TSANG WING KWAI AND ANOTHER v. WONG WING SZE TIFFANY AND ANOTHER

HCMP 1912/2013

[2019] HKCFI 3148

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1912 OF 2013

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(By Original Writ and Order to carry on dated 29^th November 2013)

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J U D G M E N T

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A. INTRODUCTION

1.  This is the re-trial of a dispute in respect of the beneficial ownership and validity of an allotment of shares in the 2^nd Applicant (“Open Treasure”).

2.  According to the annual return and a Return of Allotment of Open Treasure.  Madam Chan Chung Han, deceased (“the Mother”) held 5,000 shares in Open Treasure as at the date of her death.

3.  The case of the 1^st Applicant (“Kwai”) is that the Mother held one of 2 original shares in Open Treasure on trust for him by way of a declaration of trust and that there had not been a valid allotment of shares which increased the shares to Kwai and the Mother to 5,000 each.  Kwai seeks a declaration to these effects.

4.  The 2^nd Respondent (“Fai”) counterclaims that the Declaration of Trust was void for non est factum and mistake, and seeks an order that the Mother’s disposal of her 1 share in Open Treasure be set aside.

5.  Open Treasure and the 1^st Respondent (“the Administratrix”) have been excused from attendance.  The real battle is between Kwai and Fai.

B.    UNDISPUTED FACTS

B1.  The parties

6.  The facts in Section B are largely taken from the submission of Mr Ho SC (leading Mr Yuen Siu Kei) or supported by documents; and I find these facts to be true.

7.  The Mother and her husband (“the Parents”) had 3 sons and 2 daughters.  Kwai is the third child and Fai is the eldest.

8.  Fai was the original executor of the Mother’s estate but was removed and replaced by the Administratrix by court order on 13 August 2018, as amended on 20 November 2018.  On 26 June 2019, DHCJ K Wong ordered, amongst others, that the Administratrix shall remain neutral in the present proceedings and the Mother’s estate shall indemnify her as to costs.

9.  By an order dated 7 August 2019, Fai was joined as the 2^nd Respondent to the present action.

B2.  The Parents’ investment through United Kesvick Ltd (“UKL”)

10.  The Parents bought a number of properties in joint names during their lifetime.  They then acquired UKL in 1986, with the Father and the Mother each holding one share.  They later injected some of their properties into UKL as tabulated below.

Table 1

	Abbreviated description of                property	Year of purchase in joint names   of Parents	Year of injection into       UKL	Remarks
1.	Kiu Hing Mansion, at King’s Road and Tin Hau Temple Road	1966	2004
2.	Flat 907 in Kent Mansion, Tin Hau Temple Road	1969		Remains in Parents’ joint names; occupied by Fai
3.	Shop B at King Tak House, King Kwong Street	1975	1997
4.	Shop A, On Fung Building, Caine Road	1977	2003
5.	Shop D, Kar On House, Ford Street and Cheung Hong Street		1987	direct purchase by UKL

B3.  Fai’s personal investment

11.  In February 1986, Kwai purchased in his name Shop C, lower ground floor, Siu Bo Mansion in Tsat Tsz Mui Road (“the Tsat Tsz Mui Shop”) at the price of HK$525,000.

B4.  Open Treasure

12.  Open Treasure was incorporated on 15 July 1988.  On 19 July 1988, the Mother and Kwai became registered as its only 2 directors and shareholders, each holding one of the only 2 issued shares.  The Mother was also its secretary and a signatory to its bank accounts. 

13.  After the Mother passed away, Ms Chen Tan Ying, the wife of Kwai, was appointed as a director and company secretary on 28 March 2013.

14.  Since 1988, Open Treasure has acquired the following properties:

Table 2

	Description of Property	Date of acquisition	Price
1.	The Shop at G/F, Kar On House, next to Shop D	31 August 1988	$639,000
2.	Flat 908 in Kent Mansion, opposite to Flat 907	20 May 1991	$1,830,000
3.	Coral Court in Cloud View Road	December 1994 (sold in 1997)	$3,950,000

B5.  The 4 key documents relating to Open Treasure

15.  The validity and effect of 4 documents (“the 4 Key Documents”) form the subject of dispute in this action:

(1)  A Declaration of Trust dated 29 July 1988;

(2)  A Return of Allotment dated 16 January 2012;

(3)  A set of Board Minutes dated 16 January 2012; and

(4)  A set of Annual Return dated 8 August 2012.

16.  The Declaration of Trust was signed by the Mother 10 days after Open Treasure was acquired.  It stated that the one original share in Open Treasure standing in the Mother’s name did not belong to her but to Kwai.  The Mother’s signature was attested by an unnamed witness.  The document was stamped.

17.  The Allotment Return was purportedly signed by the Mother but not Kwai.  It stated that 9,998 shares had been allotted on 16 January 2012 equally to the Mother and Kwai (“the Purported Allotment”).

18.  The set of Board Minutes was purportedly signed by the Mother but not Kwai, purporting to resolve that 9,998 shares be allotted to the Mother and Kwai equally.

19.  The Annual Return was filed by Ready Secretaries & Nominees Ltd (“RSN”) with the Companies Registry.  This document was signed by Kwai.  It purportedly showed that the members of Open Treasure, being Kwai and the Mother, each held 5,000 shares.

20.  Kwai relies on the Declaration of Trust, but disputes the authenticity of the Mother’s signatures on the Return of Allotment and the Board Minutes.  He admits signing the Annual Return but says that it was under a mistake, without knowledge of the Purported Allotment.

21.  Fai admits the Mother’s signature on the Declaration of Trust but disputes its validity.  He relies on the other 3 Key Documents in support of his counterclaim.

B6.  Death of the Mother

22.  The Mother passed away on 20 August 2012, leaving a will dated 16 June 1997, naming Fai as executor.  By the will, she divided her residuary estate, after payment of debts and expenses, into 5 shares. She left 2 shares to Fai, 1 share to Kwai, 1 share to a daughter, and 1 share to the 2 sons of Fai as tenants in common in equal shares.

23.  It is noteworthy that the Mother’s will specifically dealt with her 49,999 shares in UKL but not those of the Company.

24.  Before her death, the Mother was diagnosed with dementia and old stroke. Her memory greatly suffered with progressive short-term memory impairment for 4 to 5 years. Since 2011, her memory clearly worsened. Two months prior to her death, she was diagnosed with cerebral atrophy and lacunar infarct.  Fai concedes that the Mother had low to medium grade dementia.

C.    KWAI’S CASE

25.  Kwai claims that Open Treasure was intended to be his vehicle for holding his property investments and he retained sole control of Open Treasure at all times. The properties that Open Treasure acquired throughout had all been paid for by him, from his salary, rental income, investment return and mortgage loans.

26.  At the time of incorporation, Kwai was under the belief that an incorporated company had to have at least 2 shareholders and 2 directors.  In fact, this was required under Articles 19 of the Memorandum and Articles of association.  He, being unmarried then, thus turned to the Mother.

27.  Except with prior discussion with Kwai, the Mother had no involvement whatsoever in the operation and management of Open Treasure.

28.  It is Kwai’s case that the Declaration of Trust was duly executed by the Mother in front of him and a Mr Lau, a manager of SY Leung & Co (“SYL”) an accounting and auditing firm.  Mr Lau had explained the document to her in Chinese.  She understood before she signed.  This necessarily meant that Open Treasure had been beneficially and wholly owned by Kwai up to January 2012.

29.  Kwai queried how the Mother was able to produce the Allotment Return or Board Minutes without assistance, since the Mother spoke only simple English.  He denied that a board meeting ever took place.

30.  Kwai asserted that the Purported Allotment did not serve any other purpose than to dilute his shareholding in Open Treasure.  He also queried why the Purported Allotment was prepared and filed at the Companies Registry by Open Treasure and not through SYL/RSN which Open Treasure had always retained.

31.  In any case, Kwai said that the Return of Allotment had no validity as it was not approved at Open Treasure’s general meeting, and was filed without Kwai or Open Treasure’s consent or approval.

32.  Kwai further alleged that the Return of Allotment and the Board Minutes were made at the inducement and/or “unlawful interference” of Fai.

33.  With regard to the Annual Return, Kwai claimed to have signed it by mistakenly assuming that its contents truly reflected the original position on issued capital.  Kwai was not aware that the Annual Return stated that the Mother and he each held 5,000 shares in Open Treasure.  He was made aware of his mistaken assumption and the Purported Allotment only 2 months after the Mother had passed away, by which time the Annual Return was already filed with the Companies Registry.

D.   FAI’S CASE

34.  Fai asserted that Open Treasure was the Mother’s company and she had contributed to part of the purchase price of the Shop and/or Flat 908.  She gave 50% of the shares to Kwai out of love and care.  Kwai was then only a junior civil servant.  His arrangement with the Mother was that the Mother would execute a trust document, to be arranged by Kwai, which would state that Kwai’s one share in Open Treasure was held by him on behalf of the Mother.  Kwai could rely on this document in the event of ICAC’s investigation against him for holding shares in a highly valuable company (“the ICAC Story”).

35.  Fai’s position is that the Declaration of Trust was signed by the Mother “under a serious misapprehension that it was to the opposite effect”.  The Declaration of Trust was void and of no effect by reason of (i) non est factum; and/or (ii) serious mistake as to the character and nature of the Declaration of Trust at the time it was executed”.

36.  Fai’s position is that Kwai and the Mother as the only two directors and shareholders of Open Treasure had assented to the Allotment, as evidenced by the Return of Allotment, the Board Minutes and the Annual Return.

E.    ISSUES

37.  To decide whether the 5,000 shares in Open Treasure standing in the name of the Mother at the time of her death belonged beneficially to her estate, the court has to decide the validity of the 4 Key Documents.

F.    THE WITNESSES AND THEIR CREDIBILITY

38.  Kwai, his wife and Fai gave evidence.  In assessing their credibility, the court is entitled to and should consider:

“(1) whether that part of his/her testimony is inherently plausible or implausible;

(2) whether that part of his/her testimony is, in a material way, contradicted by other evidence which is undisputed or indisputable;

(3) where it is shown that a witness has been discredited over one or more matters to which he has testified, this fact is relevant to the assessment of his overall credibility;

(4) whether the witness has any motive for deliberately not giving truthful testimony, for example, where telling the truth may prejudice his interest or a just determination of the litigation may affect his interest.”

Star Glory Investment Ltd v Kai Tuo (HK) Technology Co Ltd (unreported, HCA 3523/2002, 13 August 2005) §12, Chung J

39.  Open Treasure holds 2 properties.  The judgment will have great impact on the value that Kwai or Fai could obtain from the Mother’s estate.  Each therefore may have his motive to lie.

40.  Having heard them, I find that Kwai and Fai each has, on some aspects, given speculative views, which have no factual foundation. I shall demonstrate that below.  Kwai’s wife is generally credible.

41.  I now analyse each of the Key Documents.

G.   THE DECLARATION OF TRUST

G1.  Legal principles

42.  In relation to the Declaration of Trust, the starting point is that a person (in this case, the Mother) who has signed the document is bound by its contents, especially where the document purports to have legal effect. An alleged lack of understanding of the contents, meaning, terms or effect of a document signed by a person of full age and understanding is not a ground in itself to disown the document: see Bank of China (Hong Kong) Ltd v Fung Chin Kan (2002) 5 HKCFAR 515, at §51, per Litton NPJ, who observed that:

“[g]enerally speaking, when a person signs a legal document, he or she is bound by the act of signature: As a matter of general law, it is no defence to say that he or she did not understand the contents of a legal document; that person takes the chance of being bound by its terms, as he or she can take the simple precaution of not signing until its contents have been fully explained and understood.”

43.  Where the person can show (both in the pleadings and in the evidence at trial) that his/her signature has been affected by vitiating factors such as fraud or mistake, it may be liable to be disavowed: Ming Shiu Chung v Ming Shiu Sum (2006) 9 HKCFAR 334, §§84-87, per Ribeiro PJ.

44.  In relation to non est factum, whether the Mother understood all the contents of the document is irrelevant.  Instead, the burden is on Fai to show that the Mother thought she was signing a document of a different nature.  It is not for Kwai to establish that the Mother knew the contents of the document: Kincheng Banking Corp v Kao Yu Kuei [1986] HKC 212, at 214I, per Huggins VP.

G2.  Analyses of the facts

45.  Whilst I accept that Kwai was told by SYL that Mr Lau had left the firm and he did not have the contact details of that witness, it was unfortunate that Kwai had not issued a subpoena to Mr Lau with the assistance of SYL.  Be that as it may, Kwai’s evidence on execution and attestation was logical and uncontradicted.

46.  Fai challenges the validity of the Declaration of Trust on 5 grounds. 

47.  Firstly, Fai relies on the defence of non est factum.  However, the Mother understood simple English.  She was an experienced property investor who had signed multiple legal documents between 1966 and 2012.  It was an agreed fact that the documents she signed were always explained to her in Chinese.  She must have appreciated that the Declaration of Trust was a document with legal effect, especially against the background that the document was attested and subsequently stamped.  Even on Fai’s case, the Mother knew that she was signing a declaration of trust of some sort.  Whether she fully understood the contents was irrelevant.  The defence of non est factum fails.

48.  Secondly, Fai relied on mistake, basing himself on the ICAC Story.  He pointed out that Kwai had purchased 4 properties between 1986 and 1995 using $6,944,000, without reporting his finance to the Government. With respect, the $6,944,000 was not paid in one go and was funded partly by mortgages and rental income, ie Kwai used money to generate money.  Further, Kwai denied the need to report his finance to Government, but Fai has not produced evidence to contradict Kwai.

49.  In any case, the ICAC Story was inherently unbelievable.  If that Story were true, it should have been Kwai, not the Mother, who should execute a declaration of trust.  It was hardly believable that the Mother, being an experienced property investor, would have signed the Declaration of Trust without noticing that its contents were contrary to the spirit of the ICAC Story.   

50.  In addition, Fai’s evidence was not satisfactory in itself.  Fai testified that the Mother first told him in March 1992, around the time of his emigration to the United States, that she had signed “a trust document” (信託紙).  He could not give details of the purpose or beneficiary of the trust.  Allegedly, the Mother told him the “fuller” ICAC Story only 9 years later, in 2011, when Fai executed a declaration of trust over the UKL shares.  This version simply contradicted §3(7) of his witness statement, which had omitted altogether the 2011 “fuller” version.

51.  I reject the defence of ICAC Story and mistake as incredible.

52.  Thirdly, whilst Fai claims to be sensitive about ICAC because the Father had previously been investigated by ICAC, this piece of evidence has never appeared in Fai’s witness statements.

53.  Incidentally, Kwai’s evidence supported Fai’s sensitivity about ICAC.  According to Kwai, the family relationship was harmonious.  Kwai mentioned the trust during casual family talks, whereupon Fai asked for a copy of the Declaration of Trust and Kwai did give him a copy. I accept these to be true.

54.  Further, whilst paragraph §3(7) of his witness statement stated that he could not recall the specific occasion when the ICAC Story was mentioned, Fai remembered in the witness box that there was a specific conversation at Flat 907.  He then recalled that there were many conversations which took place at restaurants, in the car and during shopping with the Mother.  Such variations in locations and occasions undermined his credibility.

55.  Fourthly, Fai pointed to clause 3 in the Declaration of Trust which referred to a “transfer document” “attached” but nothing was attached.  He claimed that the Declaration of Trust could not have been explained to the Mother since no one noticed the attachment missing.

56.  With respect, the missing attachment would not affect the validity of the trust.  Read in context, clause 3 was a standard term which the parties to the Declaration of Trust failed to delete.

57.  By way of comparison, Fai’s own declaration of trust of the Mother’s share in UKL also omitted to include an instrument of transfer despite reference to it in clause 4 of the declaration of trust.

58.  Fifthly, Fai asserted that the Mother gave 50% of the shareholding to Kwai “out of love and concern” for him.  She had also partly funded the purchase price for 2 out of the 3 properties purchased by Open Treasure.  Kwai denied and asserted that all the purchase money came from Kwai’s side.

59.  Fai did not have documentary proof in support of his assertion in the preceding paragraph:

(1)  He admitted under oath that the Mother never said that she gave the one share to Kwai out of love and care but that that was his own speculation.

(2)  He asserted that on 4 July 1988, the Parents mortgaged Kiu Hing Mansion for $150,000 to fund the purchase of the Shop.  This assertion was based on his consideration of land search documents and the close proximity in time between that mortgage and the purchase of the Shop.  Kwai put forth the possibility that the $150,000 was used for the education of his sister, which also lacked documentary proof.  Neither party’s version was more probable than the other.  As the burden of proof of funding rested on Fai, he failed in that burden as his evidence was speculation.

(3)  Fai asserted that Kwai had mortgaged the Tsat Tsz Mui Shop in 1991 but kept the money until he bought Coral Court in 1994.  I find this to be speculative and far-fetched.  There was no logical reason why Kwai should take out a mortgage for no apparent reason, paid interest on it and put the mortgage loan to use only 3 years later.

60.  Kwai’s evidence was that, since 1975, he has had a stable salary, rental and investment income to finance his property acquisitions and to assist him in defraying the other living expenses.  He was able to provide some salary statements during the period when he was a junior and his income was low, and rental agreements in his possession.

61.  In respect of Coral Court:

(a)  The combined monthly rental income of Coral Court, Shop C, and Shop F was between HK$55,000 to HK$68,800, and the monthly mortgage repayment of Shop C, Shop F, Flat 908 and Coral Court was around HK$60,000 per month.

(b)  Kwai testified that he had obtained two loans, HK$450,000 and HK$200,000 respectively, to fund his acquisition of Coral Court. Both Kwai and his wife were unshaken under cross‑examination.

(c)  There was no trace of the Mother contributing to the purchase price of Coral Court.

62.  Kwai’s evidence in respect of his ability to finance the acquisition of all the properties of Open Treasure was unshaken under cross-examination.

63.  Even if the Mother had partly funded Open Treasure’s purchase of properties, that was irrelevant. Even on Fai’s case, the Mother had intended Kwai to receive 50% beneficial interest.  Funding of the purchase was only relevant to credibility (or the lack of it) of Fai’s case – given that the Mother was a partial funder, she would not have intended Kwai to have the full beneficial interest in Open Treasure.

64.  I find Kwai’s version credible and reject Fai’s assertion in paragraph 58.

65.  In summary, all the 5 grounds of Fai in challenge fails.

G3.  The bigger picture

66.  More importantly, one should look at the bigger picture.  For 22 years between 1966 and 1988, the Parents had purchased a total of 5 properties in their joint names or through UKL (see Table 1 above).  And yet the Father was not involved in Open Treasure at all, even though the Mother had allegedly provided some purchase price.

67.  On Fai’s own case, the Mother had offered money to him to purchase a property, which was declined by him.  It would not be surprising for the Mother to buy a property or part of a property through Open Treasure for Kwai.  And yet, the first property bought by Open Treasure was a shop and not a residence for Kwai.

68.  There was also no evidence that the Mother had made a similar gift of properties (whether or not through a company) to her 2 other children.

69.  The rental agreements in relation to Open Treasure’s properties were in Kwai’s possession.  Fai confirmed in the witness box that amongst his Mother’s papers, there was nothing to indicate, eg that Kwai shared rental income with the Mother.

70.  The bigger picture points one way — that Open Treasure was Kwai’s investment vehicle.

G4.  Conclusion on the Declaration of Trust

71.  For the reasons given in Section G, I find on balance of probabilities that Kwai has had 100% beneficial interest in Open Treasure and the Mother was all along his nominee.  I reject the ICAC Story.  I find that the Mother had signed the Declaration of Trust after the contents had been explained to her by Mr Lau.  The contents of the Declaration of Trust reflected the true intention of the Mother and Kwai.  There was no evidence to support Fai’s defences of non est factum and mistake.

H.   THE PURPORTED ALLOTMENT

H1.  Legal principles

72.  The starting position is that equity follows the law.  The burden of showing that the beneficial title in the 50% shareholding of the Mother did not follow her legal title rests on Kwai: Woo Chak Keung Ricky v The Personal Representative of the Estate of Yu Yuet Yuen, [2019] HKCFI 1567, §§2, 4 and 6, DHCJ K Wong.

73.  If Kwai cannot discharge the burden of proof, the claim shall be dismissed.  It matters not whether Fai’s version of events is proved, as the trial judge is not compelled to choose between two rival contentions where the evidence is unsatisfactory: Beijing Haitong Yuzhi Convention Centre Ltd v Lao Yuan Yi, §§43-44, Recorder Linder Chan, SC (as she then was) [2018] HKCFI 1030

74.  The principles on the propriety of allotment of shares are summarised in the judgment of Lam J (as Lam VP then was) in Wong Kam San v Yeung Wing Keung [2007] 2 HKLRD 267 at §76, whose judgment was upheld by the Court of Appeal (CACV 131 & 144 /2007):

(1)  The power to allot shares is a fiduciary power which must be exercised for a proper purpose.

(2)  The Court will have to examine the substantive purpose for which the shares were allotted.

(3)  If the purpose was to destroy an existing majority or to create a new majority which did not previously exist, even if it is not for the self-interest of the directors, the allotment would be unconstitutional and unlawful.

(4)  The aggrieved shareholder has a personal right to apply to set aside the allotment.

H2.  Analyses

75.  Firstly, the Return of Allotment was prepared and filed at the Companies Registry by Open Treasure itself.  Such preparation and filing was contrary to Open Treasure’s established practice of engaging the services of SYL.  The actual secretarial work including the preparation and filing of returns with the Companies Registry had never been performed by Kwai nor the Mother but had been outsourced to RSN which had common staff and office with SYL.  The Mother could not have prepared the Return of Allotment with her limited command of English. 

76.  Secondly, Kwai disputed the signature of the Mother on the Purported Allotment but Fai has not come up with proof of execution. 

77.  Thirdly, as of the date of filing of the Return of Allotment, there was medical evidence showing that the Mother had been suffering from dementia and other debilitating illnesses all through 2012:

(1)  Three days before the Board Minutes were purportedly signed, on 13 January 2012, the Mother was seen by Dr Rex Hung of Grantham Hospital and was found to have history of diabetes mellitus, hypertension, hyperlipidemia, old cerebrovascular accident (CVA).

(2)  On 10 February 2012, Mother was seen by Dr. Vincent Poon of Grantham Hospital and was found to have history of diabetes mellitus, hypertension, hyperlipidemia, old stroke, etc.  The Mother was hospitalized until 18 February 2012.

(3)  On 9 March 2012, the Mother was seen by Dr Chan Wai Ling (Associate Consultant) of Grantham Hospital, with the same findings as in sub-paragraph (2) plus dementia with MMSE 16/30 (ie moderate cognitive impairment).

(4)  On 29 May 2012, the Mother was seen at the geriatric clinic of Tung Wah Eastern Hospital.  Follow up session took place on 19 June 2012.  The Mother was diagnosed to suffer from vascular dementia, cerebral atrophy and lacunar infarct.

(5)  On 5 June 2012, the Mother was examined by the Department of Radiology of Queen Mary Hospital and was found to be suffering from cerebral atrophy and lacunar infarct.

(6)  On 7 July 2012, the Mother was seen by Dr Raymond Fung of Grantham Hospital; same findings as in sub-paragraph (3).

78.  There was also the unchallenged evidence of Kwai and his wife that the Mother suffered from memory impairment.  The Mother had failed to turn off water taps, misplaced objects, called up the wrong persons, forgotten to take medicine, and went to the wrong floor of a restaurant after going to the toilet.  At one instance, the Mother claimed to have taken a stroll with the Father, who had passed away for many years in 1998.  The Mother had also failed to recognize Kwai’s son.

79.  Fourthly, indisputably there was no evidence of a board meeting convened to inform, discuss, or approve the offering to issue the Purported Allotment.  This was implicit in the fact that the Return of Allotment and Board Minutes were signed only by the Mother as a director but not Kwai.  If Kwai had genuinely consented to the allotment, it would have been surprising that he had not signed the Board Minutes and now resiled from his own consent.

80.  Fifthly, there was no evidence to suggest that the purpose of the Purported Allotment was to raise capital or for any commercial purpose of Open Treasure.  The shareholding structure between the Mother and Kwai remain unchanged after the Purported Allotment.  There was no evidence of payment to Open Treasure in respect of the Purported Allotment.

81.  Sixthly, Kwai pleaded that the Return of Allotment was made at the inducement or unlawful interference of Fai.  It was Fai who procured the Mother to sign the Board Minutes and Return of Allotment (if indeed those were her signatures) and so procured her whilst the Mother was mentally incapacitated.  There were no particulars as to what the inducement was, or when and how the interference took place.  Mr Ho SC (who was not the pleader) could not explain the difference between unlawful interference and undue influence.

82.  In my view, the plea of inducement and/or unlawful interference is a half-baked plea of actual undue influence without evidence.  All that Kwai could show was circumstantial evidence.  Even Kwai said that it was his “suspicion” that Fai was the mastermind behind the execution of the Return of Allotment and Board Minutes (§23 of the supplemental witness statement).  The plea is bound to fail.

83.  If I am wrong, the circumstantial evidence is set out in paragraphs 84-86 below.

84.  Fai admitted knowing about the Parents’ wills being of similar contents in 1996/1997.  On 9 December 2011, years after the Father’s death, the Father’s one share of UKL was transferred to the Mother as executrix; and one share of the Mother in UKL was transferred to Fai as her trustee.  At that time, Fai knew that he would get the biggest share (2/5) from the Mother’s estate and his sons would get 1/5.  The Purported Allotment was made a month later.  One possibility, and I do not think that Kwai can put higher than that, was that Fai asked the Mother to do the Purported Allotment so that Fai would get a share of Open Treasure under the Mother’s will.  Kwai’s suggestion was that Fai filed the Return of Allotment and flew back to the USA on the same day.

85.  According to Kwai, Fai could have influenced the Mother as he had been living with her at Flat 907 during 2010 to 2012, although Kwai could only guess that the actual occupation was for maybe 5-6 months. Kwai claimed that in that period, he could not gain entry to Flat 907 with his own keys because Fai had bolted the door.

86.  Further, Kwai claimed that Fai was in financial difficulty after losing his business license and that might be the cause for inducement and/or unlawful interference of the Mother.

87.  I have taken into account the following matters:

(1)  Fai successfully persuaded the Father to change his will to give Kwai 20% of his estate.  If Fai considered it necessary, I cannot see why he would not persuade the Mother to give Fai 20% in Open Treasure since he believed that the Mother owned 50% in Open Treasure.

(2)  Fai was not the only person who could have influenced the Mother.  The sister also lived at Flat 907 whilst Fai was there.

(3)  Fai was certain that he had lived at Flat 907 for 3 weeks each year in 2010 and 2011.  He came back to Hong Kong to visit the Mother and to take care of the sister who was sick and in unstable mood.  He did not bolt the door but the sister did because she did not want to be bothered by Kwai.  On balance, I prefer Fai’s first-hand knowledge than the guesses of Kwai.

(4)  Fai denied that his business license had been revoked and Kwai could not prove otherwise.

(5)  Fai testified that he flew back to USA by a 9 am flight on the day the Return of Allotment was filed with the Companies Registry.  Mr Ho SC submits that there was no objective proof. However, that is precisely the difficulty when Kwai’s pleaded case on inducement and/or unlawful interference has no particulars.

(6)  As rightly pointed out by Fai, the wrongdoer would not have anticipated that the Mother would die so soon after the Purported Allotment.  Kwai would have to file the annual return in 6 months’ time, ie on or before 14 July 2012 and the Return of Allotment would be discovered.  I do not believe that Fai, if he were the wrongdoer, would have run the risk of exposure.

(7)  I cannot exclude the possibility that the Mother, in her mentally incapacitated state, wrongly thought that she could allot shares in Open Treasure and forgot to ask Kwai to sign the necessary documents.

88.  I have rejected other parts of Fai’s defence as speculation.  Even so, I do not consider the circumstantial evidence relied on by Kwai, taken individually or collectively, could lead to an irresistible inference of inducement and/or unlawful interference on Fai’s part.  In the eyes of the law, it was speculation on the part of Kwai.

89.  Based on the first 5 factors set out in paragraphs 75-80, I am not satisfied that the Mother had signed the Return of Allotment or, if she had, that she understood its effect in view of her mental incapacity. 

90.  Moreover, the Return of Allotment was invalid on another ground.  The Purported Allotment had the plain effect of diluting Kwai’s beneficial interest in Open Treasure from 100% to 50.01%, with the concomitant effect of increasing the Mother’s beneficial interest from 0% to 49.99% for no apparent reason. 

91.  In other words, the dominant (if not the only) purpose of the Purported Allotment was to replace the existing majority with a new majority without payment to Open Treasure.  That was clearly unconstitutional and unlawful within the meaning of Wong Kam San.

92.  I hold that the Return of Allotment was invalid and ineffective even if the Mother had signed it.

I.   THE PURPORTED BOARD MINUTES

93.  As the former executor, Fai had searched for documents in the Mother’s home.  He claimed to have found the Board Minutes on 3 July 2015 by chance from one of the unlocked drawers of a dresser table inside the Mother’s room, 11 days prior to the previous trial. 

94.  As confirmed by Fai under cross-examination, the Mother would not have been able to prepare the Board Minutes since it was written in English and the document was a computer print-out.

95.  The set of Board Minutes was found in the same drawer in which the Mother’s will was found.  The document was one which Fai would have been able to recognize easily as board minutes given that he also ran a limited company.  It sounded strange that Fai would have overlooked such a document if had existed at the time of the Mother’s death.  However, the suspicious circumstances under which the set of Board Minutes was found was not in itself sufficient to disturb its authenticity.

96.  Paragraphs 75-89 above concerning the Return of Allotment equally apply to the Board Minutes.  Additionally, I have considered the following factors.

97.  With no actual board meeting and only one director signing the Board Minutes, this meant that the purported board meeting was inquorate as Articles 19, 25 and 27 of the Memorandum and Articles of Association required 2 directors to form a quorum.

98.  Further, a board meeting could not take the place of the general meeting to approve an allotment as a matter of legal principle:

(1)  Section 57B(1) of the Companies Ordinance (Cap 32) (“CO”) (in force on 16 January 2012) provides that the directors of a company should not without the prior approval of the company in a general meeting exercise any power of the company to allot shares. Contravention of section 57B(1) would nullify any purported allotment.

(2)  Section 57C of CO gives the court power to validate an allotment which was invalid by reason of, inter alia, any provision in the Companies Ordinance when it is satisfied that in all the circumstances it is just and equitable so to do.

(3)  Without the approval of a properly held general meeting of the company, the allotment would be invalid irrespective of the validity of the directors’ meeting: Wong Kam San, at §§25 and 62.

99.  There is no documentary evidence to suggest that:

(1)  A notice of convening a general meeting was given; and

(2)  A notice of the resolution to allot shares was given.

100.  I am not satisfied on balance of probabilities that there was a board meeting or that the Board Minutes were signed by the Mother, and if it were, that she understood the terms and effect of that document.

J.   THE ANNUAL RETURN

101.  It is not disputed that Kwai signed the Annual Return.  The legal principles in paragraphs 42-44 apply.  The burden of proof is on him to show that his signing was vitiated by his own mistake. 

102.  Kwai’s explanation is that he signed, mistakenly assuming that the contents of the Annual Return truly reflected the historical position since incorporation.  He was not aware of the existence of the Return of Allotment until a couple of months after the Mother passed away.

103.  As pointed out by Fai, Kwai has failed to call the witness from SYL/RSN to explain the circumstances in which the “mistake” has arisen.  That, however, was not fatal.  Kwai was not laying blame on SYL/RSN.  Afterall, it was his own explanation for the mistake that really mattered.

104.  From Kwai’s perspective, the position under the Declaration of Trust had stood for 24 years.  There was nothing to lead him to suspect that that position had changed in 2012.

105.  Kwai had always relied on the professional services rendered by SYL/RSN.  He did not even notice that SYL/RSN made a wrong entry in Open Treasure’s statutory books which referred to Flat 908 at a time when Flat 908 was not purchased.  Even though the Mother passed away on 20 August 2012, Kwai left it to SYL/RSN to put down the date of cessation as 16 May 2013.  It was credible that Kwai did not in fact check the contents of documents prepared by them, including the Annual Return, before signing.

106.  Further, the Board Minutes also contravened Section 57B(1) CO and were invalid.  This is clearly not an appropriate case for validation under section 57C CO, for the reasons set out in paragraphs 90 and 91 above.

107.  Further, this court has considered whether or not by signing the Annual Return, Kwai was giving his retrospective consent as director and shareholder to the Purported Allotment.

108.  Shareholders’ unanimous consent will bind the company, even on a course governed by statute or the company’s articles.  It operates to waive formalities required for the protection of shareholders.  This is also known as the Duomatic principle: Yifung Developments Ltd v Liu Chi Keung Ricky & ors, HCA 1341/2014 (25 April 2016, unreported) at §62-64, Au-Yeung J.

109.  It has been held that a share option scheme, pursuant to which share options were issued and shares were allotted, can be ratified by the company’s shareholders. Ratification by the shareholders may be implied if they can be regarded as having acquiesced in such an act with knowledge of the circumstances, even in the absence of a formal meeting: Poon Yee Kan Andrea Eleanor v New Paradigm E-Technology Ltd, CACV 325/2004 (6 December 2006, unreported)at §§49 to 50.

110.  Having considered the authorities, I am of the view that the answer to the question posed in paragraph 107 to be no.  Filing of the Annual Return itself was an administrative act of Open Treasure to satisfy statutory requirements.  Kwai could hardly be taken to have ratified any allotment when he had no knowledge of the circumstances of the Purported Allotment.  In any case, there was nothing to show that the fact of Kwai’s “consent” to the Purported Allotment as recorded in the Annual Return was communicated to the Mother or the Company before her death. 

111.  I find that Kwai signed the Annual Return under mistake and such signing was not his retrospective consent to the Purported Allotment.

K.    CONCLUSION

112.  I find the Declaration of Trust to have been executed by the Mother with understanding and consent to the contents.  The Return of Allotment and Board Minutes were not valid as there were unrebutted doubts that the Mother had executed them or, if she had, that she understood them due to her mental incapacity.  In any case, the Purported Allotment did not fulfil the statutory requirements of being approved by a general meeting of Open Treasure and was for the dominant (if not only) and unlawful purpose of diluting Kwai’s shareholding in Open Treasure.  The Annual Return was signed by Kwai under a mistake that it reflected the position on shareholding that had stood for 24 years.  The filing of the Annual Return was an administrative act which did not represent Kwai’s retrospective consent to the Purported Allotment.

113.  I therefore give judgment as follows:

With regard to Kwai:

(1)  That there be a declaration that the share settled by the Declaration of Trust has been held on bare trust by the Mother for Kwai’s benefit;

(2)  The share be vested in Kwai;

(3)  That the Administratrix do execute the transfer of the share to Kwai within 7 days from the date of this judgment;

With regard to Open Treasure:

(4)  That there be a declaration that Open Treasure’s paid up capital is HK$2.00 divided into 2 shares of HK$1.00 each;

(5)  That the Return of the Allotment be set aside;

(6)  That the Annual Return be rectified by striking out the figure of HK$10,000 (being the total amount of issued and paid up capital) and 5,000 (being the number of shares of each registered shareholder) and substituting by the figure of HK$2 (being the total amount of issued and paid up capital) and 1 (being the number of share of each registered shareholder) respectively;

(7)  That the Administratrix be authorized to give notice of the above rectifications to the Companies Registry; and

With regard to Fai:

(8)  The counterclaim be dismissed.

L.   COSTS

114.  Costs should follow the event.  Kwai’s costs, with certificates for 2 counsel, should be borne by the estate up to 6 August 2019 (the day prior to Fai’s joinder as the 2^nd Respondent) and thereafter by Fai alone.

115.  There will be no order as to costs of Open Treasure as Mr Ho SC confirms that it has been represented by the same team of legal representatives as Kwai.

116.  This court has been informed by Mr Ho SC that there was a hearing before M Ng J on 17 September 2019 in HCMP 793/2019 (with the Administratrix as the plaintiff, Fai as D1, Kwai as D2 and the sister as D3).  M Ng J was asked to determine:

(1)  Whether the costs orders made in favour of Kwai in CACV 216/2015 and HCMP 1912/2013 (if any) should be borne by the Mother’s estate or by Fai personally; and

(2)  Whether the costs incurred by Fai in CACV 216/2015 and HCMP 1912/2013, to the extent that those costs are not borne by Fai or Kwai, should be borne by the Mother’s estate, or by Fai personally.

The decision is pending.

117.  Unless there is good cause to the contrary, the costs of preparing the composite witness statements should be borne by the solicitors of Kwai as those composite witness statements just cut off some action titles and some paragraphs without thought as to re-arranging the contents in a logical and comprehensible way.

118.  Costs of the Administratrix for this trial should be borne by Fai as well as a matter of principle, but Fai should not be required to bear the costs of the Administratrix in participating in this trial.  This is because Deputy Judge K Wong had already directed the Administratrix to take a neutral stance.  It was thus up to the Administratrix to seek leave to participate if there was justification and not for the court to direct that her attendance be excused.  Yet, without disrespect, the Administratrix instructed counsel to prepare a lengthy opening submission, the contents of which could be and were covered by Mr Ho SC or would have been raised by this court anyway.

119.  The Administratrix should expect this court to do summary assessment of her personal costs and those of her lawyers on the papers without a hearing.  She should file a costs statement within 28 days. An opposing party should file the grounds of objection within 14 days thereafter. 

120.  I make an order nisi along the lines of paragraphs 114, 115, 117, 118 and 119, but this court has no intention of duplicating the order to be made by M Ng J.

121.  Any party who seeks to vary the costs order nisi may do so within 28 days from the date of handing down of this judgment.

122.  I thank counsel for their assistance.