IP FUNG KUEN v. SAM KEE FROZEN MEAT CO LTD AND OTHERS

CACV 107/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 107 OF 2016

(ON APPEAL FROM HCA NO 1897 OF 2009)

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REASONS FOR JUDGMENT

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Hon Cheung JA:

1.  I agree with Kwan JA’s Reasons for Judgment.

Hon Yuen JA:

2.  I agree with Kwan JA’s Reasons for Judgment.

Hon Kwan JA:

3.  This is an appeal brought by Yip King Wah Enterprise Company Limited, the 2^nd defendant in the action (“D2”), against the judgment of B Chu J handed down on 6 April 2016 (“the Judgment”) after a trial which lasted 15 days.  D2 is the registered owner of a commercial property known as Shop F, M/F, Nam Wing Building, 49 to 51A Sing Woo Road, Hong Kong (“the Happy Valley Property”).  It sought to challenge that part of the Judgment in which the Happy Valley Property is declared to have been held by D2 on trust for the sole benefit of the plaintiff Madam Ip Fung Kuen (“P”) absolutely since 8 November 2004.

4.  At the conclusion of the hearing, we dismissed D2’s appeal with costs to P, and ordered P’s own costs to be taxed in accordance with the Legal Aid Regulations.  These are my reasons for dismissing the appeal.

Relevant background and findings

5.  I will use the same abbreviated terms as in the Judgment.

6.  This is a dispute between the siblings in a traditional Chinese family.  The main protagonists are P (the second eldest daughter) and Yip King Wah (the eldest son; “D3”).  D2 and Sam Kee Frozen Meat Co Ltd (“D1”) are companies set up and controlled by D3.  D1’s principal business has been in the trading of frozen meat, while D2 was used by D3 to operate a sushi restaurant (“the Sushi Restaurant”) and to hold commercial properties.  The father, mother and their six children are collectively referred to as “the Family Members”.

7.  In a thorough and comprehensive judgment of 161 pages, the judge gave a very detailed account of the evidence which led to her findings.  For the purpose of this appeal, it is not necessary to go into all the background matters and findings.  Nor do I propose to relate the family history and activities of the Family Members in their business dealings and property transactions over the years.  Mr Benny Lo, who appeared for P at the trial and on appeal, has given the court a helpful summary of the relevant matters and findings.  Mr Jeremy Cheung, who appeared with Ms Candy Tang, for the defendants at the trial and for D2 on appeal, has not challenged the accuracy of Mr Lo’s summary.  I will adopt Mr Lo’s summary, leaving out the references in his footnotes.

8.  P has little formal education, having only completed primary 5 at an evening school when she was 14.  She helped in the family business since her early teens.  In contrast, D3 had completed secondary education and later attended courses in book-keeping and business administration.  He joined the family business when he was 19 and gradually took over the management.  The judge formed the view that as compared to D3, P is “less worldly or sophisticated”.  The parents had not been actively running the business since 1983.  The father passed away in March 2006.

9.  P’s claim in this action comprises 3 parts: (a) the Debt Claim (against Ds); (b) the Property Claim (against D2); and (c) the Employment Claim (against D1 and D2).  P failed to establish the Debt Claim.  She succeeded on the Property Claim and the Employment Claim.  While this appeal relates only to the Property Claim, some of the findings in respect of the other two claims are also relevant for present purpose.

(a) The Debt Claim

10.  On the Debt Claim, the judge found that Ds (acting via D3) had borrowed various sums from P from 1987 to 2003, and “8 Loan Cheques” totalling $1,030,000 were given to P as security for repayment.  As of the date of the last of the 8 Loan Cheques being 23 September 2003, P was owed a total sum of $1,030,000.

11.  In 2004, as P was demanding D3 for repayment of the outstanding sums, D3 proposed to repay part of the loans by helping her pay part of the purchase price of a shop unit, i.e. the Happy Valley Property.  This was the set-off arrangement under “the Acquisition Proposal”, which was accepted by P.

12.  The judge found that even after part of the outstanding loans was applied towards P’s payment for the purchase of the Happy Valley Property in 2004, there was still an outstanding amount due to P under the loans, which D3 promised to pay P at the meeting of P, D3 and some of the Family Members on 10 August 2006 (“the Family Meeting”).

13.  P’s case on the Debt Claim was based only on an “Oral Acknowledgment” which D3 was alleged to have made at the Family Meeting.  By the Oral Acknowledgment, D3 acknowledged to P that the then outstanding amount of the loans due to her, after the set-off arrangement under the Acquisition Proposal, was $350,000.

14.  The judge found there was not sufficient evidence that D3 had made the Oral Acknowledgment as alleged, and the amount of the loans outstanding after setting off the amounts paid towards the balance of the purchase price of the Happy Valley Property was “not exactly clear”.  So on that basis, the Debt Claim was dismissed.

(b) The Property Claim

15.  The judge found that in about August 2004, D3 made the Acquisition Proposal on behalf of himself, D1 and/or D2 for P to acquire the Happy Valley Property, in the terms set out by P.  And on the completion day of the purchase (8 November 2004), D2, via all its six directors and shareholders (D3, P, the father, and three other Family Members), executed the “Letter of Ownership” (擁有書) in Chinese, declaring that P was the sole beneficial owner of the Happy Valley Property, and that D2 was only managing the Property on P’s behalf.

16.  Ds did not plead that D2 did not have the capacity to hold the Happy Valley Property on trust for P and did not take any issue with the Letter of Ownership itself at the trial.  Their only pleaded case was that the Letter of Ownership was subject to an oral agreement made between P and D3/Family Members prior to the signing of the Letter of Ownership (“the Happy Valley Agreement”).  One of the terms of the Happy Valley Agreement was a condition precedent that P should first transfer her half share in a property in the South Horizons (“the South Horizon Property”) to D2 or one of the other family companies before the Happy Valley Property would be transferred to her, and unless and until the condition precedent was fulfilled by P, D2 would retain the whole beneficial interest in the Happy Valley Property.  The condition precedent was not fulfilled.  The Happy Valley Agreement was alleged to be evidenced by two Chinese memoranda signed by P, D3 and some of the Family Members dated 2 July 2006 (“the 1^st Memo”) and 29 September 2006 (“the 2^nd Memo”).

17.  The judge found the Happy Valley Agreement did not exist, after a most detailed analysis of the evidence in §§287 to 371 of the Judgment.

18.  As regards the purchase price of the Happy Valley Property of $3.4 million, the judge found that:

(i) P paid $980,000 as part of the initial payments by the three “2004 Cashier Orders” dated 26 August 2004, 30 September 2004 and 25 October 2004;

(ii) P paid the balance of the initial payments in the region of $310,620 by way of a set-off against such part of the loans due to her;

(iii) the balance of the purchase price was funded by a bank loan of $2.2 million arranged by D3 in D2’s name and secured on a mortgage of the Happy Valley Property executed by D2 and by the joint and several guarantee of each of the directors of D2, including P and D3;

(iv) the monthly repayment of the mortgage loan was met in part by the rental income of the Happy Valley Property and the balance of $4,300 was met by deducting from P’s monthly remuneration of $9,500 for working at the Sushi Restaurant of D2; the deductions from P’s remuneration were made from January 2005 until July 2006, when she stopped working at the Sushi Restaurant when its business was transferred to an outsider.

19.  Having come to the conclusion there was no Happy Valley Agreement and having considered the contents of the Letter of Ownership, the judge found the common intention of D2 (through all its directors) and P on 8 November 2004 was that the Happy Valley Property was to be held by D2 under an express trust for P’s sole benefit absolutely (§376 of the Judgment).

20.  Alternatively, if there was no express trust, having considered all the factors and circumstances (set out in §§377 to 387 of the Judgment), the judge found it was the common intention of D2 through its directors and P that P was to be the sole beneficial owner of the Happy Valley Property and there was a common intention constructive trust (§388 of the Judgment).

21.  The judge made no finding who or which entity paid the shortfall of the monthly mortgage instalments as from July 2006 or when the mortgage was discharged, as these did not feature in the pleaded case of the parties.  Mr Cheung was unable to refer us to any evidence that would support his contention based on who had paid for the shortfall of the monthly mortgage instalments after July 2006 and when the mortgage was discharged.

22.  Apart from making a declaration in favour of P that the Happy Valley Property has been held by D2 on trust for her sole benefit absolutely since the assignment on 8 November 2004, the judge ordered a full and proper account to be taken in respect of all monies paid or received by P and D2 in respect of the Happy Valley Property, including but not limited to the purchase thereof, and made an order that D2 or P do pay to the other party any such net sum found due upon the taking of such account together with interest (§488(ii) of the Judgment).  This provided for equitable accounting, so any payments made by Ds towards the shortfall of the monthly mortgage instalments after July 2006 would be addressed.

23.  The judge did not make any finding on resulting trust as Mr Lo had clarified at the trial that P would not be relying on this and would only rely on express trust, alternatively constructive trust, for the Property Claim.

(iii) The Employment Claim

24.  The judge found that at the material times, P was working under a contract of employment with the Sushi Restaurant and/or D2, for which she was paid the monthly remuneration of $9,500 after deducting the contribution to Mandatory Provident Fund.  When the business of the Sushi Restaurant was transferred, P was transferred back by D3 to work for D1 on 1 July 2006.  D1 and/or D2 did not pay her any salary from July to September 2006.  P resigned on 30 September 2006.

25.  P succeeded in proving the Employment Claim against D2 to the extent of $358,193.63 plus interest.

This appeal

26.  We granted leave to D2 to rely on the additional grounds of appeal in the draft supplementary notice of appeal annexed to its summons filed on 23 November 2016.

27.  D2 sought to set aside the judgment and orders on the Property Claim and contended that it should be dismissed.  Mr Cheung advanced various arguments to contend that the judge was in error in finding in favour of P on an express trust and in the alternative a constructive trust.  He also sought to argue the judge should have found on a constructive trust, alternatively a resulting trust, that D2 had a beneficial interest in the property and the extent of its beneficial interest was to be quantified by the financial contributions D2 had made towards the purchase price, in particular the mortgage loan taken out by D2 and the continuation of the payment of mortgage instalments after the deduction from P’s remuneration had ceased as from July 2006.

28.  Lastly, he contended that in view of the judge’s finding that P failed in the Debt Claim, and as this finding was inextricably linked to the Property Claim, the Property Claim could not be sustained since the amount of the loans outstanding, if any, had not been “unravelled”.  He submitted that given that the judge had found P’s evidence on her recording of the loans confusing, this should have a decisive impact and a domino effect on P’s testimony as regards her contribution towards the purchase price of the Happy Valley Property.

Express trust

29.  In his oral submission, Mr Cheung argued the judge’s holding that the property was held on an express trust for P cannot stand because P did not know in November 2004 that the property was to be assigned by the vendor to D2 as the purchaser.  P did not know before April 2005 that the property was held in D2’s name.  The Letter of Ownership in November 2004 only stated that P was the owner of the property and D2 was managing the property for her.  It did not mention any trust arrangement.  There was no meeting of the minds between P and D2 of any arrangement of express trust, and no common intention that D2 should hold the property as trustee for her.

30.  I reject the above submission.  The Letter of Ownership was made by D2 just before the assignment was executed and its language is clear.  It stated expressly that P was the owner of the property and D2 was only to manage the property for her.  D2’s involvement in the purchase of the property, as represented by D3 to P, was to obtain a bank loan of $2.2 million to assist P to pay the purchase price in part.  Being the unsophisticated person that she was as found by the judge, P was not aware of D2’s unconscionable departure from the Letter of Ownership in that not only was it to manage the property, it had subsequently taken up the assignment in its name.  There is no reason not to give effect to the clear terms of the Letter of Ownership.  As P was acknowledged as the owner in that document by all the directors of D2, and D2 the legal owner was merely managing the property for her, there is therefore an express trust in P’s favour.  The common intention, shared by P and D2, as evidenced by the Letter of Ownership, was that P was the owner of the property, and that is what matters.  It is immaterial that P had no knowledge D2 subsequently took up the assignment in its own name.

31.  Other points were made to attack the holding of express trust in the notice of appeal and in Mr Cheung’s written submissions.

32.  It was contended that D2 is not capable of being a trustee to hold the property on trust for P.  In support of this, Mr Cheung cited Prest v Petrodel Resources Ltd [2013] 2 AC 415 at §8 for the proposition that a company is a legal entity distinct from its shareholders and the property of the company is its own, not that of its shareholders.  I cannot see how this would advance Mr Cheung’s argument.  There can be no question that a company is capable to act as a trustee, even though the beneficiary of the trust happens to be a member of the company.  All that the proposition says is that since the company is a separate legal entity, the mere fact that it holds an asset does not make it a trustee of the asset for its members.  It does not affect the situation where there is an express trust making the company a trustee for a member or where there are circumstances giving rise to an implied trust making it a trustee for a member.

33.  It was further contended that the judge erred in law in failing to take cognizance that by a nomination dated 19 October 2004 executed by Asia Creative International Ltd (“Asia Creative”), the beneficial ownership in the Happy Valley Property was vested in D2, and that the Letter of Ownership could not in law vitiate the vesting of the beneficial ownership in D2 by the nomination.

34.  This argument is also without merit.  The nomination gave notice to the vendor of the Happy Valley Property that among other things D2 was nominated to take up the assignment and directed the vendor to execute the assignment to D2 to the intent that all the estate, right, title, benefit and interest in the property shall be vested in D2 and that D2 shall become the legal and beneficial owner of the property, and Asia Creative renounced all its rights and interests in the sale and purchase agreement and the property in favour of D2.  A purchaser does not acquire full beneficial ownership of the property until the assignment was executed in his favour.  It is wrong to say there was vesting of the beneficial ownership in the property in D2 by virtue of the nomination.

35.  Lastly, Mr Cheung submitted that even if the Letter of Ownership is adjudged to reflect the beneficial interest of the property at the time of acquisition, the events after July 2006 may nevertheless vary the allocation of the beneficial interest.  I will deal with this submission under the next heading.

Constructive trust

36.  This is a contention that would seem to be common to both constructive trust and resulting trust, as I understand Mr Cheung’s argument.

37.  He prayed in aid the statement of Lord Neuberger in Stack v Dowden [2007] 2 AC 432 at §138 (“The fact that the ownership of the beneficial interest in a home is determined at the date of acquisition does not mean that it cannot alter thereafter.”) and the statement of Baroness Hale at §60 (“The search is to ascertain the parties’ shared intentions, actual, inferred or imputed, with respect to the property in the light of their whole course of conduct in relation to it.”).

38.  He pointed to the judge’s finding that P’s contribution to the monthly mortgage instalments had ceased as from July 2006.  He submitted that the mortgage was not discharged until 2014 and the contributions to the mortgage instalments made by D2 as from July 2006 are relevant to ascertain the extent of the parties’ interests in the property, by adopting a holistic approach to quantification in the common intention constructive trust context.  He emphasised that the whole course of conduct in respect of the property must be taken into account in deducing objectively the shared intention as to its ownership, and that should include what had transpired after July 2006.  He submitted it could be inferred from the fact that P no longer contributed to the mortgage instalments after July 2006 and D2’s contributions thereafter that the initial common intention as to the allocation of the beneficial interest must have changed over time, because this is what reasonable people would have intended if they had thought about it at the time. He contended it was irrational that the other shareholders of D2 would have contributed towards the payments of the mortgage instalments had D2 not retained a beneficial interest in the property.

39.  There are a number of reasons why the above arguments must be rejected.

40.  First and foremost, the point about a change of intention over time was not a case that featured in the pleading of D2, nor was it raised in any way by D2 at the trial.  The question of whether there was a change of the initial common intention is fact-sensitive.  The principles are well established in The Tasmania (1890) LR 15 App Cas 223 at 225, see also Flywin Co Ltd v Strong & Associates Ltd (2002) 5 HKCFAR 356 at §§37 to 38.  Where a party has omitted to take a point at the trial and then seeks to raise it on appeal, he will be barred from doing so unless there is no reasonable possibility that the state of the evidence relevant to the point would have been materially more favourable to the other side if the point had been taken at the trial.  Hence, D2 is not allowed to raise this new point on appeal.

41.  Secondly, there is no evidential basis to support this new point.  As I have mentioned earlier, the judge made no findings as to who had paid the mortgage instalments after July 2006 or when the mortgage was discharged, because these matters are not relevant to any disputed issue the judge was required to determine.

42.  Thirdly, although it is legally possible for there to be a change in the initial common intention, this cannot be brought about unilaterally by one party without the consent and against the wishes of the other (Chen Lily v Yip Tsun Wah Alvan CACV 4/2016, 28 October 2016 at §24.3).  So even if D2 had paid for the mortgage instalments after July 2006, there is simply no evidence that this was done with the consent of P, on the express or implicit understanding there was to be a change of intention as regards the ownership of the property.  It must be borne in mind that D1 and/or D2 withheld paying salaries to P for the months of July to September 2006, so deduction from her remuneration was not possible.

43.  Fourthly, as submitted by Mr Lo, there was nothing in the words and action of D3 (who would be regarded as acting on D2’s behalf) to indicate that D2 had paid the subsequent mortgage instalments in the belief that it was acquiring a beneficial interest in the property.  To the contrary, as found by the judge (§377 of the Judgment), the statements in the 1^st Memo (dated 2 July 2006), D3’s own entries in his diary for the year 2006, and the 2^nd Memo (dated 29 September 2006) all provided evidence that the Happy Valley Property had been regarded by D3 as P’s property all along.  There was no indication of any change in the common intention.

44.  Having ruled against D2 on express trust and having rejected the arguments of subsequent change of common intention, it is not necessary to consider Mr Cheung’s arguments on resulting trust and that is sufficient to dismiss the appeal.  As rightly submitted by Mr Lo, the resulting trust analysis is to find out the presumed intention of the parties.  It is only where there is no evidence of what the actual intention was that the court would have to apply the presumption of resulting trust.  That is plainly not the situation here.  Just for completeness, I will deal with the arguments on resulting trust succinctly.

Resulting trust

45.  The argument here is that the court should focus on the contributions made by D2 towards the purchase price of the property and impute an intention that the beneficial interest of the property was to be shared by P and D2 founded on their respective contributions on the basis of a resulting trust.  Leaving aside the subsequent mortgage payments after July 2006 (which I have dealt with), Mr Cheung submitted that D2’s financial contributions were firstly $340,000 being the deposit paid on the acquisition of the property, and secondly $2.2 million being the bank loan borrowed by D2 for which it had incurred a legal liability to the bank to repay.

46.  In support of the contention that the bank loan obtained by D2 should be regarded as D2’s money and hence its contribution, Mr Cheung cited Close Invoice Finance Ltd v Abaowa [2010] EWHC 1920 (QB) at §§100 to 114 and Samad v Thompson [2008] EWHC 2809 (Ch) at §§122 to 124.  He sought to distinguish Goodman v Carlton [2002] All ER (D) 284 at §22 relied on by Mr Lo for the proposition that a party who has simply lent its name to secure a mortgage advance without any intention of it being liable for repaying the instalments will not be considered to have contributed to the purchase price.

47.  It seems doubtful if D2 had pleaded a resulting trust on the basis of its financial contributions as now asserted, nor was this even raised in the Notice of Appeal or the draft supplementary notice of appeal.  Leaving all that aside, I do not think the arguments advanced here can succeed.

48.  The deposit of $340,000 was not funded by D2 but by P on the judge’s finding.  The purchase price of $3.4 million was met by three sums: $2.2 million by the mortgage advance; $980,000 by the three 2004 Cashier Orders purchased by P; and $310,620 by way of a set-off of such part of the loans due to P.

49.  Whether the mortgage advance of $2.2 million should be regarded as the funds of the borrower must be decided with regard to the facts as found by the judge.  The judge accepted P’s evidence on the Acquisition Proposal.  D2 was to obtain a mortgage loan of $2.2 million to help P pay the purchase price in part and there was a clear understanding she was solely responsible for paying the mortgage instalments.  P did in fact discharge that liability during January 2005 to July 2006, when the instalments were paid in part from the rental income of the property and the balance of $4,300 was deducted from P’s remuneration.  D2 was merely used as a conduit to obtain the advance from the bank.  The liability for repayment was actually shouldered by P.  P had also signed a joint and several guarantee as security for D2’s liability.  It is not the case that the bank would have no recourse against P if the mortgage instalments were not paid.  The facts here are clearly distinguishable from Close Invoice Finance and Samad v Thompson.  Any presumption of resulting trust in D2’s favour by virtue of it being the borrower of the mortgage loan would have been rebutted.

P’s evidence on her contribution to the purchase price

50.  Mr Cheung pointed to the fact that the Debt Claim failed because P had failed to prove the exact amount of the debt owing.  He argued that since the outstanding loans were inextricably linked to the Property Claim, as the purchase price was paid in part by set-off from part of the outstanding loans, the Property Claim cannot be sustained since the amount of the outstanding loans had not been unravelled.  He asserted that the judge had to be satisfied that Ds must be indebted to P in the sum of $720,000 at least for there to be a set-off.  Further, as the evidence of P on her recording of the loans was found by the judge to be confusing, this should have an adverse impact on her testimony in respect of her contribution towards the purchase price.

51.  These arguments have no substance.

52.  The figure of $720,000 put forward by Mr Cheung was premised on there being an amount of $400,000 required to be paid in addition to the purchase price of $3.4 million as “under the table” money, as represented by D3 to P.  But the judge found that such “under the table” money had not actually been paid (§§244 to 245 of the Judgment), and only $310,620 was required to be set off against the outstanding loans (§384 of the Judgment).

53.  Further, as submitted by Mr Lo, the judge did not simply rely on P’s evidence in finding there was still an outstanding amount of the loans even after setting off part of the loans and applying the amount set off in part payment of the purchase price.  She was satisfied on the evidence of P, the mother and another Family Member that at the Family Meeting, which was nearly two years after the purchase of the Happy Valley Property, D3 had promised to repay P the outstanding amount of the loans.

54.  Although the judge has found P’s evidence on the contents of her notebook confusing, and she was cross-examined on its contents at length, the judge accepted that the amount outstanding recorded by P was a figure provided by D3 with no verification on her part (§§229 and 230 of the Judgment).  After reviewing the whole of the evidence, including P’s evidence on her notebook, the judge found there was still an outstanding amount of the loans due to P after setting off the amounts paid towards the balance of the purchase price of the Happy Valley Property.  The judge dismissed the Debt Claim only because the amount outstanding was not clear enough for P to discharge her burden of proof (§§270 and 274 of the Judgment).  That is a finding the judge is clearly entitled to make.

55.  There is simply no basis for the appeal court to disturb this finding of fact of the judge.

56.  As none of the grounds of appeal are of merit, we have therefore dismissed D2’s appeal with costs.