YAN WAN PUN JOHNSON v. WING KING TONG CO LTD

CACV 32/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 32 OF 2004

(ON APPEAL FROM HCA NO. 4112 OF 2002)

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J U D G M E N T

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Hon Woo VP (giving the judgment of the Court):

Background

1. This is an appeal from the Order of Deputy Judge Gill in Chambers made on 21 January 2004 whereby it was ordered that the order of Master Lisa Wong made on 7 October 2003 be set aside and the defendant's appeal against the master's order be allowed. The judge ordered paragraph 4 of the plaintiff's Amended Reply and Defence to Counterclaim filed on 6 July 2003 ("Reply") to be struck out with costs. By the notice of appeal, the plaintiff seeks to set aside the judge's order and restore the master's order with costs.

2. The plaintiff's claim against the defendant is for the non-payment of a sum of $50,000 per month payable by the defendant pursuant to an agreement dated 31 March 1994 ("the Agreement") whereby the defendant agreed to engage the plaintiff as a "consultant" of the defendant and to pay the plaintiff $50,000 a month. It is pleaded in paragraph 6 of the Amended Statement of Claim ("S/C") that unless and until the Agreement shall be determined by clause 6 thereof, the plaintiff's engagement by the defendant shall be for life or a maximum period of 20 years from 1 April 1994. It is also pleaded that the Agreement shall be irrevocable unless being terminated either on 1 April 2014, or the death of the plaintiff, or upon the exercise of the option by the defendant under clause 6.2 thereof which is by payment of a lump sum calculated on the basis of the maximum period of 20 years and at a discount rate of 10% per annum. The plaintiff's claim was caused by the fact (which is not disputed) that the defendant ceased to pay the plaintiff the monthly payment in about July 2001. The S/C further alleges that the Agreement had been repudiated by the defendant, which repudiation had been accepted by the plaintiff, giving rise to the plaintiff's claim for damages.

3. The genesis of the Agreement appears in paragraphs 2 to 5 of the S/C. Paragraph 2 pleads that in 1944, the plaintiff founded a Wing King Tong Printing Factory, the predecessor of the defendant and that in 1955, the plaintiff incorporated the said factory into a limited company which is the defendant. Paragraph 3 pleads that in about 1993, the plaintiff intended to retire from the defendant and to transfer all his shares in the defendant to his five sons and his wife who later divorced him. By a letter of intent dated 20 January 1994 ("the letter of intent"), it was agreed between the plaintiff and his sons and ex-wife that:

(a) The plaintiff would sell 2/8 of his shareholdings in the defendant to the five sons and wife for $10 million. Agreement would be signed on or before 31 March 1994.

(b) 6/8 of the plaintiff's shares would be equally distributed to the wife and five sons.

(c) The wife and five sons would arrange WKT Holding Company to pay the plaintiff $50,000 per month for life.

(d) All the above terms and conditions would be subject to each party's lawyer's final agreement.

4. Paragraph 4 of the S/C pleads that on or about 31 March 1994, the plaintiff transferred all his shareholdings in the defendant to companies designated by the wife and five sons. On the same day, the plaintiff received from them $10 million less some deductions. Paragraph 5 pleads that the Agreement was made between the plaintiff and the defendant on 31 March 1994.

5. In the Re-Amended Defence and Counterclaim ("Defence"), the defendant raises a number of factual defences, namely, that the plaintiff had never provided the required services to the defendant as a consultant or otherwise, and that the monthly payments so made to the plaintiff up to the end of June 2001 were made on a gratuitous basis as ex gratia payments. It is also alleged that the plaintiff was in breach of the Agreement by not providing the services, whereby the defendant had been discharged from its obligation to pay the plaintiff. It is pleaded that the Agreement is unenforceable in law and not binding upon the defendant in that no consideration moved from the plaintiff. Another defence pleaded is that the Agreement was ultra vires the Memorandum of Association of the defendant as it provided for ex gratia payments.

6. Apart from the aforesaid defences raised by the defendant, in paragraph 5 of the Defence, the defendant further avers that:

(a) The plaintiff was not a shareholder of the defendant and did not own any shares in the defendant as at the date of the letter of intent, 20 January 1994.

(b) The letter of intent was not intended to be a binding agreement and there was no agreement between the plaintiff of the one part and the wife and five sons of the other part on any matters by signing the letter of intent.

(c) The defendant is not a party to the letter of intent.

7. Paragraph 4 of the Reply relates to the questions of whether the monthly payment was an ex gratia payment and whether there was consideration for it flowing from the plaintiff. But it only forms part of the whole case of the plaintiff as pleaded in paragraphs 3, 4, 5 and 6 of the Reply.

8. It is necessary to set out these four paragraphs in order to have an overall view of the plaintiff's case:

"3. As to paragraph 5 [of the Defence], the Plaintiff avers that on or around 28 January 1992, the Plaintiff, as settlor, entered into a Deed of Settlement (the "Deed") with BANKAMERICA INTERNATIONAL TRUSTEES (B.V.I.) LIMITED (the "Trustees") which Deed constituted the Yan Family Trust (the "Trust"). The Plaintiff transferred his shareholdings in the Defendant to the Trust. Through a series of trust arrangement, the majority of shares of the Defendant were held by two BVI companies, namely, Lettuce Company Limited and Water Green Inc.

4. At the request of Yan Tak Chung Alex and Yan Tak Sing Stephen acting on behalf of the Defendant and Yan Tak Ming Alan, Yan Tak Kei Aldous and Yak Tak Kin Andrew and in consideration of, inter alia, the Defendant entering into the Agreement and agreeing to pay the Plaintiff HK$50,000.00 per month from 31 March 1994 until 1 April 2014 or the Plaintiff dies under the Agreement, the Plaintiff requested and directed the Trustees to add the following BVI companies (which were owned by discretionary trusts set up for the benefit of Yan Tak Chung Alex, Yan Tak Ming Alan, Yan Tak Kei Aldous, Yan Tak Kin Andrew, Yan Tak Sing Stephen, and Yan Ho Wai Ching, May respectively) to the class of beneficiaries under the Trust:

BVI companies	Being owned by a discretionary trust Set up for the benefit of
Alpha Juliett Holdings Limited	Yan Tak Chung Alex
Enterprising Investments Limited	Yan Tak Ming Alan
Rite Choice Investments Limited	Yan Tak Kei Aldous
Fair Champion Investments Limited	Yan Tak Kin Andrew
Vasi Corporation	Yan Tak Sing Stephen
Well Chosen Limited	Yan Ho Wai Ching May

5. At the further request of Yan Tak Chung Alex and Yan Tak Sing Stephen acting on behalf of the Defendant and Yan Tak Ming Alan, Yan Tak Kei Aldous and Yan Tak Kin Andrew and in consideration of, inter alia, the Defendant entering into the Agreement and agreeing to pay the Plaintiff HK$50,000.00 per month from 31 March 1994 until 1 April 2014 or the Plaintiff dies, the Plaintiff further requested and directed the Trustees to distribute the trust assets, which comprised 2,198,848 preferred shares and 2,000 common shares in Water Green Inc, in the following proportion:

Alpha Juliett Holdings Limited	274,856 preferred shares & 250 common shares
Enterprising Investments Limited	274,856 preferred shares & 250 common shares
Rite Choice Investments Limited	274,856 preferred shares & 250 common shares
Fair Champion Investments Limited	274,856 preferred shares & 250 common shares
Vasi Corporation	274,856 preferred shares & 250 common shares
Well Chosen Limited	824,568 preferred shares & 750 common shares
	2,198,848 preferred shares and 2,000 common shares

6. Upon receiving the directions and requests from the Plaintiff as aforesaid, the Trustees entered into a Deed of Addition and Appointment dated 31 March 1994 with inter alia, Alpha Juliett Holdings Limited, Enterprising Investments Limited, Rite Choice Investments Limited, Fair Champion Investments Limited, Vasi Corporation, Well Chosen Limited to give effect to the addition and appointment of the said beneficiaries to the Trust and the division of the shares in Water Green Inc in the aforesaid proportion."

The judge's judgment

9. By his judgment dated 21 January 2004, the judge ordered paragraph 4 of the Reply to be struck out. The judge's reasons for so doing appear in the following parts of his judgment:

"15. What clause 4 [paragraph 4 of the Reply] amounts to is an averment that in consideration of the defendant agreeing to pay the plaintiff $50,000 per month the plaintiff requested the trustees of his family trust to 'add to the class of beneficiaries under the trust' BVI companies owned by 'discretionary trusts set up for the benefit of [his five sons and former wife]'.

16. The first difficulty he faces consequent upon the challenge by the defendant is that he cannot provide evidence of, let alone proof of, the existence of the so-called discretionary trusts. The fax of 25 March 1984 is his strongest point. But it only anticipates their coming into being and nothing further.

17. But a more fundamental problem is that there is nowhere adduced in evidence, whether in affidavit opposing this application or in a witness statement intended to be evidence-in-chief, any evidence at all from the plaintiff that there was a contract as averred in paragraph 4 between himself and the defendant in respect of which the Agreement was the consideration.

18. Miss Fenn for the defendant submits this is an attempt to establish a contractual link between the defendant and any arrangement made by the plaintiff with his family members, but the evidence does not support that.

19. I agree.

20. In my view this is a deficiency which requires the striking out of the offending paragraph; I exercise my discretion to do so. ..."

10. The "fax of 25 March 1984" should be one dated 25 March 1994. The judge described it in paragraphs 9 and 10 of his judgment:

"9. Subsequently and in opposition to this application to strike out the plaintiff has attested the existence of the discretionary trusts by producing a fax from one Samson Ho, then the Financial Controller of the defendant, dated 25 March 1984, headed 'Distribution of Shares in Water Green Inc.' in which he records:

'1. Five separate discretionary trusts will be set up for the benefit of (then are named the plaintiff's five sons) ...

2. Another trust will be set up for the benefit of (then is named the plaintiff's ex-wife) ...'

10. The fax goes on to record that each trust will receive through a BVI company in the trust a shareholding in Water Green Inc representing thus the transfer in each case of the appropriate beneficial interest in the defendant."

11. It seems to us that in paragraph 16 of his judgment, the judge considered that the plaintiff has difficulty to provide evidence or proof of the existence of the discretionary trusts. Apparently, the judge attached little weight to the fax of 25 March 1994 as "it only anticipates their (ie the discretionary trusts) coming into being and nothing further." What appears to be the crux of the reason for the striking out is what the judge stated in paragraph 17 of his judgment. It seems that he was of the view that there was a fundamental problem that confronted the plaintiff in proving that "there was a contract as averred in paragraph 4 (the paragraph struck out) between himself and the defendant in respect of which the Agreement was the consideration."

12. It appears that the judge was impressed by the fact that the plaintiff could not recall the details of the discretionary trusts such as the trustees, the settlers, and the trust deeds in each of the six discretionary trusts set up for the benefit of the five sons and ex-wife. This was based on the plaintiff's answer to the defendant's request for further and better particulars of such details, which was "the plaintiff cannot recall" (referred to in paragraph 8 of the judgment).

13. On behalf of the plaintiff, Mr Paul Lam draws our attention to a number of documentary evidence showing that the discretionary trusts existed, although the judge only mentioned the fax of 25 March 1994.

14. It is unnecessary for us to go into all the detailed documentation. As the judge had well appreciated, the claim must be obviously unsustainable and the pleadings unarguably bad and it must be impossible, not just improbable, for the claim to succeed before the court will strike it out. See para 18/19/4 on p 316 of the Hong Kong Civil Procedure 2004, Ha Francesca v Tsai Kut Kan (No. 1) [1982] HKC 382 CA and Hubbuck v Wilkinson [1899] 1 QB 86 referred to in paragraph 14 of the judgment. In our judgment, the judge erred in applying the principle. The plaintiff's inability to recall the details of the discretionary trusts does not mean that he cannot prove them at trial. While it is true that the fax of 25 March 1994 was termed in the future tense, what the S/C has pleaded about the letter of intent dated 20 January 1994 puts the fax into proper context, and together with the plaintiff's subsequent transfer of the beneficial interest in his shares in the defendant (held by Water Green Inc) to companies designated by the five sons and his ex-wife, his receipt of $10 million less some deductions and the making of the Agreement between him and the defendant, they evidence the consequence of what was mentioned in fax of 25 March 1994. As to what weight is to be attached to the plaintiff's version as pleaded or to the defendant's version of a bare denial of the existence of such discretionary trusts, it is a matter for trial and cannot be resolved at an application to strike out.

15. Notwithstanding what is said above, it appears that the judge's main reason for the striking out was that the plaintiff could not prove that there was a contractual link between the plaintiff and the defendant (see paragraph 17 of the judgment cited above).

16. Mr Paul Lam refers us to a number of passages in the plaintiff's witness statement and successive affirmations filed for the purpose of opposing the striking out to show that there was a contractual link and the Agreement between the plaintiff and the defendant was the consideration for the plaintiff's transfer of the beneficial interest in his shares in the defendant (held by Water Green Inc) to various BVI companies for the benefit of his wife and five sons under discretionary trusts.

17. On behalf of the defendant, Mr Johnny Mok submits that the overall effect of the plaintiff's witness statement and affirmations is that the alleged consideration for his agreeing to add the new beneficiaries to the trust was a promise by his wife and sons to procure a company to pay him $50,000 per month, and they arranged with the defendant to pay him that monthly sum. This, Mr Mok argues, was not a promise by the defendant itself.

18. Again, one does not need to go into details at this stage. The agreement between the plaintiff and his wife and sons is a matter of the background facts giving rise to the Agreement. The Agreement itself is evidence of the promise made by the defendant to pay the monthly sum. What is left to fill the gap, as far as pleadings are concerned, is the consideration for the defendant, with Yan Tak Chung Alex and Yan Tak Sing Stephen, two of the sons, as its directors, to enter into the Agreement. The timing of the letter of intent of 20 January 1994 and of the fax of 25 March 1994, the identification of a BVI company, namely, Water Green Inc, which owned 42.5% of the shares in the defendant as at 31 December 1993 (see the defendant's annual return made up to 31 December 1993 at p 48 of the appeal bundle) and the fact that Yan Tak Chung Alex and Yan Tak Sing Stephen, two of the sons, were at all material times the directors of the defendant, together with the inescapable fact that the defendant did enter into the Agreement with the plaintiff on 31 March 1994, all point to the link between the so-called "the plaintiff's family arrangements" and the defendant in agreeing to pay $50,000 per month to the plaintiff.

19. Apart from paragraph 4 of the Reply, its paragraph 5 also pleads that the Agreement was consideration for the plaintiff to transfer the beneficial interest in his shares to the sons and wife. The making of the Agreement might well have been the performance of the promise by the sons and wife under the agreement between them and the plaintiff, but that would not alter the fact that the Agreement was the consideration or part of it for the plaintiff to make the transfer.

20. Strangely enough, and this is an indication of the lack of merit in the striking out application, there has been no application for striking out the genesis of the Agreement pleaded in paragraphs 3 to 5 of the S/C and the matters pleaded in paragraphs 3, 5 and 6 of the Reply that are closely connected with the struck out paragraph. If there was no contractual link between the plaintiff's family arrangements and the Agreement, all these paragraphs in the S/C and the Reply, not only paragraph 4 of the Reply, should also have been sought to be struck out for being irrelevant, frivolous and vexatious.

21. As we have said twice before, it is unnecessary to go into details at this stage. Indeed, were we to go into details, we might make comments which might be beneficial or prejudicial to the parties' respective causes in these proceedings.

Conclusion

22. In the circumstances, we consider that the judge was wrong as this is a clear case where paragraph 4 of the Reply should never have been struck out. The appeal must be allowed and paragraph 4 of the pleading restored.

[After hearing the parties]

23. We also make an order that the defendant pay the plaintiff the costs here and below, to be taxed forthwith if not agreed. The order for costs made by Master Lisa Wong is restored to be effective as from today. The plaintiff's own costs be taxed under the Legal Aid Regulations.