CHOI GAIN CHEE AND ANOTHER v. KOWLOON DEVELOPMENT CO LTD AND OTHERS

HCA761/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.761 OF 2005

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Before : Deputy High Court Judge Muttrie in Chambers (Open to Public)

Date of Hearing : 20 September 2005

Date of Judgment : 19 October 2005

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J U D G M E N T

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1. The defendants apply to strike out the plaintiffs’ claim under Order 18 rule 19(1) (a), (b) and (d) of the Rules of the High Court, and the inherent jurisdiction of the court, and that consequential on such order the registration of the writ as a lis pendens against certain property be vacated, pursuant to section 19 of the Lands Registration Ordinance.

2.[J1]  The 1^st plaintiff (“Choi”) is a property investor and interior designer.  He and a Mr Lo Por Kit, (“Lo”) who was declared bankrupt on 19 April 2004, are the owners of the 2^nd defendant, World Tower. 

3. The 1^st defendant, (“KDCL”), is a listed company and property developer.  The 2^nd defendant (“Roe”) is its wholly owned subsidiary and a money lender.  The 3^rd defendant, (“KC”) was formerly owned by Choi and Lo, but it became a wholly owned subsidiary of the 2^nd defendant on 27 July 1998.  The chairman of its board of directors was formerly one Ng Siu Chang, known as “Uncle Chang”.

4. This action concerns a project for the development of properties at Nos. 31 and 31A-G, Robinson Road, Hong Kong.  The plaintiffs’ pleaded case tells a story of dealings by individuals, namely Lo, Choi and Uncle Chang, through their various “corporate vehicles”.  In brief, Lo and Choi, through World Tower were to be the developers and Uncle Chang through his companies the financier of the project.  But they fell out.  Now, all the land is in the ownership of KC.  Choi and World Tower seek a declaration that Choi and/or World Tower is the beneficial owner of the project, including the land and KC holds it on trust for them, or alternatively that they have a proprietary interest in the project; an injunction to restrain the defendants from selling off the units of the development without the plaintiffs’ consent; and an order for specific performance of the agreements between the parties.

5. The matter is already before the court, in action no. HCA 192 of 2003 (“HCA192”), which was brought by Choi, Lo and World Tower against the same defendants.  In it the plaintiffs sought specific performance of various pleaded agreements and declaratory reliefs including declarations that Choi and Lo are the beneficial owners of the project site, or that they are the beneficial owners of the share capital of KC, or that they are the beneficial owners of the project property and the project and/or the proceeds of sale therefrom.

6. When HCA192 was raised, the plaintiffs registered the writ as a lis pendens.  The defendants successfully applied to strike out the paragraph in the pleadings which averred that the plaintiffs held a beneficial and/or proprietary interest in the project, including the lands thereof, and the related prayers for declaratory relief which I have set out above.  They also applied to have the registration of the lis pendens vacated.  They were successful in their applications but the court stayed the vacation of the registration in order to allow the plaintiffs to apply to amend their pleadings.  The plaintiff so applied, but unsuccessfully; the stay was lifted and the registration vacated.  There the matter remained, until the plaintiff raised the present action, and registered a fresh lis pendens.

7. What is really at stake here is the registration of the lis pendens.  The defendants want it vacated.  Their position on this application is, first, that there is no reasonable cause of action, at any rate so far as the plaintiffs’ claim to a beneficial or proprietary interest is concerned, though there may be a claim in contract and second, that to bring the present action is an abuse of process, because the cause of action is pending in HCA192 and because, in that action, the claim in respect of beneficial interest in land has been struck out, and therefore issue estoppel applies.

8. The plaintiffs’ position is that they have a reasonable cause of action for a beneficial or proprietary interest arising out of the agreements made between them, which were not pleaded, or not pleaded in the same way in HCA192.  There is no decision in that action which would preclude their further amendment of the pleadings, but they have raised this fresh action to avoid the difficulties caused by Lo’s bankruptcy.  They do not intend duplication of proceedings, and will apply to discontinue HCA192.  There is therefore no abuse of process.

9. The issues for decision are therefore, first, whether the plaintiffs have pleaded a reasonable cause of action for beneficial interest or proprietary right.  If there is such reasonable cause of action, the issue of abuse of process arises.  Under this heading it is necessary to consider whether this action should in any event be struck out because the cause of action is already pending in HCA192 and to raise it afresh is an abuse of process and whether the raising of a fresh action, in order to register a fresh lis pendens, it itself an abuse.  Further, if there is no reasonable cause of action on beneficial interest or proprietary right, but the contractual cause of action remains, again there is the issue of striking out the whole action because of the pending action.  The question of issue estoppel also comes into the issue of abuse of process.

10. The plaintiffs plead that they have or continue to have beneficial interests in the “Development Project (including the Project Property and the Project Site)”.  As pleaded this is rather nebulous.  The Project Property seems to be the new buildings on the land lots, and the Project Site the land lots.  Of course the buildings go with the land and the lis pendens is registered against the land, so I take it that what the plaintiffs mean is that they have beneficial interests in or proprietary rights to the land.

The plaintiff’s pleaded case

11. This is quite complicated. The plaintiffs aver that in 1988, Lo formed the idea of redeveloping the land at Robinson Road by buying up all the 36 units in the existing buildings, then demolishing the buildings and erecting a new building complex.  In 1989, Lo introduced the project to Uncle Chang and between 1989 and 1994, Uncle Chang bought up one building, No. 31, and a number of units in the other buildings, through a company named Ford System Investment Ltd (“Ford System”) while Lo provided advice and liaison.

12. In 1994 Uncle Chang told Lo that he wanted Lo to take over the development project, and said he would put up the money.  The two individuals entered into an Oral Agreement at this time whereby Lo was to take over the project from Uncle Chang and become the beneficial owner of the project, including the site and the buildings, while Uncle Chang and his companies would provide finance to Lo at a reasonable interest rate to enable him to continue the project.

13. Lo then put together an investor group, including Choi, which took over the project and bought all the shares in Ford System from Uncle Chang and his fellow shareholder in 1994 and from then until 1995 this investor group bought up another five units, in the names of four other limited companies.  In 1996, Choi became a party to the existing Oral Agreement between Lo and Uncle Chang, and in 1997 Lo and Choi became the sole members of the investor group.  Between November 1997 and April 1998, Lo and Choi bought up another 10 units, again in the names of different companies, including KC.  This meant that only five units remained unbought; and once preliminary agreements were made for the sale of two of them, Lo and Choi (through the various companies) had passed the threshold of 90% ownership imposed by the Land (Compulsory Sale for Redevelopment) Ordinance, which was passed into law in April 1998.

14. In May 1998, according to the plaintiffs, Lo, Choi and Uncle Chang entered into an Oral Funding Agreement, whereby KDCL or its subsidiaries would put up the funds to finance the project at agreed interest rates; Lo and Choi would continue to have the beneficial interest in the project, including the land and buildings, though the legal titles would all be transferred to KC; and the shares in KC would be transferred to KDCL or its subsidiaries with an option granted to Lo and Choi to repurchase the shares at a price which would effectively give KDCL a refund of its advances, plus interest at the agreed rates.  On completion of the project, Lo and Choi would be entitled to the net proceeds of sale after paying off KDCL’s loans with interest, provided that KDCL would also receive a bonus if the total sales proceeds exceeded $1 billion.

15. Pursuant to this oral agreement, Choi and Lo’s daughter Irene as vendors and Lo as guarantor entered into an agreement dated 25 May 1998 which effectively sold the shares and shareholders’ loan of KC to Roe.  Choi and Irene Lo also entered into an agreement in writing with Roe, known as the “Heads of Agreement” setting out in detail the ownership status of the units and the steps to be taken to consolidate the titles to be held by KC.  The plaintiffs plead that the terms of these Heads of Agreement demonstrated that Uncle Chang, representing himself and the defendants, recognised and accepted that Choi and Lo were the beneficial owners of the site lands although the legal titles were vested in various companies.

16. Thereafter Choi and Lo put forward plans for the project to the Building Authority for approval through Ford System.  These were disapproved, but the disapproval was successfully appealed.  In March 1999 Choi and Lo, “using KC as a vehicle” (although the shares in KC had by then passed into the ownership of Roe) bought up the three remaining units.

17. Then on 31 May 1999, Choi, Irene Lo and Roe entered into a Deed of Cancellation of the Heads of Agreement, and World Tower and KC entered into a Consultancy Agreement, which was later supplemented by three further agreements.  Legal title in the various units which had been acquired in the names of different companies was transferred to KC.

18. The plaintiffs at paragraphs 29 and 30 of the Statement of Claim aver that various specified provisions of the Consultancy Agreement show that World Tower was “much more than a consultant of the development project”.  In particular, the consultancy fee was in substance equivalent to the net proceeds of sale, after paying off KDCL’s loans and agreed interest; in certain circumstances of non-completion of the project, World Tower would be able to buy back the entire share capital of KC at a figure which would repay KDCL’s loans; KC undertook to proceed with the project and to sell off the units and apply the proceeds of sale in a manner controlled by World Tower; and the reward to KC was restricted to, in effect, the repayment of the loans with interest at the agreed rates plus a bonus in the event that the total sale proceeds exceeded $1 billion.

19. In effect therefore, the plaintiffs say that Choi and/or World Tower, the present plaintiffs, are the beneficial owners of the project, including the land and buildings thereon; and alternatively they should have a proprietary interest in the project.

20. The Statement of Claim goes on to plead various breaches of the 1994 oral agreement and the Consultancy Agreement, which I need not set out here.  They say they have suffered loss and damage thereby.  They seek the remedies which I have set out above.

HCA192

21. The writ was issued on 13 June 2003.  The pleadings are very similar to the pleadings in this action.  The 1994 Oral Agreement between Lo and Uncle Chang is not pleaded.  The 1998 Oral Funding Agreement appears as the “KDCL Agreement” and the transfer of properties to KC appears as an “Acquisition Agreement”.  The Consultancy Agreement and its supplements are referred to as “Appointment Agreement” and Consultancy Agreements.  But the basic story is the same, though set out in less detail; and again, there was an averment that Lo and Choi were by themselves or through World Tower the beneficial owners of the project site.  This appeared at paragraph 19 of the Statement of Claim which read as follows :

“19. By reason of the aforesaid paragraphs, Choi and Lo were and are at all material times by themselves or through World Tower the true beneficial owners of the Project Site, the Project Property, the Development Project and/or the net proceeds of sale therefrom upon the true and proper construction and meaning of the Project Agreements.”

22. The defendants applied to strike out paragraph 19 and the related paragraphs 6, 7 and 8 of the prayer for relief.  Rogers VP, sitting as an additional judge of the Court of First Instance, on 5 September 2003 heard and allowed the application, and also ordered that the registration of the amended writ be vacated.

23. In his Reasons for Judgment Rogers VP said :

“Whereas it seems that there are grounds for considering that the plaintiffs could plead a case on the basis argued, there would have to be a substantial amendment to the pleading in order for the plaintiffs to show that they had a valid claim to a proprietary right in the land”

and he ordered that the vacation of the registration be suspended for 21 days to allow application for amendment to be filed, and then that there be a further suspension until determination of that amendment.

24. The plaintiffs applied to amend, and their application came on before Deputy Judge Gill on 16 December 2003.  Their proposed amendments to paragraph 8 averred that Choi and Lo, by virtue of their shareholdings and directorships in KC and other companies through which they bought units, were beneficial owners and controllers of those units.  Their amendments to paragraph 12 averred an agreement between them and KDCL that the transfer of the shares (which was made to KC) should not be an outright sale of the same or the units, but that Choi and Lo should retain a beneficial or proprietary interest in the shares and/or units until the completion of the project, when their rights and interests should be in the proceeds of sale; and that the transfer of shares was in true substance and equity a security of the provision of capital by KDCL.  Their amendments to paragraph 19 were to similar effect.

25. Deputy Judge Gill, as I have indicated, dismissed the application to amend.  He took the view that it was trite law that being a shareholder of a company owning land does not confer on the shareholder a beneficial interest in that land and that the proposed amendments were not sustainable.  With that I respectfully agree.

Reasonable cause of action for beneficial or proprietary interest?

26. In this action it appears that the plaintiffs do not say that by virtue of their shareholdings they are beneficial owners.  Rather they rely on the agreements and in particularly the Consultancy Agreement whose provisions are pleaded at pleaded at paragraphs 29 and 30 of the Statement of Claim.  In fact there is no real difference between their case as now pleaded, and the amendments brought unsuccessfully before Deputy Judge Gill.

27. The plaintiffs say that the law looks at the form, and not the substance of an agreement, and the Consultancy Agreement is much more than that.  No doubt that is right, and the Consultancy Agreement is really a loan, but it is difficult to see how that agreement or indeed any other agreement pleaded could operate to confer beneficial ownership on Choi or World Tower.

28. Now no doubt the individuals, Choi, Lo and Uncle Chang all dealt through their corporate vehicles.  Any company can be regarded as a corporate vehicle for the human persons behind it; a kind of legal puppet whose strings they pull.  But the principle which has long been recognised is that the company has a separate legal persona.  That is why owning shares does not give a beneficial interest in the company’s property.

29. On that basis, Choi and Lo never had any beneficial or proprietary interest in any of the units, arising out of their ownership of shares in the companies which were the legal owners of the units.  If, as appears in paragraph 33 of the Statement of Claim companies, which Choi and Lo controlled, assigned properties to KC at a low value (cost plus stamp duty) this might infer a resulting trust but that would be in favour of the transferors and not the transferors’ shareholders.

30. It is argued that the Consultancy Agreement and indeed the other agreements show a common intention that KC should give a beneficial interest to Choi and Lo and/or World Tower; that it is open to the KC and Choi and Lo to agree that what was otherwise lost by the individual companies and transferred to KC would be returned in the form of beneficial interest in the land to World Tower.  The fact that the Consultancy Agreement gives World Tower the right to control the sales of units and to set the price shows such a common intention.

31. However, neither Choi nor Lo ever had any proprietary right to any land; they only held shares in companies which had such a right.  What was lost to the individual companies and transferred to KC was not theirs.  Conversely, Uncle Chang did not himself have any beneficial interest in or proprietary right to the units once they came into the ownership of KC.  So what is pleaded is that individuals made an agreement or agreements relating to beneficial interests in property which they did not own and never had owned, either legally or beneficially; and that one individual purported to grant to other individuals a beneficial interest in property which he did not own, whether legally or beneficially. I do not see how that can work or how there can be any more than contractual rights arising out such agreements and in particular the Consultancy Agreement.

32. If it be said that a common intention between companies to confer a beneficial interest is to be inferred, again it is difficult to see how. The Consultancy Agreement provides for KC to sell the units.  Granted that by Clause 5 it is to sell them at agreed minimum prices per square foot and “at such time and in such manner as advised by” World Tower, this is still subject to KC’s own final approval as it shall think beneficial for discharging the Shareholder’s Entitlement (i.e. what is due to Roe) and the Deduction (i.e. what is due to World Tower).  So KC sells the units and World Tower has no right to veto any sale.  World Tower has an interest in the proceeds but I cannot see how it has any beneficial or proprietary interest in the land.

33. In any event, if it was the intention of the companies that the one should confer on the other a beneficial interest in property registered in its name, one wonders why the Agreement did not say so.  It was obviously drawn up formally and by solicitors; it was not some home-made agreement.  To be enforceable a land contract must be in writing, under section 3 of the Conveyancing and Property Ordinance; and the drafters must have known that.

34. Mr Warren Chan SC also advanced the argument that the companies which held the titles to land in 1999 became agents to achieve the objective of the redevelopment.  They assigned units below market value, without any recourse, for consolidation of legal title.  In return the shareholders of the companies and by agreement WT, by its agreement with KC, would get back what was given up in the form of beneficial interest in the consolidated land.  Mr Edward Chan SC replied that the companies could not become agents retrospectively; they would have to be agents when the property was acquired.  But in any event, so far as I can see there is no pleading of agency; and if there were I still do not see how a beneficial interest in land could come to be conferred.

35. It follows that I do not see that the plaintiffs have a reasonable cause of action for beneficial or proprietary interest in the land concerned here, although they have — and I do not think this is disputed — a reasonable cause of action in contract.  The remaining issues have to be seen in the light of these findings.

Abuse of process — raising a fresh action

36. The principle stated by Sir John Donaldson MR in Buckland v. Palmer [1984] 3 All ER 554 at 559b is that :

“(1) it is an abuse of process of the court to bring two actions in respect of the same cause of action but (2) where there has been no judgment in the first action, that action can, in appropriate circumstances, be revived and amended so as to enable there to be an adjudication of the whole of the plaintiff’s claim.”

I have no doubt that the two actions arise out of the same cause of action.  The pleadings are different but on analysis it can be seen that the cause of action is the same.

37. The plaintiffs seek to justify the second action, by the fact that Lo is now bankrupt and the Official Receiver sought security before consenting to his continuing with the first action.  Mr Warren Chan says that the second action was raised on his advice, not with a view to abusing process, but because it would be difficult to get Lo out of HCA192.  Some pretext would have to be found to strike him out. This could cause various problems and it is simpler to start again, and discontinue HCA192.

38. Mr Edward Chan says that HCA192 could proceed in any event.  Lo could discontinue.  He could indeed, under Order 21, with the consent of his co-plaintiffs.  Paragraph 21/5/4 of the Hong Kong Civil Procedure 2004 describes the procedure where a plaintiff declines to proceed; it is said that the usual order is to strike him out as plaintiff and add him as defendant upon the terms of security being given for the costs of the original defendants.  Of course this too would pose problems, because of the requirement of security.

39. As matters stand HCA192 is not discontinued; it is still alive.  On my finding the plaintiffs have no case for a beneficial or proprietary interest.  Even if I were to strike out all but the contractual claim in the present action HCA 761 of 2005, that claim would still be on foot in both actions.  I accept that on the basis of the principle set out above, the contractual claim in this action should be struck out as it can still be tried in HCA192.

A[J2]  buse of process — raising the second action in order to re-register the lis pendens

40. Given that this action was raised on the legal advice of senior counsel it is difficult to infer that it must have been raised as a device to allow the plaintiff to re-register, even if that is a side-effect.  In any event this would really only need to be considered if the plaintiff were found to have a cause of action for a beneficial or proprietary interest.

Abuse of process — issue estoppel

41. As I understand the defendants’ argument here it is that issue estoppel applies either because the court has already decided in HCA192 that there was no cause of action disclosed by the amendments, and what is now pleaded is no different; or res judicata applies in the wider sense because whatever new claims are brought should have been brought in HCA192 on the application to amend.  See Yat Tung Investment Co. Ltd v. Dao Heng Bank Ltd [1975] AC 581.  I accept that this argument if carried to its conclusion would mean that no amendment could ever be made.  Further, given that Rogers VP left open the possibility of amendment, and Gill DJ simply refused amendments, it is difficult to see that any issue has been decided.

Conclusion

42. The action must be struck out because it discloses no cause of action on the claim for beneficial or proprietary interest and because to continue the action on the claim for a contractual remedy, when that claim is alive in a previous action, would be an abuse of process.  Because there is no cause of action on the claim for beneficial or proprietary interest, the registration of the Writ must be vacated.

43. There will therefore be an order in terms of paragraphs 1(a) and (b) of the Summons.

Costs

44. The defendants by their summons seek indemnity costs.  I have heard no argument specifically directed to costs.  There must be some special or unusual feature to justify an order for indemnity costs : see Sung Foo Kee Ltd v. Pak Lik Co. [1996] 3 HKC 570.  I do not think there is such a feature here.  The plaintiffs took a view as to how to proceed which the court considers to be wrong, but there is nothing special or unusual in that.  I will award costs to the defendants as sought in paragraph 1(c) of the Summons but on the party and party basis only.  Since this ruling is to be handed down the costs order is nisi.

Mr Warren Chan, SC and Mr Patrick Sezto, instructed by Messrs Gallant Y.T. Ho & Co., for the 1^st and 2^nd Plaintiffs

Mr Edward Chan, SC, Mr K.M. Chong, Ms Emma Wong, instructed by Messrs So, Keung, Yip & Sin, for the 1^st, 2^nd and 3^rd Defendants