SAMMY INVESTMENT LTD v. SUN HONG KEE LTD AND OTHERS

CACV 229/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 229 OF 2000

(ON APPEAL FROM HCMP NO. 4151 OF 1993)

____________________

____________________

____________________

J U D G M E N T

____________________

Hon Rogers VP:

1. This is an appeal from a judgment of Deputy High Court Judge Li given on 26 May 2000. The matter before the judge were interpleader proceedings. The interpleader had been commenced by originating summons on 3 December 1993 in respect of 6.5 million shares and 1.3 million warrants in Lucky Man Properties Limited ("Lucky Man") which were then registered in the name of Asian Oceanic Nominees Limited ("AONL"). The judge made a declaration that 3 million shares in Lucky Man together with all dividends, bonus shares, rights issues, warrants and proceeds deriving therefrom, belonged to Newport Plaza Limited and a similar order in respect of 3.5 million Lucky Man shares, save that the order was that they belonged to Sun Hong Kee Limited. Sammy Investment Limited, the 2nd defendant to the originating summons and referred to as the "actual plaintiff" in the interpleader proceedings, was ordered to bear the costs of the proceedings.

The background facts

2. As has already been stated, the dispute in this case centres around 6.5 million shares (the "shares in dispute"), which, at the time of the liquidation of AONL, were registered in that company's name.

3. In the 1980s, the shares of Lucky Man Enterprises Limited ("Lucky Man") were quoted on the Kowloon Stock Exchange. On 29 May 1985 that company issued a circular entitled "Recommended Proposals for the Disposal and Acquisition of Assets by Lucky Man Enterprises Limited and cash offer by Samuel Montagu & Co. Ltd on behalf of Asiatic Fortune Company Limited to acquire all the shares of Lucky Man Enterprises Limited issued and to be issued pursuant to a proposed bonus issue not already agreed to be acquired by Asiatic Fortune Company Limited." That document (which will be referred to as "the Proposal") was relied upon in the interpleader proceedings by the parties who were referred to as the "actual 2nd defendant", namely, Sun Hong Kee Limited, Newport Plaza Limited and Lucky Plaza Limited. It was the subject of a hearsay notice served on their behalf.

4. The Proposal contained a notice of an EGM for Lucky Man convened for 24 June 1985 for passing various resolutions including a resolution that, subject to the comment of the Registrar of Companies, the name of the Company be changed from "Lucky Man Enterprises Limited" to "Lucky Man Properties Limited." It would appear that this resolution was passed at the EGM since the Proposal was implemented.

5. Under what was identified in the Proposal as the "acquisition agreement", Lucky Man was to acquire all the shares the Broadworld Development Company Limited ("Broadworld"). Broadworld was said to be the registered and beneficial owner of Blocks A - B, Fairmont Terrace in Repulse Bay. The value that the property was said to be $44 million. Lucky Man was to acquire all the shares in Broadworld for $25 million. Just over $22 million was to be paid in cash and the remainder was to be paid by way of an issue of 2.3 million new shares in Lucky Man.

6. The Proposal identified the other parties to the acquisition agreement as Asian Master Enterprises Limited ("Asian Master") and Mandarin Resources Corporation Limited. According to the affirmation of Foo Hooi Goh, who gave evidence on behalf of the actual 2nd defendant, 90% of the issued share capital of Broadworld was registered in the name of Asian Master. There is no dispute that Asian Master was a nominee company, apparently, at the time, holding the shares as nominee for Sun Hong Kee Limited.

7. The actual plaintiff put its claim to the shares in dispute upon two bases. The primary basis upon which the actual plaintiff founded its claim was that the Lucky Man shares i.e. the shares in dispute, which it had purchased, were registered in the name of AONL and had been sold through a chain of purchasers through whom the actual plaintiff derived title. This chain of title is set out in the judgment below. There is no need to repeat it here because it is not disputed that, if AONL had been entitled to sell the shares in dispute, the actual plaintiff had good title.

8. It was the actual 2nd defendant's case that AONL had not been entitled to sell or otherwise deal with the shares in dispute because it had actual or constructive notice that the beneficial ownership in those shares belonged, as to 3 million to Newport Plaza Limited and as to 3.5 million, to Lucky Plaza Limited. It was said that the circumstances in which the shares in dispute had come into the possession of AONL were sufficient to put AONL on inquiry as to the true owner. If AONL had made the appropriate inquiries, in particular of the two companies in whose names those shares were registered, they would, or should, have been informed of the true position of the ownership of those shares. The parcel of 3 million shares, which were said to be owned by Newport Plaza Limited, had been registered in the name of Asian Master prior to coming into AONL's possession. The 3.5 million Lucky Man shares, which were said to be beneficially owned by Lucky Plaza Limited, had been registered in the name of Crownhall Investments Limited ("Crownhall Investments") prior to coming into AONL's possession.

9. At the trial of the interpleader proceedings there was a list of ten agreed issues. The judge set them out at page 15 of his judgment.

10. The first issue was "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". Crucial, therefore, to the 1st issue was the beneficial ownership of the shares in dispute.

11. The shares in dispute were part of a parcel of 15,732,000 shares which are referred to in the Proposal. The Proposal identifies the agreement to sell those shares as "the Lucky Man agreement". It was apparently an agreement dated 11 May 1985 conditional upon:

(a) the shareholders of Lucky Man approving the disposal of various assets of Lucky Man (this is not relevant to these proceedings) and the acquisition of Broadworld and an issue of bonus shares; and

(b) the Kowloon Stock Exchange giving its permission to deal in the new shares.

12. The shares of the Lucky Man agreement were to be constituted by 5,244,000 shares, which were then presently issued, and 10,488,000 shares, which would be issued as bonus shares. The vendors of those shares were the then shareholders of Lucky Man, who apparently had control of Lucky Man at that stage. The purchaser under the Lucky Man agreement was named as Asiatic Fortune Company Limited ("Asiatic Fortune"). It was described in the Proposal as "a private company which was incorporated in Hong Kong on 16 November 1984 with an authorised share capital of $5,000,000 divided into 5,000,000 shares of $1 each all of which are issued and fully paid and are beneficially owned by Mr Chan How Kiat. The directors of Asiatic Fortune are Mr Chan How Kiat and Mr Sideman Ho. Asiatic Fortune has not transacted any business or entered into any contracts or commitments since the date of its incorporation other then the Lucky Man agreement."

13. Mr Chan How Kiat was described as being a Singapore citizen and a director of two companies, which were apparently Singapore companies. One of those companies was said to have a paid up capital of S$30 million and was engaged in real estate investments. The other had a paid up capital of S$3.7 million and was engaged in the business of manufacturing furniture.

14. A general offer was also made, on behalf of Asiatic Fortune, in respect of all the outstanding issued shares of Lucky Man. In the proposal, Samuel Montagu expressed themselves as "satisfied that the necessary financial resources are available to Asiatic Fortune to enable it to satisfy full acceptance of the offer." Chase Manhattan Asia Limited was appointed to advise the minority shareholders. Their report, which was endorsed by the then Board of Lucky Man, advised acceptance of the general offer, but also indicated that Lucky Man would continue to be a quoted company. It also indicated that Lucky Man would be controlled by Mr Chan How Kiat.

15. The clear statement in this document was, therefore, that the parcel of 15 million odd Lucky Man shares were to be acquired by Asiatic Fortune, which was in turn wholly beneficially owned by Mr Chan. Furthermore, Asiatic Fortune had the financial resources available to it to make the purchase. It would seem that it had an original capital of $5 million. That had, seemingly, been recently raised and had not been used for anything else. There was no statement in the document to the effect that the Broadworld shares, or part of them, were being exchanged for the 15,732,000 Lucky Man shares. The only statement which would give rise to a suggestion that there was possibly a connection between Asiatic Fortune and Broadworld was on page 29 of the document, under the heading of "Responsibility statement". It was said that information relating to Asiatic Fortune and Broadworld Development had been supplied by the directors of Asiatic Fortune. It might be observed, at this stage, again, that 10% of the Broadworld shares were owned by Mandarin Resources Corporation Limited and 90% were held in the name of Asian Master.

16. As has already been observed, the Proposal was the subject of a hearsay notice on behalf of the actual 2nd defendants. On the face of the document, therefore, the 15,732,000 Lucky Man shares were acquired beneficially by Asiatic Fortune.

17. Indeed, there is no dispute that 5,732,000 Lucky Man shares were registered in the name of Asiatic Fortune. 5 million Lucky Man shares were, however, registered in the name of Asian Master and the further 5 million registered in the name of Crownhall Investments.

18. Tomax Investments Corp. was a company apparently in the control of the actual 2nd defendant. There were letters from Tomax Investments Corp. which were produced. One of those letters is dated 1 May 1985 and addressed to Asiatic Fortune. The material part reads:

"RE: LUCKY MAN ENTERPRISES LTD

As arranged with some major shareholders of the captioned company, please purchase 15,732,000 shares in the said company on June 26, 1985 at HK$1.29 each on our behalf. Upon completion, kindly send the aforesaid shares to the Registrar for registration as below:-

5,000,000 shares in name of Asian Master Enterprises Ltd
5,000,000 shares in name of Crownhall Investments Ltd
5,732,000 shares in name of Asiatic Fortune Co Ltd

Please also arrange to extend a Cash Offer on our behalf to acquire the remaining shares of the captioned company at the price of HK$1.29 each."

19. At this juncture it is pertinent to note that the fact that such a letter might have been written by Tomax Investments Corp. does not mean that it, or any other party than Mr Chan How Kiat, owned Asiatic Fortune. Still less does it mean that it owned the assets held by Asiatic Fortune.

20. It was the case of the actual 2nd defendant that the contents of the Proposal were true. As already indicated, the Proposal stated that Asiatic Fortune would purchase the 15,732,000 Lucky Man shares beneficially. Madam Foo was the only person to give evidence on behalf of the actual 2nd defendant. At one stage in her evidence, she said that she took part in the business of, amongst other companies, Asiatic Fortune. It might be observed that later in her evidence she did not identify Asiatic Fortune as being one of "our" companies. Perhaps, a great deal of significance cannot be attached to that latter point as there were a number of companies referred to at that time. In her oral evidence, Madam Foo identified Mr Chan How Kiat as being one of her company's employees. So, too, in relation to Mr Sideman Ho, Madam Foo also identified him as being one of her company's employees "long ago". This was, in effect, the total of Madam Foo's evidence in relation to those two persons.

21. The judge below was clearly not favourably impressed by Madam Foo's evidence. The judge recorded that counsel for the actual plaintiff "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." This conclusion by the judge seems to have been amply justified. For example, Madam Foo was not apparently aware that Asian Master was in liquidation. Although Madam Foo said she took part in the affairs of Sun Hong Kee in the early 1980s it is by no means apparent from what she said that she took part in that company's affairs in the mid 1980s. Since Madam Foo's relevant knowledge was thus shown to be virtually non-existent, her evidence was clearly of little weight.

22. In addition to the unsatisfactory nature of Madam Foo's knowledge, it can be observed that she gave no explanation as to how the shares in dispute came to be registered in the name of Asian Master and Crownhall Investments. In view of the fact that it was the actual 2nd defendant's evidence that the shares had been acquired by Asiatic Fortune beneficially, it was incumbent on the actual 2nd defendant to adduce evidence as to how the beneficial ownership of the shares in dispute either was not originally acquired by Asiatic Fortune or, if it had been so acquired, how it had come to be transferred to other entities.

23. It might also be observed that there appeared to be a curious change of mind, on behalf of the actual 2nd defendant, as to the evidence that would be adduced. Madam Foo said in her evidence that Asian Master and Crownhall Investments had been controlled by a Mr Henry Tsang. Indeed, he appears to have been a director of Asian Master from 14 December 1983 to 11 November 1985 and as director of Crownhall Investments from 29 October 1985 to 16 July 1990. A witness statement was provided in respect of him. Sir John Swaine SC, who appeared on behalf of the actual 2nd defendant in the court below, made reference to this as the "next witness statement" on more than one occasion during the cross-examination of Madam Foo. The implication to be derived from his interruptions was that Mr Tsang was to give evidence. However, we were informed, after Madam Foo's evidence had been concluded, it was announced that Mr Tsang would not be giving evidence.

24. The consequence of the actual 2nd defendant not calling Mr Tsang to give evidence is that the documents which were said to have been signed by Mr Tsang were not proved. This included a letter of 19 July 1985 on Asian Master note paper addressed to Tomax indicating the acquisition of 5,000,000 Lucky Man shares on behalf of Tomax and a declaration of trust of the same day by Asian Master in favour of Tomax. Despite the fact that these documents on their own would not go to show either the non-acquisition of the beneficial ownership of the shares in dispute by Asiatic Fortune or the transfer of that beneficial ownership, the declaration of trust has not been proved in any event. As Mr Yu, who appeared on behalf of the appellant, the actual plaintiff, pointed out, no similar declaration of trust by Crownhall Investments in favour of Tomax had been produced.

25. In summary, the actual 2nd defendant's case, as argued, was that the shares in dispute were bought with the proceeds of the sale of Broadworld. As indicated, this was contrary to the evidence which was adduced by the actual 2nd defendant. This evidence was significant because, not only was it contemporaneous documentary evidence but it constituted a public document, drafted and published with the intention that its contents should be relied upon by the investing public.

26. Since the actual 2nd defendant's claim was based upon their beneficial ownership of the shares in dispute and there was no evidence to establish that, there was nothing to contradict the actual plaintiff's claim that it was entitled to the shares in dispute.

27. The matter does not end quite there, however. In the first place, Asian Master, Crownhall Investments and Asiatic Fortune were all put into liquidation. The Liquidator delivered Reports dated 21 September 1992 in respect of each company. A hearsay notice was served on behalf of the actual plaintiff in respect of each of the Reports. Although a counter notice was served, no order seems to have been made in respect of any objection and the documents are contained in the appeal bundles. In respect of each company, the Liquidator refers to the claims made that the Lucky Man shares, and in particular the shares in dispute, were held on behalf of Tomax, which in turn held them on behalf of others namely the actual 2nd defendant. In respect of each company, the Liquidator repeats what had been said in the initial reports of October 1991, that there was "compelling evidence to dispel the notion that the Company was at all times acting as a nominee".

28. After examining the accounting records and considering the assertions which had been made, the Liquidator reached the conclusion, in each case, that the shares registered in the names of the companies were owned by those companies.

29. Moreover, the Liquidator records the fact that proceedings had been commenced in the names of Asian Master and Crownhall Investments against AONL to recover the shares in dispute. Shortly after the Liquidator's reports in September 1992, the Liquidator agreed terms of settlement not only with AONL but also with actual plaintiff. As a result of the agreement, the actual plaintiff paid Asian Master and Crownhall Investments a total of HK$3 million in return for which Asian Master and Crownhall Investments released their claims over the shares in dispute.

30. Insofar as the actual plaintiff's evidence based on the Liquidator's report is relevant, therefore, the indication is that the shares in dispute had been purchased beneficially by Asian Master and Crownhall Investments. In paragraphs 14 and 15 of the judgment the judge identified the transactions whereby shares registered in the name of Asian Master and Crownhall Investments were given to AONL (or its associated entities) as security or consideration for what would appear to have been transactions unconnected with Asian Master and Crownhall Investments. Even assuming that the transactions should have put AONL on notice to make enquiries as to the true ownership of the shares, any claim that Asian Master and Crownhall Investments had was relinquished for substantial consideration.

31. In summary, on the actual 2nd defendant's evidence the shares were purchased by Asiatic Fortune and owned by them beneficially. There was no evidence that the beneficial ownership had changed. Furthermore, the paper trail of declarations of trust from Asian Master and Crownhall Investments had not been proved. A very material witness, who might well have shed further light on the matter, was not called. In my view, therefore, the actual plaintiff is entitled to an order in terms sought in the notice of appeal.

32. I would only add this. It was suggested in the course of argument that there might be a retrial of this matter, primarily in order that the contents of the Proposal might be put to Madam Foo. In my view, such a course would not be justified, still less correct. In the first place, it does not appear to be a matter of the document not having been put to the witness. The actual 2nd defendant adduced the evidence, namely the Proposal, which was neither explained nor contradicted. Furthermore, the actual 2nd defendant called only one witness to give oral evidence. That evidence was wholly unsatisfactory. Furthermore, Mr Tsang was, apparently, deliberately not called. These proceedings were commenced nearly eight years ago and related to events which took place more than sixteen years ago.

33. In these circumstances, there appears to me to be no justification to have a retrial of the matter.

Hon Le Pichon JA:

34. I agree.

Hon Cheung JA:

35. I agree.

Hon Rogers VP:

36. There will be an order that the judgment below be set aside and judgment be entered for the actual plaintiff against the actual 2nd defendant for a declaration that the actual plaintiff is the legal and beneficial owner of the 6,500,000 Lucky Man shares of any subsequent dividends, bonus shares and warrants issued in respect of or derived therefrom. There will be an order nisi that costs here and below be to the actual plaintiff.