CHAN HAK LOK , CLARK v. CHAN HAK KONG, DANNY AND ANOTHER

1986, No. 5332

IN THE HIGH COURT OF JUSTICE

HONG KONG

________

____________

JUDGMENT

___________

1. This is an application for summary judgment under 0.14. The plaintiff seeks the following orders against the 1st defendant:

2. Counsel for the plaintiff invites this Court, as an alternative, to consider imposing conditions if leave to defend were to be granted to the 1st defendant. By way of calculations which I do not propose to repeat, it is suggested by Mr Swaine, counsel for the plaintiff, that a sum in the region of $750,000 would be a proper amount for a payment-in by the 1st defendant for conditional leave to be granted to him.

3. It is to be noted right from the very inception that the. plaintiff confines his 0.14 application for summary judgment to only the Wayonet shares.

4. I hope I shall be able to do full justice to counsel's meticulous analysis of the facts which are complex and involved. They may be conveniently summarised as follows:-

5. In 1984, when the plaintiff returned from Canada to Hong Kong he acquired the Oriental Pearl Airways Ltd. I will hereinafter call it OPA. The intention was to manage Air Hong Kong which enjoys various landing rights through the vehicle of OPA. After a time, the plaintiff, in conjunction with the 1st defendant realised that due to the uncooperative attitude of the minority shareholders in the OPA, it was not quite possible to have the scheme implemented. Other alternatives were then being considered by the plaintiff and the 1st defendant. A shell company, Wayonet Enterprises Limited was taken over by the 1st defendant, I shall call it Wayonet. More or less at the same time, a company, Takasor Investment Limited which I shall call Takasor, was bought by the plaintiff. The issued capital of Takasor was $100,000 and by two increases in capital, the issued capital of Takasor was taken up to $2.2 million. Such investment was allegedly financed by monies solely coming from the plaintiff.

6. After the acquisition of Wayonet, it was felt that the interest in Air Hong Kong, then under the umbrella of Wayonet should best be separated from the plaintiff and the 1st defendant who had become directors and interested in OPA. It was thought advisable for Air Hong Kong to appear to be separately controlled. As a result, it was decided to have the shares of Takasor to be issued in the following ratio: as to 30% thereof to the plaintiff and as to the remaining 70% thereof to the 1st' defendant. Of these 70% shareholdings in Takasor, 50% was to be floated and the final 20% already vested in the 1st defendant as issued capital would eventually go to him as a gift from the plaintiff conditional upon a successful floating of the Takasor shares. In order to present an image of different control by separate personalities in Wayonet, the 1st' defendant had proposed the 2nd defendant as a nominee and the plaintiff one Mr Patrick Chan. The 2nd defendant and Mr Patrick Chan duly took the subscribers' shares, one each. Both the 2nd defendant and Mr Patrick Chan had made a Declaration of Trust and signed a blank instrument of transfer. The declarations of trust were in favour of Takasor.

7. A little earlier in time, there was a Sale Agreement whereby the plaintiff and the 1st defendant sold Wayonet to the 2nd defendant. The 1st defendant had allegedly a priority option to repurchase. It is also necessary for me to mention the Prospectus of Takasor, in which it was explicitly recorded that the shareholders and directors of Wayonet Enterprises Limited in the person of Mr Patrick Chan and the 2nd defendant hold the shares of Wayonet in trust for Takasor. The said Declarations of Trust were also specifically referred to in that Prospectus. A further reference was made to Air Hong Kong which reads:

 

"Thus Air Hong Kong is ultimately owned by Takasor Investment Limited. "

8. To sum up, Wayonet owns Air Hong Kong. Wayonet appears to be separately controlled in the personalities of the 2nd defendant and Mr Patrick Chan, both being subscribers of the company. Takasor owns Wayonet. The relationship between Wayonet and Takasor is evidenced by the Prospectus of Takasor, the Declarations of Trust. The Sale Agreement dated the 25th May 1985 of Wayonet to the 2nd defendant by the plaintiff and the 1st defendant was, at one time, part of the overall arrangement.

9. In a letter from a firm of accountants to the 1st defendant dated 12th August 1986, some proposals were made as to how the shareholdings of Takasor were to be distributed and paid up. One of the proposals was that the transfer of the two subscribers' shares in Wayonet held by the 2nd defendant and Mr Patrick Chan to Takasor be approved. What was sought to be conveyed in that proposal is that the subscribers shares were "held in trust for the 1st defendant". Such indication in the proposal is obviously inconsistent with the arrangements that had been made between the plaintiff and the 1st defendant. With this letter of the accountants of the 12th August 1986 was enclosed a memorandum, what I would describe as the Restructuring Memorandum. This letter came about after one Mr Tsang and one Mr Lai had agreed to take up half of the shares in Takasor for a consideration of $25 million. The shares in Takasor had been arranged to reach the ceiling value of $50 million at $1 per share. Some other proposals in this Restructuring Memorandum were equally inconsistent with the arrangments that had been reached or mutually understood between the plaintiff and the 1st defendant, Suffice it for me to describe them as briefly as I can. Perhaps having in mind the 20% ,conditional gift in Takasor, what was being suggested in the Restructuring Memorandum is that the 1st defendant was to have 19.5 million shares to be paid for by the transfer of the two subscribers' shares of Wayonet, and in addition, the 1st defendant was to have also another 3.3 million shares to be paid for by amounts allegedly owed to him by Takasor. In the result, of the 50 million shares in the increased capital of Takasor, the prospective takers Mr Tsang and Mr Lai would have 25 million shares representing half of the increased capital. The 1st defendant was to take 22.8 million shares with the remaining 2.2 million shares outstanding. Even if these 2.2 million shares were to go wholly to the plaintiff, that would represent no more than 4.4% of the shareholdings in Takasor. One must not overlook, of course, that the 1st defendant had not intimated whether he would forgo his 20% by way of agreed conditional gift; nor was there any clear indication as to how it was proposed to deal with the rest of the original 50% out of the 70% of $2.2 million shareholdings in Takasor that had already been issued to the 1st defendant.

10. About a month or so later, in the course of contesting the intended continuation of the interim injunction, the 1st defendant caused his affirmation to be filed. Suffice it for me to say, not once, but seven times, he asserted that Wayonet had been sold to the 2nd defendant.  The 2nd defendant also filed an affirmation corroborating this assertion of the 1st defendant. It is an extraordinary assertion. The least said about it at this stage would seem to be the better.

11. In his attempt to explain the Prospectus of Takasor, the portions that I have made reference to, it was said by the 1st defendant that it was prepared and disseminated before the sale of Wayonet to the 2nd defendant. I should interpose here by referring to a Letter of Intent which I should have also mentioned in my narration of the basic facts. That is a letter bearing the date of the 30th July 1986, sighed, inter alia, by the 1stdefendant, whereby Mr Tsang and Mr Lai agreed to take up 25 of the 50 million shares in Takasor. It was recited in that Letter of Intent that Takasor held 100% of Wayonet.

12. Before the return date for the intended continuation of the interim injunction, the 2nd defendant, without prejudice and against an indemnity, had come to terms with the plaintiff, under which he acknowledged, in effect, the subscriber's share in his name as being held in trust for the. plaintiff. I need not go into the terms of the Consent Order between the plaintiff and the 2nd defendant. Mr Patrick Chan, I am told, the other subscriber of Wayonet, has always sided with the plaintiff.

13. The plaintiff's contention is, in the main, based on the 1st defendant's acknowledgement of the inaccuracy in his assertion by his subsequent affirmation. It is submitted on behalf of the plaintiff that this is a fundamental lie that goes not only to the very root of the 1st defendant's alleged divested interest in Wayonet but has also shaken the whole foundation of the 1st defendant's indirect claim to the interest of Wayonet through his claimed 70% of Takasor.

14. It is urged upon me that because of the mode of presenting his case, and by reason of the real doubt about his good faith that must be left with the Court, if the plaintiff is not to be granted judgment as to the Wayonet interest in form of the two subscribers' shares against the 1st defendant, at least, the 1st defendant ought not be permitted to go to trial on his defence in relation to these subscribers' shares of Wayonet without conditions.

15. The position is, therefore, that the 1st defendant claims part ownership of Takasor to the extent of 70%. The assets of Takasor are substantially the Wayonet interest in the form of the two subscribers' shares for the time being. Wayonet controls Air Hong Kong. The interest in Air Hong Kong is the real bone of contention. Mr Swaine presses upon me, repeatedly, that a lie told about the real bone of contention would go to the very root of the 1st defendant's 70% claim in Takasor. It is almost inexplicable as to why the 1st defendant could, in the light of his knowledge for arranging the proposed Restructuring Memorandum and his obvious awareness of the other documents involved in these proceedings, such as the Prospectus of Takasor, the Declarations of Trust and the Letter of Intent, have made these assertions of a sale of the entire Wayonet interest to the 2nd defendant. Untruth has been detected in a great many assertions in the 2nd defendant's former claim to the entire Wayonet interest in his and the 1st defendant's first affirmations. The 1st defendant's assertion has been corrected by his second affirmation, but this correction certainly has not removed the sting of such a lie.

16. The 1st defendant, at one time before his 2nd affirmation claimed that the 2nd defendant was the sole beneficial owner of all these Wayonet shares. The 1st defendant's former assertion in respect to the entire Wayonet interest as supported by the 2nd defendant, was in direct competition with the claim of Takasor. Time and again, Mr Swaine has emphasized that since Takasor has no other substantial assets than the Wayonet interest, the 1st defendant's fabrication in his former affirmation as to these subscribers' shares in Wayonet is a fundamental lie which would not have been made unless he, the 1st defendant, had himself entertained no confidence in or serious doubts as to his own claim of 70% part-ownership of Takasor. In another words, there would have been no incentive for the 1st defendant so to lie if he had had any genuine claim in the 70% of Takasor. Attractive as it may sound and appear to be, the difficulty in this analysis of counsel lies in the fact that the 1st defendant claims only 70%, part-ownership in Takasor. If the 1st defendant had been minded to unjustifiably relieve the plaintiff of the other 30% in Takasor, temptation would have existed for the 1st defendant fabricating a claim to the whole substantial' asset of Takasor in the two subscribers' shares of Wayonet.

17. Mr Swaine implores me not to indulge in speculation. Counsel suggests that it would not be profitable to ascribe any other possible motivation to the 1st defendant in his fundamental lie. The Court, so counsel maintains, would be too charitable and generous so to provide a possible motive for the basic fundamental lie said to have been told by the 1st defendant. In the consideration of the alleged sale of the entire Wayonet interest to the 2nd defendant, one cannot really impute any personal lack of confidence in the 1st defendant's claimed 70% part-ownership in Takasor unless there had been no other conceivable motive compelling the 1st defendant to tell an untruth as he apparently did. Moreover, although the 1st defendant's alleged sale to the 2nd defendant of the entire interest in Wayonet does not really bear close examination, the two claims in this case have to be carefully examined. One is a claim to part-ownership of Takasor and another is a claim to the same interest now forming or being acknowledged as the substantial assets of the same company, Takasor. To me these seem to be claims of a dissimilar nature and not altogether inseparable. Allegations in support of one would not or would not necessarily relate to or associate with the allegations in support of the other. Motive for making allegations in one may be even more remote from that for making allegations in the other.

18. The plaintiff seeks summary judgment against the 1st defendant in respect to the legal or beneficial interest in the Wayonet subscribers' shares. A concession has been made as to legal interest of the two subscribers' shares, and there is no longer any dispute. A declaration need not be made as to such legal interest. The remaining prayer in respect to the beneficial interest of the two subscribers' shares in Wayonet in prayer 1 of the plaintiff's 0.14 summons is the only outstanding matter for my consideration. Counsel for the plaintiff has conceded that in essence, a prime facie defence has been established by the 1st defendant in respect to his claim to the 70% part-ownership of Takasor. Were I to accede to the declaration in respect to the beneficial interest in the two subscribers' shares in Wayonet, it would present much difficulty if the Takasor controversy went to trial and the 1st defendant succeeded in his 70% claim. This is, I hope, a sufficiently clear illustration of why there should be no final determination or resolution of the disputes between the plaintiff and the 1st defendant on the two Wayonet subscribers' shares, even if they represent the substantial assets of Takasor, before the ultimate determination of the 1st defendant's 70% part-ownership claim to the same Takasor Company. Mala fide inferred or imputed from the 1st defendant's alledged falsity in his former assertion on another matter would not, ipso facto, destroy his prima facie case in respect to Takasor. What is being suggested here is, that the 1st defendant's bad faith in his fabricated claim to the entire Wayonet interest shows, or must have shown that there is something suspicious in the mode of presenting his case, or, this Court must be left with a real doubt of the 1st defendant's good faith in his 70% claim to the proprietary interest in Takasor. Having conceded that the 1st defendant has a prima facie defence or claim to 70% of Takasor, it is inconceivable that the plaintiff by himself, or through his solicitors, can believe that there is no defence to the plaintiff's claim in respect to the Wayonet interest. It is also inconceivable that the plaintiff by himself or through his solicitors, can be in a position to verify that the 1st defendant has no defence to the subscribers' shares in Wayonet.

19. I accept Mr Wong's contention that 0.14 is not open to the plaintiff. I have endeavoured to illustrate that a declaration made in respect to the beneficial interest of the subscribers' shares in Wayonet as prayed for in paragraph 1 of the plaintiff's 0,14 summons would cause untold difficulty if the Takasor dispute were to go to trial with the 1st defendant ultimately succeeding.

20. In the circumstances, attractive as Mr Swaine's arguments appear to be, I am constrained in the end to hold that the plaintiff is not entitled to the prayers in his 0.14 summons. Less, would I feel justified in imposing a condition on the 1st defendant defending the plaintiff's claim against him in these proceedings.

21. Mr Wong is confident' enough not to address me on the quantum suggested by Mr Swaine. If I held in favour of Mr Swaine, subject to the 1st defendant's ability to pay, a matter not ventilated before me, I would be prepared to order the 1st defendant to pay into Court, not the entire loss of interests as calculated by Mr Swaine but half of it by reason of the other speculative and unforeseen elements. That would be $375,000. But in the circumstances, I would dismiss the plaintiff's 0.14 summons and subject to what counsel have to say, with costs to the 1st defendant.

22. I said I would reduce my decision into writing with full reasons, which I now do. I stood corrected by counsel as to the confusion caused by the use of "1st and/or 2nd defendants", which has now been clarified.