MATHAN KANER AND ANOTHER v. JOHN MICHAEL JERWOOD AND OTHERS

ACTION NO. 15052/1983

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. It is sad to see two old friends falling out over money. For nearly twenty years Mr. Kaner and Mr. Jerwood esteemed and trusted one another. In this action the honey has turned to bile.

2. It has to do with some shares which Mr. Jerwood held in trust for Mr. Kaner through a nominee. Mr. Jerwood contends that Mr. Kaner transferred his beneficial interest in the shares to him or his nominee at some date between mid-1977 and late 1981. Mr. Kaner says he never did. The shares have since been sold.

3. The parties line up as follows: Mr. Kaner is the 1st Plaintiff. The 2nd Plaintiff, Jewelry Fashions and Pearls Inc. (Jewelry), is a company to which Mr. Kaner purports to have assigned a half share in his beneficial interest in the trust shares. Mr. Jerwood is 1st Defendant: his nominee, in the name of which the shares were held for a period of time up to their disposal to third parties, is 2nd Defendant; it is White Birch Establishment (WBE). The 3rd Defendant, Pearl Trade Company Limited (Pearl), is one of the third parties to which the shares were eventually sold and is said to have been under Jerwood's control and therefore constructive trustee of Mr. Kaner's beneficial interest. Essentially, however, the action is between Mr. Kaner and Mr. Jerwood (to whom henceforward I shall refer, I hope without discourtesy, as Kaner and Jerwood) it being agreed that for all practical purposes Kaner and Jewelry can be regarded as one, as can Jerwood and WBE, and that Pearl can be ignored.

4. Kaner seeks declarations proclaiming what he says is his continuing interest in the shares or the proceeds of their sale and orders for inquiries to be made and for accounts to be taken and for damages for breach of trust. Again in practical terms he is looking to recover the actual proceeds of sale or, if sold at an undervalue, what they ought to have been, and any dividends declared in the meantime which are referable to his beneficial interest.

5. He concedes that any sums owed by him to Jerwood must be brought into the account.

6. If, contrary to his case, it is found that he agreed to and did transfer his interest to Jerwood he claims that the disposition was void, not having been in writing as required by section 6 subsection (1)(c) of the Law Amendment Reform Consolidation Ordinance, Cap. 23. If not void Kaner claims that any such transaction would be voidable ex debito justitiae unless Jerwood could show that it was an arm's length bargain for Kaner's advantage which Kaner entered into with full knowledge of all the circumstances, which, he says, has not been done.

7. If such a disposition is found to have taken place and can stand in law, nevertheless Kaner claims finally to be entitled to participate in any profits up to the date of alienation.

8. Jerwood's answer to the claims made is quite simply that Kaner assigned any interest he had in the shares in mid-1977; that he has been paid for them; that it was an arm's length open transaction for the mutual benefit of the parties and that if, which is not admitted, it was required to be in writing is sufficiently evidenced by performance. If the assignment was not in 1977 Jerwood says that it was made on some later date to be gathered from all the evidence but in any event not later than December 1981. Lastly, whatever the position in law Kaner is estopped from claiming any interest after the date of the purported assignment.

9. There is a counterclaim by WBE against Kaner for the repayment of a US$50,000 loan which is now admitted.

ISSUES

10. The issues can be stated quite shortly.

11. It seems to me that it is for Mr. Buckloy for the Defendants to satisfy me on a balance of probabilities on the first four issues and if necessary on the fifth. I believe Mr. Buckley accepts that the burden is his.

CONCLUSIONS

12. I shall state my conclusions and then develop the reasons for them by reference to the evidence and the submissions on fact and law.

REASONS

1.             I turn now to the reasons for my decision on the first question and I think a little scene setting is in order. The shares in which the beneficial interest is claimed is a 22½% holding in South Sea Pearl Trading Ltd. (SSPT). That Company started to do business in 1969 with Kaner as its managing director. Jerwood was also a director. Others were a Robert Chow, Tang Kam Sheung and a Juanita Blye. The Company was Jerwood's brainchild. He is a considerable expert on the subject of pearls and had for some years been operating out of Japan selling pearls to wholesalers and retailers in various parts of the world including Hong Kong where some years previously he had come to know Kaner who was also in the business of buying and selling pearls. The idea was that SSPT should be formed with a view to importing pearls from Jerwood or Jerwood's company in Japan and selling them on. Kaner, Tang and Blye were recruited from a previous customer of Jerwoods in Hong Kong to run the company on working capital borrowed from the bank. The early history is not important but by 1975 the shares were held as to 67.5% by White Birch Co. Ltd., a nominee of Jerwoods, as to 22.5% by a Robert and Sammy Chow and as to the remaining 10% by Tang Kam Sheung. The holding by White Birch Company was later transferred to another nominee of Jerwood's, namely WBE. It is common ground that in 1975 White Birch Co. held 22½% of the 67½% of the shares in its name in trust for Kaner. It follows that unless Kaner disposed of his beneficial interest beforetimes WBE also in turn became trustee of the 22½% of the 67½% holding. And since Jerwood controlled both White Birch Co. Ltd. and WBE he was also a trustee of Kaner's interest. Although Kaner had an interest in the shares of SSFT since the company's inception no document recognising the fact came into existence until 7th May 1975 when what has been called a declaration of trust was signed by Jerwood on behalf of White Birch Co. Ltd. It is a measure of the confidence reposed by Kaner in Jerwood that no previous record of the position had been thought necessary and it seems unimportant either in itself or as affecting credibility whether, as he claims, Kaner asked for some record or as Jerwood says he, Jerwood, insisted on providing it. Jerwood told me that it was Kaner's wish for the shares not to be in his name as they might cause him embarrassment with the United States' fiscal authorities when, as intended, he eventually emigrated there. Kaner, whilst admitting his intention to go to the United States disclaims any possible embarrassment and attributes the arrangement to Jerwood's desire to keep SSPT under his control, an ambition in which he, Kaner, acquiesced. It is perhaps not of great significance save as to credibility but of the two I take Kaner's version to be the more probable not only inherently but because I formed the impression from Jerwood that being in control was of importance to him.

13. The declaration of trust was followed by a letter dated 25th June 1975 from Jerwood to Mr. & Mrs. Kaner. I read it in its entirety and, for the time being without comment:

                "Dear Olga and Folia,

 

                The undersigned has already issued a statement confirming he holds on your account shares in SSPT (HK) Ltd; and this company endorses this statement and is responsible additionally to J.M. Jerwood individually.

 

                At any time either J.M. Jerwood or this company agree to assist you, on request, in selling these shares; this assistance means that failing any third person purchasing from you these shares then this company will buy them at bock value on the day of transaction. Book value means assessing the actual worth of SSPT (HK) Ltd. and then valuing your shares proportionately.

 

                You are advised to lodge this letter with a lawyer who should note that in Hong Kong this company's (and J.M. Jerwood's) affairs are handled by Messrs. Johnson, Stokes & Master.

 

 

 

 

 

Sgd.

J.M. Jerwood and also for the Company"

It is written on White Birch Co. Ltd. writing paper and it is White Birch Co. Ltd. to which Mr. Jerwood is referring in the body of the letter.

14. It is common ground that in May or June 1977 Kaner left for San Francisco handing over respensibility for managing the company to someone called Lomax. Lomax in turn handed over to one Irene Woo in about November 1977. Some months later Kaner resigned as a director. Meantime in San Francisco, with the help of an associate, Kaner formed the 2nd Plaintiff, Jewelry, which began to trade with Jerwood in Japan on similar terms to these enjoyed by SSPT. There is no doubt that at about the time of Kaner's departure for San Francisce Jerwood intended to carry through a restructuring of SSPT which would see the Chows and Tang eliminated as shareholders to be replaced by WBE (51%) and ultimately Irene Woo (49%). The documents record the uncontested fact that the Chows sold out their 22½% holding for HK$774,000 and the terms of the agreement are set out in a solicitors letter dated 3rd July 1978. Tang also sold out and the terms of agreement are also recorded. By the end of July 1978 the only registered shareholders were WBE and Irene Woo. Thereafter instead of capitalising its profits SSPT began to declare dividends in not insubstantial amounts. It is also plain that Jerwood was looking around for a purchaser for SSPT. There had been negotiations with others previously but eventually in March 1982 the shares were sold by WBE to Lieberman Waelchli & Co. Ltd. and to Pearl. Although the transfers were effected in March 1982 it is agreed that Jerwood's signatures on the three instruments of transfer were witnessed by Kaner on a visit to Tokyo in December 1981, Jerwood previously having written to Kaner on the 14th October 1981, to tell him of his intention to sell the shares. I read from that letter the relevant portion:

                "Dear Folia,

                This is for your ears only, please keep it COFFIDEFTIAL.

 

                I am making considerable changes in the financing of my business word wide, the sale of shares of SSPT HK is all a part of the major plan. It is on account of this that the extremely slow cash flow from JF is embarrassing for me."

Jerwood told me that it was always understood between himself and Kaner that Kaner would transfer his beneficial interest to Jerwood on leaving SSPT. He said that Kaner agreed to accept in payment the same sum as was eventually agreed with the Chow brothers for their shares.

15. So on that version Kaner agreed to transfer his interest as from the time he ceased to manage SSPT or at the latest the end of that financial year.

16. The agreement depended, of course, on the Chows agreeing a price for their shares but on principle the bargain is not to be attacked merely because it was conditional. Such an express oral agreement is denied by Kaner: he says that the sale of his interest was never discussed. The conflict is stark and not made easier to resolve by the fact that neither of the main witnesses was impressive. On Jerwood's side there is the letter of the 25th June 1975 which seems to contemplate on his part at any rate a sale by Kaner of his interest at some stage though not necessarily, as Jerwood claimed was the intention of the letter, to him. There is also the point that Kaner would not be likely to want to hold onto his interest in this private company after he had left. Most significantly, however, is the fact that Kaner did on 16th May 1977 receive HK$400,000 on account, as he put it, of undistributed profits. Since up to that time all profits had been capitalised it is difficult to reconcile his evidence with anything other than a desire to be paid out at some time. Also I find it difficult to accept Kaner's insistence that he never discussed even the possible sale of his interest. On the other side it seems improbable that Kaner would agree to let his interest go before any price had been agreed. And if the terms were as clear cut as Jerwood contends it seems strange that they were never reduced to writing as with the Chows and Tang except perhaps in the letter dated 5th July 1978 which is to say the least of questionable provenance. Kaner says he never received a copy. Jerwood will not swear that a copy was sent to Kaner. Irene Woo cannot remember seeing it and it bears no chop to show that it was ever received at the office of SSPT. On the evidence I can only hold that Jerwood alone was aware of its contents though it has not been suggested, and I do not find, that it has been manufactured for the purposes of this action. But more impressively than the lack of any written confirmation of the terms of the agreement are the letters emanating from Jerwood couched in terms inconsistent with the earlier, clear and concluded oral agreement for which he contends. In particular his letter to Kaner of 11th June 1979 seems to me to be entirely consistent with there being negotiations leading to a sale but quite inconsistont with a sale having taken place. For one thing it is in the present tense, for another it makes no reference to the alleged bargain and finally it does not disclose a previous crediting of Kaner's account with a sum sufficient to clear it which Jerwood told me was the balance of the consideration and as he had claimed to be the case in the mysterious letter of 5th July 1978. There are other matters which I think on the whole are to be regarded as neutral. Accepting as I do that there was to be some restructuring of the company following Kaner's departure I find nothing surprising in the references to "old" and "now" accounts or to "old" and "new" shareholders which seem to me to be as consistent with Kaner retaining his interest after mid-1977 as not. And I am bound to say that such references are consistent with the assertion that there were at least negotiations for a sale or a transfer of interest taking place. So too do I find the absence of any claim by Kaner after he left in mid-1977 to be neutral. It seems to me that so long as Kaner was receiving substantial financial and other help from Jerwood in support of his San Francisco company there is nothing remarkable about the fact that he was not claiming to participate in any profits at that stage or asking for the balance of any money which might be due to him by reason of his interest in the shares.

17. So whilst I think it probable that there were discussions it is not clear on the evidence once one rejects, as I do, Jerwood's account of an express oral agreement, whether those discussions related to a concluded or to a contemplated bargain. If the matters referred to stood alone I would have felt myself unable to say that there ever was a firm or concluded agreement to sell or that such a sale ever took place. But Kaner's signature appears on the instruments of transfer as witness to that of Jerwood and that signing took place in December 1981. Kaner says that the documents had not been completed when he signed and he did not appreciate that they had anything to do with the transfer of SSPT shares. Jerwood says they were completed at the time and that Kaner knew perfectly well that they were instruments of transfer of SSPT shares. If Jerwood is to be believed then Kaner must have known at that time that the shares in which his interest resided were to be sold. I do not find it an easy question to resolve but bearing in mind that Jerwood had indicated his intention to sell in the letter of the 14th October I think it more likely than not that the documents were completed when Kaner signed as a witness. That being so he must have known that the shares were being sold and I am satisfied that by that time he had agreed to dispose of his beneficial interest to Jerwood.

2.              As to my second conclusion regarding the terms of the agreement I have taken the view that there is clear and acceptable evidence of an offer to buy Kaner's interest in the letter of the 25th June 1975. It was an open offer. There is no evidence which I can accept of any other offer. That the offer was accepted at some time before December 1981 I conclude for reasons previously given. I find that the receipt by Kaner of HK$400,000 was in part payment but that, in any event, it must have been an implied term of the agreement that any such advance or credit, if given, was to be set off against his entitlement. In the absence of agreement to the contrary, and I find no such agreement, Kaner must be entitled to participate in any declared profits up to the date of transfer.

3.              I have found that there was an agreement to transfer the beneficial interest and that the transfer took place no later than December 1981.

18. Rejecting, as I do, the claim for an express oral agreement made prior to Kaner's departure and the burden being on the Defence there is no sufficient evidence to satisfy me that the agreement or transfer took place earlier than December 1981. I therefore reach my third conclusion.

4.              Whether or not the agreement for the transfer of Kaner's beneficial interest stands up in law depends in the first place on whether it is a disposition to which section 6 1(c) of LARCO applies and if so whether the effect of that provision was to make any such agreement void.

19. Section 6 of LARCO has recently been repealed and reproduced elsewhere, but it is common ground that at all material times it was in force. Section 6 1(c) reads as follows:

"A disposition of an equitable interest or trust subsisting at the time of the disposition shall be in writing signed by the person disposing of the same, or by his agent thereunto, lawfully authorised in writing or by will."

The application of the subsection is not seriously contested, this being a disposition of an equitable interest only as opposed to a disposition of the equitable and legal interest in the shares. Is therefore the effect of the use of the word "shall" such as to render the contract void and unenforceable for all purposes even if wholly or partly performed? The English authorities cited to me do not seem to decide the precise point although Britain v. Rossiter⁽¹⁾ is strongly persuasive of the proposition that the doctrine of part performance is confined to the sale of interests in land. But it seems to me that the saving provision of section 8(c) which is to the effect that nothing in section 6 shall affect the operation of the law relating to part performance must be given some meaning and it would be quite wrong to allow one party to escape the consequences of a contract of which he has had the advantage. Here there was part performance referable to the contract in the payment on account of HK$400,000. The bargain, in my judgment, does not fail through lack of writing.

20. But if not void was the contract voidable? It was indeed the purchase of an equitable interest of a beneficiary in trust property by the trustee. But on my findings the beneficiary, Kaner, acquiesced, the transaction was at arm's length, for Kaner's advantage as well as Jerwood's and Kaner was fully informed. In my judgment the agreement found by me was not void, want of formality has been cured by part performance and I have been satisfied that the transaction should be allowed to stand.

5.              If my view of the law under the previous heading be in error then I would hold that by his agreement to sell his interest to Jerwood then by his acquiescing in the sale of the shares and by signing as Jerwood's witness Kaner represented that he consented to the sale of his interest, as a result of which Jerwood has purported to pass an unencumbered title and I hold that Kaner is not to be heard to claim any interest in those shares subsequent to that date.

21. Having stated the conclusions and my reasons for reaching them what consequences should follow. I shall hear Counsel later but I think it must follow that no breach of trust has been proved and that the claim by the 2nd Plaintiff must fail and there must be judgment on the counterclaim. I think it may also be appropriate subject to further argument that there should be a declaration that either WBE and/or the 1st Defendant were trustees of the 1st Plaintiff's interest up to December 1981; that there should be an inquiry as to the value of the shares as at December 1981; that there should be an account of the profits made by SSPT up to December 1981; that there should be an account of any entitlement by the 1st Plaintiff under the previous two heads after giving credit for any sums owed by him to either the 1st or 2nd Defendant and that there should be an order for the payment of any sums found to be due to the 1st Plaintiff.

22. Having heard Counsel further as to the orders which should flow from the judgment which I have just delivered it will follow that the claim of the 2nd Plaintiff against all 3 Defendants will be dismissed with costs. The claim of the 1st Plaintiff against the 3rd Defendant will also be dismissed but I make no order as to costs in relation to that. The claim of the 1st Plaintiff against the 1st and 2nd Defendants will succeed to the following extent and I make the following orders:-

23. With regard to the 1st Plaintiff's claim against the 1st and 2nd Defendants, the 1st Plaintiff will have the costs of the action. There will be judgment for the 2nd Defendant on the counterclaim for US$50,000 against the 1st Plaintiff with costs and interest from the 1st July 1979 at the rate offered from time to time over the period up to judgment by the Hongkong & Shanghai Bank on deposit account.

(1) Q.B.D. Vol. 11 P. 123