CHENG KIN KU v. AEROLIGHTS ENTERPRISES LTD.

HCA 11215/97

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 11215 OF 1997

______________

_____________________

J U D G M E N T

_____________________

1. The Defendant was, until 1996, a shareholder in a joint venture in China, formed in 1992 with two Chinese corporations, under the name of Yunnan Jingang (or Jinggang) Packing Materials Co. Ltd. Upon formation of the new company, the Defendant had a 30% shareholding, with the remaining 70% divided as to 40% and 30% between the two mainland partners. The Plaintiff was, until 1994, employed by the Defendant, and had been for some years, first as a broker or agent, then as manager dealing with their business in China, and, following the setting up of the joint venture, as the general manager of its operations in China.

2. When the Plaintiff first went to manage the joint venture, he was there in two capacities: as general manager of the factory, and also representing the interests of the Defendant, his employer. He was paid $20,000 a month, double what he had earned while based in Hong Kong, and he asked for, and expected, more than that once the company was set up and earning a profit. This was denied in evidence by Mr. Ho, a director of the Defendant, but in effect admitted by him in a letter sent to the Legal Aid Department on 13 May 1997 in reply to their letter before action. The precise nature of what the Plaintiff expected I shall return to shortly.

3. It is clear that the Plaintiff worked hard at establishing the company which was being started from scratch. As the Plaintiff said in evidence, when he began it was just farmland. By the time he left in 1994 it was a fully functioning factory manufacturing aluminium packaging, although it had yet to make a profit. This, the Plaintiff says, is not unusual in new ventures such as this, which often take some time before they establish a regular pattern of profit. However, conflicts arose between the Hong Kong staff and the local employees and directors and in July 1994 a management agreement was entered into by which it was sub-contracted to the Defendant on the basis that they guaranteed a profit at a certain level. The arrangement also seems to have involved the removal, together with the rest of the management staff, of the Plaintiff as general manager, who, after handing over to his successor, returned to Hong Kong, where he was put on a salary of $8,000 a month, an amount with which he was so dissatisfied that he tendered his resignation at the beginning of September.

4. Meanwhile the Plaintiff says that he approached Mr. Ho of the Defendant in early July regarding the bonus that he had been promised. He had done all the hard work of setting up the venture and was being removed before he could reap the rewards when it came into profit. He, not unnaturally, considered that he was due something for the considerable contribution that he had made and wanted a share in the venture. Although there was a suggestion from Mr. Ho that the directors were dissatisfied with the Plaintiff's performance, and that he had in some way been responsible for a fire which had occurred at the factory while he was away in Hong Kong, I accept his evidence that his contribution had been positive, and it was internal conflicts rather than his conduct and performance which caused his dismissal. In any event, Mr. Ho offered, and the Plaintiff accepted, 15% of the Defendant's share and an agreement was signed by them both on 15 September 1994, the translation of the relevant part of which reads as follows:

5. Mr. Ho has tried to maintain that the intention of this was to give the Plaintiff only a 15% share of the profits, not the shareholding. However, not only is the wording of the agreement crystal clear as to what is being given, a share in the profits would be meaningless, as it was then making a loss, unless it referred to profits which might be made in the future. To his credit, this line was not pursued seriously by Mr. Tang on behalf of the Defendant.

6. Following this agreement, a written notice was given to the board of directors of the joint venture company, dated the same day, the translation of the relevant part of which reads as follows:

7. The defence to the Plaintiff's claim that he is entitled to the benefit of these shares falls into three parts: first, that the agreement is void for lack of consideration, or that any consideration is past; second that a valid trust has not been created; and third, that the agreement was made under duress, this latter being added by an amendment made with leave during the trial.

8. The first can be dealt with very briefly. The Plaintiff is not suing on the agreement or for a breach of it. He says it is clear from the agreement and the notice that it has already been performed. In the written agreement it states: ...Mr. Cheng Kin Ku holds 15% of all the share..., and in the notice: ...on 7/7/94 our party had given part of our shareholding ...to Mr Cheng Kin Ku, that is, Mr Cheng Kin Ku holds 4.5% in the total investment .... I agree that nothing could be clearer than this, that the Defendant had already given the 15% share to the Plaintiff and was notifying the directors of this fact. He is not now asking the Defendant to carry out its part of the agreement, it has already done so.

9. The second part of the defence is more to the point. The Plaintiff says that following the gift of the shares, as there was no formal transfer procedure, something which I understand is complicated and fraught with difficulty, and the shares remained in the name of the Defendant, they were held in trust for the Plaintiff.

10. The creation of a trust needs no formality nor technical expressions. There are three essential requirements: there must be the intention to create a trust, the beneficiary or beneficiaries of the trust must be ascertained, and the trust property must be definite and capable of being the subject of a trust. The second and third requirements are clearly met here. The Plaintiff is identified as the beneficiary and the shares as the trust property. Mr Tang for the Defendant says, however, there is no intention to create a trust. I have to say that I disagree. The notice to the directors is a clear statement that the Plaintiff beneficially owns the shares, and has the "independent right to exercise the right of the shareholdings." The intention of the writer of that notice, the Defendant's Mr Ho, could not be more precise, that the Plaintiff owns the shares, has the rights under them, and is in the same position as if they had been formally transferred to him. As they had not, the Defendant must be in the position of a trustee, holding them on his behalf.

11. As to the third limb of the defence, the Defendant claims "economic duress or duress" in the making of the agreement and the signing of it and the notice.

12. The evidence of this comes from Mr Ho, who said he thought that the Plaintiff might damage the goodwill of the factory, that he had a good relationship with the technicians there, and he was afraid that something may be done to damage the factory or the equipment. The Plaintiff denies this. He says that he was naturally upset at being removed as general manager, and being paid a reduced salary, which was why he resigned. He may well have grumbled to the staff in Hong Kong, there being no evidence that he then had any contact with the factory in China, but I am not satisfied that it went beyond that. It is also significant that nothing more than an adverse effect on staff morale caused by the Plaintiff complaining is pleaded in the defence as the duress, and in his letter to the Director of Legal Aid of 13 May 1997, no mention was made of any duress, and he repeated that his company had agreed to give him 15% bonus shares to thank him for his past contribution to Jinggang.

13. I am satisfied that the evidence falls far short of showing any duress on the Defendant and this part of the defence also fails.

14. It follows that, as at 15 September 1994, the Plaintiff was the owner of 4.5% of the total shareholding in Yunnan Jinggang Packing Materials Co. Ltd, which was held on his behalf by the Defendant, and it would also follow that the Plaintiff ought to be entitled to a declaration to that effect, and an order that the Defendant formally transfer the shares to him.

15. However, on 18 July 1996, the Defendant sold, or purported to sell, the whole of the 30% shareholding in their name, including the Plaintiff's 4.5%, to a company called Sky Tank International Ltd for RMB5,000,000, as a result of which they appear to have no interest in the joint venture company which they can now transfer. The sale may not have been, and I put it no higher, totally at arms length, as 60% of the shareholding in Sky Tank International is registered in the names of Mr Ho's wife and mother in law, both housewives, the remaining shareholder being a Mr Hon Shing. It may also be significant that 1996 was the first year that the joint venture was going to show a profit, which it has done since.

16. Be that as it may, it is clear that the Defendant held shares which belonged to the Plaintiff and has now transferred them to a third party. The Plaintiff is accordingly deprived of the benefit of those shares, both as to their value and any income which they might have generated. Mr Miu on his behalf submits that he is entitled to a 4.5% share of the profits made since 1994, less accumulated losses, and a declaration that he is entitled to the same percentage of any future profits. There are two principal difficulties with granting such relief. The first is the question of how much his share of the profits would have been. I have been shown accounts which on the face of them seem to indicate substantial profits since 1996, but nothing to show how much of those profits were distributed by way of dividends to the shareholders and how much reinvested in the business. The next is for how long should such an order be made? An indefinite order would neither be sensible nor practical. It would assume that the Plaintiff would have held the shares indefinitely and be almost impossible to enforce, requiring as it would provision of accounts from the joint venture company for the foreseeable future. The Court cannot make an order which is neither definite nor realistically enforceable.

17. Mr Miu has, however, put forward an alternative, that I assess damages at a sum equal to 15% of the amount paid to the Defendant for the shares in 1996. This seems to me to be by far the most effective way of compensating the Plaintiff for the loss of his shares and removes any uncertainty of what he would be entitled to receive under any other order.

18. I accordingly assess and award damages to the Plaintiff in the sum of the Hong Kong dollar equivalent of RMB750,000, being 15% of RMB5million.

19. There will be an order nisi that the Defendant pays the Plaintiff the costs of these proceedings to be taxed, and the Plaintiff's own costs are to be taxed in accordance with Legal Aid Regulations.