HISAMICHI KIYOHARA and Another v. WONG SHUK WAH and Another

1994 No. A11400

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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(By original writ and order to carry on dated 15th June 1995)

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J U D G M E N T

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1. Mr. Hisamichi Kiyohara ("The President") was a Japanese businessman who in 1978 established businesses in Hong Kong and in the mid-1980's in China. The business he established in Japan continued as part of his, relatively small, but successful business empire.

2. He was born in 1914. He was therefore 64 when he came to Hong Kong. The business with which we are primarily concerned in this case is H. & K. Company Limited.

3. I have heard expert evidence from a Japanese lawyer of the traditional Japanese practice of "rewarding" loyal and industrious employees of a company by entrusting them with a shareholding. Although the shares are transferred into the names of such employees, no beneficial interest is attached to the transfer. The employees hold such shares as nominees of the "boss" of the company, or as trustees. They are liable to be recalled at the whim of the boss. There is no entitlement to a dividend or to dispose of them at will. The only benefit to such an employee is that the transfer betokens a recognition of the employee's worth. He or she has a heightened image - it is a matter of 'face'.

4. Apart from the evidence of the Japanese lawyer called on behalf of the Plaintiff, there is a report from an expert in Japanese law obtained on behalf of the first Defendant. The effect of that evidence is that there is no conflict on this issue. A change in the Japanese Commercial Code in 1990 removed the need for there to be seven promoters (i.e. shareholders) on the incorporation of a private limited company. However although there appears to have been in the past a practical benefit in distributing shares amongst a number of employees, since 1990 it is no longer necessary. I am told that the Japanese practice 'dies hard'. Perhaps in Hong Kong, 'face' or prestige on the part of the employee would exist only if the full beneficial interest in shares were to be held by him or her. But again the commercial scene in Hong Kong would require an arms length commercial transaction in the allotment or distribution of shares at the outset. The traditional Japanese businessman adheres to the idea that the conditional non-beneficial grant of a shareholding, is a tangible expression of his appreciation of good service from loyal employees.

5. Attached to it is the obligation to transfer back the holding to the "boss" on resignation or death of the employee, or upon the request to transfer back the shares. I accept the evidence of Mr. Noboru Kayanuma supported by various Japanese publications. I also admit into evidence the report of Mr. Koshi Yamaguchi instructed on behalf of the Defendant, Madam Betty Wong Shuk Wah. At paragraph 9 of his report he confirms that the practice was "effected in order to observe legal formalities and therefore rarely involved the purchase or subscription of actual shares or exchange of funds." He regarded as unusual the giving of shares in a company owned by a Japanese family to a non-family member. The greater the number of shares so given, the more likely that there will be a formal written trust agreement.

6. Upford Electronics Limited was the second business he established in Hong Kong, the first being the Hong Kong branch of Kroori Industry Company Limited, the Japanese corporate entity. The President's son-in-law, Sonoda, and an employee, Mr. Fujimura, assisted the founder of the business and when H. & K. Company Limited was formed in 1985 Upford ceased business.

7. In H. & K. Company Limited, Sonoda and Mr. Fujimura had shareholdings as well as the President. The shares held by Sonoda and Mr. Fujimura were held as nominees according to the President's statement. Both transferred their shareholdings back to the President; Sonoda on leaving the company, and Mr. Fujimura on leaving Hong Kong to work in China. There had been and was no consideration for the transactions either way.

8. Mr. Fujimura when he gave evidence recollected being told by the President that the shareholding was to be 10 per cent. The records show that to be correct. He had little recollection of the circumstances of the acquisition or of relinquishing the shares. Sonoda, who did not give evidence, held 20 per cent of the shares. The Defendant, Madam Wong, played some part in the mechanics of the re-transfer of these two shareholdings. It is necessary to recount how she came into the scheme of things as far as the President recalls in his statement.

9. She joined the Plaintiff's business, Upford, in or about 1982. She soon acquired fluency in Japanese which enabled her to play an important part of the general functioning of the business. Clearly she became a valued and loyal employee which accounts for her becoming the President's personal assistant after the departure of, Mr. Leung Siu Chiu in 1987. The President's recollection is that she became a director when Sonoda became less available in Hong Kong to deal with the business here. It is also his recollection that Madam Wong advised him that Mr. Fujimura and Sonoda should return their respective shareholdings on their disengagement from their involvement with the company. Madam Wong denies this although she accepts that the President asked her to instruct Mr. Leung Shing Hin to prepare the necessary documentation, shortly after she became a director of H. & K. Company Limited (1 April 1987). Madam Wong received 50,000 shares (27 May 1987). Approximately one month later Mr. Fujimura transferred to the President his holding of 30,000 shares (29 June 1987). At the same time as Madam Wong received 50,000 shares, a further 10,000 shares were transferred into Sonoda's name.

10. A further 100,000 shares were transferred into her name on the 8th September 1989 and three days later, Sonoda's 70,000 shares were transferred back to the President.

11. At that stage the shareholding stood as follows:

The President	550,000
Madam Wong	150,000

12. That position remained until 11th June 1990 when the President transferred 150,000 shares into his son Isao's name. The President remained the largest shareholder with 400,000 shares; 150,000 shares stood each in the names of his son Isao and Madam Wong.

13. The President said in his statement that he told Madam Wong that she held the shares in trust for him. No payment in any form was made by Madam Wong for the shares.

14. It is important to see her pleaded case in respect of these shares. Paragraph 10 of the Amended Defence and Counterclaim said "all allotments and/or transfers of shares were at arms length and/or supported with consideration". Paragraph 13 alleged long working hours, frequent meetings at the President's residence outside office hours and during holidays or weekends which were not compensated for by additional payment or bonus. It is also alleged that the President promised hard work and loyalty would be rewarded in the form of bonus shares and directorship in the company. At paragraph 17(ii) it is contended by her that the 50,000 shares were allotted to her as an acknowledgement of her performance and loyalty; at paragraph 19, that the 100,000 shares were allotted in recognition of her loyalty and hard work. On the face of it there is some inconsistency between the pleaded case in paragraph 10 and that in paragraphs 13, 17 and 19. Not surprisingly particulars were sought.

15. Under paragraph 10 the request merely produced the statement that the transactions were recorded in "Bought and Sold" notes signed by the parties. Under paragraph 13 the alleged oral promises were stated to be too many to particularise but were made on formal and informal occasions.

16. To this extent the Defendant's case on the pleadings is clear; a promise of shares was made as a reward for loyalty and hard work. When shares were received that was the consideration. No payments or financial consideration existed. Bought and sold notes were a device.

17. The Defendant's oral evidence gave a different picture. Although she referred to the President's oral promise she said she did not take it seriously. When he specifically referred to the 50,000 shares her reaction was that she did not have the money to buy them. His reaction she said, was to say that he would pay for them and then she could repay him when the company declared a dividend. This is not the pleaded case either of consideration enhanced by a bought and sold note, or of bonus shares given as a reward for industry and loyalty. She made it clear that she understood she was going to have to pay for the shares.

18. As to the 100,000 shares, she said that she was unprepared for these as she had not paid for the 50,000. Again she said she was re-assured by the President that he would fund her purchase of them and she could repay him out of the dividends which would be declared.

19. She contended that the company declared a dividend in 1992 and that $450,000.00 were due to her. She later put forward the contention that in fact the 150,000 shares had been paid for, at $1.00 per share, and that she held a credit of $300,000.00. Under cross-examination she reverted to the contention that the shares were a reward for work done - in which case she could not contend that she had in fact paid for them. They were not given to her as a gift.

20. As far as any dividend was concerned the only sum declared was $6m., paid in fact to the President. She did not receive any dividend nor was there any declaration or statement in the accounts or report to show she was to benefit, or had benefited from any dividend.

21. I found Madam Wong's evidence in relation to the basis upon which the 150,000 shares came to be in her name wholly unreliable. From asserting that they were a reward for hard work and loyalty she moved to contend not only had they been paid for out of the dividend declared in respect of such shares but that by the end of 1992 somewhere she had a credit to the extent of $300,000 being the excess of declared dividends over what she was required to pay for the shares. I am satisfied on the evidence that she knew that they were put in her name as the President's nominee and that she held them on trust for him. He, I am sure, explained this to her at some stage. She knew too the policy or tradition, by virtue of her role in the re-transfer to the President of the shares formerly held in the name of Mr. Fujimura and son-in-law Sonoda. These shares, in common with shares held by other employees and co-directors (being mainly members of the family), were held on trust. I think it likely too that she did advise or suggest to the President, who was in his mid-70's at that time, that such shares should be returned to him. She was very much his amanuensis, a capable, knowledgeable assistant who would have acquainted herself with the Japanese style of small family business administration.

The "Re-Structuring" of the Company

22. Between June 1990 and March 1993, the President's shareholding increased to 1.7m. shares, the issued shares totalling 2m.

23. In March 1993 the Company appears to have passed a resolution to increase its capital from $2m. to $4m. There was a re-distribution of shares with the result that of the 4m. issued shares, 1.2m. were held by the President, 300,000 were in his son Isao's name, 400,000 were in the name of an employee Mr. Ho Wai Ming, and 2.1m. in the name of the Defendant. The effect was clearly, that the Defendant Madam Wong had not simply the largest shareholding but, de facto, control of the company. This was on any view an astonishing development. How did it come about?

24. At that time the Plaintiff was 79 years old and not in the best of health. In 1992 he had had a few short periods in hospital. There seems to have been no real need on the part of the company for such re-structuring. It was in a healthy enough state. The money being drawn from it was essentially going into the President's account. There was no need for capital and in fact no money was paid for any of the extra 2m. shares issued.

25. The memorandum incorporating the resolution was undated. It was signed by all directors. It was in English. It set out the aspects of distribution and the final state of play including the share ratio.

26. There is more than one strange aspect to this so-called "restructuring". According to the Defendant in her statement, the President, in September 1992 on leaving the airport for a flight to Japan, gave her a piece of paper on which he had written his plans for this share "restructure". She asked him no questions about this. She said in evidence that she showed the note to Mr. Fung, the company's accountant but added that she did not think the President was serious, that he had been joking, that his proposal did not make good sense. She already had a 7.5 per cent holding in her name and did not feel she should receive such an allotment of shares. Accordingly she threw the piece of paper away and thought no more about it. She was an efficient and assiduously attentive assistant to the President. She had been involved in the mechanics of the re-transfer of shares from Sonoda and Mr. Fujimura. I do not accept her evidence that she simply let instructions slide and threw the President's note away if that is indeed what happened.

27. According to her, some two months later the President raised the matter again asking what she had done about his proposal. Her evidence then went on to deal with her coyly rejecting the proposal concerning allotment of shares and his having to persuade her to accept. I do not propose to set out that evidence but her story I regard as a charade.

28. Even when she took his instructions down again, and says she asked him to sign it, she says she was too busy and occupied to pass it on to Mr. Leung for his action - "Even though it was a lot of shares for me, I did not care much about it and did not think I should put it immediately into effect," was the gist of her explanation.

29. Eventually, she said, there was a meeting with the President, and Mr. Leung which she attended. As a result the resolution appears to have been drafted and sent to Isao for his signature as one of the directors. He was in Japan at the time. At that meeting she said that it was agreed the shares would be paid for with Mr. Leung saying that payment could come out of dividends to be declared, and that the President agreed to this.

30. Eventually a meeting was held on the 5th March 1993 from which Isao, the President's son was excluded. Why he should have been excluded is not clear. However I am satisfied that by that time the Defendant was very much in the "driving seat" of the business and for a variety of reasons, not the least being the age and health of the President, she was concerned to put the share re-distribution into effect. The President emerged from that meeting with a document in his hands which he showed to Isao. It was in English and shortly stated the identities of the four shareholders, the percentage shareholdings and other figures. There was additional writing. The President pointed out to his son, and I accept Mr. Isao Kiyohara's evidence on this, that the latter was to receive a dividend (The Defendant agrees that the figures representing this were written by her) but Mr. Ho and the Defendant were not to. Isao made a note on that document which I accept as an accurate statement of what was relayed to him by the President.

31. The President's statement concerning this event essentially denies the Defendant's version as to how the re-distribution of shares came about from the outset. He contended that she persuaded him to transfer some shares into Mr. Ho's name. He has no recollection of signing any of the documents relating to the increased shareholding. These documents are essentially in English. He did not read English. He relied upon the Defendant's Japanese linguistic fluency to explain documents etc. to him. Therein perhaps was the explanation for the President's signature to a number of documents. I accept that his son Isao was easily persuaded to sign documents once he saw that his father had signed them. I am satisfied that the President did not intend that Madam Wong should be the beneficial owner of the majority shareholding. It is inconsistent with his style of business control, with Japanese tradition, with his view of family priorities however autocratic he may have been, and with common sense.

32. The Defendant's pleaded case in respect of the consideration for the shares is set out at paragraphs 31 and 32 of the Amended Defence. It alleges the President adopted on Leung Shing Hin's advice a scheme whereby payment for the shares would be made by a loan from the President repaid by dividends declared in respect of the shares. That scheme was partially put into effect by the Directors declaring a dividend of $1.00 per share on the 5th March 1993. The dividends declared were to be applied to repayment of the loans made by the President. The son, Isao, though a director, was not at that meeting and even Madame Wong had to concede that he was not there all the time and certainly not at the time dividends were discussed. The document with the figures on, and in particular the figure written in by the Defendant purporting to represent Isao's dividend would not have come into existence had he been present throughout. I accept his evidence that he was not present at all. Mr. Leung did not give evidence although it is the Defendant's case that he was instrumental in the formulation of the scheme of things.

33. The Defendant went on to contend that a declared dividend of $6m. in 1991/92 included $450,000.00 as a dividend in respect of the 150,000 shares which were already in her name. Mr. Ronny Tong on behalf of the Plaintiff put to her that she was now making up her story as she went along and my impression of her evidence was that this was very much the case. She said that of the dividend for her, $150,000.00 was the purchase price of the shares i.e. $1.00 per share - and the balance of $300,000.00 was a credit which was to be applied towards the purchase of her additional shares on the re-structure. She had never mentioned such a scheme before. In any event all the documentation showed that the declared dividend was for the benefit of the President, at $3.00 per share, on the total shareholding of 2m., all of which were held in his name or in the name of nominees. It is equally clear that the alleged purchase price of the shares at the par value was well-below the real value.

34. Not long after this the Plaintiff became ill and his family was concerned about the Defendant's influence and, on the face of it, controlling interest in the company. On numerous occasions, as the Defendant agrees, the President asked her to return the shares. She either refused or prevaricated on her own evidence. It was clear to me that she regarded herself as now in control and was not going to give it up. She claimed that the shares were held by her beneficially, although it is clear that no document or record existed to show payment for the shares. The President's son, Isao, said it was not until later in this contact that she asserted the shares were hers.

35. At some stage because deadlock had been reached Mr. Leung appears to have been involved in the drafting of an agreement to compromise the dispute. Madame Wong says that it was entirely on his initiative but there is a clear inconsistency between her written version of how it came about and her oral evidence. In the absence of Mr. Leung's evidence it is impossible to conclude with precision how the draft was prepared. I have no doubt however that Madame Wong's influence was instrumental, and that the agreement was drafted to serve her purposes.

36. Mr. Isao Kiyohara said that when the President saw the agreement (Bundle C.B. p.215) he refused to sign. Again it was an English document. Clause 5 in particular was objectionable to the President. Although by that clause he was to be restored as the major share-holder, that clause was to prevent him from disposing of any of his shares for 18 months. Since clause 6 provided for Mr. Leung's company to replace him as director whilst he was ill, the control of the company would be left in the hands of Madame Wong as the effective major shareholder. That was clearly the intention of this unsubtle document. It was to prevent the son, still a director under its provisions, from receiving from his father a transfer of shares which would make him the major controlling shareholder. The agreement was not signed.

37. One other document emerged which helped to cast light on Madame Wong's reliability as a witness. It was an affirmation to which she was sworn in November 1994 in an action brought by the Company on her instructions as director and controlling shareholder. In paragraph 30 she clearly denied that up to 14th November 1994 the President had requested return of the shares. That is quite contrary to what she now accepts was the position. She blames her former solicitors for this. Her conduct of this action on her own behalf has demonstrated that she is a shrewd and capable woman with a quick grasp of matters. She is also prepared to change her evidence to accord with what she sees as her advantage. I am satisfied that she well knew the contents and purpose of that affirmation. She would not have left that paragraph as it is unless it suited her then purpose. She is in my view quite unreliable.

38. She made much in the early stages of this action of her allegation that she was otherwise unrewarded for all the extra work she carried out on behalf of the company, of promises allegedly made by the President of the gift of shares as a bonus for loyalty and hard work. The undisputed record of the company shows she received every year generous bonuses equivalent in some years to half her salary, and with an extra months salary as a further bonus on top of that. She was the most handsomely rewarded of all employees in the company. I totally reject her contention that she was inadequately or insufficiently rewarded for her loyalty and hard work. The arguments about long nights of mahjong playing for which she expected additional recompense are unworthy of consideration.

39. I am compelled to be equally dismissive of her arguments about the guarantee to the Commercial Bank, which she gave as a director. It is unnecessary even to consider whether the obtaining of such facilities at that bank was truly necessary or simply an idea which she formulated. Her experience and understanding were extensive. I am satisfied that the implications of such a guarantee were clear to her and that her initiative brought the situation about.

40. As for the use of her own money to purchase a Mercedes motor-car for the use of the President, I am satisfied that this is quite unrelated to the material issues. The account of the company shows that it was unnecessary for her to take this course. The state of it was well within the facility granted by the bank. I have to assume that she took such a course in order to strengthen her apparent control or her claimed entitlement to control. The proposals at the meeting at an hotel in Kowloon, at which the Defendant's husband appears to have taken a leading role, demonstrates the unreality of her position.

41. I am satisfied that the shares transferred into the name of the Defendant were to be held upon trust for the President Shephard v. Cartwright [1955] A.C. 431 applies. There was no payment or consideration for the transfer in any real form. The documentation was a device. I reject the Defendant's evidence. She has changed her story to suit her cause as it has in turn shown itself to be without substance. Although there is some evidence to suggest that she exerted undue influence upon the President in order to secure the transfer of the shares in 1993 which gave her 52.5 per cent of the Company, I am uncertain as to Mr. Leung's role in what took place. The President, who died in 1995, was ageing, on the edge of illness, and probably very vulnerable. He was, I am sure, not willing for the Defendant, in effect, to take the company away from him and his family, and did not intend that she should have effective controlling beneficial shareholding. In reaching this decision I have ignored the Defendant's evidence in relation to her application for Legal Aid and the inferences to be drawn from it.

42. The Plaintiff succeeds. There will be a declaration that the Defendant held and holds all 2,100,000 shares as trustee for the estate of the President. There will be an order that the said shares be transferred into the name of Isao Kiyohara forthwith. There will be an order for an examination into the question of what damage had been caused to the Plaintiff by her action. The Defendant will pay the Plaintiff's costs of this action to be taxed if not agreed.