SZETO WING HONG v. MAINTOWN INDUSTRIES LTD AND ANOTHER

HCA 1649/2018

[2021] HKCFI 179

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1649 OF 2018

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BETWEEN

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J U D G M E N T

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1.  This action concerns the validity of a Declaration of Trust dated 21 August 2006 (“Declaration of Trust”) which provides, inter alia, that Maintown Industries Limited (敏騰實業有限公司) (“D1”) holds 5% of its interest in Luen Shing (Guangzhou) Industries Limited (廣州市聯盛塑料五金模具有限公) (“D2”) on trust for Mr Szeto Wing Hong (“P”) (“Trust”). P seeks 3 heads of relief, namely:

(1) Declarations that the Trust is valid and binding as between P and D1 and that pursuant to the Trust, D1 holds 5% of its interest in D2 as trustee for P;

(2) An order that D1 do transfer a 5% interest in D2 to P or his designated nominee; and

(3) An order that D1 do deliver to P copies of D2’s books and accounts.

2.  D1, on the other hand, counterclaims against P for a declaration that the Trust is void ab initio.

3.  Mr Tony Chow appears on behalf of P at this trial and Mr Simon Chan appears on behalf of D1.  D2 is a nominal party and does not appear at trial.

Background

4.  P was an engineering director by trade until his retirement in or around 2008.  He obtained a Higher Diploma in Production and Industrial Engineering from Hong Kong Polytechnic in 1984 and a doctoral degree relating to the mould industry in 2016. 

5.  P joined Luen Shing Mould Factory around the time when it was first set up in 1986.  Luen Shing Mould Factory’s key personnel at the time were P, Mr Chan King Yu (“Mr Chan”), Mr Wong Wah (“Mr Wong”), Mr Ma Yik Kwun (“Mr Ma”), Mr Kan Yuen Sum (“Mr Kan”), Mr Lee Shiu Kam (“Mr Lee”) and Mr Ng Kwok Keung (“Mr Ng”).  According to D1, Mr Chan, Mr Wong and Mr Ma are the “bosses” whereas P, Mr Kan, Mr Lee and Mr Ng are the “senior employees”.

6.  In 1987, P entered into a formal employment contract with Luen Shing Mould Factory Limited (which was incorporated to carry on the business then carried on by Luen Shing Mould Factory). 

7.  In 1993, D2 was formed and registered in the Mainland as a “limited company (sole investment of Taiwan, Hong Kong and Macau legal person)” (有限責任公司 (台港澳法人獨資)).  D1 is a Hong Kong incorporated company and has always been the sole registered shareholder of D2.  D1’s registered shareholders and directors as at 4 August 1993 were Mr Chan, Mr Wong and Mr Ma. 

8.  In 1995, Maintown (Guangzhou) Industrial Company Limited (敏騰 (廣州) 實業有限公司) (“Maintown Guangzhou”) was formed in the Mainland as a wholly-owned subsidiary of Luen Shing Mould Factory Limited. 

9.  In 1998, Luen Shing Holdings Limited (“Luen Shing Holdings”) and 2 wholly-owned subsidiaries, Luen Shing Tools Limited (“Luen Shing Tools”) and Maintown Engineering Limited (“Maintown Engineering”), were incorporated in Hong Kong.  The first directors of Luen Shing Holdings were Mr Lee, Mr Ng, Mr Kan and P.  At or around the same time, P’s employment with Luen Shing Mould Factory Limited was terminated and he entered into a new employment contract with Luen Shing Tools, which remained in place until his retirement in 2008. 

10.  For ease of exposition, I will refer to D1, D2, Luen Shing Mould Factory Limited, Maintown Guangzhou, Luen Shing Holdings, Luen Shing Tools and Maintown Engineering collectively as the “Group”.

11.  The precise relationship between the various entities within the Group is a matter of some dispute.  P says that D1, D2, Maintown Guangzhou, Luen Shing Holdings, Luen Shing Tools and Maintown Engineering were all set up using funds accumulated from Luen Shing Mould Factory Limited’s profits in the past.  Furthermore, the Group operated as a single business at all material times: while he was formally employed by Luen Shing Mould Factory Limited and subsequently Luen Shing Tools as a matter of formality and bookkeeping, he also worked for the other companies and factories in the Group throughout. 

12.  D1, on the other hand, contends that the 3 corporate branches in the Group, namely (1) D1 and D2, (2) Luen Shing Mould Factory Limited and Maintown Guangzhou, and (3) Luen Shing Holdings, Luen Shing Tools and Maintown Engineering were entirely separate businesses.  D1 says that its capital did not come from Luen Shing Mould Factory, and that it had its own offices, customers and employees.  As for Luen Shing Holdings and its subsidiaries, these companies were incorporated by P, Mr Kan, Mr Lee and Mr Ng when they decided to set up their own business in the mould industry with Mr Chan, Mr Wong and Mr Ma’s encouragement. 

13.  On or about 21 August 2006, a Declaration of Trust was executed, as a deed, between D1 as trustee on one part (signed by Mr Chan and Mr Wong as directors), and 5 beneficiaries on the other part, namely P, Mr Chan, Mr Wong, Mr Kan and Mr Lee (collectively “Beneficiaries”).

14.  The Declaration of Trust stated as follows:

“THIS DECLARATION OF TRUST is made this 21^st day of August, 2006 BETWEEN [D1] … (hereinafter called the ‘Trustee’) of the one part AND the persons who are the Beneficiaries named in the 1^st Column of the First Schedule hereto (hereinafter called the ‘Beneficiaries’) of the other part.

WHEREAS the Beneficiaries are the beneficial owners of the Capital Contribution and Investments respectively specified in the 2^nd Column of the First Schedule hereto who together paid the entire Capital Contribution of [D2] […]

AND WHEREAS the Beneficiaries have requested the Trustee to register the said Capital Contritbution [sic] in the Trustee’s sole name.

AND WHEREAS the registration as aforesaid was made to the Trustee as a nominee of the Beneficiaries respectively and it was agreed that the Trustee should execute this Declaration of Trust as is hereinafter contained.

NOW THIS DEED WITNESSTH [sic] as follows:-

(6) The Trustee hereby declares that it holds the Capital Contribtuion [sic] specified in the schedule hereto and all dividends and interest accrue upon the same or any of them upon trust for the Beneficiaries respectively and thier [sic] successors in title and agrees to transfer pay and deal with the said Capital Contribution and the dividends and interest payable in respect of the same in such manners as the Beneficiaries shall from time to time direct in writing.

(7) The Trustee will at the request of the Beneficiaries or their successors in title attend all meetings of shareholders or otherwise which it shall be entitled to attend by virtue of being the registered proprietor of the said Capital Contribution or any of them and will vote at every such meeting in such manner as the Beneficiaries or their successors in title shall have previously directed in writing and in default of such direction at the discretion of the Trustee and further will if so required by the Beneficiaries or their successors in title execute all proxies or other documents which shall be necessary or proper to enable the Beneficiaries or their personal representatives or assigns or its or their nominees to vote at any such meeting in the place of the Trustee.

(8) The Trustee shall upon request provide the Beneficiaries or their successors in title with such information as may be available to the Trustee as a shareholder with regard to the operation of [D2].

FIRST SCHEUDLE [sic]
Names		Amount of Capital Contribution
1.	[Mr Chan]	US$17,800,000
2.	[Mr Wong]	US$7,400,000
3.	[Mr Kan]	US$2,100,000
4.	[Mr Szeto]	US$1,500,000
5.	[Mr Lee]	US$1,200,000
	Total :-	US$30,000,000

…”

15.  The Declaration of Trust was prepared by Messrs Jesse H Y Kwok & Co and witnessed by Mr Jesse Kwok (“Mr Kwok”), its sole proprietor.

16.  On or around 8 February 2010, Luen Shing Mould Factory Limited and the Beneficiaries executed a further deed in which Luen Shing Mould Factory Limited declared that it held its interest in Maintown Guangzhou on trust for the Beneficiaries in same proportions as those set out in the Declaration of Trust (“Maintown Declaration”).  The Maintown Declaration was similarly prepared by Messrs Jesse H Y Kwok & Co and witnessed by Mr Kwok, and its terms are materially identical to those of the Declaration of Trust.  There is no dispute as to the validity of the Maintown Declaration. 

17.  P sold his 5% beneficial interest in Maintown Guangzhou to Mr Chan for HK$1,750,000 in August 2010 and the parties executed an Assignment dated 2 August 2010.

18.  Also in August 2010, P executed the following documents at the request of Mr Martin Or (“Mr Or”), who occasionally assisted Mr Chan with matters relating to the Group:

(1) An Option Agreement dated 24 August 2010 with Silvergear Limited (“Silvergear”), pursuant to which Silvergear was granted a 3-year option to purchase P’s 5% interest in D2 at a price of HK$3,500,000;

(2) An Irrevocable Power of Attorney dated 24 August 2010 authorising Mr Chan to act for P in all matters in connection with the Option Agreement; and

(3) A Deed of Undertaking dated 24 August 2010 expressed as between P and Mr Chan but which was only ever signed by P.  The Deed of Undertaking provided, inter alia, as follows:

“WHEREAS

By virtue of a Declaration of Trust dated 21^st August 2006, [P] is the beneficial owner in the sum of US$1,500,000 which for the time being, represents a 5% of the Owner’s equity with the aggregate Capital Contribution and Investments in the total sum of US$30,000,000 […] of [D2] […];

[Mr Chan] is desires [sic] to reorganise the investees positioning of [D2] which include [sic] [P]’s beneficial interest in [D2]

By an oral agreement [P] agrees and undertakes to carry out all reasonable instructions and directions and sign and execute all documents in the reorganisation which may be implemented at the time determine [sic] by [Mr Chan];

NOW THIS DEED WITHNESSES [sic] as follows: […]

I [P] undertake at all time [sic] to sign execute and deliver any documents which [Mr Chan] may require me to sign execute and deliver for performing, perfecting and reorganising the business interest of [D2] without affect [sic] the beneficial interest of myself;

  I also undertake to carry out perform and execute all reasonable instructions and directions from [Mr Chan] in relation to the normal operation of the business of [D2].”

19.  P says that Mr Or approached him to sign these documents on behalf of Mr Chan.  Mr Chan says that he had no involvement in this transaction and denies knowledge of these documents. 

20.  On at least two occasions in June 2016 and August 2017 respectively, P attended D2’s offices in the Mainland and was permitted to review its books and records.  P says that the fact that he was allowed to review its records is evidence of his beneficial interest in D2. D1 denies this, and says instead that Mr Chan permitted P to review D2’s records on the basis that it formed part of P’s research for his doctoral degree, and also because P had offered to help him improve D2’s business operations.

21.  In or about September 2017, Mr Or contacted P and informed him that Mr Chan wished to purchase his interest in D2. P proposed a price of RMB 7.4 million, but Mr Or later informed P that his offer had been rejected by Mr Chan.  Mr Chan denies having instructed Mr Or to approach P, and says instead that Mr Or acted of his own volition to mediate the dispute between the parties in relation to P’s alleged beneficial interest in D2. 

22.  Correspondence then ensued between P and D1, in which D1 claimed through its solicitors that (1) P had no relationship with D1 and/or D2, (2) D2 was the sole legal and beneficial owner of D1 and D2 at all times, and (3) the Declaration of Trust was mistakenly executed and is invalid and/or void.  D1 also refused P’s demand that it transfer back to P the 5% interest in D2.  This prompted the commencement of the present action on 16 July 2018. 

D1’s case

23.  D1’s primary contention is that the Declaration of Trust is void for mistake.  It says that in or about late 2005, Mr Chan became unable to participate in the daily management of his companies due to a serious illness.  Mr Or, who came to Hong Kong to assist Mr Chan with managing his affairs during this period, suggested that Mr Chan should pay a gratuity or discretionary bonus to senior employees in recognition of their effort in managing their respective companies while Mr Chan was receiving medical treatment.  Mr Or (acting for Mr Chan) thus instructed Messrs Jesse H Y Kwok & Co to draft the Declaration of Trust, and Mr Chan executed the Declaration of Trust in the belief that it gave effect to the discretionary bonus.   

24.  However, none of P, Mr Kan and Mr Lee had ever been employed by D1 or D2.  Mr Chan never intended to grant any discretionary bonus to P, Mr Kan or Mr Lee as by then they only worked for Luen Shing Holdings and its subsidiaries, which were functionally separate from D1, D2 and Luen Shing Mould Factory.  Mr Or might have mistakenly thought that they were employees of D1 and D2 because of the similarity between the names of D1 and Maintown Engineering.  There was also a mistake in the Declaration of Trust in that it stated P had paid his share of D2’s Capital Contribution when in fact he had not. 

25.  D1 advances two further arguments. First, it says that, since the Declaration of Trust referred to the Beneficiaries having paid the Capital Contribution of D2, it was an express or implied condition precedent of the Declaration of Trust that they must have paid the Capital Contribution, and this condition precedent was never satisfied. Alternatively, it says that D1 was only ever obliged to hold the Capital Contribution paid by each Beneficiary on trust for them, and since P never made any payment of Capital Contribution, the Trust fails for want of subject matter.

26.  As for relief, D1 claims that P is not entitled to an order for the transfer of interest in D2 in any event, on the basis that D2’s ownership is incapable of being divided or split[1]. Nor, it says, is P entitled to a copy of D2’s accounts and records, given that on a true construction of clause (8) of the Declaration of Trust, such request may only be made by the Beneficiaries jointly and not severally.

P’s case

27.  P, on the other hand, contends that the Declaration of Trust stems from an oral agreement made in or around 1986 between the 7 founding members of Luen Shing Mould Factory Limited that P, Mr Lee, Mr Ng and Mr Kan would each be entitled to a 4% share in all Group companies, in return for their contributions to the Group in terms of their expertise in mould manufacturing and design (“Oral Agreement”). When Mr Ng left the Group in 2001, P acquired a 1% interest from him, such that P ended up with the 5% interest recorded in the Declaration of Trust.  Similarly, the parties entered into the Maintown Declaration in 2010 so to give effect to the Oral Agreement. 

28.  P further submits that the phrase “Capital Contribution” simply denoted the proportion of the Beneficiaries’ respective beneficial interests in D2 and, as such, there was no express or implied condition precedent nor failure of subject matter.

Evidence

29.  At trial, P, Mr Chan and Mr Kwok give viva voce evidence.  P and Mr Kwok are largely satisfactory witnesses and their testimony is unshaken under cross-examination.  I accept their evidence. 

30.  On the other hand, I find that Mr Chan’s testimony is at times evasive and at others self-contradictory.  This is most conspicuous in his evidence concerning the relationship between Luen Shing Holdings and the other companies in the Group.  As noted above, Mr Chan initially sought to portray Luen Shing Holdings as a separate mould business independently set up and run by P, Mr Kan, Mr Lee and Mr Ng.  In his witness statement, he explained that P resigned from Luen Shing Mould Factory in 1998 as “he wished to set up his own company”; and that he “encouraged [P], Mr Kan, [Mr Lee] and Mr Ng to set up their own business in the mould industry”.[2]  Mr Chan also denied having any interest (whether direct or indirect) in Luen Shing Holdings when it was founded, saying instead that “I (through Chassington International Limited) had only formally acquired the beneficial interest of [Luen Shing Holdings] and its subsidiaries … from [P] since September 2007”.[3]  However, under cross-examination, he admits that he, Mr Ma and Mr Wong were in fact “hidden shareholders” in Luen Shing Holdings from the outset, and that initially, P, Mr Kan, Mr Lee and Mr Ng each only had a 4% beneficial interest in Luen Shing Holdings.  Such inconsistencies in his evidence do not reflect well on his credibility.

31.  Mr Chan’s evidence in relation to the Oral Agreement is similarly confused and unsatisfactory.  In his witness statement, he claimed that there was never any Oral Agreement as to the beneficial ownership of the Group companies, and there was only ever a gratuitous offer made by him and Mr Wong to P, Mr Kan, Mr Lee and Mr Ng that they would each be entitled to receive 4% of the profits made by Luen Shing Mould Factory Limited and its subsidiaries (“Wong’s Offer”).  While the Declaration of Trust was executed to give effect to the gratuitous bonus following Mr Chan’s illness, the Maintown Declaration was executed in part to give effect to Wong’s Offer, and in part to formalise Mr Chan and Mr Wong’s respective beneficial interests in Maintown Guangzhou.  However, as Mr Chan accepts in cross-examination, the Maintown Declaration does not draw any distinction in its treatment of Mr Chan and Mr Wong (the remaining bosses at the time) on one hand, and Mr Kan, Mr Lee, and Mr Ng (the employees) on the other.  It simply purported to record the beneficial interests of each of the Beneficiaries.  Mr Chan did not have any answer for why he executed the Maintown Declaration (both on behalf of Luen Shing Mould Factory Limited and on his own behalf) despite what was, on his version of events, a glaring error.  I find Mr Chan’s evidence to be deeply unconvincing even when it is considered on its own terms.

32.  Mr Chan’s admission in cross-examination that each of P, Mr Lee, Mr Kan and Mr Ng only ever had a 4% beneficial interest in Luen Shing Holdings is also revealing in this context.  When pressed on how this figure of 4% came about, Mr Chan denies that this stemmed from the Oral Agreement, and claims that the parties merely “referenced” the profit-sharing proportions in Wong’s Offer.  But this explanation does not sit well with his earlier assertion that Wong’s Offer was only ever a profit-sharing arrangement in respect of Luen Shing Mould Factory Limited: if that were true, then there was no reason why the parties should have followed it when apportioning the beneficial interest of what was on D1’s case an entirely separate company.

33.  There are 2 further points which cast doubt on Mr Chan’s evidence on the purposes of the Declaration of Trust and the Maintown Declaration:

(1) As noted above, both documents were materially identical in content, a fact which Mr Chan was well aware of.  Indeed, he interrupted P’s counsel during cross-examination to make this very point.  As such, if the Declaration of Trust and the Maintown Declaration were in fact executed for different purposes, ie (i) to award senior employees with gratuitous bonuses and (ii) to give effect to Wong’s Offer respectively as Mr Chan asserts, then he would certainly have realised that the Declaration of Trust was executed by mistake when he came to sign the Maintown Declaration in 2010.  However, there is no evidence that Mr Chan, or indeed any other Beneficiaries, raised this issue when they executed the Maintown Declaration.

(2) D1’s pleaded case is that Mr Or might have mistakenly thought that P, Mr Kan and Mr Lee were employees of D1 and D2 because of the similarity between the names of D1 and Maintown Engineering (see §24 above).  This means that the Declaration of Trust was never intended to cover D1 and D2.  However, under cross-examination, Mr Chan asserts that the Declaration of Trust was intended to cover D1 and D2 albeit for the purpose of paying a gratuitous bonus to P, Mr Kan and Mr Lee to incentivize them to work for D1 and D2 while Mr Chan was ill and unable to attend to their business.

34.  All in all, I do not consider Mr Chan to be a credible witness.  I do not accept his evidence insofar as it is inconsistent with the testimony of the other witnesses or contradicted by contemporaneous documents.

35.  I should add that D1 previously attempted to introduce as evidence signed “statements” from 3 other persons, including Mr Or, by way of annexures to Mr Chan’s witness statement.  At the pre-trial review, P (rightly) objected to the admissibility of such “statements” whereupon this Court ordered that these potential witnesses be debarred from giving evidence at trial unless D1 and D2 file their witness statements or lodge applications for leave to issue subpoenas to secure their attendance.  In the end, no witness statement or application for leave to issue subpoenas was filed or made by D1 (or D2). 

36.  In his written opening submissions, counsel for D1 purports to give an explanation for the absence of these 3 potential witnesses, suggesting that they are ordinarily resident outside Hong Kong.  As this Court points out at the hearing, the suggestion is not supported by any evidence filed.  Counsel then attempts to ask Mr Chan about such matters in his examination-in-chief when no application for leave, as required under O 38 r 2A(7)(b), has been made.  Counsel then seeks to apply for leave to “top up” the evidence of Mr Chan, which I deny in view of the lateness of the application and the prejudice to P (who would not be able to properly consider or address the new evidence to be given by Mr Chan).  In view of the above, I disregard the purported explanation for their absences set out in D1’s opening submissions. 

37.  In any event, I find that D1’s purported explanation for not calling the 3 potential witnesses unconvincing.  It was open to D1 to ask them to file witness statements and to testify via video-link, which has been the common practice for dealing with overseas witnesses since the outbreak of COVID-19.  There was more than sufficient time between the pre-trial review and the deadline for filing their witness statements, bearing in mind that it was an indulgence given to D1 to rectify the obvious irregularity in attempting to adduce the “statements” as evidence at trial.   

Mistake

38.  There is no dispute as far as governing law is concerned, both parties are content to proceed on the basis that the Declaration of Trust is governed by Hong Kong law.  However, the parties are not agreed as to the applicable legal test for mistake.  Counsel for P submits that contractual principles apply, such that D1 must either show (1) a common and fundamental mistake as to the factual circumstances in which the contract was made, or (2) a unilateral mistake as to the terms of the contract (Sealegend Holdings Ltd v China Taiping Insurance (HK) Co Ltd, unrep., HCAJ 95/2012, 24 Oct 2014, §54 per Au-Yeung J).  On the other hand, counsel for D1 submits, somewhat cryptically, that as this is a trust case “principles in equity should also be applied”.

39.  I reject D1’s submissions.  It is wholly unclear what equitable principles it suggests ought to be applied.  There is no separate equitable jurisdiction to set aside a contract on grounds of mistake (Great Peace Shipping v Tsavliris Salvage (International) Ltd (The Great Peace) [2002] EWCA Civ 1407, [2003] QB 679; Chitty on Contracts (33^rd ed) §6-055).  And while there is indeed an equitable jurisdiction to set aside a gratuitous disposition where there is sufficiently serious and causative unilateral mistake such that it would be unconscionable to refuse relief (Pitt v Holt [2013] UKSC 26 [2013] 2 AC 108), this principle has no application outside the realm of gifts.  As Lord Walker explained in Pitt v Holt at §114:

“The fact that a unilateral mistake is sufficient (without the additional ingredient of misrepresentation or fraud) to make a gift voidable has been attributed to gifts being outside the law’s special concern for the sanctity of contracts (O’Sullivan, Elliott & Zakrzewski, The Law of Rescission (2007), para 29.22):

‘It is apparent from the foregoing survey that vitiated consent permits the rescission of gifts when unaccompanied by the additional factors that must be present in order to render a contract voidable.  The reason is that the law’s interest in protecting bargains, and in the security of contracts, is not engaged in the case of a gift, even if made by deed.’”

40.  The Declaration of Trust is not on its face a gratuitous disposition.  As mentioned above, it recorded that the Deed of Trust was executed in view of the Beneficiaries having collectively paid the entire Capital Contribution of D2 and had requested D1 (qua Trustee) to register the Capital Contribution in its sole name.  In the premises, I see no reason why the Court should apply the test for rescission of mistaken gifts in the present case.  In any event, since counsel for D1 makes no submissions by reference to the elements set out in Pitt v Holt (in particular the requirement of unconscionability), with the effect that P now lacks the opportunity to consider these matters and explore the same in evidence, I do not think it would be right for the Court to embark on such an analysis. 

41.  P submits, and I accept, that D1’s case is not one of common mistake.  It is well established that a “mistake” refers to a positive belief in something which is not in fact true, rather than the situation where a party has simply not thought about a particular issue or forgotten about it (Sealegend §54, Bank of China (Hong Kong) Ltd v Keen Lloyd Energy Ltd unrep., CACV 132/2011, 23 Mar 2012, §30(1) per Cheung JA).  D1 has not pleaded any positive belief on P’s part.  The only “mistakes” and state of mind pleaded by D1 are those of Mr Or and Mr Chan in his capacity as signatory on behalf of D1.  It is worth setting out D1’s somewhat convoluted plea of mistake in full:

“16. In or about late 2005, Mr. Chan had severe disease (liver cancer) and had undergone a major operation at that time. In fact, Mr. Chan has undergone a series of surgeries and medical treatments in the hospital since 2005 till now. At that time, Mr. Chan could not actively participate in the daily management of the Group. Mr Chan then wished to ask his senior employees to make more efforts to manage the companies they respectively worked for and Mr Chan had offered that if they did a good job, then they might have some gratuities or discretionary bonus. Mr. Chan's wife, who was residing in Canada, urged Mr. Chan to take a long sick leave for recovery. With the intention to help her husband, she requested her relative, [Mr Or], who is also residing in Canada, to come to Hong Kong to help Mr. Chan. With the mission to help Mr. Chan, [Mr Or], (who is the husband of cousin [sic] (表妹夫) of Mr. Chan) suggested to Mr. Chan that Mr. Chan should make such gratuitous offer in writing so as to maintain the dedication of the senior employees. Mr. Or then invited a solicitor to draft some sort of documents for such gratuitous offer.

17. In or about August 2006, Mr. Or acting for Mr. Chan, instructed Messrs. Jesse H. Y. Kwok & Co. to draft a purported Declaration of Trust. Limited by the knowledge in legal terms [sic], Mr. Chan did not express with the exact wordings which should use on the document that drafted at that time. At all material times, Mr. Chan did not appreciate the true effect and legal meaning of the Declaration of Trust and he only firstly read such document (the Purported Trust) when he signed on it on 21^st August 2006. Mr. Chan’s true intention should be the discretionary bonus for those senior employees for their effort spent for the respective companies being employed only [sic]. At all material times, Mr. Or, did not know the history of shareholding of the 1^st Defendant and/or the paid-up capital of [D2].

18. At that time, Mr. Chan’s serious illness had not yet fully recovered. Due to his severe disease at that time, Mr. Chan did not remind Mr. Or and Mr. Kwok that [Mr Kan], [Mr Lee] (who passed away in September 2012, [Mr Lee]) and [P] did not pay any capital contribution of [D2] at all. At the material times [sic], Mr. Or (who instructed Messrs. Jesse H. Y. Kwok & Co to draft the Declaration of Trust (the Purported Trust)) was confused and mistakenly treated Mr. Kan, [Mr Lee] and [P] were the senior staff members of the [D1] and/or [D2] as the [D1’s] name is similar to [Maintown Engineering]. In fact, Mr. Kan, [Mr Lee] and [P] have never been the employees of the [D1] and/or [D2] at all times. Still due to the impact of his severe disease at that time, Mr. Chan was confused about the nature of the Purported Trust was related to discretionary bonus and he was also confused that Mr. Kan, [Mr Lee] and [P] had indirectly contributed to the capital contribution of [D2] (in fact, they (including [P]) have never made any direct or indirect capital contribution of [D2] as alleged or at all). Mr. Kan, Mr. Lee and [P] only worked for [Luen Shing Holdings] and its subsidiaries at all material times in particular in 2006 and Mr. Chan had indirect beneficial interest in [Luen Shing Holdings] and its subsidiaries since 2004. Accordingly, the purported Declaration of Trust for [D2] should not be drafted and executed at all. […]

28. Still further and/or alternatively, the Purported Trust sued on was entered into by mistake.

PARTICULARS OF MISTAKE RELIED ON

(1)  [P] was a senior staff who worked at the [D1] and/or [D2];

(2)  [P] has paid the capital contribution of [D2] directly or indirectly for USD1,500,000”

(underlined added)

42.  Accordingly, D1’s case can only be one of unilateral mistake.  D1’s counsel confirms this in his oral closing.  Such a plea is similarly unsustainable.  In the first place, the alleged mistake that “[P] was a senior staff who worked at [D1] and/or [D2]” is evidently not a mistake as to the terms of the Declaration of Trust but a mistake as to a fact forming the basis upon which the deed was executed. 

43.  I am prepared to accept that the alleged mistake that P had paid the capital contribution of the Company was a mistake as to the terms of the contract, given that this fact was recited in the first recital to the Declaration of Trust.  That said, D1 runs into another pleading issue.  It is well settled that a unilateral mistake will only affect a contract if the other party knew, or at the very least, ought to have known,^[4] of the mistake (Chitty §3-022 – 3-023).  Such actual or constructive knowledge is plainly a material fact which must be pleaded.  However, in D1’s Defence, there was no plea on P’s state of mind, let alone any averment that P knew or ought to have known of the mistake.  Nor does D1’s counsel put such suggestion to P in his cross-examination.  In oral closing, D1’s counsel confirms that there is no plea or evidence that P knew or ought to have known that Mr Chan was labouring under any mistake when he executed the Declaration of Trust.

44.  Similarly, there is no plea or evidence that Mr Wong, who executed the Declaration of Trust (qua director) on behalf of D1, was under the alleged or any mistake.  This again is fatal to D1’s case.  As Mr Chan accepts in cross-examination, until his retirement in 2010, Mr Wong played an active and pivotal role in the affairs of the Group and was the person entrusted with the responsibility of discussing and agreeing with P, Mr Kan, Mr Lee and Mr Ng on their terms to work for the Group back in 1986, which resulted in, inter alia, Wong’s Offer (in 1986) and the Maintown Declaration (in 2010).  There was no suggestion that Mr Wong was not involved in reviewing and signing the Declaration of Trust, particularly when he was one of the Beneficiaries named therein.  In these circumstances, his knowledge should be attributed to D1.  I do not see how D1 can advance a defence of unilateral mistake when only one of its two directors and decision-makers was under the alleged mistake. 

45.  The above analysis suffices to dispose of D1’s case of mistake.  But even if I am wrong, I do not consider that D1 has made out its allegations on the facts:

(1) For the reasons explained in §§29–3432 above, I do not accept Mr Chan’s evidence that the agreement reached by the 7 founding members of Luen Shing Mould Factory Limited in 1986 was a profit-sharing arrangement limited in respect of  that company alone.  I find on the balance of probabilities that there was an Oral Agreement between the 7 founding members of Luen Shing Mould Factory Limited that P would be entitled to a 4% interest in all companies within the Group, which was given effect by the Declaration of Trust and the Maintown Declaration.  I am unable to detect any material inconsistencies in P’s written and oral evidence.  I do not accept D1’s criticism of P’s evidence as evasive on the basis that he answers a number of questions as “I guess” (估計) and “It was arranged by the company” (公司安排).  Rather, I consider that this is indicative of his willingness to give evidence as he understood and recalled, and his recognition of the limits of his personal knowledge.  P’s lack of detailed knowledge as to the reasons for the many changes in the corporate structure of the Group and the reasons for why he was asked to sign the many documents he did is also unsurprising given that (as is accepted by both sides) the Group was primarily controlled by Mr Chan and Mr Wong.

(2) More importantly, P’s case is corroborated by the documentary evidence, most significantly the terms of the Maintown Declaration which (as D1 accepts) concerned with the beneficial interest in Maintown Guangzhou.  It is also consistent with Mr Kwok’s evidence that the Declaration of Trust and the Maintown Declaration were prepared based on Mr Chan’s instructions (through Mr Or) in order to deal with the beneficial interests in D2 and Maintown Guangzhou respectively.

(3) It necessarily follows that I reject D1’s case (to the extent that it relies on Mr Chan’s oral evidence) that the Declaration of Trust was intended as a gratuitous bonus to senior employees of D1 and D2 in light of Mr Chan’s ill health.  Indeed, this assertion makes no sense, given that Mr Chan was also listed as one of the Beneficiaries in the Declaration of Trust.  Mr Chan has no answer to this point when it is put to him in cross-examination, other than saying that this arrangement was not unreasonable. 

(4) I also find that Mr Chan was not under any positive belief that P was a senior employee of D1 and/or D2 at the time he executed the Declaration of Trust.  By that time, Mr Chan and P had worked with each other for nearly 20 years.  It is scarcely believable that he would have had any misapprehension about P’s role in the Group.  In any event, I accept P’s evidence that the Group largely operated as a single business primarily under the direction of Mr Chan and Mr Wong.  As a result, any belief Mr Chan had about P’s role in D1 and D2 was not materially incorrect.

(5) Similarly, I reject D1’s case that there was a mistake as to whether P had paid any capital contribution to D2.  On Mr Chan’s own evidence, he never entertained such a belief: all he says is that “I did not remind Mr Or and Mr Kwok that … [P] did not pay any capital contribution of [D2]”.[5]  Furthermore, if, as is Mr Chan’s assertion, the Declaration of Trust was intended to effect a gratuitous bonus to his employees, any such belief was not operative in his mind when he executed the Declaration of Trust.

(6) I also find that Mr Chan was fully aware of the nature and contents of the Declaration of Trust when he executed the document.  In the first place, Mr Chan was on all account a very experienced commercial actor who was familiar with the use of “hidden” (ie beneficial) shareholders.  Mr Chan’s own evidence is that he read the Declaration of Trust when signing it.[6]  Under cross-examination, he also recognises the importance and binding effect of legal documents.  His assertion that “he did not appreciate the true effect and legal meaning of the Declaration of Trust” rings very hollow.

(7) Mr Chan’s understanding of its terms is separately evidenced by the Option Agreement, Irrevocable Power of Attorney and Deed of Undertaking, which P signed upon Mr Or’s request in August 2010.  I consider that his bald denial of knowledge of these documents is not believable.  It is common ground that Mr Or did from time to time assist Mr Chan with managing his affairs.  Mr Kwok testifies that while he never received any direct instructions from Mr Chan, he understood that whenever Mr Or gave instructions in relation to the Group he did so based on Mr Chan’s instructions and as his agent.  More importantly, Mr Chan’s assertion is inherently improbable when the stated purpose of the Deed of Undertaking was to give effect to Mr Chan’s desire to reorganize the Group, while the Deed of Undertaking and Irrevocable Power of Attorney were to confer rights on him.  As for the Option Agreement, I similarly reject Mr Chan’s evidence that he was not associated with Silvergear. It is not in dispute that Silvergear was a director of Chassington International Limited between 2004 and 2009.  In turn, Chassington International Limited was, on Mr Chan’s own evidence, a company he set up to hold the shares of Luen Shing Holdings.[7]

(8) Insofar as D1 relies on Mr Or’s alleged mistake as the basis for its claim to set aside the Declaration of Trust, even if his state of mind may be attributed to D1 (which has not been made out), there is simply no evidence before the Court as to his state of mind at the time.  All D1 is able to point to is Mr Chan’s speculative assertion that “Mr Or might have confused and mistakenly treated Mr Kan, [Mr Lee] and [P] were [sic] the senior staff members of [D1] and/or [D2]”[8] (emphasis added). 

46.  For these reasons, I consider that D1 has failed to discharge the burden of proving its case of mistake.  There otherwise being no challenge to the validity of the Declaration of Trust, I find that it is valid and binding as between P and D1. 

Non-fulfilment of condition precedent

47.  I do not accept D1’s contention that it was an express or implied condition precedent of the Declaration of Trust that the Beneficiaries must have paid D2’s capital contribution.  On a plain reading of the recital that “WHEREAS the Beneficiaries are the beneficial owners of the Capital Contribution and Investments respectively specified in the 2^nd Column of the First Schedule hereto who together paid the entire Capital Contribution of [D2]” (underlined added), it is a statement of past fact. 

48.  My reading of the recital is reinforced by my finding above that the purpose of the Declaration of Trust was to give effect to the Oral Agreement between the 7 founding members of Luen Shing Mould Factory Limited as to their respective beneficial interests in the Group companies.  Clearly, the underlying purpose of the Declaration of Trust would be defeated if the recital were construed as obliging the Beneficiaries to pay in D2’s Capital Contribution. 

49.  Furthermore, as mentioned above, D2 was formed and registered in 1993.  D1’s own evidence is that the entirety of D2’s capital contribution had been fully paid up by April 2001 at the latest.[9]  Against this background, the alleged condition precedent that the Beneficiaries pay in a sum which has already been paid makes no sense at all.  When this is put to D1’s counsel during closing, he is unable to provide any answer on the point.   

50.  For essentially the same reasons, there is no room for any implied condition precedent on the lines suggested by D1 either. 

51.  Even if, contrary to my view above, it was a condition precedent to the Declaration of Trust that the Beneficiaries must have paid in the Capital Contribution, I consider that D1 is contractually estopped from asserting that this condition precedent had not yet been fulfilled.  The relevant principles are those explained by Lord Toulson in Prime Sight v Lavarello [2013] UKPC 22 [2014] AC 436, §41, cited with approval by Lam VP in Asgain Co Ltd v Cheng Ka Yan (No 2) [2018] HKCA 200 [2018] 2 HKLRD 641, §11.  In summary, a recital can operate as an estoppel if as a matter of construction it amounts to a mutual agreement to treat it as true, and if there are no vitiating factors such as illegality or misrepresentation, then the fact that the parties have willingly so bound themselves is itself sufficient reason for the contract to be enforced.  The mere fact that parties knew that it was false is not sufficient to defeat the effect of the clause. 

52.  In the present case, the preamble to the Declaration of Trust stated that the Beneficiaries had paid the Capital Contribution of D2.  In my view, it cannot sensibly be construed as anything but a mutual agreement to treat it as true.  Absent any vitiating factor (given my findings on mistake above), D1 is estopped from contradicting the facts set out therein.   

53.  Counsel for D1 does not seek to argue that the recital did not amount to a mutual agreement to treat the Beneficiaries as having paid in the Capital Contribution.  Instead, he submits, firstly, that the issue has not been pleaded, and that secondly, contractual estoppel is a principle of commercial contracts which does not apply to declarations of trust.

54.  I reject both arguments.  The statement in Hong Kong Civil Procedure 2021 §18/8/11 that estoppel “must be specifically pleaded” on which D1 relies must be read in its proper context.  The reason why a party who wishes to rely on an estoppel must specifically plead (1) the representation alleged to have been made, (2) the reliance which it has placed on the representation, and (3) the detriment which he has suffered in reliance of the representation is so that the other party knows what the live issues are and can accordingly adduce evidence in response to these allegations.  This concern does not arise as far as contractual estoppel is concerned: it does not depend on any representation, nor is proof of reliance or detriment necessary. It simply requires a contractual term which, on its true construction, amounts to an agreement to treat a certain state of affairs as true.  It is for this reason that contractual estoppel has been described as little more than a “convenient label” for describing a situation which lacks “a defining characteristic of estoppels”, namely “a detriment in some form or another” (Credit Suisse International v Stichting Vestia Groep [2014] EWHC 3103 (Comm), §309 per Andrew Smith J). 

55.  This was also the view of Barma JA (with whom Cheung JA agreed) in Nokia Corp v TCT Mobile Ltd [2017] 3 HKC 102.  There, the Court was similarly concerned with an argument that the plaintiff was debarred from running a case of contractual estoppel by virtue of its pleadings.  His Lordship held at §25 that:

“I would accept that the plaintiff has not expressly referred to a contractual estoppel in its Re-Amended Reply. However, it seems to me that all of the necessary contractual provisions have already been pleaded by one or other of the parties, so that there is no impediment to the plaintiff advancing such a case should it wish (as it now does) to do so. As the estoppel is based on the terms of the contract itself, I do not see that any evidence (other than the contract) will be required to make it out, and there is no reason why it cannot be considered at this stage.”

56.  In his closing submissions, D1’s counsel cites Joytex Development Limited v Super Homes Limited [2018] HKCFI 2286 HCA 18/2012 (unrep., 10 Oct 2018), §§133-134 (DHCJ Alexander Stock SC) as authority for its submission.  However, it seems to me that this case is of limited assistance, given that on its facts it is not entirely clear whether the subject clause has been pleaded by either party.  In any event, to the extent that it suggests that contractual estoppel must be specifically pleaded, I respectfully agree with, and am in any event bound by, Barma JA’s analysis in Nokia Corp v TCT Mobile Ltd. 

57.  Returning to the present case, the subject recital to the Declaration of Trust was pleaded by D1 in its Defence and Counterclaim.[10]  As such, P is entitled to refer to and rely on the clause in any event. 

58.  D1’s second argument fails to recognise the fact that the doctrine of contractual estoppel is simply a logical corollary of the binding effect of contractual terms.  It is for this reason that the doctrine applies equally to simple contracts and to deeds (Prime Sight, §46 per Lord Toulson).  In my judgment, there is similarly no basis for distinguishing between commercial and non-commercial contracts, or declarations of trust and other types of deeds as far as their binding effect, and consequently the operation of contractual estoppel, is concerned. 

59.  Counsel for D1’s reliance on the maxim that “equity will not assist a volunteer” in support of his submission is wholly misplaced.  Such maxim is not of freestanding application; it is little more than a succinct summary of the law on incomplete gifts and the bar to specific performance of contracts unsupported by consideration.  It does not operate to displace well-established general principles of law just because the case contains an equitable component.  It is worth bearing in mind the cautionary reminder in Snell’s Equity (34^th ed), §5-001, that:

“A maxim of equity is ‘not a specific rule or principle of law. It is a summary statement of a broad theme which underlies equitable concepts and principles’. As a result, the utility of the equitable maxims is limited. A party cannot, for example, seek to rely directly on such a maxim in order to circumvent well-established rules or principles.”

Want of subject matter

60.  I do not think there is any merit in D1’s contention that the Trust fails for want of subject matter either.  In my judgment, the phrase “Capital Contribution” in the Declaration of Trust simply refers to ownership of D2.  In my view, this is clear from the fact that clause (7) of the Declaration of Trust speaks of the Trustee being entitled to attend shareholders meetings “by virtue of being the registered proprietor of the Capital Contribution”, and clause (8) obliges the Trustee to provide the Beneficiaries with information concerning D2 available to it “as a shareholder”.

61.  It is also entirely understandable that the parties drafted the Declaration of Trust in such a way.  As a Mainland company, D2’s ownership is not divided into shares but is rather apportioned by reference to its registered or paid up capital.  This can be seen from its Articles of Association, which speaks in terms of capital contribution (出资额) and registered capital (注册资本).[11]  Similarly, D2’s shareholder details are registered with the Administration of Industry and Commerce of Guangzhou Municipality in terms of capital contribution:

“股东情况： (1) 敏腾实业有限公司 出资额：3000 (万元) 出资比例： 100% 出资方式：货币”

62.  D1’s proposed construction also runs counter to the purpose of the document, which, as I find, was to give effect to the Oral Agreement.  Its submission effectively means that it was only obliged to hold on trust such capital contribution transferred to it by the Beneficiaries.  However, such a reading makes no sense when one bears in mind that D2’s registered capital contribution has been fully paid up by April 2001. 

Relief

63.  Finally, I reject D1’s contention that it is not capable of transferring to P a 5% interest in D2.  First, there is nothing in D2’s Articles of Association which prevents the transfer or division of D2’s ownership.  To the contrary, Article 25 provides that “下列事项由出席董事会会议一致通过方可作出決議 … (三)、外资企业注册资本的增加、转让以及其他方式的处置；(四)、外资企业的分立或与其他经济组织的合并。”.  Second, insofar as D1 contends that D2’s ownership is incapable of being split by virtue of its status as a “limited company (sole investment of Taiwan, Hong Kong and Macau legal person)”, this is not an issue which has been raised by D1 (or D2 for that matter).  Nor is there any evidence before the Court.  It is well established that foreign law is a question of fact which must be distinctly pleaded and proved (Dicey, Morris and Collins on the Conflict of Laws (15^th ed) §9R-001).

64.  I am also unable to agree with D1’s submission that cl (8) of the Declaration of Trust only obliges D1 to provide D2’s accounts and documents upon a request made by the Beneficiaries jointly. There is nothing in the language used which militates towards such a construction: on its face it can equally be read as requiring a collective request of the Beneficiaries or a request by any one of them.  In my judgment the latter construction is plainly more consistent with commercial common sense and thus ought to be preferred.  In any event, as a matter of general trust law, and as D1’s counsel accepts in his oral closing, a beneficiary has a right to seek disclosure of trust documents as an aspect of the court’s inherent jurisdiction to supervise and intervene in the administration of trusts (Schmidt v Rosewood Trust Ltd [2003] UKPC 26 [2003] 2 AC 709, §51 per Lord Walker).  Therefore, even if clause (8) bears the meaning D1 contends, I do not think it is an obstacle to P’s claim for copies of D2’s accounts and records.

Conclusion

65.  For the reasons above, I give judgment to P and make the declarations and orders which it seeks.  I dismiss D1’s Counterclaim.  The parties be at liberty to apply to the Court for the purpose of executing or carrying into effect the terms of the Order. 

66.  As for costs, I make an order nisi that D1 and D2 do pay P’s costs of this action, to be taxed if not agreed.