CHU CHUNG MING v. NGAI SAU WAH

CACV16 /2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 16 OF 2013

(ON APPEAL FROM HCA NO. 673 OF 2011)

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REASONS FOR JUDGMENT

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Hon Cheung CJHC:

1. I agree with the Reasons for Judgment given by Yuen JA.

Hon Yuen JA:

2. This is the plaintiff’s appeal from a judgment of Deputy High Court Judge Cheng SC dismissing the plaintiff’s claim for a declaration that he is entitled by way of express or resulting trust to beneficial ownership of 690,789 shares in Capital Honour Enterprises Ltd (“Capital”), alternatively for an order that the defendant repay $1m to him with interest.  On appeal, the claim has been limited to the shares only.  At the conclusion of the hearing before this court, we dismissed the appeal with costs to the defendant/respondent, with certificate for two counsel.  My reasons appear below.

Background

3. The case involves 3 siblings of the Lam family, and some of their spouses, namely:

- Lam Wai Dan (“LWD”), whose wife is Chan Sui Fong,

- Lam Kit Hang (“LKH”), whose husband is the plaintiff Chu Chung Ming (“CCM”), and

- Lam Wai Tat (“LWT”) whose wife is the defendant Ngai Sau Wah (“NSW”).

4. LWD and CCM were the registered shareholders of a company called Sun Shing Machinery and Construction Co Ltd (“Sun Shing”) holding the shares in equal portions.  The business of Sun Shing had grown since the 1980's.  It was incorporated in 1994, and after its incorporation, a number of associated companies were formed.  For convenience, I will refer to Sun Shing and its associated companies as “the business”.  Apart from LWD and CCM, other members of the family also worked in the business, including LWT and LKH.

The OD accounts

5. LKH was in charge of the accounts of the business.  It was common ground that in order to save on overdraft interest payable by the companies in the business, individual accounts with overdraft facilities were opened by LWD, LWT, CCM and his brother Chu Chung Chung (“CCC”).  These accounts served a dual purpose - they were for the account holders’ personal use as well as the use of the business.  Money was transferred freely among the 4 accounts (which were called “the OD accounts”).  The cheque books for these accounts were kept with LKH, and she kept a book which recorded monetary transactions relating to the business.  However this book was lost.  As will be seen later, the OD accounts feature significantly in the present proceedings.

Acquisition of Capital Honour Enterprises Ltd

6. The subject matter of these proceedings is a company called Capital.  It held some land in the New Territories.  Originally it had 4 shareholders, namely LWD and 3 of his friends, holding the company in equal shares.

7. In April-May 2007, the Capital shareholders wished to cash in their interests. LWD told his family about it.  The price that the Capital shareholders were eventually prepared to accept was $1.52m.  Initially the transaction was by way of sale of the land, but this was later changed to be by way of sale of all the shares of Capital. 

8. It is not disputed that:

(1)  on 22 May 2007, NSW paid from her personal account a sum of   $100,000 to Capital as an initial deposit for the purchase of the    land;

(2)  on 1 June 2007, NSW paid from her personal account a 2^nd tranche of $52,000 (making up a total of 10% of the purchase price), it having been agreed in the meantime that the transaction would be changed from sale of the land to sale of the shares in Capital;

(3)  on 8 August 2007, NSW paid from her personal account the   balance of 90% (ie $1,368,000), by way of 4 cashier orders, one for   each of the 4 original shareholders, including LWD who received   for   his shares a total sum of $380,000;

(4)  NSW became the sole shareholder and the sole director of Capital. 

9. It is also not disputed that after payment of the 2^nd tranche, on 1 and 2 August 2007 a total sum of $1m was transferred to NSW’s account, being $650,000 by way of 2 cheques from CCM’s OD account and $350,000 by way of a cheque from CCC’s OD account. 

Issue

10. What is in dispute between the parties is whether these monies (totaling $1m) were CCM’s personally, paid to NSW as his trustee to fund his acquisition of part of the shares in Capital, or whether these were repayments by the business to LWT, which he directed to be paid to his wife NSW for her purchase of all the shares of Capital.  

CCM’s case

11. CCM’s case was that he personally put up $1m to acquire the shares in Capital, with LWD personally putting up the balance of $520,000.  However as LWD did not wish the other 3 shareholders of Capital to know that he and CCM were buying up the shares, NSW was nominated as the purchaser.  It is important to note that CCM’s case is based on an express or resulting trust (although neither is specifically pleaded in the Statement of Claim) that NSW held the relevant shares in Capital for him personally as beneficial owner.

NSW’s case

12. NSW denied that she acquired the shares of Capital (or any part thereof) on trust for CCM.  The transfer of funds from CCM and CCC was explained as follows.  Her husband LWT had recently received $1.9m from the sale of a piece of land he owned.  He had deposited the money into his OD account.  When they (LWT and NSW) decided to purchase Capital, he (LWT) asked LKH how much money he had available, and when he was told that the business owed him about $1.1m, he asked her (LKH) to arrange for $1m to be transferred to NSW’s account.  That sum of money was then transferred from CCM’s and CCC’s OD accounts.

Judgment

13. At trial, the issues which the judge needed to determine were:

(1)   first and foremost, whether Capital was acquired by CCM and    LWD personally, with NSW holding it for them on express or   resulting trust;

(2)  secondly, even if Capital had been acquired by NSW beneficially,   was that with the help of personal funds from CCM, in which event CCM’s alternative case for repayment would kick in. 

However, as mentioned earlier, the second (alternative) case is not being pursued on appeal, so the only issue before this court is whether part of the shares of Capital had been acquired by CCM personally.

14. There was a 4-day trial, in which viva voce evidence was given by CCM, his wife LKH and his brother CCC for the plaintiff.  Giving evidence for the defence was NSW, her husband LWT and his brother LWD (who denied that there was any agreement between him and CCM personally to acquire Capital).  LWD’s wife also gave evidence but that is not material for present purposes.

15. The judge rejected CCM’s case that he had agreed with LWD to acquire Capital in the name of NSW.  LWD denied any such agreement.  The judge accepted he was a credible witness.  Further, the judge found that CCM knew little about Capital’s affairs, and his excuse that he trusted LWD with them was not accepted as the relationship between them by that time was already very strained.  The judge also did not accept CCM’s allegation that NSW was asked to be his (and LWD’s) nominee as LWD did not wish the other 3 original shareholders of Capital to know that he (LWD) was retaining an interest in it. The judge rejected CCM, LKH and CCC’s evidence.  These are essentially findings of fact made by the judge after having seen and heard evidence from the witnesses first-hand. 

Appeal -

Claim based on express trust

16. I shall first examine CCM’s case.  Insofar as he alleged an express trust, there is no documentary evidence to support it.  The absence of documentary evidence is surprising in the circumstances of his case.  CCM had started secretly recording his conversations with LWD from April 2007 (Transcript p19-J), because (according to CCM) LWD had a habit of reneging on what he said.  On CCM’s own case therefore, he harboured a high degree of mistrust of LWD. And yet when (as CCM alleged) he agreed with LWD to acquire Capital in the name of NSW, CCM made no attempt to audio record that agreement with LWD or with NSW, or to obtain an acknowledgment in writing from either of them.

17. I would add that there is also no documentary evidence (or indeed, any other form of evidence) that LWD had contributed $520,000 for his new shares, or at least the balance of $140,000 as he only received $380,000 for his original shares in Capital. 

18. Further CCM’s evidence that NSW hadorally agreed to be trustee for him and LWD at a meeting (Transcript p15-S) was inconsistent with the evidence of his wife LKH who, in her account of the same meeting, said all the women (which would have included NSW) had refused (Transcript p65-K).  It is notable that the allegation of NSW’s oral agreement at the meeting was not in CCM’s witness statement, and the judge was entitled to find that it was a recent fabrication (Judgment para. 30(2)). 

19. It would be convenient to add at this juncture that the judge was also entitled to reject CCM’s case that he and LWD wanted NSW as their nominee because LWD did not wish the other 3 original shareholders of Capital to know about his continued interest in the company.  There is no evidence from any of the other 3 original shareholders that it would have made a difference to them.  

Claim based on resulting trust

20. Insofar as CCM alleges a resulting trust from the transfer of funds from his and CCC’s OD accounts, it is important to note the undisputed evidence that these OD accounts were also used for the business and that the judge accepted that Sun Shing owed LWT $1.1m.  Counsel for CCM emphasized that NSW’s original pleaded case was that it was CCM and CCC, not the business, who owed LWT money.  However, irrespective of this pleading point, the more significant point is that the OD accounts were for a dual purpose.  Therefore this is not a case of a resulting trust which is presumed to arise when property is purchased in the name of a person using moneys provided by another.  Any such presumption (if it arose) would have been easily rebutted by the undisputed evidence of the dual purpose of the OD accounts, and so the burden was on CCM to prove that he provided the $1m in his personalcapacity for NSW to acquire Capital.  This burden was not discharged (see para 57(6) of the Judgment).

21. Given CCM’s failure to prove any express or resulting trust, the judge was entitled to dismiss his action.

NSW’s recorded statement

22. On appeal it was submitted on behalf of CCM that a statement made by NSW (in the course of a discussion between LWD, CCM and others over Sun Shing) amounted to an admission that CCM had a share in Capital, and that the judge failed to give sufficient or any weight to it. 

23. By way of background, LWD and CCM had been discussing a break-up of the business for some time.  However, amongst other things, CCM and LWD could not agree on whether LWT (who was not a registered shareholder of Sun Shing) was a part owner of the business.  LWD’s position was that LWT was a part owner and it was only because he (LWT) had been too young when Sun Shing first started, that he was not registered as a shareholder. 

24. This issue of LWT’s entitlement (even though he was not a registered shareholder) was being discussed, somewhat acrimoniously, at a meeting on 18 May 2009 between CCM, his son Chu Cheung Fai, LWD and a member of staff Mr Wong. In the course of the meeting, NSW entered the room to help with printing out a document, and was recorded saying (counter 282):  

“ 我有一個意見，嗱，如果你咁講，亞德哥[LWT]冇、冇、冇落名，冇意見，咁常康[Capital]嗰笪地係我個名，咁係咪又－－又冇你份呢?”

That was all that she said as LWD then said (counter 283):

“唔好同佢講，妳 (…) 收聲，妳收聲，妳走，妳走，妳 - ”

and then (counter 285):

“唔關妳事，妳 - - 妳係女人，妳唔好搭嘴。”

25. Having listened to the audio recording in chambers, I am prepared to accept the submission on behalf of CCM that NSW’s statement was a “rhetorical question blurted out … as a ‘tit for tat’ challenge to the Chu family”.  Further I am prepared to accept his further submission that NSW’s attempts in her witness statement and in the witness box to explain the statement (by reference to her fear that he might also make a claim on her absolute ownership of Capital) appear somewhat contrived. 

26. However, even so, the statement does not amount to an unequivocal admission on the part of NSW that CCM had a personal interest in Capital, because it is equally consistent with a scenario in which Capital had been acquired by Sun Shing, in which CCM had a share and as such, an indirect share in Capital. This scenario was in fact what CCM himself advanced earlier at the same meeting, saying (counter 87):

“咁公司名下物業呀，…常康呀，你而家運作緊嗰啲 - - 整 緊嗰啲 … 都係公司有份㗎啦，係公司資產嚟㗎。”

27. In view of the equivocal nature of NSW’s statement, it cannot be taken as an admission that CCM had acquired any shares in Capital in his personal capacity, which is his case.  Of course it is not consistent with NSW’s case of absolute ownership either, but what matters in these proceedings is whether CCM can establish his claim to personal ownership of some of the shares in Capital by way of express or resulting trust.

The List

28. It follows from the above conclusion that it matters not whether, or when, NSW had sight of the list written by CCM as to what he wanted on a break-up of the business. 

Other submissions

29. The other points submitted on behalf of CCM can be dealt with summarily.  There are no grounds for the submission that it was “inherently incredible” that LWD would have “let” LWT and NSW take over Capital.  The evidence was that LWT had received $1.9m from the sale of a piece of land he (LWT) owned, and the judge accepted the evidence that he and his wife NSW liked the location of the land owned by Capital.  It cannot be seriously suggested that, just because LWD might have been able to borrow money from the business, it was “inherently incredible” that he decided to let go of Capital. 

30. On the contrary, the judge was perfectly entitled to decide that given the strained, if not hostile, relationship between LWD and CCM, it was inherently unlikely that CCM would have acquired Capital together with LWD in another person’s name without any acknowledgment of his (CCM’s) interest.  The judge was also entitled to take into account the fact that for 3½ years after NSW became the sole registered shareholder of Capital, CCM did not assert any claim in Capital, nor sought to become a director of that company (even though, on his case, he was its majority shareholder), notwithstanding the further deterioration of his relations with LWD and his institution of other legal proceedings (the winding-up of Sun Shing on the just and equitable ground) in October 2009. 

Order

31. For the reasons set out above, the appeal was dismissed.  Although the issues were straightforward, the matter was certified fit for two counsel as it was reasonable to retain trial counsel for the appeal, and as he is relatively junior, it was reasonable to instruct leading counsel.

Hon Kwan JA:

32. I agree with the Reasons for Judgment of Yuen JA.