POON TING CHAU v. WONG KWOK CHI AND ANOTHER

CACV 162/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 162 OF 2007

(ON APPEAL FROM HCMP 5314 OF 2002)

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J U D G M E N T

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Hon Cheung JA :

The appeal

1.  This appeal is concerned with the property known as Flat F, 6^th floor, Hanley House, Nos. 68─80, Canton Road, Kowloon (‘the property’).

2.  The plaintiff claimed that he was and still is the beneficial owner of the property and sought, among other things, a declaration to that effect.  His claim was dismissed by Lam J.  He now appeals.

The parties

3.  The plaintiff and the 2^nd defendant are husband and wife.  They were married in 1977 but separated in 2002.  The 1^st defendant is the brother-in-law of the 2^nd defendant having married her sister.

The transactions

4.  The plaintiff purchased the property in 1977.  In 1982, the plaintiff, the 2^nd defendant and their children moved to the property and lived there as their home.

5.  On 29 December 1987, the plaintiff assigned the property to the 2^nd defendant for a consideration of $340,000 (‘the 1^st assignment’).  On 20 July 1988, the 2^nd defendant assigned the property to the 1^st defendant for a consideration of $380,000 (‘the 2^nd assignment’).  On 24 April 2002, the 1^st defendant assigned the property to the 2^nd defendant by way of gift (‘the 3^rd assignment’).

The plaintiff’s case of the assignment

6.  The plaintiff stated that the 1^st and 2^nd assignments were sham transactions.  They were implemented by him as a two stage ‘money-kiting scheme’ pursuant to legal advice.  At that time he owed people money in the sum of $900,000.  Mortgage was obtained under the 1^st and 2^nd assignments and he used the money received from the mortgage to discharge his debts arising from overdraft facilities.

The defendant’s case on the assignments

7.  In respect of the 1^st assignment, the 2^nd defendant stated that at the end of 1987 the plaintiff frequently borrowed money from her in order to cover his investment loss.  She agreed to help him with his financial difficulties.  However in order to provide financial security for the family, she proposed to buy the property at the market price so that the whole family could continue to live there.  The 2^nd defendant paid for the down payment of $80,000 and the balance of the purchase price of $260,000 was financed by a mortgage loan repayable at $3,090 per month.  The plaintiff received the purchase price.  The 2^nd defendant further stated that she actually paid the $80,000 and the monthly mortgage installment. 

8.  In respect of the 2^nd assignment, as the 2^nd defendant was in need of money she wanted to sell the property to the 1^st defendant.  He agreed.  The 1^st defendant paid the deposit $38,000.  Of the balance of the purchase price of $342,000, $150,000 was financed by a mortgage with a monthly repayment of $1,772.  A substantial part of the purchase price of the 2^nd assignment was used to redeem the mortgage under the 1^st assignment.  The 1^st defendant was solely responsible for the mortgage repayment under the 2^nd assignment.

9.  In respect of the 3^rd assignment, the 1^st defendant and his wife wanted to give the property to the 2^nd defendant as a gesture of goodwill as they knew the plaintiff contributed little in household expenses and the property would enable the 2^nd defendant to be financially secure.  The 1^st defendant and his wife originally wanted to give the property to the 2^nd defendant’s daughter but as she was living overseas, it was decided that the property would be assigned to the 2^nd defendant instead.

The plaintiff’s response

10.  The plaintiff claimed that in respect of the 1^st assignment he had repaid $90,000 (being the down payment of $80,000 plus legal expenses of $10,000) to the 2^nd defendant.  He asked the 2^nd defendant to deposit the balance of the proceeds of sale received from the solicitors into the account of the 1^st defendant for the purpose of facilitating stage two of his money-kiting scheme.  He also paid the mortgage installments and had made substantial partial repayment in the sum of $120,000 of the mortgage loan in respect of the 1^st assignment.

11.  The plaintiff further claimed that the money received by the 2^nd defendant from the 2^nd assignment in the sum of $190,000 was transferred to his account.  He was also solely responsible for the mortgage repayments under the 2^nd assignment.

Issue of fact

12.  Whether on the one hand the 1^st and 2^nd assignments were sham transactions and were in fact a ‘two stage money kiting scheme’ or on the other hand proper transactions with considerations fully furnished by the defendants are questions of fact.

The Judge rejected the plaintiff’s case

13.  The plaintiff clearly bears the burden of proof of establishing his case by reference to the evidence adduced.  The Judge after analysing the evidence was clearly not satisfied with the plaintiff’s case and rejected it.  This is what he said :

‘23.  The Plaintiff cannot produce any documentary evidence to support his payment of the $340,000 to the 2^nd Defendant and the repayment of $120,000 to the bank.  These are substantial amounts and they added up to $460,000.  The Plaintiff was in need of cash to finance his debts. Against that background, is it likely that he would use money as he alleged instead of paying off his debts?

24.  In fact, the so-called stage two of his money kiting arrangement did not make any sense. The absurdity of the alleged money kiting scheme can be demonstrated by comparing the respective notional cashflow positions of the Plaintiff at different stages of his scheme. From the 1987 transaction, the Plaintiff got the sale proceeds in the sum of $340,000. After deducting the reimbursement of $90,000 to the 2^nd Defendant, the Plaintiff could have retained $250,000 for his own cashflow.  Instead of that, the Plaintiff’s case was that he had proceeded to what he called stage two to his money kiting scheme. According to him, the $250,000 was used in the name of the 1^st Defendant to pay for the consideration under the 1988 transaction. The purchase price of $380,000 was financed by a mortgage of $150,000 leaving a balance of $230,000 to be paid by cash. The $250,000 was, the Plaintiff said, used up for the payment of that balance and the legal costs for the 1988 transaction. Since the 1987 mortgage had to be discharged, together with legal costs around $20,000, all that the Plaintiff could have got at the end of stage two would be $100,000 ($380,000 - $260,000 - $20,000). In other words, the Plaintiff would get $150,000 less by way of cashflow by going through stage two instead of stopping at stage one. Does that make sense for someone who was in need of cash to meet a claim of $900,000?

25.  The above analysis is done on a notional basis. I am aware that the Plaintiff said he had made a partial mortgage repayment of $120,000 and there were some mortgage instalment payments between December 1987 and July 1988. These matters does not alter the net cashflow benefit that the Plaintiff could derive from his alleged scheme.  The $120,000 and mortgage instalment payments would need to come from the Plaintiff’s own resources and they would not affect the net cashflow position solely arising from the scheme after stage one and that after stage two.’

14.  What is equally important is that the Judge found that the documentary evidence produced by the plaintiff was of such a scanty nature that it did not support his case on the various payments he had allegedly made including his claim on the partial repayment of $120,000 the exact figure of which was only identified for the first time in his oral testimony.

The acceptance of the defendants’ case

15.  Both the defendants had disclosed how they financed the two assignments.  Both of them were gainfully employed and were able to carry out the respective purchase.  The Judge was clearly entitled to accept their evidence as truthful and credible.  The plaintiff has simply not shown why the Judge’s finding of fact was flawed.

Other considerations

16.  The Judge further considered the following issues :

1)  The plaintiff’s belated explanation when giving evidence that the assignments were carried out in order to avoid some possible actions by his brothers.  The Judge having considered the evidence rejected this explanation.  In our view he was entitled to do so.

2)  The 2^nd defendant had executed a Power of Attorney in favour of the plaintiff in which it was stated that the 2^nd defendant acknowledged that he had paid for the purchase and mortgage installments.  The Judge accepted the 2^nd defendant’s explanation that the plaintiff had misrepresented to her about the nature of the document when he asked her to sign it.  Again the plaintiff had not shown why the Judge was wrong to make this finding.

3)  

a.)  The plaintiff was in possession of letters issued by the Rating and Valuation Department and the Inland Revenue Department concerning the valuation of the property after he had disposed of his interest to the 2^nd defendant.

b.)  The Judge found that the letters were not forwarded by the 1^st and 2^nd defendants to the plaintiff in recognition of his continuous beneficial interest in the property.  In fact the Judge found that the 1^st defendant himself had paid for the extra stamp duty assessed by the authorities due to the undervaluation of the 2^nd assignment.  Such a finding clearly refuted the plaintiff’s contention of a continuous beneficial interest.

c.)   The Judge further held that the undervaluation did not support the plaintiff’s contention of a sham transaction.  In our view the Judge was entitled to this view having regard to the overall circumstances of the case.

4)  The continuous occupation by the plaintiff and his family at the property despite the assignment to the 1^st defendant.  There is no substance in the plaintiff’s contention that the Judge had misunderstood the legal concepts of ‘possession’ and ‘occupation’.  The Judge recognized that the property was used by the plaintiff and his family as their home as before but he held that in view of, among other things, the close relation between the 1^st defendant’s family and the 2^nd defendant, it would not be surprising for the 1^st defendant to permit the 2^nd defendant to live there with her family without payment of rent.  I can see no reason why this conclusion is wrong.

The plaintiff fails to show he is a beneficial owner

17.  The principles relating to a trust arising from a voluntary conveyancing are well established but the plaintiff could derive no assistance from these principles unless he could show that the property was assigned to the defendants without consideration.  In my view the plaintiff has not even begun to demonstrate that the Judge’s finding was wrong.  His complaint that the 3^rd assignment which was by way of gift to the 2^nd defendant constituted a slur on the title of the property would only be relevant had he shown that he is still the beneficial owner.  He failed to establish that and there is no need to consider the matter further.

Conclusion

18.  The appeal is dismissed with costs to the 1^st and 2^nd defendants.

Hon Yeung JA :

19.  I agree with the judgment of Cheung JA and have nothing to add.

Hon Yuen JA :

20.  I agree.