AMEROSE INTERNATIONAL LTD AND ANOTHER v. FU HAU CHING

HCMP 2241/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2241 OF 2004

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J U D G M E N T

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1.  This is an application by Pacific Challenge Securities Ltd (“Pacific Challenge”) for interpleader relief against the claims of Fu Hau Ching on the one part, and Amerose International Ltd and Baserich International Ltd (“A & B”) in respect of shares of B & S Entertainment Holdings Ltd (“B & S”) and moneys in an account in Mr Fu’s name with Pacific Challenge.  Pleadings were ordered.  In the pleadings A & B are the plaintiffs and Mr Fu the defendant.

Background

2.  On 19 August 2004 the defendant opened cash account no. A133179 with Pacific Challenge.  On 23 August 2004, on the defendant’s instructions, 60 million B & S shares were transferred from his account with Taiwan Concord Capital Securities (Hong Kong) Ltd (“Taiwan Concord”) to that account.  On the same day, the defendant deposited $20,000 cash into the account.  He sold 50,032,000 and bought 44,000 B & S shares.  He bought and then sold 800,000 shares in Sinopec Corporation.  On 24 August 2004, again on the defendant’s instructions, 10,000,000 B & S shares were transferred from his account with GC Capital (Asia) Ltd (“GC”).  As a result of the activities in the account, there are now in the account 20,012 B & S shares and $2,406,941.75 cash (now paid into court).  These are the subject of the interpleader.

3.  It is not in dispute that the plaintiffs owned between them 70 million B & S shares, and that it was these shares which found their way into the defendant’s account with Taiwan Concord, and thence to his account with Pacific Challenge.

The plaintiffs’claim

4.  The plaintiffs claim that the shares were the subject of a loan agreement between themselves and one Lee Tak Cheung.  Lee was to lend them $50 million against the transfer of the shares, which the plaintiffs could redeem after 7 months for $56 million.  The agreement provided for the plaintiffs to deposit the shares with Taiwan Concord, and give signed blank transfer documents to a stakeholder, for delivery to Lee against a cashier order for $50 million.  In the event, the cashier order never materialised although the signed transfer documents were used to transfer the shares to the defendant.

5.  The plaintiffs plead that the defendant was Lee’s nominee.  Lee wrongfully repudiated the Agreement, and the plaintiffs were entitled to rescind it.  Alternatively the consideration for the transfer of the shares failed, and that defendant was obliged to return them and the proceeds of their sale to the plaintiffs as lawful owners.  Further alternatively the defendant wrongfully converted the shares to his own use.  It is also claimed that the defendant is a bare trustee of the share and beneficial ownership of them remains with the plaintiffs.

6.  The plaintiffs accordingly claim declaratory relief and the payment out of the subject shares, cash and interest which are now held in court.

The defence

7.  The defendant admits that some time prior to 20 August 2004, A & B were the respective registered shareholders of 33,200,000 and 36,800,000 B & S shares, but does not know, and makes no admission to the averments relating to the Agreement.

8.  The defendant says that in 1997 he lent $7 million to one Chu Wing Fung, who failed to repay and disappeared.  In 2004, the defendant found Chu, and demanded payment.  Chu, who claimed to be the Assistant to the Chairman of B & S, and the defendant entered into a settlement agreement for the transfer to the defendant of 70 million B & S shares, in settlement of the debt plus a further $3 million of interest.  The defendant was told to meet a Mr Chan at the Inland Revenue Department on 20 August 2004, which he did, and Mr Chan gave him two sets of Bought and Sold Notes, which he signed, and which were later submitted for stamping.  It later transpired that these Bought and Sold Notes were respectively signed by A & B to transfer their B & S shares.  Again following the instructions of Chu, the defendant presented the Bought and Sold Notes to Taiwan Concord; he was later told that Taiwan Concord had received the written consent of A & B to the transfer of the shares.  On the instructions of Mr Chan, the defendant caused the transfer of 60,000,000 shares to Pacific Challenge, and 10,000,000 shares to GC. Following instructions given by Mr Chan the defendant instructed the sets of the        B & S shares.

9.  The defendant avers that the transfer was made voluntarily and with the consent of the plaintiffs, in consideration of the defendant accepting them for settlement of loan owed to him by Chu.  He denies that he was Lee’s nominee.  He counterclaims for declaratory relief and for payment out of the shares and cash to himself.

Evidence

10.  Oral evidence for the plaintiff comes from Mr Siu Kuen Fat.  The defendant himself gave evidence.  Of course Lee is not to be found and neither is Chu.  Also missing is one Janet Yeung Lai Ming, who made an affirmation in support of the plaintiffs’ claim; she, it appears, was the link nearest to the plaintiffs in a chain of intermediaries between them and the proposed lender.

11.  Mr Siu’s evidence is as follows.  At the beginning of August 2004 Janet Yeung told him that someone was interested in the shares of B & S.  Mr Siu knew that A & B intended to sell or mortgage their shares so he passed on the information to them.  On 10 August 2004, A & B authorised him, in writing, to negotiate the sale or mortgage.  He asked to deal directly with the other party, but this was refused by the other party’s agent, Mr Chan Tin Wah; so he dealt with Mr Chan.  In fact it appears from Mr Siu’s evidence that behind Mr Chan was not necessarily only someone called Lee; he continuously referred to a Chinese party or parties.  I asked what he meant by that, and he was not clear, but what is clear is that he had the impression that behind Mr Chan there was a group rather than an individual.

12.  On 16 August, Mr Siu signed the Agreement.  It provides for the handing over of the transfer documents for the lender, against a cashier order to be delivered within 24 hours.  Mr Siu says that he wanted to provide for a simultaneous exchange but by oversight, failed to get the Agreement amended.  In any event, on 20 August, A & B handed over the transfer documents to Littlewoods, solicitors, who were the stakeholder.

13.  On 23 August, Mr Siu went to Littlewoods to get the cashier order for $50 million but was told that Lee had not provided it.  A fax was received, which indicated that because of fluctuations in the price, the Agreement was “temporarily withheld”.  However, Mr Chan, who was either present at the office, or on the end of a telephone said that the money would be deposited the next day.  On the following day, Chan telephoned Mr Siu and told him that the deal was cancelled.  The $50 million was never received.

14.  Mr Siu said in his first affirmation that unknown to him, the 70 million shares were transferred to the defendant, who was Lee’s nominee.  In oral evidence he said that Siu says that he knows that the defendant was the nominee because the defendant told this to Chan Tin Wah who in turn told Janet Yeung.

15.  As to Chu Wing Fung who, according to the defendant, claimed to be the Assistant to the Chairman of B & S, Mr Siu confirms that there was no such person.  The telephone numbers shown on the Chu’s card, which the defendant has put in evidence, were never used by B & S, although it appears that they were used earlier by a related company which had the same address; and although the logo of B & S appears on the card, the layout is different from that used on genuine cards used by B & S personnel.

The defendant’s evidence

16.  In 1997 the defendant was working for STDM, the casino operator in Macau.  One of his business partners used to bring Chu Wing Fung to Macau for gambling, and introduced Chu to the defendant.  When Chu lost money, the business partner asked the defendant to lend money to him.  This the defendant did.  He lent Chu, and was repaid, $12 million.  It appears that the loans were, in whole or in part, in the form of “mud chips” which could be used for gambling but which could not be cashed.

17.  In August 1997 Chu asked the defendant to lend him $7 million for one month to finance his cigarette business.  The defendant agreed to lend Chu this money, on the basis that he was to receive a profit of $200,000 for every million lent.  The defendant made five transfers between 12 September and 3 October 1997.  He has produced evidence of written evidence of transfers from his bank in Hong Kong to his account with STDM in Macau but there is no documentary evidence of transfer of the loans to Chu.  Again, it seems that “mud chips” and/or chips which could be exchanged for cash were involved; the evidence is rather confused and unclear on this point.

18.  According to the defendant, Chu defaulted on the loan; he simply disappeared.  But on 12 August 2004, the defendant found Chu by chance in Shenzhen.  The defendant got his friends there to assist him, and they all sat down with Chu to discuss how the loan was to be repaid.  Chu did not have enough money to pay the defendant but he said he owned some shares in a listed company in Hong Kong which he could sell to recover the money.  He said he could not sell them himself, because he would have a shareholder of the listed company.  He produced a business card, showing that he was the Assistant to the Chairman of B & S.

19.  After further discussion, it was agreed that Chu would pay a further $3 million by way of interest on the defaulted loan.  He and the defendant signed an agreement that the total debt of $10 million would be settled by way of 70 million B & S shares, and that when the defendant received those shares, “my debt of $10,000,000 owed to him is considered to be settled and we do not owe each other any more”. 

20.  Chu then agreed to stay in Macau with the defendant’s friends while the defendant went to Hong Kong to deal with the transfer.  Chu called the defendant there, and told him that had arranged for the opening of security accounts with Taiwan Concord and GC.  The defendant was told to go to those companies and sign documents, which he did.  Then on 20 August, Chu, again by telephone told the defendant to meet a Mr Chan at the Inland Revenue Department.  This person brought the Bought and Sold Notes and other documents, which the defendant signed, and the defendant paid the stamp duty.  After that, the defendant, acting on instructions of this Mr Chan, who had with him some kind of electronic device which showed the share prices, made telephone calls to the Pacific Challenge to sell the shares.

21.  Mr Chan told the defendant that the proceeds of sale would be enough to cover the 10 million.  But it turned out that they would not.  Indeed it appears that the broker told the defendant that the price was dropping, as he made the telephone calls; but still he followed Chan’s instructions.  In fact the price of the B & S shares dropped by 94% in the course of the day, although the defendant says that he did not know that.

22.  In any event, it turned out that there was only about was only 2.4 million in the account at the end of the day.  The defendant telephoned Chu, who by this time was still with the defendant’s friends, though apparently they had gone to Zhuhai.  Chu said that the price had dropped, but it was not his problem because he had done his part of the bargain by transferring the shares.

Issues

23.  The plaintiffs’ case is that they intended to transfer the shares to Lee, but unknown to them they documents were filled in to transfer them to Lee’s nominee, the defendant.  The defendant’s case is that the plaintiffs transferred the shares to him in settlement of the debt owed to him by Chu.  The linked issues are whether the defendant was Lee’s nominee, whether that was known to the plaintiffs or not, so that the transfer was made to him as nominee; or whether the transfer was made to him in settlement of Chu’s debt.

Discussion

24.  Mr Egan, who appears for the defendant suggests the possibility that there were two parallel transactions.  Reference is made to the fact that the transfer documents were signed in duplicate, and there seem to be some differences between the layout of them on the copies which have been produced.  However, there is simply no evidence that there was more than one transaction, involving 70 million B & S shares, at the relevant time.  Further, only one set of transfer documents was in fact used.

25.  Mr Egan argues that the there is no proof that the defendant was Lee’s nominee, which the plaintiffs plead as a major plank in their case.  In Mr Siu’s first affirmation, there is only a bald assertion that the defendant was a nominee.  Although Mr Siu says in oral evidence that the defendant was a nominee, it appears that this is double hearsay; he got it from Janet Leung who in turn got it from Chan Tin Wah.  There is nothing of this in the affirmation of Janet Leung, which she would no doubt have adopted if she had been called.

26.  The hearsay is not the subject of any hearsay notice, and, it is argued, should not be admitted.  Section 47 of the Evidence Ordinance, Cap.8 provides that evidence is not to be excluded on the ground of hearsay unless there is objection to it and the court is satisfied that its exclusion is not prejudicial to the interests of justice.  In this case, there is objection to the evidence and its exclusion would not be prejudicial to the interests of justice, so it should be excluded.

27.  I do not see that this hearsay evidence is to be excluded, but I do accept that it is questionable.  There is only a bare assertion that the defendant is a nominee, in the affirmation.  The evidence that this fact was known to the plaintiffs only came out in oral evidence and was not foreshadowed in the affirmation of Janet Leung.  It seems to me that Mr Siu’s evidence that he knew that the defendant was Lee’s nominee must be disregarded.

28.  Nevertheless, whether or not anyone told the plaintiffs that the defendant was to take the transfer of the shares as nominee, an obvious inference arises from the plaintiffs’ evidence that this is what in fact happened.  If one looks only at the plaintiffs’ evidence, one must conclude that as far as they were concerned, they were transferring the shares to someone called Lee, whom they only knew as the named principal of the agent, Chan Tin Wah.  The transfer documents were signed in blank, and it was open to the principal to put in whomever he wished as transferee.  In the end that was the defendant and there is an obvious inference that Lee – if he existed, for it appears that the police told the defendant that this person was the possessor of a fake identity card – or whoever was Chan’s principal put the defendant up to taking the registration in his name.  If, however, the plaintiffs did indeed transfer the shares in settlement of Chu’s alleged debt to the defendant, that inference is negatived.

29.  Mr Egan in effect argues that on the face of the documents, the defendant is the legal transferee of the shares and it is for the plaintiffs to prove that he is not.  He points to the fact that there seems to have been some confirmation of the transfer by the plaintiffs to Taiwan Concord.  Specific discovery in respect of this was sought by the defendant, but refused by the court, so we do not know what really happened.  He suggests that the plaintiffs are trying to hide the true facts, because of this and because the have not called Janet Yeung, Chan Tin Wah, or the signatories of the Bought and Sold notes, or even the person dealing with the matter in Littlewoods, to give evidence.

30.  This is all very well, but there is nothing to contradict the plaintiffs’ evidence of the Agreement, or how it came into being, or how it was to be performed, or how that performance went wrong.  At the same time, the defendant pleads as a fact that the plaintiffs transferred the shares voluntarily to him in consideration of their accepting them for settlement of the loan owed to him by Chu, and it seems to me that the onus is on him to prove that on the balance of probabilities.

31.  The defendant’s evidence is difficult to accept.  It starts with a story of a loan of a large sum of money for one month at interest equivalent to 240% per annum. Leaving aside any question as to whether the loan, which seems to have been made, if made it was, in Macau would be struck at by Macanese law as usurious, that is a very high rate.  There is nothing in writing to support either the loan or the interest rate; the bank transfers are equivocal at best.  There is some evidence of an IOU, destroyed when the agreement for transfer of shares was made, but this only came out in cross-examination and can only be a recent invention.

32.  There is, it seems, nothing to support the existence of Chu except the name card.  The plaintiff’s evidence is that no such person worked for B & S; and from his connection with that company and its chairman, this is something which I accept would be known to Mr Siu. 

33.  In any event if there was, at some time, a Chu Wing Fung who worked for the Chairman of B & S, it is difficult to see what hold he might have over A & B which would cause them, or the individuals behind them to transfer 70,000,000 of their shares in settlement of his debt of $10,000,000.  It appears from the trading record that the shares started selling at 0.78.  This is consistent enough with a story of a transfer as security for a loan of $50 million, because at that price the shares would be worth about $54 million.  It is not consistent with a story of transferring them against a debt of $10 million.  The shares were not held in the name of Chu, but in the names of A & B.  It is most unlikely that Chu, if he existed, could have prevailed upon the shareholders to dispose of their $50 million worth of shares to settle his $10 million debt.

34.  Further, if, as appears from the wording of the agreement produced by the defendant, he was to receive the shares rather than the proceeds of sale of the shares in settlement of the debt, there is no proper explanation why he would have gone through the exercise which he did, of selling the shares under the direction of Chan, especially when, as he knew, the sale price was dropping all the time.  Nor is it believable, as he says, that he did not check the listed price of the shares, or whether Chu was their owner.  While the defendant claims to have been unsophisticated in the matter of shares, the account opening documents suggest that he was not without experience and his attempts to explain this away did not ring true.

35.  Mr Tang, who appears for the plaintiffs, calls into question the validity of the agreement produced by the defendant as having been made between himself and Chu.  He says that at the time it was made, Chu was detained by the defendant’s friends in Shenzhen and therefore it was made under duress and is void.  I do not think I can find that the Chu was detained, for the evidence of the defendant, which cannot be gainsaid, is that Chu remained voluntarily.  Having said that, however, the story of a debtor voluntarily staying with a creditor’s friends, until the money is found, is one which the courts have heard very often from defendants charged with false imprisonment, particularly where Macau gambling debts have been involved.  Though criminality or indeed civil duress cannot be proved – and for all I know false imprisonment is not a crime in Shenzhen – the evidence certainly has an suspicious taint about it.

Conclusion

36.  Overall, having heard the defendant, I do not believe his evidence.  I do not accept that he accepted the transfer of the shares into his name in settlement of a debt owed to him, and I do not accept that the plaintiffs voluntarily transferred the shares to him in settlement of any debt.  I find that the defendants executed the transfer documents, to transfer the shares to someone they understood to be surnamed Lee.  It is more probable than not that the defendant was put forward by this Lee, or, if he did not exist, by whoever else was Chan’s principal, to take the transfer of the shares.

37.  In breach of contract, Lee or whoever was Chan’s principal failed to provide the cashier order.  The plaintiffs were entitled to and did rescind the Agreement.  The defendant has no right to the shares or the proceeds of sale of them.  The beneficial ownership remains with the plaintiff and the defendant is a bare trustee of the shares.

Result

38.  There will be judgment for the plaintiffs as prayed for, with costs to be taxed if not agreed.  The defendant’s counterclaim is dismissed, with costs to the plaintiffs to be taxed if not agreed.  Since the judgment is to be handed down the costs orders are nisi.