LAM CHI KUEN (also known as Frank Lam) v. CHENG WING CHUNG (also known as Edward Cheng)

HCA 349/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 349 OF 2015

_______________

_______________

HCA 350/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 350 OF 2015

_______________

_______________

HCA 351/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 351 OF 2015

_______________

_______________

(Heard Together)

________________________

JUDGMENT
________________________

1.  I have before me an application under Rules of the High Court Order 14 for judgement against the defendant in each action, being numbers HCA 349, 350 and 351 of 2015. In each action the claim is for various declarations concerning the proposition that the defendant holds various shares of various companies on trust for the plaintiff and that the defendant should transfer the legal ownership of those shares to the plaintiff’s daughter Miss Juliana Lam, pursuant to paragraph 3 of the relevant declaration of trust in each case.

2.  The applications, and the actions, are premised upon written declarations of trust each dated 8 August 2014.  The declarations are each in similar terms, although inevitably due to the slightly different subject matter of each alleged trust there are slight differences as to the description of the subject matter.  I shall take action HCA 349/2015, which deals with AML Group Holdings Ltd (“AML”) first and will then turn to the remaining actions. 

HCA 349/2015

3.  The declaration (“Declaration of Trust”) in respect of action HCA 349/2015 is, materially, in the following terms:

“This trust deed is made on 8 August, 2014 whereby Cheng Wing Chung … , of Tower 3 6/E the Waterfront, 1 Austin Road, Kowloon Hong Kong (hereinafter referred to as the ‘Trustee’) declares that, with effect from 4 February, 2008 25,834 ordinary shares and 50% of the one preference shares in the capital of AML Group Holdings Ltd (hereinafter referred to collectively as ‘the said shares’) which was incorporated on 20 March, 1981 under the Companies Ordinance of Hong Kong with the Hong Kong Company Number 95073 and with the Registered Office at 29 F Nanyang Plaza, 57 Hung To Road, Kwun Tong, Kowloon, Hong Kong, (hereinafter referred to as the ‘Company’), which are registered in the name of the Trustee on the Register of Members of the Company, are held by the Trustee in trust for Lam Chi Kuen … of House 10 Villa Castell, 20 Yau King Lane Tai Po, New Territories, Hong Kong or his successors and assigns (hereinafter referred to as the ‘owner’) by which the subscription money for the said shares provided.

Now therefore the Trustee covenants with the Owner as follows:

1. That the Trustee will at all times and from time to time hereafter deal with, transfer and dispose of the said shares and the dividends and proceeds thereof and any rights or privileges now or hereafter appertaining thereto in accordance in all respects with the instructions from time to time given to the Trustee by the Owner subject to the Articles of Association of the Company and requirements of the Companies Ordinance of Hong Kong.

2. …

3. That the Owner has the right to appoint a new Trustee (hereinafter referred to as the ‘New Trustee’) to hold the said shares.  The Trustee shall arrange for the said shares to be transferred by the Trustee to the New Trustee upon written instructions from the Owner.”

4.  The Declaration of Trust was signed by the defendant.  By letter dated 8 August 2014 the plaintiff signed a letter addressed to the board of directors of AML referring to the Declaration of Trust and confirming that if a new trustee is to be appointed it would only be Lam Hiu Ying, Juliana Lam.

5.  The statement of claim relies only upon the Declaration of Trust as the basis for the claim and does not explain in any way the reasons why the Declaration of Trust was entered into and gives no background as to it.  In support of the application for judgement the plaintiff has sworn an affirmation which sets out some of the background and circumstances leading to the execution of the Declaration of Trust.  That evidence is important to the decision I shall make and therefore I set out in full the relevant parts:

“8. After certain shareholdings structural changes, since 2008, I have been a 50 percent beneficial owner of AML and those other companies. From 2008‑2013, I reposed such trust and confidence in the defendant that I did not request any documents to evidence my 50% true ownership [of] AML and other companies (as opposed to being registered as a 1/3 shareholder of AML only).

9. However, due to an incident that took place in 2013 which again do not concern the present action, I lost such trust and confidence. As a result, I asked Juliana to discuss with the defendant as to the execution of documents necessary to protect my 50% rights and interests in AML.

10. Email exchange ensued between Juliana, the defendant and Leo Leung, the then Financial Control of AML (and a nominee of the defendant), as to the terms of a declaration of trust in respect of my shares in AML as well as to other declarations of trust in respect of the other companies mentioned above.”

6.  The defendant’s evidence however presents a rather different set of circumstances. The defendant says that the necessary background for the purposes of assessing the claim is set out in a petition issued in action HCCW 53/2015 in which the plaintiff seeks the winding up of AML on a just and equitable basis as a result of the breakdown of trust and confidence as between the original shareholders and on the ground that the affairs of AML have been conducted in a manner unfairly prejudicial to the plaintiff’s interests.  In that petition the plaintiff sets out a rather longer history of the relationship between the plaintiff and defendant than is otherwise apparent.

7.  It is clear that the plaintiff and defendant became good friends in the 1960s and shortly thereafter they both became equal partners in a business which traded gloves on a worldwide basis.  There is an underlying dispute between as to who was the driving force within the business but it is not necessary for me to resolve that dispute.  In early 1981 a Mr Raymond Choy became associated with the business and ultimately became a 1/3 shareholder with each of the plaintiff and defendant also holding 1/3 of the shares. 

8.  Around the same time a company in the United States also became interested in the business that was being conducted, and in June 1991 that company invested in the business through a vehicle which is now AML.  Following that investment the shareholding structure of AML was as follows:

(i) 77,500 shares, representing 50%, held by Wells Lamont Division, the US organisation;

(ii) 25,834 shares, representing a 1/6 shareholding, held by the plaintiff;

(iii) 25,834 shares, representing a 1/6 shareholding, held by the defendant; and

(iv) 25,832 shares, representing a 1/6 shareholding, held by Raymond Choy.

9.  From that it can be seen that the three original partners (and I shall treat Raymond Choy as an original partner for this purpose) remained as equal partners as amongst themselves although the US company had the majority shareholding.

10.  There was a minor alteration of the shareholding structure so as to reward a long‑standing employee, Mr Chu Chiu Ching William, in which he was given approximately 2500 ordinary shares with an approximately equal split of those shares as between the original partners.  As a result, although the precise number of shares that they held changed, the relative proportions as against each other did not.  Ultimately however those shares were transferred back the original partners when Chu left the company in 1995.

11.  Towards the end of 2007 the US company indicated that it wished to sell its shares.  By an agreement dated 4 February 2008 the US company agreed to transfer its shares in AML to the three original partners in equal proportions for approximately US$9 million.  There is a dispute between the plaintiff and the defendant as to whether that agreement was completed in 2008 or 2011, although it seems to me most likely to have completed in 2008.

12.  The defendant sets out in his evidence that the US$9 million was paid by him, through his wife or alternatively through various companies owned by him.  He relies upon that payment as demonstrating the proposition that although the shares were technically purchased by each of the original partners he became the beneficial owner of them.  In addition he relies upon two declarations of trust, each dated 4 February 2008 executed by Raymond Choy and the plaintiff in which they each declared that they hold approximately 25,000 shares of AML on trust for the defendant.

13.  The plaintiff, in the petition, denies the validity of this declaration of trust saying that it was a sham document designed to persuade Raymond Choy to sell his shares to the plaintiff.  Mr Smith SC, counsel for the plaintiff, has suggested that the debate about the validity of this particular declaration of trust is not relevant to a determination of whether the Declaration of Trust which was subsequently signed in 2014 is or is not valid.  Mr Smith contends that even if the 2008 declaration is valid all that will happen is that some of the shares held by the plaintiff will ultimately be held as trustee for the defendant, but that for the purposes of determining the validity of the 2014 Declaration of Trust that proposition makes no difference.

14.  Subsequently, in 2011, Raymond Choy decided that he wanted to sell his shares and exit the business.  As at that stage he held 51,666 shares which represented 1/3 of the overall shareholding.  Leaving aside for the moment whether 25,000 odd of those shares were held on trust pursuant to the 2008 declaration, the documentation which is currently before me demonstrates that Raymond Choy executed a transfer, and a bought and sold note, in favour of the defendant. The documents demonstrate that the plaintiff was given an opportunity to purchase 25,000 odd of the 51,666 shares being transferred but declined to do so.  In particular he signed a resolution of the board of directors of AML on 2 December 2011 confirming that he waived his right to take up the shares offered by Raymond Choy.

15.  The plaintiff’s case, as set out in his affirmation which I have quoted above, and as confirmed by paragraph 30 of the petition, is that the 2014 Declaration of Trust reflected the position which had existed since the US company sold its shares back to the original partners in 2008.  The plaintiff says that version of events is supported by the wording of the 2014 Declaration of Trust where it states that the trust is retrospective as from 4 February 2008.

16.  However from the material which has been produced by the defendant, and which I have referred to above, it is clear that:

(i) Between at least February 2008 and December 2011 Raymond Choy was interested in at least 1/3 of the shares, and consequently it cannot be the case that plaintiff was entitled to a 50% interest with the other 50% being held by the defendant.

(ii) As at December 2011 the plaintiff was given an opportunity to equalise his shareholding at 50%, but declined to take that opportunity.  It is somewhat inconsistent with his case as set out in his evidence and his petition that despite what he says was the position as from 2008, he declined nonetheless to accept shares from Raymond Choy which would have regularised what he says was his entitlement. 

17.  Consequently I have some doubt as to whether in fact the case as put forward in his evidence and in his petition is correct.

18.  No doubt recognising the difficulty which these points created for his case, Mr Smith sought to advance a case that in August 2014 the plaintiff and the defendant agreed that they would recreate the position as it had been at the start of the business back in the 1960s by recreating a situation in which each party held 50% of the shares of the business and they were thereafter equal parties. He says that they agreed to apply that new agreement retrospectively back to February 2008, on the basis that Raymond Choy was no longer any impediment to that structure.

19.  In support of this case Mr Smith relied upon various aspects of evidence, the majority of which post dated the Declaration of Trust in August 2014.  One particular aspect of the evidence that he relied upon was the transcript of a meeting held on 2 January 2015 between the defendant, Juliana Lam, and two others.  In that meeting it is clear that the defendant was quite content to allow the plaintiff to hold 50% of the shares of the business but he was concerned that Raymond Choy needed to be paid for the shares that he had transferred in 2011.  It is noteworthy that nowhere in the meeting is there any suggestion of type which is currently made by the defendant that the Declaration of Trust was a sham, or was only intended to be effective in the event that there was a listing of AML.  The transcript of that meeting is entirely consistent with the proposition advanced by Mr Smith that the parties had, at least by that stage, agreed to recreate an equal partnership with each of the plaintiff and the defendant holding 50%.

20.  If one reads the correspondence which passed between the parties or their representatives from August 2014 onwards it is clear that the parties were of the view that the Declaration of Trust was a valid and binding document and that it did indeed represent a legitimate trust over the shares which it referred to. It is all consistent with the way that Mr. Smith put his case.

21.  Mr Chan SC, for the defendant has run a series of legal arguments which, if correct, would have the effect of preventing a legitimate trust from arising by virtue of the August 2014 Declaration of Trust.  His proposition is, essentially, that if the evidence of plaintiff which I have quoted above were correct then a trust over the shares would already exist from as far back as 2008 and there would be no need for the declaration.  He contends that if, in 2008, the beneficial ownership of the shares passed to the plaintiff then the Declaration of Trust in 2014 could not amount to a disposition by the defendant because the defendant did not have anything to dispose of and consequently, because of the lack of any disposition, the Declaration of Trust could not have created a trust. 

22.  He says that the only way in which a trust could be created in 2014 is if there was a gift made by the defendant to the plaintiff, which gift had the effect of disposing of the beneficial interest which otherwise vested in the defendant and conferring it upon the plaintiff.  He says that this is not the substance of the evidence of the plaintiff and that consequently there is a triable issue as to whether or not the 2014 Declaration of Trust did indeed create a trust. 

23.  Mr Chan’s proposition was, at least in part, premised upon the submission that it was not possible to create a trust with retrospective effect, such that a declaration in 2014 could not accurately record that the shares were, and had always been held on trust with effect from February 2008.  That proposition is clearly wrong as a matter of law, and in the light of the authorities which were produced by Mr Smith, Mr Chan quite correctly accepted that it was erroneous.

24.  As a result much of the force of Mr Chan’s submissions falls away.  However I do not think that the basic proposition falls away.  That basic proposition is that the way in which the plaintiff has put the case in his evidence, namely that as from 2008 the shares were always held on trust, and that the Declaration of Trust was simply documenting that inevitable position, is inconsistent with the evidence, and in particular the evidence of ownership and transfer of shares by Mr Raymond Choy in December 2011. 

25.  Having regard to the evidence which I have seen there is much force in Mr Smith’s proposition.  It seems to me that the likely situation is indeed that in 2014 the parties reached an agreement that they would recreate the equal shareholdings of the plaintiff and the defendant irrespective of what had previously occurred.  But for the purposes of an Order 14 proceeding I must have regard to the sworn evidence of the plaintiff.  That sworn evidence is inconsistent with what I suspect is the likely position. 

26.  Mr Smith suggests that I should have regard to the contemporaneous documentary evidence and I should not be unduly concerned that the plaintiff may not have entirely accurately represented that evidence in his affirmation.  Whilst I have some sympathy with that proposition I do not believe that it is open to me at an Order 14 application to disregard the way in which the plaintiff himself has explained the position.  I am unable to reconcile the plaintiffs affirmation with the documentary evidence in the light of what I have set out above.  Inevitably in such circumstances it seems to me that I must refuse to give summary judgement.

27.  Notwithstanding that, I do not believe that the proposition advanced by the defendant to the effect that the Declaration of Trust was only to be effective upon a listing of AML has any real merit.  Based upon the contemporaneous evidence I would be inclined to the view that the parties had reached an entire agreement in 2014 to recreate the old shareholding structure and to share the business equally between them.  Consequently it seems to me that the defence which is being run by the defendant is, to use the time honoured words of Order 14 applications, shadowy.

28.  In the light of that I grant conditional leave to defend in action HCA 349/2015.

HCA 350 and 351 of 2015

29.  These actions are in respect of declarations of trust over 50% of the equity interest of a company called High Status Investments Limited (“HSI”) (Action HCA 350/2015) and various other companies through which various aspects of the overall glove trading business is operated (Action HCA 351/2015). The issues which arise are very similar to those which arise in Action HCA 349/2015. The difference between HSI and the other companies and AML is that the defendant contends that HSI, and other companies, were set up and run independently of AML and only the defendant and Raymond Choy had any interest in those companies throughout.

30.  The problem for the defendant in this respect is that he unquestionably did sign declarations of trust in relation to 50% of the shares in HSI and the other companies in August 2014.  Therefore unless it can be demonstrated that those declarations of trust are, in some sense, a sham and did not in fact reflect any intention to create a trust over the 50% shareholdings, then on the face of the evidence the plaintiff does indeed have a beneficial entitlement to 50% of those shares.

31.  However, as with the AML case, the plaintiff’s affidavit evidence is to the effect that he has always been entitled to a 50% interest in HSI and the other companies because he was always entitled to a 50% interest in AML.  I have already dealt with that issue above and because I am satisfied that there must be leave to defend in relation to the AML position, I am equally satisfied that there must be leave to defend in relation to HSI and the other companies.

32.  Consequently I grant conditional leave to the defendants to defend Actions HCA 350 and 351 of 2015.

Conditions

33.  Counsel are agreed that in the event that I was persuaded that conditional leave to defend should be given then there would be two appropriate conditions.  First that the defendant should give an undertaking not to deal with or dispose of the subject matter of the various declarations of trust, and secondly that in the event that any company which is the subject of the declaration of trust should declare and/or pay any dividends the defendant should set aside such dividends so that they may be available to be paid to the plaintiffs in the event that the plaintiffs is ultimately successful in his actions.  I agree that those two conditions are appropriate conditions to require as the basis upon which the defendant is entitled to defend the actions, and I so order.

34.  However I would add a third condition that the defendant should undertake to exercise any rights or privileges attaching to the shares the subject of each declaration of trust only in a manner which is consistent with the existence of the alleged trust set out in the declaration.

35.  The intention behind these conditions is so as to preserve the current status quo as between each of the plaintiff and the defendant pending the resolution of the actions, so that whosoever is ultimately entitled to the beneficial interest in the shares has not had that interest prejudiced as between now and the conclusion of the trial.

36.  Neither party has drawn up any order to reflect these conditions, and I shall leave it to the parties to agree the appropriate wording.  If the parties are of the view that additional words are required so as properly to reflect my expressed intention, then that too should be added to the order.  In the event of any dispute as to the appropriate wording to reflect that intention, the parties are to apply, and the court will settle the matter.

Costs

37.  I make a costs order nisi in each case as follows:

1. In the event that the defendant complies with the conditions for leave to defend, costs in the cause of the action.

2. In the event that the defendant does not comply with the conditions for leave to defend the defendant shall pay the costs of the action to the plaintiff to be taxed if not agreed.

38.  Either party may apply in writing within 14 days of the date of this judgement for that costs order nisi to be varied.  If no such application is made then the costs order will become absolute.