CHAN SUK YING (aka CHAN SHOCK YING) v. LEE WAI LING CELINE the personal representatives of THE ESTATE OF PETER LI CHAK MING AND OTHERS

HCA 568/2021

[2023] HKCFI 3085

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 568 OF 2021

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J U D G M E N T

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A.  INTRODUCTION

1.  This is the plaintiff’s appeal against the Order of Master Kent Yee dated 8 March 2023 where the learned Master struck out the Statement of Claim (“SOC”) and ordered that the action against the 1^st and 2^nd defendants (“D1-D2”) be dismissed.  He also set aside an order dated 29 March 2022 granting extension / renewal of the Writ of Summons in this action. 

2.  When the plaintiff’s skeleton arguments for this appeal were filed, Mr Douglas Lam SC (appearing with Mr Arthur Poon) also submitted a “Draft Substituted SOC” and it is said that this draft is placed before the Court as an alternative to the original SOC in a more succinct and simplified form.  The plaintiff also indicated that insofar as necessary, she is prepared to apply to amend the SOC based on the Draft Substituted SOC if the appeal is allowed. Given the position adopted, Mr Richard Khaw SC (appeared with Mr James Ma and Mr John Cheung) appearing for D1-D2 sensibly accepted that the merits of the plaintiff’s case should be assessed on the Draft Substituted SOC for the purpose of this appeal.

B.  BACKGROUND

3.  The background summarised in this section is not controversial.  

4.  The plaintiff was the lawful wife of the late Mr Stephan Li (“Father”) who passed away on 12 October 1993.  She is currently 96 years old. She is someone who received little formal education, having only attended a few years of primary school in Mainland China. She can barely read and write in Chinese and does not understand English at all.

5.  The couple had 5 children, i.e. Teresa, Peter, Paul, Steven and Anna.  Peter passed away in October 2020 and the 1^st defendant (“D1”) is his widow and the personal representative of his estate.

6.  The 2^nd defendant (“D2”) is a company incorporated in Samoa and presently holds 92.9% of the shares in the 3^rd defendant (“the Company”).  These shares were acquired by D2 on 12 March 2018 when Peter and his wife (i.e. D1) together with 2 of their children (Michael and Simon) transferred their respective shareholdings in the Company to D2.

7.  The plaintiff’s case is based on her investment in Sun Hoi Garments Factory (新海製衣廠) (“Garments Factory”). In summary, her pleaded case (as re-formulated in the Draft Substituted SOC) is as follows:

(1)  The Garments Factory was co-founded by her and Father in the 1960s.  Back then it was agreed between them that she (or any of her relatives or friends) would contribute $40,000, and be entitled to 4/10 “shares” in the business, i.e. 40% of the entire essence, substance and substratum of Garments Factory, including its business, machinery, factory, and profits (the “4 Original Shares”) and Father would contribute $60,000 and be entitled to 6/10 “shares” in the business.

(2)  The plaintiff contributed the $40,000 start-up capital through her relative and nominee, one Chan Kwong Tak (“CKT”).

(3)  Father was aware that the HK$40,000 start-up capital was contributed by the plaintiff and at all material times treated her as a co-owner of the Garment Factory.

(4)  In or around 1967 to 1968, the plaintiff said she reached an agreement with CKT and Peter for the 4 Original Shares to be transferred to Peter. The plaintiff said she requested, and Peter agreed, to safeguard the value of her 4 Original Shares for her.

(a)  The plaintiff claims that she reposed the fullest reliance, trust and confidence in Peter, and was dependent on Peter to manage her financial affairs and assets.

(b)  As a result, Peter held the following assets (collectively, the “Trust Assets”) by way of a common intention constructive trust for and on behalf of the plaintiff:

(i)  the plaintiff’s right to call upon CKT to transfer back the 4 Original Shares;

(ii)  the plaintiff’s beneficial interest in the 4 Original Shares; and

(iii)  all traceable proceeds of the 4 Original Shares.

(c)  Since the Garments Factory was set up, there had been no major change to the modus operandi of the business. As a result, the plaintiff had no knowledge or understanding that in 1968, the Company was incorporated, and the entire business of the Garments Factory had in fact been transferred to and/or taken over by the Company.

(d)  Although the plaintiff served as a director of the Company from 1987 onwards and appeared to have participated in numerous board and shareholders’ meetings, she claimed that she was not aware of the incorporation of the Company until late 2020 and did not know why she was initially allotted only 14% of the shareholdings in the Company.

(e)  Peter is and was at all material times a trustee and/or fiduciary of the plaintiff and he is under a duty to protect the Trust Assets and acquire up to 40% of the shareholding interest in the Company for the purpose of holding the same on trust for the plaintiff.

(f)  While new shares were allotted by the Company throughout the years, (i)the plaintiff was not aware of these changes in shareholding, and(ii)on the basis of the corporate documents before the Court, there is no evidence of further cash injection into the Company by any shareholders for the purpose of subscribing to the shares in the Company. 

(g)  As of 11 March 2018, Peter held 52.5% of the shares in the Company, while the plaintiff held 0.4% only. Consistent with Peter’s fiduciary duties owed to the plaintiff, it is her case that Peter held at least 39.6% of his shareholding on trust for her.

(h)  In breach of Peter’s trustee and/or fiduciary duties owed to the plaintiff, on 12 March 2018, he transferred without consideration all his 52.5% shareholding in the Company to D2 without the prior consent, authorisation or approval of the plaintiff, and she is therefore entitled to reliefs against Peter and D2.

8.  When the Company was incorporated on 27 May 1968, the issued share capital of HK$100,000 was divided into 1,000 shares of HK$1.00 each.  The shareholdings under the first allotment were as follows:

Party	Shares	Shareholdings %
Father	240	24%
Peter	200	20%
Paul	120	12%
Plaintiff	140	14%
Teresa	100	10%
Ng Sau Man	100	10%
CKT	100	10%
Total:	1,000	100%

9.  The shareholdings of the Company underwent significant changes over the years and the share capital also increased significantly.  By 27 May 2018, the Company had an issued capital of HK$14,510,000 and the shares were held as follows:

Party	Shares	Shareholdings %
Father	580	0.4%
Plaintiff	580	0.4%
Teresa	9,099	6.3%
D2	134,841	92.9%
Total:	145,100	100%

C.  BASIS FOR STRIKING OUT

10.  In gist, D1-D2 advanced 3 grounds for striking out the plaintiff’s claim.

11.  Firstly, it is said that the plaintiff’s pleaded claim failed to properly identify the original trust property upon which the tracing claim is asserted.  This is because the case in relation to the 4 Original Shares in the Garments Factory depends on the actual terms of the oral agreement between the plaintiff and Father and the relevant terms were not pleaded.  As the trust property has not been identified, the claim is doomed.

12.  Second, it is also submitted that the claim is doomed to fail at the “tracing stage”.  It is argued that the plaintiff’s claim that she can trace from her ownership of the “4 Original Shares” into the Company’s present 40% shareholding is an affront to the fundamental principles of tracing.  The claim is contradicted by the evolution of the share capital and the changes in the shareholdings of the Company and the expansion over the years.  Various matters and documents such as the Return of Allotment in 1968; the fact that the share capital of the Company has expanded by over 150 times; and the transfer of the shares in Peter’s name to D2 have been relied upon to demonstrate that the plaintiff’s claim is unsustainable.

13.  Third, reliance is also placed on the extended period of time taken by the plaintiff to assert her claim.  It is said that there is no reason why the plaintiff should wait until 2021 to commence these proceedings and that there is real prejudice caused by her delay rendering a fair trial impossible. The plaintiff did not take any step to assert her claim during the lifetime of Peter and only commenced the same shortly after his death.  All the key witnesses against whom the main allegations are directed had passed away and this is grossly unfair to D1-D2.  The claim against D1-D2 should therefore be struck out on the basis of laches and the claim against D2 should be dismissed as it is also time-barred.

D.  DISCUSSION

D1.   Applicable Principle

14.  The applicable principles are trite.  To recap, disputed facts should be taken in favour of the party whose pleading is under attack.  Where the legal viability of a cause of action is facts sensitive, an order to strike out should not be made.   If it is shown to be plain and obvious that the disputed assertion was made without evidence or any solid basis, a spurious action may be struck out.  However, unless it can be shown that what is asserted is “incontrovertibly false”, the court will not find that a claim is plainly and obviously unsustainable.  The Court should not lightly engage in debate on affidavit evidence.  

15.  Having considered the helpful submissions from both parties, I am of the view that the appeal ought to be allowed.  The action is sustainable on the basis of the matters pleaded in the Draft Substituted SOC in light of the threshold that the plaintiff has to meet at this stage.

D2.   No basis to assert beneficial interest

16.  First, I agree with the submissions that there is no conceptual difficulty in establishing a trust over the shares in the Garments Factory even though it is an unincorporated business. Further, the matters pleaded in the Draft Substituted SOC are arguably sufficient for the purpose of substantiating a trust over the Trust Assets.

(1)  Considerable submissions were made on the decision of the English Court of Appeal in North v Wilkinson [2018] 4 WLR 41 where the court had to determine, inter alia, whether a trust was created to the effect that Mr North held the assets of his business (a sole proprietorship) on trust for himself and Mr Wilkinson (an investor), by construing inter alia the terms of a written investment agreement giving Mr Wilkinson 5% to 8% of the profits in the business (§§26 and 27).

(2)  The Court found that there was no intention to create a trust over the assets of the business on the facts of that case.  For example, no thought had been given to: (i)how the liabilities of the business shall be dealt with; or (ii) how the business would be managed if a trust were created, including the investors’ extent of participation in the management of the business.  They are clearly matters which negate the intention to create a trust over the assets of the business.

(3)  As submitted by the plaintiff, David Richards LJ (as he then was) made it clear that there is no difficulty in finding a trust of a share over an indivisible asset of a business such as real property, intellectual or book debts of business (§21).  If an intention to create a trust is shown the Court is entitled to find that a business is held by 2 people as equitable tenants in common in the agreed proportions (§§23-24).

(4)  As rightly accepted by Mr Khaw SC, in North v Wilkinson, it was decided that there was a lack of certainty over the intention to create a trust on the basis of the written terms.  On the basis of what is pleaded in the Draft Substituted SOC, I am of the view that there is no such uncertainty here.

(5)  The plaintiff asserted in her 1^st affidavit that Father and she intended the business of the Garments Factory to be jointly managed by them as a family business. I agree that it could (at least) be inferred that the profits and losses would be shared by Father and the plaintiff in the agreed proportion on the basis of how she described their intentions and the operations in the early days.  Her assertion that the Garments Factory was in effect co-owned and operated by them in the agreed proportion is not something I can reject at this stage.

(6)  I also agree that the lack of any written agreement or explicit discussion between Father and the plaintiff on the distribution of net assets of the business does not necessarily negate the intention to create a trust given the relationship between the parties in the context of a family business.

17.  Second, D1-D2 made the following points in contending that the claim is doomed at the tracing stage:

(1)  D1-D2 relied on the fact that initial shares in the Company were, on objective evidence, allotted in return for cash (HK$100 per share) as opposed to any of the business and assets of the unincorporated Garments Factory.  The shares in the Company could not in any way be correlated to the “4 Original Shares” in the factory.  The expansion of the share capital of the Company in the years that followed further defeats the tracing claim completely. 

(2)  Even if the plaintiff’s alleged 40% ownership interest in the Garments Factory was somehow referrable to or identifiable from the Company’s 400 (40%) shares in 1968, the Company’s share capital then expanded from HK$100,000 (with 1,000 issued shares) in 1968 to HK$14,510,000 by 1992 (with 145,100 issued shares). This amounted to an expansion of almost 150 times.  Given the injection of new cash on each allotment, the 400 shares in 1968 cannot be traced into 40% of the Company’s current shareholding.

18.  In response, the plaintiff does not take issue with the aforesaid matters relied upon by D1 and D2 as a matter of fact but pointed to the following matters:

(1)  The circumstantial evidence shows at least an arguable case that the entire business of the Garments Factory has been injected into the corporate structure of the Company, and therefore Father and the plaintiff should have received in exchange proportionate beneficial interests in the shareholding of the Company. 

(2)  Mr Lam SC also pointed to the fact that: (i) the Company had a share capital of $100,000 (1,000 shares at HK$100 each), which is the mirror-image of the original start-up capital of the Garments Factory contributed by Father and the plaintiff; (ii) the Company has had an extremely sizeable gross asset value of over HK$526,000 by the end of 31 December 1968 (i.e. less than 1 year since its incorporation on or around 27 May 1968) when the entirety of the issued share capital was HK$100,000. They are inconsistent with the notion that each member has subscribed to shares and injected capital for the purpose of purchasing the assets, factories and machinery. As a matter of common sense, Mr Lam SC must be correct.

(3)  The plaintiff also relied on the fact that there is at least an arguable case that there has been no cash or capital injection by the initial shareholders into the Company for the allotment of shares when the Company was first incorporated in 1968 pointing to the fact that there is no documentary evidence of payment by members and the Return of Allotment dated 16 September 1968 does not show that each member had in fact paid the subscription price. 

(4)  In any event, in September 1968, Peter and Paul were 21 and 18 years old respectively and had just finished or were studying in the UK and were supported by their parents.  Teresa was only 21 or 22 years old and was helping out at another business known as “Sun Hing”.  Ng Sau Man who is a brother-in-law of the plaintiff was working as the general manager of the Garments Factory.  None of the registered members was therefore in a position to pay any significant amount of cash for the subscription for the shares in the Company.  

(5)  The plaintiff also asserted that there is at least an arguable case that there has been no (or limited) fresh cash injection into the Company by any shareholders.  In the 2 years between December 1968 and December 1970, the Company’s share capital increased by 15 times, and the number of issued shares also increased by 10 times. In that period, the idea that each of the children was able to provide full cash consideration for the subscription given that they have just started working or (in the case of Steven) still in school is difficult to believe.  There is also no evidence of actual payment for the subsequent allotments.

19.  Some of the aforesaid points are of course stronger than others but taken collectively, I am of the view that it is not possible to conclude that the claim is definitely doomed at the tracing stage as contended by D1-D2.

D3.   Laches

20.  As to laches applicable to the claims against D1-D2, it is accepted by Mr Khaw SC that the defence of laches is only applicable to a striking out application in a “plain and obvious” case but he argued that the Court should take into account when the plaintiff knew or ought to have known her alleged interest, whether it is inequitable for the plaintiff to stand by and do nothing over a long period of time, and whether the defendants would suffer serious prejudice if the proceedings were allowed to continue.  In particular, loss of evidence caused by the delay, especially loss of viva voce evidence which would have been given by key witnesses, amounts to significant prejudice against the defendant: The Estate of Yang Sen Hui (Decd) v Pao Yuen Tung Hsing Yieh Co Ltd [1983] HKLR 124 and Chan Sunny v Chen Min Chun [2022] HKCFI 165.

21.  D1-D2 relied on the fact that the alleged beneficial interest first arose in the mid-1960s (i.e. almost 60 years ago).  It is said that at the very latest, the plaintiff ought to have known about the alleged breaches by Peter by 1983 as she signed the share transfer documents which resulted in the transfer of her shares to Peter in that year. Given the authenticity of these documents is not disputed, she must have been aware that she did not have a 40% interest in the Company by then. 

22.  As to prejudice, they pointed to the fact that it is irremediable as both Father and Peter have passed away and they are the only people who have direct knowledge of the alleged trust and are able to give evidence against the plaintiff.  Given the grave accusations against Peter, it is inequitable to allow the plaintiff to press ahead with her claims as a fair trial cannot take place.

23.  Mr Khaw SC also invited me to reject the plaintiff’s assertion that she was not aware of the existence of the Company until after Peter’s death given the numerous documents signed by her over the years.  I have been asked to reject her suggestion that she would “basically sign whatever documents [Peter] asked [her] to sign” and that she was unable to understand the nature of any of the documents given to her given her education level. 

24.  In response, the plaintiff takes the point that laches and acquiescence have no application if the cause of action is subject to a statutory limitation period: see Cheng Hung Kit v Tsoi Chik Sang Lawrence [2017] 4 HKLRD 579 at §§51-57 per DHCJ Kent Yee.  On the basis that the plaintiff’s claims against D1-D2 are subject to section 20(2) of the Limitation Ordinance (Cap. 347) (i.e.,a 6-year limitation period), the issue of laches does not arise at all. This is said to be a complete answer to D1-D2’s defence of laches.  I am persuaded by this argument at this stage.

25.  Whilst there are cases suggesting that the defence of acquiescence remains available where the cause of action is still within the statutory limitation period, D1-D2 accepts that a certain level of knowledge on the part of the plaintiff is required and it is said that it is sufficient for the plaintiff to have been put on suspicion and she should possess the necessary knowledge by 1983 when she signed the share transfer documents.

26.  I am also not persuaded that the plaintiff’s claim should be barred by reason of laches on the facts pleaded.  Whilst there is arguably some prejudice arising from the delay in asserting the plaintiff’s claim, I cannot reject at this stage the plaintiff’s contention that she had left the matter in Peter’s hands over the years and had placed complete reliance on him.  Given her level of education and the family context in this case, her case is not fanciful. I am unable to reject the plaintiff’s case on what she knew or ought to have known on the basis of affidavit evidence.

27.  Similarly, insofar as acquiescence is concerned, the plaintiff’s case is that she was not aware of the transfer of shares in 1983 is relevant and is something that I am not prepared to dismiss at this stage. The idea that she had reposed absolute trust and confidence on Peter to look after her interest is not surprising. She also pointed to the fact that throughout the years the Company has been paying for various expenses for her and there is no reason for her to believe that her beneficial interest in any trust assets was in jeopardy. I am not persuaded that the claim should be struck out on the basis of acquiescence.

D4.   Limitation Defence

28.  As a result of the amendments proposed by the plaintiff in the Draft Substituted SOC, she is only relying on the post-2018 breaches against Peter.  The parties are in agreement that there is no longer any standalone allegations capable of being struck out by reason of any limitation point.  The limitation issue is therefore academic.

D5.   Set aside application

29.  D1-D2’s complaints are that the plaintiff was in clear breach of her duty of full and frank disclosure in applying for the ex parte order to renew the writ.  First, it is said that the plaintiff failed to present any of the limitation defences open to D1-D2.  When the application was made, it is said that the claims were for breaches of trust and fiduciary duties which are not subject to limitation. It is said that this was particularly misleading, especially when all the pre-2018 allegations of breach against D1 are liable to be defeated on limitation grounds.  There is also no reference in any of the evidence filed for the ex parte application to all the potential laches and acquiescence defences available to D1-D2. 

30.  It is also said that given the serious nature of the breaches in question, the court should not exercise the power to re-grant in circumstances where such power should be exercised “sparingly” in any event.

31.  I agree with the plaintiff that the setting aside application is now academic by reason of the Draft Substituted SOC which makes it clear that she is only relying on the breaches that took place after March 2018. The application for extension was therefore made at a time when the writ was still valid and the relevant period of limitation for claims against the defendants does not expire until March 2024.  I am therefore not prepared to set aside the writ. 

E.  Conclusion

32.  Although the appeal is allowed and the application to strike out the SOC and to set aside the ex parte order is dismissed, it is apparent from the aforesaid reasons that the Draft Substituted SOC has an important part to play in the reasoning.  The plaintiff should apply for leave to amend on the basis of the Draft Substituted SOC within 14 days.

33.  However, I cannot see any reason as to why the Draft Substituted SOC cannot be presented at an earlier stage, and the learned Master’s decision was based on a very different set of pleadings.  I therefore make a costs order nisi that the Plaintiff should have the costs of this appeal with certificate for 2 counsel but costs order made in the Court below is upheld, i.e. all the costs incurred in the applications before the learned Master should be paid by the plaintiff to D1-D2.

34.  I thank counsel for their assistance.