RE GLORY RISE LTD

cacv 381/2004

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 381 of 2004

(on appeal from HCCW 568 OF 2002 AND HCA 285 of 2003)

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HCCW 568/2002

BETWEEN

AND

HCA 285/2003

(HEARD TOGETHER)

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J U D G M E N T

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Hon Rogers VP:

1.  I agree with the judgment of Le Pichon JA.

Hon Le Pichon JA:

2.  This is an appeal from a winding up order made by Madam Justice Kwan dated 17 November 2004 on the plaintiff’s petition that the third respondent (“the company”) be wound up and from an order made at the same time dismissing the action brought by the company against the plaintiff.  At the conclusion of the appeal hearing, judgment was reserved which we now give.

3.  The plaintiff issued the petition against the estate of Hui Shui See Willy (“the deceased”), Hui Mi Chi (“Miss Hui”) the sister of the deceased and the company seeking a winding up order under the just and equitable ground alternatively, relief under section 168A of the Companies Ordinance.  In its action against the plaintiff, the company sought vacant possession of the property registered in the name of the company in Sai Kung, the New Territories (“the property”), mesne profits and a declaration that the plaintiff holds 3,500 shares in the company on trust for the estate of the deceased.

Background

4.  The plaintiff was married to a Mr Yik in the mainland in 1992.  A daughter was born the following year and in 1995, the plaintiff came to Hong Kong by herself leaving her daughter in the care of her parents in Shanghai.  She separated from Mr Yik soon after and worked in Hong Kong where she met the deceased in 1996.  They started cohabiting a few months later, initially in premises rented by the plaintiff in Tsimshatsui and in September 1997 they moved to a small flat in the same building purchased in the plaintiff’s name with a mortgage.  By 1997 the plaintiff had been introduced to the deceased’s family.  She accompanied the deceased every weekend to have dinner with the deceased’s family and was present on family celebrations and festivals.

5.  The deceased was a businessman and since about 1980 had been in business together with his sister Miss Hui holding shares in various companies.  Some of these held properties as investments.  One of the companies was called Inter-Trade Agencies Ltd owned by the deceased and his sister in the proportions 80:20.  After he had surgery for cancer in 1993 he relied more on Miss Hui to handle his business affairs and the administration matters of the company.

6.  In July 1997 the deceased and a business partner, a Mr Cheng, acquired the company as a vehicle for investment.  They were the first directors. Mr Cheng held 6000 shares and the deceased the remaining 4000 shares.  In April 1998 the deceased and his sister decided to purchase the property which was then being developed for investment purposes.  Miss Hui signed a memorandum of sale on behalf of the company on 2 April 1998 and on the following day it was resolved inter alia that Mr Cheng should resign as a director and Miss Hui appointed a director with immediate effect.  Mr Cheng agreed to transfer all his shares in the company to the deceased and Miss Hui.  This he did shortly before completion of the purchase of the property on 12 February 1999.  The company obtained a loan of $4 million secured by mortgage from the Bank of America to finance the purchase.  The deceased and Miss Hui also gave a joint and several personal guarantee.  After the transfer the deceased and Miss Hui owned 8000 and 2000 shares respectively in the company which reflected the respective contributions made by them.  Apart from holding the property, the company had no other business.

7.  After paying two mortgage instalments in March and April 1999, the deceased and Miss Hui engaged agents to sell the property at a profit or to let it.  When this produced no results, the deceased decided to reside in the property with the plaintiff instead.  By this time, a divorce petition had been filed by the plaintiff.  This happened sometime in 1998.  Also the plaintiff’s daughter was already living with the plaintiff and the deceased in Hong Kong.  They had gone to Shanghai to fetch her after the plaintiff accepted the deceased’s first marriage proposal made in about February 1999.  The judge found that the plaintiff and the deceased moved into the property sometime after April 1999, that after moving in, the deceased had assumed full responsibility for the mortgage repayments, that he had also come to an arrangement with his sister in June 1999 to acquire her interest in the property and her shareholding in the company by paying back all her contributions towards the purchase.  This happened about the time the decree nisi was granted which was 14 June 1999.  It was also in June 1999 that the plaintiff proposed to the plaintiff a second time.

8.  Documents for the transfer of all but one of her shares were signed in escrow on 25 June 1999.  The one share was to be held in trust for the deceased and Miss Hui was to remain as director so as to oversee and attend to the administrative affairs of the company.  On the same day, i.e. 25 June 1999, the deceased transferred 3500 out of his 8000 shares to the plaintiff, having on 9 June 1999 given instructions to an outside accountant to make arrangements for the transfer.  About 3 months later, in September 1999, the decree nisi was made absolute.

9.  The transfer of Miss Hui’s shares to the plaintiff took place on 9 March 2000 when the deceased repaid Miss Hui her contribution in full.  At the same time, the deceased discharged the mortgage and caused Inter-Trade Agencies Ltd to make a loan of $2.9 million to the company.

10.  The judge accepted the plaintiff’s evidence that the deceased had proposed to her twice, in February and June 1999.  She found that the deceased had represented to the plaintiff that he would buy out Miss Hui’s interest and give the plaintiff a 35% interest in the property so that she and the deceased would jointly own the property which was to be their matrimonial home.  He had told her that this was to provide her with financial security at the time he proposed marriage.  The plaintiff said that if the deceased had not proposed and promised to give her security, she would not have continued their relationship.  The judge made the following findings of fact:

“44.      I find that the deceased had intended to confer 35% beneficial interest in the Property to Miss Luo so as to give her some form of financial security in anticipation of their marriage.

45.       I also find that in transferring the 3,500 shares in the Company to Miss Luo, it must have been the deceased’s intention to assign to her as well 35% of the loans that he had provided or caused to be provided to the Company to fund the purchase price and the outgoing expenses of the Property.  To hold otherwise would defeat the deceased’s intention that she should have a 35% interest in the Property through her shareholding in the Company.  It would have been meaningless merely to give her 35% of the shareholding without a corresponding proportion of the loans to the Company, as she would hardly have derived any real benefit from her shareholding if the proceeds of realisation of the only asset of the Company were to be used wholly or substantially to pay off the existing loans to others.”

11.  It was the plaintiff’s evidence that in reliance on the deceased’s representation, she spent $70,000 to decorate the master bedroom in the property and purchase furnishings and arranged for all her furniture in her property to be moved to the property; paid one mortgage instalment of $40,000 in August 1999 and remained living with the deceased and did not seek employment until after his death.  The judge said this:

“47.      I accept her evidence that she had done the above….  I also accept that she would not have done the above and continued her relationship with the deceased if he had not proposed marriage and offered her tangible financial security.”

12.  After the deceased’s death, the company as the registered and beneficial owner of the property sought to recover vacant possession of the property from the plaintiff.  It also claimed that the 3500 shares were held by the plaintiff on trust for the deceased.

13.  The central issue before the judge was the plaintiff’s right to remain in the property.  The judge was satisfied on the evidence that a common intention constructive trust had been established and held that the fact that the property was held by a company was not a legal impediment because there had been a change of intention as to the purpose of holding the property in June 1999.  Accordingly the judge found in favour of the plaintiff, holding that the company held the property as trustee for her and the deceased in the proportion of their respective shareholdings and that she had a 35% beneficial interest in the property.  As a tenant in common in equity, she was entitled to possession on a non-exclusive basis.  The company’s claims for trespass and mesne profits therefore failed.

14.  On the petition, the judge was satisfied that the plaintiff had made out her primary complaint that after the death of the deceased, the affairs of the company had been managed in a way contrary to her legitimate expectations founded on the deceased’s representations to her that she should have a right to remain in the property without payment of rent although not on an exclusive basis.  As the company and Miss Hui (as the sole personal representative of the deceased’s estate) did not wish to buy out the plaintiff’s interest, the judge made a winding up order.

This appeal

15.  Mr Wong SC who appeared for the respondents sought to challenge the judge’s finding of fact that there had been detrimental reliance on the part of the plaintiff.  He referred to paragraph 68 of the judgment:

“68.      I have accepted Miss Luo’s evidence that in June 1999, the deceased had represented to her he was to buy out Miss Hui’s interest in the Property and that he would give her 35% interest in the Property, this was to provide her with financial security when he proposed marriage to her a second time.  He had further told her that the Property would be owned by them jointly and it was to be their matrimonial home….”

He submitted that that was a finding that the representation was made by the deceased only in June 1999 when he proposed marriage to the plaintiff a second time.

16.  The acts of reliance identified by the judge were (1) expenditure incurred in decorating the master bedroom and purchasing furnishings and making arrangements to move her furniture into the property; (2) the payment of one mortgage instalment of $40,000 in August 1999; and (3) the plaintiff continuing to live with the deceased and not seeking employment until after his death.  Mr Wong submitted that as the representation was not made until June 1999, the matters in (1) which occurred prior to the making of the representation could not have been done in reliance on it.  As to the $40,000, it was said that it was natural for a shareholder to make a shareholder’s loan where the company had no other business or assets other than the property and hence no other source of income.  As to (3) above, it was said that it was nothing more than a continuation of the situation pertaining since their cohabitation in 1996.  Therefore it did not involve any alteration of the plaintiff’s position and was not a proper basis for an inference that had the decreased not made the representation, the plaintiff would have left him.

17.  The plaintiff’s evidence as to (3) appears from the following passage of the transcript:

“Q.       Now at paragraph 15 of the same affirmation… [y]ou said there, “After the deceased had proposed to marry me, he told me that he would give me some shares in Hillview Court as a security for myself and Mon Din, in particular because we were not able to formally marry until my petition for divorce from my former husband was granted.”  Miss Luo, can you tell us a little bit more, if you can recall, what exactly did Mr Hui say to you in relation to that.  What did Mr Hui tell you exactly if you can recall.

A.       He said that, “we were going to get married, but now we were not able to do so.”  He said, “I hope that you will not be worried, I will give you some security for you and your daughter.”  He said that he will not hurt me as my former husband, he will not act as my former husband did.

Q.        Do you recall what did he mean when he said or what did he say when he said he will give you some security protection, “po cheung”?

A.        He said, “For that property was concerned, I will give you some shares to hold.”

Q.        Yes.

A.        He said, originally it was his younger sister who had the shares and he said he would repay the money to her.

Q.        Yes.  Miss Luo, by now we are now in February, around February 1999, you just told us you started as a girlfriend-boyfriend relationship with Mr Hui in around 1996.  So by now your relationship has gone on for about two years or so.  Can I ask you this, had Mr Hui not proposed to marry you and to give you the security as he had just said, what will you do by then?

A.        I will not be with him.

Q.        Why?

A.        I have been hurt because I had the experience with my former husband, so I would not be with him.

Q.        But by then Mr Hui, according to you, had been treating you quite well.  Supporting you, not requiring to work and as well as having bought you the property in Wah Po Building, why would you say that had he not proposed to you, you would have left him still?

A.        Because he, being single, and I, myself, had been hurt by my former husband who took away my money and deserted me, if he was not a man to be with me and was just minded to be playing with me, I would not be with him any longer.

Q.        Yes, you said you would have left him had he not proposed to marry you.  We have also heard you just now that up to that time you had not been working, so if you left him, what would you do?

A.        I will go out to find a job.

(Transcript, pp.17N-18L)

18.  In the light of that evidence, Mr Wong’s challenge can hardly get off the ground.  The judge was amply justified in making the findings in paragraph 47 of the judgment quoted in paragraph 11 above.  I do not see on what basis the respondent’s can seek to impugn those findings. 

19.  The judge’s approach to the question of detrimental reliance can be found in paragraph 71 where she said:

“71.      I have also found that there was reliance of Miss Luo on the deceased’s representations.  I accept her evidence she had altered her position in reliance on the representations. In ascertaining whether there was a “sufficient link” between the representation and the conduct which constitutes the detriment, this must be considered as part of a broad enquiry.  The representations do not have to be the sole inducement for the conduct which constitutes the detriment, it is sufficient that they are an inducement.  Where the conduct is of such a nature that inducement may be inferred, the burden of proof shifts to the other party to establish that the claimant did not rely on the representations (Wayling v. Jones [1995] 2 FLR 1031H to 1032B, per Balcombe LJ).  It is immaterial that detrimental reliance in a situation within the first limb of Lord Bridge’s speech “fell far short of such conduct as would by itself have supported the claim in the absence of an express representation” by the other party that claimant was to have an interest in the property (Lloyds Bank v. Rosset, supra. at 133G).  It was contended on behalf of the Company and Miss Hui that Miss Luo had done what she did “willingly” and so did not act to her detriment.  This is beside the point.  They have not discharged the burden of establishing that Miss Luo had not relied on the deceased’s representations.  I find that Miss Luo had acted to her detriment in the reasonable belief that by so acting she was acquiring a beneficial interest in the Property.”

In my view, that approach was perfectly correct and irreproachable.  The respondents’ challenge on reliance was misplaced and must fail.

20.  The other main point taken by the respondents concerned the applicability of the common intention constructive trust where the property is held by a company.  As I understand it, the submission runs as follows.  Where, as here, the property had been acquired from inception and held by the company beneficially, one of several shareholders has no power through that shareholder’s own conduct to divest the company of its beneficial interest since shareholders have no beneficial interest in the properties held by the company in which they are shareholders.

21.  Mr Wong’s criticism appeared to have been directed at the judge’s finding that “in about June 1999 there was a change of intention as to the purpose of holding the Property”.  It was contended that as Miss Hui remained a holder of 20% of the shares of the company until March 2000, the judge had erred in holding that the deceased’s change of intention in June 1999 had the effect of divesting the company of its beneficial interest in the property.  Mr Wong posed the following questions to which he submitted there was simply no answer:

“(a)      Why would some of the shareholders of the Company, who normally would have no proprietary interest in any property held by the Company, have the requisite power to divest the Company from the Property which it had beneficially held ever since acquisition?

(b)        How could the Deceased have the requisite title or power in about June 1999 to vest in Miss Luo 35% of the beneficial ownership in the Property when he himself had no beneficial ownership or interest in the Property?

(c)        How could a mere change of intention of some of the shareholders of the Company as to the purpose of the Property held by the Company bind the Company or operate to divest the Company of its proprietary interest in the Property?”

22.  It is clear from the judge’s findings that although until sometime in June 1999, the company had held the property beneficially as an investment in the business undertaking, all that changed when the deceased came to an arrangement with Miss Hui to acquire her interest in the company.  That arrangement was perfected or concluded on 9 March 2000.  Once Ms Hui had been bought out, and leaving aside for the moment the transfer of the 3500 shares from the deceased to the plaintiff, the deceased became the sole owner of the company.  It was thus not a question of the deceased “divesting” the company of its interest in the property.  Such a question simply does not arise.  On any view, by 9 March 2000 the plaintiff and the deceased were the only shareholders beneficially interested in the company.  Once the constructive trust had been established, the deceased could not have dealt with his shares in the company in a manner that was inconsistent with that trust.  In my view, the company became trustee of the property holding it in trust for the plaintiff and the deceased at the very latest as from that date.  I do not see any legal impediment to the constructive trust attaching not only to the shares held by the deceased in the company but also to the underlying assets where no person other than the plaintiff and the deceased had any interest in the company.

23.  Mr Wong also submitted that the judge’s directions to the liquidators to have regard to her ruling of a constructive trust would adversely affect “innocent creditors”.  As noted above, when the Bank of America mortgage was redeemed, the deceased caused Inter-Trade Agencies Ltd to advance $2.9 million to the company.  Notwithstanding Mr Wong’s submissions to the contrary, Inter-Trade Agencies was hardly an independent third party.  But unlike the bank, it took no security for its advance.  It was therefore an unsecured creditor and, as such, it is not entitled to complain that it has to take subject to subsequent superior interests, namely, the constructive trust.

24.  For these reasons I would dismiss the appeal.  I would also propose that there be an order nisi for costs in favour of the plaintiff.

Hon Suffiad J:

25.  I agree.

Hon Rogers VP:

26.  There will therefore be an order in terms of paragraph 24 above.