing due to the shareholders’ dispute, which will be mentioned below.

38.  According to Choi, the dividends declared by Kin Shing were not in fact paid out, but were retained.  Choi explained in court that the company needed to maintain the financial commitment of the persons in charge and the company pursuant to the tender requirement of the Works Bureau so as to be eligible for bidding for Government construction projects and works. The amount maintained at one point exceeded HK$10,000,000 and varied with the scale of the work undertaken.  In court, Chau did not seek to dispute that.

39.  Choi explained that Kin Shing met such financial requirement by way of declaration of dividends, which were reverted to the company as the shareholders’ deferred loans to the company.  Notwithstanding the observation about Madam Wong’s statement mentioned above, it seems to be accepted by her side that the dividends declared were entered as loans owed by Kin Shing to the shareholders[9].  The declarations of dividends prior to the HK$3,000,000 payment in question were carried out pursuant to the advice of the company’s auditor[10] upon audit of the company’s accounts.  The company would need to submit half-yearly management account to the authority.

40.  Choi also explained in court that personal advances had also been made by Cheung and his relatives to the company, which were put into short term time deposit of Kin Shing, with a viewing to maintaining the amount so required by the Works Bureau as mentioned above.  Such deposits were maintained for a short term such as 6 months and only repaid to Cheung (and his relatives) afterwards.

41.  According to Choi, the 2 business partners maintained a shareholders’ current account between them and the company prepared by her.  Separate accounts for the 2 shareholders were kept only since 2006-2007.  They received director’s remuneration; and would indeed withdraw money from the company.  Yet Cheung ceased to do so after the passing of Chow.

42.  All these had been the modus operandi as far as Chow could tell from her service at Kin Shing.

43.  The lack or breakdown of trust between the estates of the business partners is obvious. Madam Wong’s side obviously has much to say about how Kin Shing had been managed while Cheung was alive.  Indeed for the purpose of resolving such dispute, the board of Kin Shing had already engaged forensic accountants, who had to take some 2 years to analyse the accounts of the company.  A draft report had been provided to the parties by the time of this trial.  Chau queries the independence of the forensic accountant and various aspects of the report.  But those do not form part of the pleaded case and thus issues in dispute in the present case.  The present case simply cannot be used as the venue for rehearsing the resolution of such other dispute.

44.  In court, whilst Chau eventually did not insist on the case of unauthorised withdrawals by Cheung from Kin Shing as such, he maintained that it is Cheung who owed his late father.  Query how that negatives the plaintiffs’ case that the sum of HK$3,000,000 was Cheung’s personal loan.

45.  If Cheung made the payment out of his own money for the purpose of the company’s distribution of dividends to Chow, nothing would have prevented him from causing corresponding entry and record in the company’s books that the company owed him such amount paid on its behalf.  There was no such record.

46.  If Cheung made the payment by his personal cheque because he was conscious of the (alleged) fact that such sum formed part of the undistributed dividends to Chow which he had taken from Kin Shing previously, as Madam Wong alleges, nothing would have prevented Cheung from setting the record right at the same time.  After all, such payment would mean reduction of the company’s indebtedness to Chow.  There was no record of that.

47.  If all Madam Wong asserts is that somehow what Cheung personally owed to her late husband far exceeded the sum of HK$3,000,000 in question, there is no case before me that the alleged indebtedness of Cheung could in principle and in fact serve to extinguish the liability to repay the loan by Cheung by way of set off.

48.  During the trial, I questioned the lack of formal demand for the repayment of the loan until April 2011.  However I accept Mr Dawes’ submission that this probably should not be held against his clients, if Cheung had not pursued against the estate of his business partner, and his estate did so only after Madam Wong has served a statutory demand on Kin Shing.

49.  On balance, I prefer the evidence adduced on behalf of the plaintiffs to that of Madam Wong’s side.  In any event, I am not satisfied that the sum of HK$3,000,000 paid by Cheung to Madam Wong on 15 June 2006 was in the nature as alleged by Madam Wong.  It follows that the sum was a loan repayable on demand.

50.  On Madam Wong’s behalf, it is contended that in the event that the claim is proved, it is the estate of Chow that should be liable.  Mr Dawes accepts that.

THE COUNTERCLAIM

51.  Madam Wong’s case is that Cheung was solely responsible for collecting the rents and distributing them between the 2 co-owners.  Since the passing of Chow, Cheung had failed to distribute late Chow’s share of the rental income from March 2003 to her.  The distribution resumed in August 2009 only after repeated demands.  Hence her claim for an account of all the rents received during the period between March 2003 and July 2009[11].

52.  Mr Dawes submits that as a matter of law, the mere fact that the parties are co-owners does not give rise to a duty to account for rent received.  In principle, this must be right.  As in the case where a co-owner solely occupies or collects all the rents and profits from the co-owned property, the other co-owner has no cause of action for trespass or account of the rents and profits.  The frustrated co-owner may back out of the co-ownership by seeking partition or sale.  In the case of ouster, the frustrated co-owner has a cause of action for occupation rent.  In the absence of all those circumstances, the only basis on which a co-owner may seek an account will be that it is not the mere incidence of their co-ownership but other relationship such as agency or fiduciary.  See Chen Yu Tsui, the executrix of the will of Tong Kui Ming, deceased v Tong Kui Kwong, HCA 1/2003 (25 October 2005) at §§87-105.

53.  Mr Lam argues that the circumstances of the present case may give rise to constructive trust between the co-owners.  Primarily this is contrary to the principle that mere incidence of co-ownership does not give rise to fiduciary relationship between the co-owners.  Further, not being a mere matter of law, such assertion must be but is not pleaded.  There is a gap between the assertion that Cheung was solely responsible for collecting and distributing the rents, which Cheung was entitled to as much as Chow was, and that that Cheung became Chow’s agent in rent collection.

54.  Mr Lam refers to 許尊明v歐振清, DCCJ 5396/2005, 6094/2005, 6235/2005 and 6238/2005 (Consolidated) (3 March 2008) as well as Henderson v Eason (1851) 17 QB 701; 117 ER 1451.  In the former, it was undisputed that the rents collected were deposited into the joint name account of the defendants who held the same on trust for all the co-owners, the defendants included.  The latter was an old case where a tenant in common in occupation of the property alone was answerable as bailiff to his cotenant in an action of account (of more than his share) pursuant to statute.  They are factually distinguishable from the present one.

55.  I shall nevertheless proceed to assess the relevant facts, assuming that somehow Cheung was under a duty to account the rental income.

56.  That Cheung was responsible for administration and accounts while Chow was responsible for attending construction sites was, as a matter of fact, a division of labour.  Tsang Wai Chung (“Tsang”) was the staff member of Kin Shing who collected the rents.  Tsang was primarily the one under a duty to account to both Cheung and Chow, both being his boss and the co-owners of the properties.  There is no evidence to suggest that Chow had no control over Tsang in the arrangement.  There is no evidence to suggest any change in the arrangement after KY had taken over his late father’s directorship at Kin Shing either.  As mentioned, KY was not called as a witness.

57.  Tsang was responsible for depositing the rents collected into a savings account of Kin Shing.  According to Choi in court, the rental income in the account would not be used for other business purposes of Kin Shing.  In his evidence, Chau pointed out that the accounts of Kin Shing did not reflect such deposits.  But there is equally no proof of any part of the rents collected had gone into the hands of Cheung.  In court, Chau accepted that.  If anything, any recourse in relation to any part of the rental income, which were supposed to have been deposited into Kin Shing’s bank account but allegedly not accounted for, should be that against Kin Shing.

58.  I need not go further than what is already way beyond Madam Wong’s pleaded case in this respect.

ORDER

59.  Judgment is entered against Madam Wong in her capacity as the administratrix of the estate of Chow (ie the 2^nd defendant) with interest from the date of writ until today at the HKBC best lending rate plus one percent.  Interest from today runs at the judgment rate until payment.  The claim against Madam Wong in her personal capacity (ie the 1^st defendant) is dismissed.  So is the counterclaim.

60.  Following this event, Madam Wong in her capacity as the administratrix of the estate of Chow shall pay the plaintiffs’ costs of this action, including any costs reserved.  No order as to costs between the plaintiffs and Madam Wong in her personal capacity.  Costs shall be taxed, if not agreed.  In the absence of application in 14 days for variation, this costs order shall become absolute.

61.  I thank counsel for their assistance.