XCHRX MARIE F. LEYRER and Another v. ELMER YUEN and Another

1996 No. A3547

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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INTRODUCTION

1. On 27th March, Wong J. made various interlocutory orders ex parte in favour of the Plaintiffs. Those orders were continued by Rogers J. and Yeung J. until the hearing of the Plaintiffs' inter partes summons for the continuation of the orders until trial or further order. For their part, the Defendants applied for the orders to be discharged or varied. The Plaintiffs' summons for their continuation until trial or further order, and the Defendants' summonses for their discharge or variation, are now before me.

THE POSITION OF THE 2ND DEFENDANT

2. At the beginning of the hearing, I varied para. 5 of the order of Wong J. That had the effect of preventing the 2nd Defendant from using any more of its assets to fund the legal costs incurred by it in these proceedings. I did that because

(i) Mr. Malcolm Merry for the 2nd Defendant told me that his instructions were that, so far as the 2nd Defendant's solicitors were aware, the only assets of the 2nd Defendant were those assets in which the Plaintiffs claim a proprietary interest; and

(ii) I thought that there was a strong probability that the Plaintiffs' proprietary claim to the only remaining assets of the 2nd Defendant which remain in the possession of the 2nd Defendant would be held to be well-founded.

My reasoning was in line with that of the Court of Appeal in England in Sundt Wrigley & Co Ltd. v. Wrigley, unreported, 23rd June 1993, which Miss Audrey Eu Q.C. for the Plaintiff subsequently cited to me.

3. The effect of my variation of Wong J.'s order was that Mr. Merry withdrew the 2nd Defendant's summons for the discharge or variation of Wong J.'s order, and his instructions to continue to appear for the 2nd Defendant were withdrawn. I still, of course, have to decide whether to continue the order made against the 2nd Defendant until trial or further order, though without the benefit of Mr. Merry's submissions. However, I had read Mr. Merry's helpful skeleton argument, and I have taken the arguments in it into account in deciding what order I should make.

4. Mr. Merry's skeleton argument identified five grounds for saying that the order should not be continued:

(i) the Plaintiffs' interest is not in the assets of the 2nd Defendant, but in the shares of another company, Strategic Holdings Limited ("SHL");

(ii) even on the Plaintiffs' case, the property held in trust for them does not extend to the entirety of the corporate memberships in Mission Hills Golf Club;

(iii) the 2nd Plaintiff consented to the use of the assets of the 2nd Defendant and their removal from the jurisdiction;

(iv) the ban on selling block memberships is now academic since all the memberships have been sold; and

(v) the order would cause losses to third parties, namely various companies of which SHL was either the immediate or the ultimate holding company.

I propose to deal briefly with each of these five arguments in turn.

(i) THE NATURE OF THE PLAINTIFFS' INTEREST

5. The consequence of the agreement executed in January 1995 was that the 350 corporate memberships were issued to the 2nd Defendant. However, the transfer of the bearer shares in the 2nd Defendant to SHL could not, by itself, have affected the assets of the 2nd Defendant. Those assets remained the assets of the 2nd Defendant despite a change in the ownership of the 2nd Defendant. Moreover, there is a strong probability that it will be found at trial that the 1st Defendant's mere promise to transfer 50% of the shares in SHL to the 2nd Plaintiff to be held by her on behalf of herself and the 1st Plaintiff did not have the effect of converting the Plaintiff's beneficial interest in the corporate memberships or their proceeds of sale into an actual interest in her proposed shareholding in SHL. The evidence is that the 2nd Plaintiff thought that SHL was merely a trust vehicle to hold her investments for her. The transfer of shares in SHL could only have had the effect contended for by the 2nd Defendant if the shares had actually been transferred to the Plaintiffs (and they were not), and if the 2nd Plaintiff had agreed with the 1st Defendant that the transfer of the shares should have that effect.

(ii) THE EXTENT OF THE PLAINTIFFS' INTERESTS

6. The 2nd Defendant's case is that that part of Wong J.'s order which prevented it from dealing with the proceeds of sale of the corporate memberships was too wide because the Plaintiffs have a 49.4% interest in those corporate memberships at the most. Now that the position of the other beneficiaries (Edward Ting and Robert Yuen) has become clear, it is arguable that any future order freezing the proceeds of sale should be limited to that proportion of the proceeds of sale in which the Plaintiffs have an interest. I shall have to return to that point later.

(iii) CONSENT TO THE USE OF THE 2ND DEFENDANT'S ASSETS

7. The 2nd Defendant's case is that the 2nd Plaintiff was content for the proceeds of sale of the corporate memberships to be invested in companies owned by SHL. However, the evidence is that apart from permitting the 2nd Defendant to spend those sums necessary for the sale of the corporate memberships, the 2nd Plaintiff permitted the proceeds of sale to be invested in the companies which she was told were owned by SHL only under protest, and at a time when she did not know that persons other than the 1st Defendant had a stake in SHL.

(iv) THE PROHIBITION ON BLOCK SALES

8. The 2nd Defendant's case is that that part of Wong J.'s order which prevented it (and the 1st Defendant) from effecting block sales of more than 10 corporate memberships at only one time is academic, because the 2nd Defendant had agreed, prior to the order of Wong J., to sell all but a few of the remaining memberships. For their part, the Plaintiffs accept that if that is indeed the case they would be content for the order merely to prevent the 2nd Defendant from selling any of the remaining memberships without the Plaintiffs' consent. However, the Plaintiffs only have the 1st Defendant's word to go on about the block sale of 295 memberships by the 2nd Defendant, and until they have seen a copy of the agreement said to have been entered with Mission Hills (China) Limited, the Plaintiffs need the protection which that part of Wong J.'s order gave them.

(v) LOSSES TO THIRD PARTIES

9. The 2nd Defendant's case is that the effect of freezing the 2nd Defendant's assets is that the 2nd Defendant cannot continue to invest in the companies owned by SHL, and that such losses as those companies suffer as a consequence will not be covered by the Plaintiffs' cross-undertaking as to damages. However, it is trust funds which are being invested in the companies said to be owned by SHL. Moreover, there is no evidence that the 2nd Defendant or SHL actually have an interest in those companies, and such evidence as there is as to their worth suggests that they are far from being sensible vehicles in which trust funds should prudently be invested.

THE ORDER TO BE MADE AGAINST THE 2ND DEFENDANT

10. For these reasons, I have reached the clear conclusion that, with appropriate alterations to reflect the changed circumstances to which I have referred, the order which I should make today in relation to the 2nd Defendant is one which has the effect of continuing until trial or further order the order which Wong J. made. I shall turn to the precise terms of the order I should make in due course.

THE POSITION OF THE 1ST DEFENDANT

11. The position of the 1st Defendant has changed throughout the course of the hearing. Mr. Barry Hoy for the 1st Defendant had agreed with Miss Eu that he would address me first as to whether the orders made by Wong J. against the 1st Defendant should continue. However, in the course of addressing me, Mr. Hoy told me that the 1st Defendant would not object to certain orders being made against him. From what Mr. Hoy told me, it looked to me as if there was very little between what the Plaintiffs were asking for and what the 1st Defendant was prepared to submit to. I suggested that in those circumstances there may be sufficient common ground for the parties to be able to agree a consent order.

12. After the adjournment for lunch yesterday, I was told that the Plaintiffs and the 1st Defendant had agreed the terms of a consent order, and that a draft of the proposed consent order would be placed before me this morning. However, this morning Mr. Hoy told me that the 1st Defendant was not after all prepared to agree to the consent order including one of the terms of the draft consent order, and unless the Plaintiffs relented the 1st Defendant was not prepared to agree to any terms at all. The Plaintiffs did not relent, and the consequence was that no terms have been agreed between the Plaintiff and the 1st Defendant.

13. Be that as it may, Mr. Hoy has told me that although there are no terms which can be agreed with the Plaintiffs, he does not dispute that this is an appropriate case for an order of some kind to be made. That is because Mr. Hoy accepts that the proceeds of sale of those corporate memberships which have been sold, and any assets which have been acquired with funds provided by the 2nd Defendant out of the proceeds of sale of those of the corporate memberships which have been sold, should be frozen, though to the extent only that the Plaintiffs have an interest in them - albeit on the assumption, as I have found, that there is a strongly arguable case that the trust funds remain part of the assets of the 2nd Defendant.

THE ISSUES WHICH DIVIDE THE PLAINTIFFS AND THE 1ST DEFENDANT

14. Three issues now arise. The first relates to whether the interests of a third investor, Mr. Edward Ting, should be protected. He is not a party to the proceedings, though Miss Eu and the solicitors who instruct her have now been instructed on his behalf. I have decided that the order which I shall be making should protect his interests as well, though his solicitors will have to give on his behalf the various undertakings which are set out on p.2 of the draft consent order which I was handed this morning.

15. The second issue relates to the extent of the interests of the Plaintiffs and Mr. Ting. There are three possibilities:

(i) The amount which their contributions bear to the sum of US$709,067.00, i.e. the total amounts contributed according to the letter of 17th January 1995 at p.99 of the evidence bundle. That is 49.4% in the Plaintiffs' case, and 14.1% in Mr. Ting's case.

(ii) The amount which their contributions bear to US$800,000.00, i.e. the total contributions alleged by the 1st Defendant. That is 43.8% in the Plaintiffs' case, and 12.5% in Mr. Ting's case.

(iii) The amount which their contributions bear to US$1,500,000.00, i.e. the total sum to be invested by the 1st Defendant under the joint venture agreement made between him and his co-investors in June 1992. That is 23.3% in the Plaintiffs' case, and 6.7% in Mr. Ting's case.

It is strongly arguable that (iii) will be rejected at trial in view of the evidence which suggests that the 1st Defendant's contribution was at least US$700,000.00 short. The choice for the purpose of these interlocutory proceedings is between (i) and (ii).

In my view, it is arguable that the contributions did not exceed $709,067.00. The sum alleged to have been paid by Tele-Art may have been paid by Tele-Art as principal and not as agent for the 1st Defendant. In any event, there is evidence which suggests that the 1st Defendant's interest in Tele-Art, whether held by him directly or through SHL, is only in the region of 40%. For present purposes, therefore, the interests of the Plaintiffs and Mr. Ting in the trust funds should be treated as 49.4% and 14.1% respectively.

16. The third issue is whether such order as I make for the preservation of the trust funds should be limited to the extent of the interests of the Plaintiffs and Mr. Ting in them. I do not think that it should be. For the reasons I have given, it is arguable that the interests of the Plaintiffs and Mr. Ting in the trust funds amount to 63.5% of the funds. The other 36.5% of the funds would on that supposition be held in trust for Robert Yuen, the 1st Defendant's father. It would not be treating the beneficiaries equally if the trust funds were frozen only to the extent of 63.5%, but if Mr. Yuen was able to withdraw the proceeds of his investment now. It would be different if there was a distribution now of all the trust funds, but the danger of that is that at the trial of the action it may turn out that the percentages are otherwise than I have treated them to be for the purposes of disposing of this application.

17. That is therefore the approach which I propose to adopt in deciding the precise terms of the order which I should make against the Defendants, and I will now hear the parties on the precise terms of the order I should make to reflect the way in which the issues which divide the parties have been resolved.

(Brian Keith)

Judge of the High Court