LEE JONG RONG AND ANOTHER v. GREAT CHOICE CONSULTANTS LTD AND OTHERS

HCA 789/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 789 OF 2014

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J U D G M E N T

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1.  This is an appeal against Master K Lo’s Order dated 19 February 2016 dismissing a summons issued on 2 July 2014 by the 1^st defendant (“D1”) and the 2^nd defendant (“D2”) for, inter alia,:-

(i) the striking out of the claims by the 1^st plaintiff (“P1”) and 2^nd plaintiff (“P2”) against D2 on the grounds that it discloses no reasonable cause of action; that it is scandalous frivolous or vexatious; or that it is otherwise an abuse of the process of the Court;

(ii) D2 to cease to be a party to this action;

(iii) the striking out of the claims by P1 and P2 against D1 on the grounds that it is scandalous frivolous or vexatious; or that it is otherwise an abuse of the process of the Court; and

(iv) alternative to (iii), Sections V to VI (paragraphs 41 to 83) of the Statement of Claim to be struck out on the grounds that they tend to prejudice, embarrass or delay the fair trial of the action.

2.  The 3^rd to 6^th defendants (“D3”, “D4”, “D5” and “D6” respectively) also issued a summons on 23 March 2016, which was amended on 18 July 2016 for the striking out of paragraphs 41 to 83 and paragraphs 90, 92, 94, 96, 104 and 107 of the Statement of Claim on the grounds that they disclose no reasonable cause of action and/or that they tend to prejudice, embarrass or delay the fair trial of the action.  This application of the D3 to D6 has been ordered to be heard together with this appeal.

Background

3.  According to the Statement of Claim:-

(1) In about 1993, D3, D4, D6 and on Mr Lin Chi Yuan (“Lin”) were employees of a Taiwanese company (“TMC”).  Whereas P1, P2 and D5 were employees of an associated company of TMC in Hong Kong abbreviated as Dragonwind.

(2) In or about May 1994, P1 and P2 left Dragonwind to start their own business.  Then P1, P2, D3 and D5 agreed to start and run a new business (“the Agreement”).  The terms of the Agreement were set out in paragraph 8 of the Statement of Claim.  In particular, the Agreement involved the setting up of a company to run the business.  In short, it was agreed that all 4 persons would participate equally in the management and affairs of the company.

(3) On 23 June 1994, P1 and P2 incorporated D2 pursuant to the Agreement.  The then shareholdings were:-

Shareholder	Number of shares
P1	1,500
P2	500

(4) At that time, D3 and D5 were not allotted any share because they did not want their employers in Taiwan to know about it.

4.  Pausing for a moment, based on what were pleaded by the plaintiffs so far, it would seem that the arrangement involved P1 and P2 holding the 2,000 issued shares in D2 on trust for themselves and D3 D5 equally.  This was however curiously not so pleaded.  Instead, paragraph 12 of the Statement of Claim merely pleaded that D2 had since been operated as a quasi‑partnership with P1, P2, D3 and D5 as the 4 partners.

5.  I will continue to set out the background as pleaded in the Statement of Claim:-

(1) Afterwards, D4, D6, Lin and one Mr Lee Yung Hsiang (“Lee”) were persuaded to join in the business.  It was agreed by all that they shall have the same rights, powers and privileges under the Agreement.  In other words, from 4 quasi‑partners, D2 became operated by 8 quasi‑partners.  However, it seems that there was no change to the shareholding structure of D2.  In other words, again it would seem that necessarily, P1 and P2 would have been holding the 2,000 shares on trust for the benefit of all 8 persons.  This however was not so pleaded in the Statement of Claim.

(2) Then it was pleaded in paragraph 19 of the Statement of Claim that “for the purpose of better defining their respective interests under the Agreement after the admission of D4, D6, Lin and Lee” and “for hiding their identities from the public as much as possible so as to avoid any potential conflicts with their previous employers”, the 8 persons further agreed that:-

(i) a BVI company should be acquired as the holding company of D2 whilst D2 would remain the vehicle carrying out the business; and

(ii) further companies would be incorporated or acquired for the purpose of the business if so required and agreed by all; and

(iii) the Agreement should apply to all such companies.

(3) The 8 persons were pleaded to have contributed capital into D2 as follows:-

P1	HK$400,000
P2	HK$200,000
D3	HK$400,000
D4	HK$200,000
D5	HK$200,000
D6	HK$100,000
Lin	HK$200,000
Lee	HK$300,000
	HK$2 million

(4)    D1, a BVI company, was acquired as the “holding company”.  On 9 February 1995, 19,999 shares of D1 were allotted to the 8 persons as follows:-

Shareholder	Number of shares
P1	4,000
P2	1,999
D3	4,000
D4	2,000
D5	2,000
D6	1,000
Lin	2,000
Lee	3,000
	19,999

(5) The number of shares allotted seemed to correspond to the monetary contributed by the 8 persons into D2.  It was not mentioned in either the Statement of Claim or the affirmations filed as to why P2 was only allotted 1,999 shares of D1 on 9 February 1995.  This discrepancy of 1 share was apparently cured in December 1996 as mentioned herein below.

(6) Then on 3 March 1995, shareholdings in D2 were restructured.  The 1,500 shares originally held by P1 were transferred to D1.  Of the 500 shares originally held by P2, 499 shares were transferred to D1[1]. As a result, D1 became holder of 1,999 shares of D2.  P2 remained as a shareholder of 1 share in D2.  However, P2 was merely holding that one share in D2 on trust for D1 as evidenced by a subsequent Declaration of Trust[2].  P2 also signed an undated Instrument of transfer of that one share in favour of D1[3].

(7) It would therefore seem that D1 was indeed structured to be the “holding company” of D2 as anticipated by the agreement of all 8 persons as pleaded in paragraph 19 of the Statement of Claim.  Yet, the pleader stated in paragraphs 21 and 26 that “D1 held shares of D2 on trust for the 8 persons”.  This plea constitutes a major ground for the striking out application by D1 and D2 as will be explained later.

(8) The plaintiffs then pleaded that since then, the 8 persons[4]:-

(i) had been receiving notices and attending shareholders’ meeting of D2 in the capacity as D2’s de facto and/or beneficial shareholders;

(ii) had been attending the directors’ meetings of D2 in the capacity of its de facto directors; and

(iii) had been receiving dividends directly from D2 albeit through D5’s personal bank account[5].

(9) Prior to 6 March 1995, the authorized share capital of D2 was HK$1,000,000 and the issued capital was HK$200,000, represented by the 2,000 issued shares of HK$100 per share.  Then on 6 March 1995, at an EGM, the 2 shareholders of D2 (namely D1 and P2) resolved that the authorized share capital of D2 be increased to HK$2,000,000[6].  The board of D2 also authorized the allotment of 18,000 shares of HK$100 each to D1[7].  In the balance sheet of D2 for the financial year ending 31 December 1995[8], it was stated that the share capital of D2 was HK$2,000,000.

(10) The pleaded case of the plaintiffs is that D1 continued to hold these additional 18,000 shares of and in D2 on trust for the 8 persons.

(11) The plaintiffs then pleaded[9] that on or about 12 December 1996, Lee and Lin decided to withdraw from the business.  Their beneficial interests in the shares of D2 were bought out by the remaining 6 persons by way of corresponding adjustment of their respective dividends distribution by D2.  Yet from the contemporaneous documents, the transactions were more complicated than that:-

(a) On 12 December 1996, Lee’s 3,000 shares in D1 were transferred to Lin[10].  In other words, thereafter, only 7 persons were left in the business.

(b) On 12 December 1996, D2 also held an EGM during which it was resolved that the authorized capital be increased from HK$2 million to HK$3 million by the creation of 10,000 new shares at HK$100 each[11].  It was also resolved by the board that these 10,000 shares be allotted to D1[12].

(c) The consideration that D1 had to pay to D2 for this allotment of 10,000 shares (namely HK$1 million) was funded by a corresponding allotment of new shares by D1 to the remaining 7 persons:-

Shareholder of D1	No of shares	Amount (HK$)
P1	1,100	110,000
P2	1,676	167,600
D3	1,100	110,000
D4	1,675	167,500
D5	1,675	167,500
D6	2,675	267,500
Lin	100	10,000
	10,001	1,000,100

This arrangement was evidenced by a Consent Resolution of D1 signed by all the 7 remaining persons[13].

(d)     The extra one share of D1 allotted to P2 was related to the fact that P2 had hitherto been holding one share in D2.  At the same time as the allotment of this one more share in D1 to P2, P2 also formally transferred her one share in D2 to D1.  This was evidenced by a Bought/Sold Note dated 12 December 1996[14].  The result was that as from 12 December 1996, P2 became holder of 2,000 shares in D1.  D1 also became holder of all 30,000 shares of and in D2.

(12)   Then in or about January 1998, Lin wanted to leave the business.  Lin then sold his total 5,100 shares in D1 to P2.  This was evidenced by an Instrument of Transfer dated 2 January 1998[15].  Thereafter, there were only 6 persons in the business.

(13)   There was yet another change of shareholdings in D1 that took place in January 1999.  It can be seen from documents[16] that on 27 January 1999, P2 transferred a total of 4,275 shares in D2 to the following persons:-

Person	No of shares transferred
P1	900
D3	900
D4	825
D5	825
D6	825
	4,275

(14)   After this exercise, the shareholdings in D1 remain thereafter as follows:-

Shareholder	No of shares
P1	6,000
P2	4,500
D3	6,000
D4	4,500
D5	4,500
D6	4,500
	30,000[17]

Structure of the Statement of Claim

6.  Part I of the Statement of Claim described the parties.  Part II described the basis of the incorporation of D2.  It pleaded the Agreement and the extension of it to all 8 persons.  Part III dealt with implement of the Agreement and the incorporation of D1 as the “holding company”.  Part IV then dealt with the successive changes of shareholdings in D1 and D2 between 1995 and 1996.  The Statement of Claim did not refer to the changes that were subsequent to 12 December 1996.  The legal conclusion drawn from Parts I to IV was pleaded in paragraph 37 which stated that:-

“37. By reason of the matters pleaded herein before:-

37.1 D1 held and continues to hold shares of D2 on trust for P1, P2, D3 to D6;

37.2 Further or in the alternative, D1 is estopped from denying the beneficial interest of P1, P2, D3 to D6 in shares of D2 held by it; and

37.3 The extent of beneficial interest of each of P1, P2, D3 to D6 were respectively: 20%; 15%; 20%; 15%; 15% and 15%.”

7.  I then move to the Prayers to see what claims were made by P1 and P2 against the defendants. Prayer 1 seeks a declaration that P1 is the beneficial owner of 6,000 shares of and in D2 which were being held on trust by D1 for P1. This claim arose out of the legal conclusion drawn from Parts I to IV. Prayer 2 seeks a declaration that P2 is the beneficial owner of 4,500 shares of and in D2 which were being held on trust by D1 for P2. This claim arose equally out of the legal conclusion drawn from Parts I to IV.  Prayers 3 and 4 seek consequential orders that D3 to D6 do cause D1 to transfer the aforesaid 6,000 and 4,500 shares in D2 to P1 and P2 respectively.  Prayer 5 is also a consequential order that D3 to D6 do cause the aforesaid transfer of shares to be duly registered by D2 within 7 days of such transfer.  It can be seen that Prayers 1 to 5 arose entirely out of the matters pleaded in Parts I to IV.

8.  Part V (paragraphs 41 to 57) of the Statement of Claim bears the heading “Incorporation of Further Companies”.  It is then sub‑divided into sub‑parts A to C, each dealing with a specific company namely: Top Trend Investment Limited; Floral Group Limited; and Senka Limited.

9.  Part VI (paragraphs 58 to 83) of the Statement of Claim was headed “Misconduct and Mismanagement of the Business”.  Sub‑part A (paragraphs 58 to 66) alleged that D5 misrepresented others into believing that D2 had purchased a Ningbo Property in the PRC and an Office for the business.  In the end, it was pleaded that despite D2 not being the owner of the Ningbo Property and the Office, they were fraudulently misrepresented as assets of D2 in the financial statements of D2.  Sub‑part B (paragraphs 67 to 69) alleged that D3 and D5 caused an unauthorized payment out of D2 and misappropriated it.  At the end, it pleaded that the misappropriated fund was repaid to D2.  Sub‑part C (paragraphs 70 to 72) alleged D5 of misappropriating moneys of D2.  Sub‑part D (paragraphs 73 to 75) alleged that D5 rented his property to D2 which was used as staff quarter for Mr Hansen, a manager of D2.  D5 is said to have failed to disclose his personal interest.  Sub‑part E (paragraphs 76 to 78) alleged that D5 failed to disclose that he used the office address D2 as the registered address of his own company named Supreme Ace Limited.  Sub‑part F (paragraph 79) alleged that D5 used D2’s staff members to serve Supreme Ace Limited.  Sub‑part G alleged that D5 used D2 to employ his sister as a part‑time employee.  As a summary of Part VI, it was pleaded in paragraph 83 that all the matters mentioned amount to:-

(i) fraud by D5 on P1, P2, D3, D4 and D6;

(ii) fraud and breach of fiduciary duty by D5 towards D1 and D2;

(iii) mismanagement of the business and D2 by D5; and

(iv) unfairly prejudicial to the business and hence to D1, D2 and their shareholders.

10.  It can be seen that none of the matters pleaded in Parts V and VI are relevant to Prayers 1 to 5.  The paragraphs under Part V do not result in any cause of action raised against anyone.  As for Part VI, in so far as it makes allegations of wrongdoing on the part of D5, they are again irrelevant to Prayers 1 to 5.  Neither has it been pleaded that P1 or P2 suffered any loss and damage out of those alleged misconducts on the part of D5.  There is also a total absence of allegation of wrongdoing against D1, D2, D3, D4 and D6.

11.  Part VII (paragraphs 84 to 86) pleaded that there was a meeting in March 2013 in which it was resolved that all companies in the Group be wound up voluntarily (“the Winding Up Agreement”).  Part VIII (paragraphs 87 & 88) pleaded a Memorandum of Understanding (“the MOU”) entered into by all 6 persons relating to details of the winding up arrangement.  Part IX (paragraphs 89 to 117) effectively pleaded that P1 and P2 had been wrongly and purportedly removed as directors of D2.  In particular, paragraph 113 pleaded that such purported removals were in breach of the Agreement.  Paragraph 114 then alleged that by reason of the matters pleaded in Part IX, D3 to D6 were in breach of the Agreement and/or the Wining Up Agreement. Paragraph 115 pleaded that but for the wrongful/purported removals, P1 and P2 would have continued to earn remunerations as directors of D2 until D2 is dissolved.  Paragraph 116 then pleaded that P1 and P2 suffered and continue to suffer loss and damage.  This is the first and only occasion in which P1 and P2 are pleaded to have suffered loss and damage.

12.  It can be seen that none of the matters pleaded in Parts VII to IX are relevant to Prayers 1 to 5.

13.  I now move to Prayer 6 which is simply described as “damages”.  It purports to be a prayer sought by P1 and P2 against all defendants.  However, the only possible claim for damages would be pursuant to paragraphs 113 to 116 of Part IX as explained above.  This had in fact been confirmed by the plaintiffs when they answered the Request for Further and Better Particulars of the Statement of Claim filed by D3 to D6.[18]  In any event, such claim for damages could not be against D1 and D2.  Only D3 to D6 were alleged to have been in breach of the Agreement and/or the Winding Up Agreement.

14.  Then finally, Prayer 7 is for “interest” and Prayer 8 is for “such further and other relief as the Court thinks fit”.  They do not add anything to the above analysis.

Relevant procedural history

15.  The Writ in this action was filed on 7 May 2014.  Prior to the institution of this action, the parties had already been engaged in litigations.  On 11 November 2013, P2 issued a Petition for the winding up of D2 and asked for relief under the then section 168A of the Companies Ordinance (Cap 32) (“HCCW 317”). On the same day, P1 and P2 issued another Petition for the winding up of D1 and asked for section 168A relief (“HCCW 316”).  The contents of the Petition in HCCW 317[19] contained the following important features:-

(1) Under paragraph 7, it was pleaded that:-

“[D2] was soon after its incorporation and still is the corporate vehicle of a group of companies which are beneficially owned by a group of 6 persons...via a company incorporated in the [BVI] named [D1], ie the 2^nd Respondent...”

(2) The plaintiffs’ case about “the Agreement” as pleaded in this action differs from what was pleaded in the Petition.  In this action, the Agreement referred to an agreement reached in May 1994 between 4 persons: P1, P2, D3 and D5.  In the Petition[20], the “Agreement” was said to have been reached between all 8 persons (P1, P2, D3 to D6, Lin and Lee) who agreed that:-

“12.2. for the purposed of the new business contemplated:-

12.2.1 a company would be incorporated under the laws of BVI which would be the holding company of [D2] whilst [D2] would be the vehicle carrying out the new business contemplated...

12.3 It was a mutual understanding between them that:-

12.3.1 all of them should participate in the conduct of the new business contemplated:-

12.3.2 all of them should be entitled to participate in the general management of the BVI company and hence [D2] and any further companies formed...

12.3.5 consent from all members of the BVI company should be required in the event of admission of new shareholder(s) to any of such companies...

12.3.7 ...the interests of the departing member of the BVI company should only be transferred to the remaining members unless otherwise agreed by all of the remaining members.”

Then under paragraph 13 of the Petition, it was pleaded that:-

“13. Pursuant to the Agreement:-

13.1 In early 1995, [P1,P2, D3 to D6, Lin and Lee] caused to incorporate/acquire [D1]; and

13.2 On 3.3.1995, [D1] became the majority shareholder of [D2].  Since then, [D2] became the vehicle through which the business contemplated under the Agreement was run.”

It is important to note that in this pleaded version of the Agreement, D1 was the protagonist. The 8 persons agreed to equally participate in the management of D1 “and hence D2 and any further companies formed”.  The “interest” of each of the 8 persons was described as “interest in D1”, not in D2.  Their interests were in the “holding company”.

(3) The contents of the Petition in HCCW 316 were similar.  In both Petitions, it was not pleaded that there were any agreement or common intention between the 8 persons that shares of D2 would be held by D1 on trust for the 8 persons.

16.  In HCCW 317, D1 was the “2^nd Respondent” and D2 was the “1^st Respondent”.  On 9 December 2013, the two Respondents issued a summons for the striking out of the Petition on the ground that P2 was not a shareholder of D2 and hence had no locus[21].  In response, P2 issued a summons on 16 January 2014 seeking to amend the Petition[22].  The proposed amendments contained the following features:-

(1) Under paragraph 9A, the “Agreement” became an agreement between P1, P2, D3 and D5 to establish “a new company” for the new business.  Then pursuant to this tetra‑partes agreement, D2 was formed and run as a quasi‑partnership between the 4 persons[23].  Then afterwards, D4, D6, Lin and Lee joined in the business and agreed to be bound by the Agreement and D2 became a quasi‑partnership between the 8 persons[24].  In other words, the protagonist became D2 instead.

(2) Then paragraph 12C pleaded a further agreement “to better define their respective interests under the Agreement, in particular after the admission of D4, D6, Lin and Lee”.  Under paragraphs 12C to E, it was pleaded that:-

“the [8 persons] agreed that:

12C.3 a company incorporated under the laws of BVI should be acquired as the holding company of [D2] (“the Holding Company”) although [D2] would remain the main vehicle carrying out the business contemplated under the Agreement...

12D. In late 1994 or early 1995, [the 8 persons] contributed capital into [D2] as follows...

12E. It was agreed between and/or the common intention of [the 8 persons] and it was the basis of their contributions pleaded in §12D hereinabove that:-

12E.1 shares in the Holding Company would be allocated to them as or in consideration of their contributions to [D2]...; and

12E.2 their respective interests in the Holding Company should correspond to and reflect their respective contributions to [D2]...”

(3) This proposed plea of what was “agreed between and/or the common intention of [the 8 persons] and it was the basis of their contributions” is important and will be contrasted with what is now being pleaded in the Statement of Claim in this action. Paragraphs 16B and C then stated:-

“16B. By reasons of the matters pleaded in §§12D‑16A hereinabove:-

16B.1 [D1] held [D2’s] shares on trust for [the 8 persons]; and

16B.2  The extent of beneficial interest of each of [the 8 persons] in [D2’s] shares corresponded to his or her respective contribution to [D2] pleaded in §12D hereinabove.”

This proposed amendment thus did not allege that it was “agreed between and/or the common intention of [the 8 persons] and it was the basis of their contributions to D2” that shares of D2 should begin to be held on trust for the [8 persons].  What this proposed amendment sought to achieve was to draw a legal conclusion of trust (as pleaded in §16B.1) basing on the fact of what had been agreed between the 8 persons and/or what was their common intention and basis of contribution as pleaded in §12E.

17.  The striking out application in HCCW 317 did not go ahead.  The hearing was scheduled to be heard on 7 May 2014.  Skeleton Argument was filed by D1 and D2 on 24 April 2014.  In the Skeleton Argument filed by D1 and D2, they specifically pointed out that: (i) the proposed amendments contradicted the original version of the Petition in that the latter pictured a typical corporate structure of holding company and its subsidiary and that there was no mention of any trust allegation; and (ii) the facts pleaded in proposed §12D‑16A did not give rise to a legal conclusion of D1 holding shares of D2 on trust for the 8 persons.  Then, on 2 May 2014, P2 agreed to withdraw the Petition and the amendment summons with costs against P2[25].  This was achieved by a Consent Order dated 7 May 2014.

18.  Then on the same day, P1 and P2 issued the Writ in this action.  As mentioned earlier, P1 and P2 put forward a different version of facts under §21 of the Statement of Claim as follows:-

“21. It was agreed between and/or the common intention of [the 8 persons] and it was the basis of their contributions...that:-

21.1 The shares of [D2] should begin to be held on trust for [the 8 persons]; and

21.2 The extent of their beneficial interests in such shares should correspond to and/or reflect their contributions.”

The nature of this new plea is drastically different.  The alleged trust is no longer said to arise as a legal conclusion from certain factual assertions.  It is now alleged that the 8 persons actually agreed and/or commonly intended to establish a trust.

Discussions

19.  First of all, the applicable legal principles governing a striking out application are not in dispute.  Parties referred me to Hong Kong Civil Procedure 2016, §§18/19/4; 18/19/8; 18/19/10; 18/19/12 and 18/19/21.  They also referred me to Re Emagist Entertainment Ltd, HCCW 306/2012 at §§32‑33 and to Sealegend Holdings Ltd v China Taiping Insurance (HK) Co Ltd & oths, HCAJ 95/2012 at §§25‑33.  I will apply these principles to the facts before me.

20.  Counsel for D1 and D2 submitted that the “Trust Allegation” pleaded in the Statement of Claim is incapable of belief because:-

(1)  it is flatly contradicted by documents showing that D1 acquired shares of D2 for good consideration;

(2)  it is a bare allegation irreconcilable with certain undisputed documents and facts; and

(3)  P1 and P2 had put forward 3 different and mutually inconsistent versions of their case and no valid explanation has been provided.

21.  With respect, ground (1) above is neither here nor there.  The fact that a person acquires an asset by paying good consideration does not necessary preclude the probability that he acquires it as a trustee for the benefit of others.  In my view, it is more pertinent to look at the true nature of the transactions as revealed in the indisputable documents:-

(1)  At the outset when D2 was formed, the Memorandum and Articles showed that P1 and P2 were the two subscribers[26] to that total amount of 2,000 issued shares.  The paid up share capital was thus HK$200,000.

(2)  According to the Balance Sheet of D2 as at 31 December 1994 which was signed by P1 and P2[27], it was stated that D2 was financed by “share and loan capital” of a total of slightly more than HK$2 million.  Since the paid up share capital was only HK$200,000, the rest of the funds were thus booked as “loans” to D2.  For P1 who had allegedly “contributed” HK$400,000, HK$150,000 would have been share capital.  The balance of HK$250,000 would be his loan to D2.  For P2 who had allegedly “contributed” HK$200,000, HK$50,000 would have been share capital.  The balance of HK$150,000 would be her loan to D2. As for the other 6 persons, their so‑called “contributions” were booked as their loans to D2.

(3)  When 19,990 shares of D2 were transferred from P1 and P2 to D1 on 3 March 1995, although the Instruments of Transfer and Bought/Sold Notes[28] stated that D1 had paid consideration of HK$150,000 to P1 and HK$49,900 to P2, there is no evidence that money actually changed hands. 

(4)  Similarly, when an extra 18,000 shares of D2 were allotted to D1 on 6 March 1995, there is equally no evidence that the sum of HK$1,800,000 actually changed hands between D1 and D2.

(5)  Furthermore, when a total of 19,999 shares of D1 were allotted to the 8 persons, there is equally no evidence that the 8 persons actually made payments of money to D1 which, in any event, never has any bank account.

(6)  Yet, it is clear from the Balance Sheet of D2 as at 31 December 1995[29] that D2’s operation was stated to have been funded just by a paid up capital of HK$2 million.  In other words, loans previously booked as having been provided by the 8 persons no longer existed.

(7)  The aforesaid documents demonstrate a clear scheme of restructuring D2 into a wholly owned subsidiary of D1 which would become a holding company.  The original share capital in D2 became vested in D1. The one share in D2 held by P2 was held on trust for D1.  This was post‑confirmed by the Declaration of Trust executed by P2[30].  Furthermore, the original loans provided by the 8 persons to D2 were notionally repaid such that they would notionally use the money for subscribing the newly allotted shares of and in D1.  As for P1 and P2, their 1,999 shares in D2 were transferred to D1.  They notionally received the considerations from D1 which they again notionally applied the money for subscription of shares in D1.  Hence, no money actually needed to change hands.                                     

(8)  These transactions were wholly consistent with what is now pleaded in paragraph 19.3 of the Statement of Claim, namely that the raison d’etre of establishing D1 was to use it as a “holding company”.  The monetary contributions made by each of the 8 persons were now represented as the share capital of D1 which in turn became the share capital injection by D1 into D2.  The restructuring resulted in a typical corporate structure of a holding company and an operating wholly‑owned subsidiary.

22.  In my judgment, having pleaded under paragraphs 19.3 and 22 that the 8 persons agreed to establish D1 as the “holding company of D2”, it is inconsistent and/or contradictory to further plead under paragraph 21 that it was the “common intention of the 8 persons that the shares of D2 should begin to be held on trust for the 8 persons to the extent corresponding to their respective contributions”.  The term “holding company” normally denotes a company which holds shares in a subsidiary and controlling it [see Lee Jong Rong & ano v Great Choice Consultants Ltd., CACV 152/2015 at §16.1].  If the 8 persons agreed to establish D1 as the holding company of D2, it firstly meant that they have agreed that the shares of D2 would be controlled by D1.  And having subscribed to the memorandum and articles of D1, it further meant that the 8 persons agreed that decision making in D1 would be conducted through its board of directors in accordance with the memorandum and articles of D1.  In other words, they could not have agreed that each of them could individually (as opposed to collectively) exert direction/instruction on D1 over any portion of the shares of D2.

23.  Furthermore, such a plea ignores the trite principle that each company within a group structure is a separate legal entity and is also separate from its members.  Generally, a company does not hold any property as agent or trustee for its members.  Hence, D1 holds shares of D2 but not as agent or trustee of shareholders of D1.  The mere fact that a group of persons are the ultimate shareholders of the holding company does not per se make them the direct beneficial owners of the property held by a subsidiary or through a chain of subsidiaries [see Hui Yin Sang & ano v Tsoi Ping Kwan & ano [2010] 1 HKC 585 at §§25].

24.  Counsel for D1 and D2 submitted which I agree that if the real intention was for D1 to be a bare trustee of D2’s shares, there was no need for D1 to allot shares to the 8 persons exactly in proportion to their respective monetary contributions to the new business.  One would also expect the parties to cause D1 to execute a declaration of trust (in respect of D2’s shares) in favour of the 8 persons. In my view, the absence of such a declaration of trust, coupled with the allotment of D1’s shares in proportion to each parties’ respective monetary contribution to the new business speak louder than words.

25.  Furthermore, as part of the restructuring, P2 was arranged to continue holding one share in D2 whilst D1 became the registered owner of the remaining 1,999 shares.  The fact that P2 executed a Declaration of Trust in favour of D1 in respect of this one share is crucial.  I am unable to understand the plaintiffs’ convoluted logic: that P2 held one share of D2 on trust for D1 so that D1 would hold part of D2’s shares on trust for her.  I agree with Counsel for D1 and D2 that the purpose of P2 executing the Declaration of Trust was clearly to ensure that all issued shares of and in D2 would be legally and beneficially owned by D1.  The 8 persons would then equally participate in the management of D1 as originally pleaded in the HCCW 317 Petition.  It would be through managing D1 that D2 and other companies in the group would be operated.

26.  I would now analyze the other alternative case pleaded in paragraph 21 of the Statement of claim, namely, that it was “agreed” between the 8 persons that the shares of D2 should begin to be held on trust for the 8 persons to the extent corresponding to their respective contribution.  The focus is now on what were actually agreed between the 8 persons.  This is a pure question of fact.

27.  Yet, on this factual issue, the plaintiffs had put forward 3 different versions as analyzed in paragraphs 15 to 18 above.  In the 1^st version (ie in the original Petition in HCCW 316/2013) P2 did not mention any agreement that involved the splitting of legal and beneficial interest in relation to D2’s shares.  In the 2^nd version (ie the proposed amendment to the Petition in HCCW 316/2013), the alleged agreement again did not involve the splitting of legal and beneficial interest in relation to D2’s shares.  The allegation that D1 held the shares of D2 on trust for the 8 persons was pleaded as a “legal conclusion”.  It is only in the 3^rd version (ie in the Statement of Claim of this action) that the plaintiffs put forward a case of an express agreement amongst the 8 persons that D1 would hold D2’s shares on trust for the 8 persons.

28.  At the hearing, I asked counsel for the plaintiffs to explain why the plaintiffs had put forward 3 different versions of fact.  Counsel referred me to paragraphs 45 to 50 of the affirmation of P2[31].  Basically P2 said that the plaintiffs had very limited materials at the time when they sought legal advice in relation to HCCW 317/2013.  She said that some incident happened nearly about 20 years ago and the plaintiffs had some difficulties in retrieving the relevant memory.  It was only after seeing more documents and obtaining further information from a professional firm of accountants that they had a better memory of what had occurred.

29.  I do not find P2’s explanation convincing at all.  Firstly, she did not specifically explain why 3 different versions of what were orally agreed between the 8 persons had been put forward.  Secondly, she did not explain what further documents or information caused her memory to be corrected from the 1^st version to the 2^nd version and then from the 2^nd version to the 3^rd version. Thirdly, it is clear that each occasion of change was prompted by challenges from lawyers of D1 and D2.  I accept the submission of counsel for D1 and D2 that the plaintiffs have been adjusting their case as they go along.

30.  Counsel for the plaintiffs submitted that the plaintiffs’ case is not bound to fail as it is supported by certain documents which showed that the 8 persons regarded themselves as shareholders of D2.  He referred me to the followings:-

(1) Minutes of Shareholders’ Meeting 2011[32]

The title of this document did not suggest whether it related to a Shareholders’ Meeting of D1 or D2.  Counsel for the plaintiffs submitted that it must relate to D2 because of the reference to “profit/loss account” in §2 because only D2 carried on active business.  He then submitted that references to “各股東” in §§2 and 15 indicated that the 8 persons treated themselves as shareholders of D2.

(2) Minutes of Shareholders’ Meeting 2012[33]

The title of this document again did not suggest whether it related to a Shareholders’ Meeting of D1 or D2. Counsel for the plaintiff submitted that it must relate to D2 because §1 referred again to “profit/loss account”.  He again relied on the reference to “各股東”.

(3) An email dated 26 May 2013 from D5 to P1, copied to P2, D3, D4 and D5[34]

The title of this email was “三月四至五日‑股東會議記錄”.  The contents referred to shareholders agreeing unanimously to dissolve “公司”.  Counsel for the plaintiffs submitted that it must be a reference to D2 because of the last paragraph saying: “...這裡會牽連到公司以外的其他公司 (Top Trend, Floral, Senaka, Great Choice)...”.  Since “Great Choice” must be a reference to D1, the words “公司” must be a reference to D2.  Hence, the email showed that plaintiffs and defendants regarded themselves as shareholders of D2.  He also relied on the earlier email from P1 dated 23 May 2013 which referred to shareholders agreeing to dissolve D2.

31.  Firstly, in relation to the two Minutes of Shareholders’ Meeting, I note that many other paragraphs referred to affairs of other companies within the group, eg Top Trend.  They also talked about establishing a new company.  In my view, these documents showed that the plaintiffs and the defendants conducted the affairs of their group of companies in a laymen’s manner.  During these Shareholders’ Meetings, the parties were discussing affairs of the entire group of companies. Since D1 is the holding company of the group, it seems to me that the Shareholders’ Meetings are more appropriately regarded as Shareholders’ Meetings of D1.  Be that as it may, reading the contents as a whole, I am of the view that they merely demonstrated that the parties regarded themselves loosely as shareholders of the “group” in a laymen’s sense.

32.  Secondly, in relation to the email, surely, the subject was about the shareholders’ agreement for winding up.  However, reading it in context and in particular with reference to paragraph 87 of the Statement of Claim, the agreement actually related to the winding up of the entire group of companies.  This email is thus consistent with my observation that the parties simply regarded themselves loosely as shareholders of the group in a laymen’s sense.

33.  In my judgment in any event, the fact that the plaintiffs and the defendants as laymen regarded themselves as shareholders of D2 is neither here nor there.  The issue at hand is whether there was an oral agreement between the 8 persons in or about 1995 that D1 would hold shares in D2 on trust for the 8 persons to the extent of their respective contribution.  I do not find that these documents support the existence of such an agreement at all.

34.  In the circumstance, I agree with the submissions of counsel for D1 and D2 under grounds (2) and (3).  It is clear to me that the trust claim as pleaded in the Statement of Claim is incredible and not believable and should be struck out.

35.  Having formed such a view, it is unnecessary for me deal with the alternative grounds in D1 and D2’s summons.

D3 to D6’s striking out application

36.  As analyzed in paragraphs 6 to 14 above, the only claim against D3 to D6 would be under Prayer 6 which relates specifically to the removal of the plaintiffs as directors of D2. Part V and Part VI of the Statement of Claim (paragraphs 41 to 83) are clearly irrelevant to Prayer 6.

37.  Paragraph 90 pleaded the removal of the plaintiffs as directors of Senaka.  Paragraphs 92, 104 and 107 related to the removal of the plaintiffs as directors of Top Trend.  Paragraph 96 related to the resignation of the plaintiffs as directors of Floral Group.  All these paragraphs are irrelevant to the removal of the plaintiffs as directors of D2 and hence irrelevant to Prayer 6.

38.  Counsel for D3 to D6 submitted that the matter pleaded in the above mentioned paragraphs disclosed no cause of action against D3 to D6 and will prejudice, embarrass or delay the fair trial of the action.  It would be a complete waste of time and costs for D3 to D6 to be required to plead to these irrelevant allegations which do not raise any issue or questions that require the Court’s adjudication at trial.

39.  Counsel for the plaintiffs submitted that they are relevant to the trust claim against D1 and D2.  I have already struck out plaintiffs’ trust claim against D1 and D2.  In any event, I cannot possibly see how these challenged paragraphs could in any way be relevant to Prayers 1 to 5.  Counsel for the plaintiffs did not submit that these paragraphs are relevant to Prayer 6 and in my view rightly so in the light of plaintiffs’ answers to the Request for Further and Better Particulars of the Statement of Claim.

40.  In the circumstances, I agree with Counsel for D3 and D6 and order that these paragraphs be struck out.  I will add that the matters pleaded in the paragraphs that I have struck out have in fact been pleaded in the Petition filed by P1 and P2 in HCCW 316[35].  These issues will be properly ventilated in HCCW 316.

Orders

41.  I therefore make the following orders:-

(1)  The plaintiffs’ action against D1 and D2 is struck out with costs to D1 and D2, to be taxed on party‑and‑party basis if not agreed;

(2)  There will be certificate for counsel in respect of the hearing of D1 and D2’s summons on 28 July 2016;

(3)  In relation to the plaintiffs’ action against D3 to D6, paragraphs 41 to 83; 90, 92; 94; 96; 104 and 107 of the Statement of Claim are struck out;

(4)  D3 to D6 do file and serve their defence within 28 days from the date of this Judgment;

(5)  The plaintiffs do pay forthwith to D3 to D6 costs of the summons filed by D3 to D6 on 23 March 2016 as amended pursuant their summons dated 18 July 2016 with certificate for counsel in respect of the hearing on 28 July 2016, to be taxed on party‑and‑party basis if not agreed; and

(6)  There shall be no order for costs in respect of the summons issued by D3 to D4 dated 18 July 2016.