CHAN KOON NAM v. NG MAN SUM

HCA1494/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1494 OF 2007

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J U D G M E N T

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1.  The plaintiff’s claim against the defendant is for the return of 50 shares of Karpex Holdings Limited (“Karpex”) which the plaintiff says were held by the defendant on trust for him upon an oral express trust and for which the defendant had agreed and undertook to transfer back to the plaintiff upon the plaintiff’s request or direction.

2.  On the other hand, the defendant denies the existence of the alleged express trust and/or undertaking by the defendant to return the 50 Karpex shares at the request or direction of the plaintiff, but pleads by way of defence that the transfer of the 50 Karpex shares to the defendant was by way of a “genuine and bona fide commercial transaction”.

Background

3.  In January 1994, the plaintiff entered into a sale and purchase agreement with a vendor to purchase a factory premises on the 4^th floor and flat roof of Hanway Factory Building, No.17 San On Street, Tuen Mun, New Territories (“the Property”) for a consideration of $2 million.

4.  Karpex was incorporated in December 1996 with a share capital of 10,000 shares.  At that time, Karpex had allotted and issued two shares out of its share capital.  One share was issued to the plaintiff and the other one share was issued to the plaintiff’s mother, Wong Wai Ying, who held that one share on trust for the plaintiff.  No written declaration of trust was executed in respect of the one share of Karpex held by the plaintiff’s mother on trust for the plaintiff.

5.  The plaintiff having paid off the purchase price of $2 million for the Property, on 10 March 1997 nominated Karpex to take up the assignment of and to hold the Property.

6.  Karpex had no other business and at all material times, its only function was to hold the Property and receive the rentals from it.

7.  In March 2001, due to the fact that the plaintiff’s mother was getting old and her health deteriorating, the plaintiff caused some changes in Karpex’s shareholding structure.  A further 98 shares were issued and allotted by Karpex making the total issued share capital of Karpex to be 100.  Of this issued share capital of 100 shares, 70 shares of Karpex were put in the name of and held by the plaintiff’s brother‑in‑law, Chan Wei Ming, on trust for the plaintiff.  The remaining 30 Karpex shares were put in the name of and held by the plaintiff’s daughter, Chan Ka Man also in trust for the plaintiff.  Once again no declaration of trust was executed in respect of the 70 and the 30 shares held in the names of Chan Wei Ming and Chan Ka Man respectively.

8.  In September 2001, due to the imminent emigration of Chan Wei Ming to the United States, and the financial difficulties faced by Chan Ka Man in respect of outstanding credit card debts, the plaintiff caused to be transferred 50 of the 70 Karpex shares held by Chan Wei Ming to the defendant, then a friend and former business partner of the plaintiff.  The plaintiff also caused the remaining 20 Karpex shares held by Chan Wei Ming and the 30 Karpex shares held by Chan Ka Man (making a total of 50 Karpex shares) to be transferred into the plaintiff’s own name.

9.  In the Bought and Sold Notes effecting the transfer of the 50 Karpex shares to the defendant, the consideration for the transfer was stated to be at the nominal sum of $1 for each share.  It is not in dispute that even that nominal sum stated for the consideration had never been paid by the defendant to the plaintiff or to anyone else.

10.  Subsequently, in 2002, the plaintiff transferred the 50 Karpex shares which was in the plaintiff’s own name to his sister to be held on trust for the plaintiff.  In 2005, when the plaintiff’s wife came to Hong Kong, those same 50 shares were transferred by the plaintiff’s sister to the plaintiff’s wife again to be held on trust for the plaintiff.

The plaintiff’s case

11.  It is the plaintiff’s case that he alone purchased and paid for the Property.

12.  It is also the plaintiff’s case that he alone was at all times the sole and beneficial owner of Karpex which had been used only for the purpose of holding the Property.

13.  Due to the fact that the plaintiff also had other business undertakings and which had gotten into financial difficulties, the plaintiff had not wanted to put all of the shares of Karpex into his own name, but had got others including his mother, his brother-in-law, and his daughter to hold, at different times, some or all of the Karpex shares on trust for him.

14.  In September 2001, due to the fact that Chan Wei Ming was applying to emigrate to the United States and the fact that Chan Ka Man was having financial difficulties owing credit card debts of over $100,000, the plaintiff approached the defendant, at that time his good friend and former business partner, for the defendant to hold 50 shares of Karpex on trust for the plaintiff while the plaintiff would himself hold the remaining 50 shares in his own name.

15.  It is the plaintiff’s case that when the defendant agreed to act as trustee for the plaintiff in respect of the 50 shares of Karpex, the defendant had also verbally agreed to re-transfer the 50 shares back to the plaintiff upon the plaintiff’s request or at his direction.

16.  Accordingly, the plaintiff, the defendant , Chan Wei Ming and Chan Ka Man attended the office of the plaintiff’s accountants on 8 September 2001 where the documentation for the transfer of shares were duly executed by all concerned and that 50 shares of Karpex were transferred into the name of the defendant. The remaining 50 shares were transferred into the name of the plaintiff.  Thereafter, the plaintiff and the defendant were also appointed as directors of Karpex.  At the same time, Chan Wei Ming and Chan Ka Man resigned as directors of Karpex.

17.  The consideration on the Bought and Sold notes in respect of the 50 shares transferred to the defendant stated that the consideration for such transfer was at the nominal value of $1 per share.

18.  It is common ground between the parties that this stated consideration had never been paid by the defendant whether to the plaintiff or to anyone else.

19.  Once again as on previous occasions, there was no written declaration of trust executed in respect of the 50 shares transferred to the defendant.

20.  Subsequently, the plaintiff transferred the 50 shares held in the plaintiff’s own name to the plaintiff’s sister in July 2002 to be held by her on trust for the plaintiff.  Once again no written declaration of trust was executed.  The plaintiff then resigned as a director of Karpex and his sister was appointed as director in his place.

21.  In 2005, when the plaintiff’s wife came to Hong Kong from China, the 50 shares held by the plaintiff’s sister on trust for the plaintiff was transferred into the name of the plaintiff’s wife and she was appointed a director of Karpex in place of the plaintiff’s sister.

22.  In 2007 when the plaintiff requested the defendant to transfer back to him the 50 shares of Karpex held by the defendant on trust for the plaintiff, the defendant refused to do so.

23.  It is therefore the plaintiff’s case that the defendant was in breach of the verbal trust arrangement entered into between them in early September 2001.

The Defence

24.  The pleaded defence while admitting that the consideration stated on the Bought and Sold Notes in respect of the 50 shares of Karpex transferred to the defendant to be $1 per share and also admitting that the defendant had never paid this nominal sum of $50 to the plaintiff or anyone else, denies that the 50 shares were held by the defendant as a trustee for the plaintiff.

25.  It is also denied by the defendant that he had given any verbal undertaking to the plaintiff that he would return the 50 shares to the plaintiff (or to anyone at the direction of the plaintiff) upon the plaintiff’s request.

26.  Instead it is pleaded in the Defence by the defendant that the sale and transfer of the 50 shares of Karpex to the defendant was a “genuine commercial transaction”.

27.  However, it was not pleaded in the Defence as to what was or constituted the consideration for the alleged sale and/or transfer of the said 50 shares to the defendant.

28.  Notwithstanding that consideration had not been pleaded in the Defence, in the witness statement of the defendant (which he adopted as his evidence) it was stated that the Property had been rented by Karpex to Tindex (of which the defendant was a director and shareholder) and that Tindex had operated a laundry by the name of Go Sing Laundry at the Property.  In 2001, the plaintiff, having been told by the defendant that the business of Go Sing Laundry was not doing well, became so concerned that the Go Sing Laundry would cease its business and no longer continue to rent the Property from the plaintiff, offered to the defendant 50 shares of Karpex in exchange for the promise by the defendant that he would continue the business of Tindex and Go Sing and continue to rent the Property form Karpex.  The plaintiff further promised to sell to Tindex the remaining 50 shares of Karpex in a few years’ time.

29.  When the Pre-trial Review was held in May 2011, one of the matters raised at the Pre-trial Review was the absence of any pleading of consideration in the Defence despite what had been stated in the witness statement of the defendant.  At the time, counsel for the defendant indicated that steps would be taken to amend the pleading to plead consideration.

30.  However, no such steps were taken even when the trial commenced.  Counsel who appeared at the Pre-trial Review for the defendant was the same counsel who appeared at the trial.  At the trial, I was informed by counsel for the defendant that they faced “insurmountable difficulty” in amending the Defence to plead consideration without giving any further explanation as to what the “insurmountable difficulty” was since he was unable to disclose privileged matters to the court.

31.  Counsel for the defendant further acknowledged that in the absence of any pleading as to consideration in the Defence, he would be bound by what has been pleaded in the Defence and that he would be restrained from submitting in due course that there was good consideration for the sale or transfer of the 50 Karpex shares to the defendant.

32.  The trial therefore proceeded on the basis stated above.

33.  In his final submission, counsel for the defendant was content to submit only on the basis that the evidence adduced by the plaintiff and the plaintiff’s witnesses should not be believed and accordingly, the plaintiff had failed to prove its case of there being an express trust as alleged by the plaintiff.

34.  It was also submitted by counsel for the defendant that in the absence of any pleaded case of resulting trust, the plaintiff should not be permitted to also put his case on the basis of a resulting trust, but should only be confined to its case of an express trust as pleaded by the plaintiff.

35.  There was no submission by counsel for the defendant as to consideration to support its pleaded case of “a genuine commercial transaction”.

The evidence

36.  The plaintiff gave evidence himself.  He also called two other witnesses, being his daughter Chan Ka Man and one Chan Chi Him.

37.  On the defence side, only the defendant gave evidence.

38.  Dealing first with the evidence of the plaintiff, the plaintiff adopted his witness statement as his evidence‑in‑chief. The general ambit of his evidence‑in‑chief has already been stated above, either by way of background or as part of the plaintiff’s case and will not be repeated in any detail here.

39.  The plaintiff was asked in evidence why in the Bought and Sold Notes when the 70 shares and 30 shares of Karpex were respectively transferred to his brother‑in‑law and his daughter, the consideration was stated to be $250,000 for the transfer, but that when the 50 shares were transferred to the defendant, the consideration in the Bought and Sold Notes were stated to be a nominal $1 per share.  To this the plaintiff explained that this was suggested to him by his professional accountant who advised him in relation to the share structure of Karpex and he did not know the reason why his accountant so suggested.  He merely complied with the suggestion of his accountant.

40.  The plaintiff also gave evidence that after the transfer of the 50 shares of Karpex to the defendant, all the books and records of Karpex, including the title deeds to the Property and the company seal of Karpex were handed over to the defendant for safekeeping because at that time the plaintiff trusted the defendant.  The plaintiff said that this was not done to enable the defendant to run Karpex but that between 2001 and 2005, his sister was working in Go Sing and it was his sister who had looked after the affairs of Karpex for the plaintiff.  In 2005, when his sister emigrated to the United States (with the plaintiff’s brother-in-law), his sister had returned the title deeds of the Property and the company seal to the plaintiff to keep, but the other documents and records of Karpex remained with the defendant.

41.  There was also evidence from the plaintiff that he had asked the defendant for the return of the 50 shares of Karpex in 2007 because the defendant had, acting on behalf of Karpex as landlord, entered into a tenancy agreement with Tindex (being the defendant’s own company) upon terms which the defendant had not discussed with the plaintiff and which terms were favourable to Tindex but not to Karpex.

42.  The plaintiff was cross‑examined and asked why he had caused to be transferred 50 shares into his own name in September 2001 when at that time, the risk which had caused him to put the shares into the names of his brother‑in‑law and his daughter was still present.  The plaintiff explained that his brother‑in‑law had applied to emigrate, his daughter had financial debts and two other brothers of his were working in China, and because at the time he trusted the defendant he got the defendant to hold 50 of the Karpex shares for him.  As for the remaining 50 shares, because he had no alternative and did not have time, he had to transfer back those 50 shares into his own name even though the risk was still there.  However, in July 2002, when he came to know that the application by his brother‑in‑law and his sister to emigrate had not yet been approved, so he transferred those 50 Karpex shares which were in his own name to the name of his sister to hold for him.  Later when his wife came to Hong Kong in 2005, those 50 Karpex shares were transferred to his wife’s name from his sister.

43.  The plaintiff was also asked in cross‑examination why he did not ask for written declaration of trust from the defendant for the 50 shares of Karpex if those shares were held on trust by the defendant for him.  The plaintiff explained that he did not know about such a thing and that was not discussed or suggested to him by his accountant who was advising him professionally on the shareholdings of Karpex including the allocation and structure.

44.  When asked to explain why the Karpex shares were divided in the ratio of 70:30 between his brother‑in‑law and his daughter, the plaintiff explained that since his daughter was still young, being in her 20’s, he thought that she should not be holding a large shareholding of the Karpex shares in her name.

45.  When asked why in September 2001, he did not ask the defendant to hold all of the Karpex shares for him, he answered that he had not thought of that since he was advised by his accountant that there had to be at least two shareholders holding the Karpex shares.

46.  The plaintiff was also cross‑examined as to where it was that he spoke to the defendant about holding the 50 shares of Karpex on trust for him.  Initially the plaintiff said it was on the defendant’s 9^th floor office of Hanway Factory Building.  However, when shown the answers given by the plaintiff in the Further and Better particulars which stated it to be on the 4^th floor of that same building, the plaintiff admitted that the answer given by him in cross‑examination may have been due to his failing memory since the defendant had the use of the 4^th, 9^th 10^th and 11^th floor of Hanway Building at that time and that it would be on one of those floors that the plaintiff would usually look for the defendant to collect rent from him.

47.  The second witness called by the plaintiff was Chan Chi Him, a director of Tindex from 1998 until 2003.  He adopted his witness statement as his evidence.

48.  He gave evidence that Tindex operated a laundary business by the name of Go Sing.  Apart from the business in its first year, Go Sing’s business did well and was expanding up to 2003 when he left.  He was able to say that the turnover of Go Sing rose from about $600,000 in 1998 to around $1.5 or 1.6 million in 2003 and that the turnover of Go Sing was always sufficient to cover its expenses.  In fact Go Sing’s business expanded so much that in 2001 or 2002 Go Sing had to take on an extra floor, being the 10^th floor, of Hanway Factory Building.

49.  He was quite adamant that initially, the rent paid by Tindex for the Property was at $36,000 per month but that it was reduced later to $28,000.  Still later, he believed that the rent was further reduced to $24,000 but he is not clear about that figure as by then he had already left Tindex.

50.  He gave evidence that in 2000 to 2001, the defendant only held a few percent of the shares of Tindex, and that there were at that time only two directors in Tindex, himself and the defendant.

51.  He also said in evidence that in 2003, he was asked to resign as a director of Tindex by the defendant, he himself not being a shareholder of Tindex.  After he left as a director of Tindex, he was paid a consultancy fee of $10,000 per month by Tindex/the defendant.

52.  He knew during the time when he was a director of Tindex that Tindex/Go Sing paid rent to the plaintiff for the Property and from that he knew that the plaintiff was the sole beneficial owner of Karpex.  However, he did not know who had acted for Karpex as landlord in the negotiation and discussion for the lease.

53.  The third witness Chan Ka Man’s evidence merely confirmed that she held 30 shares of Karpex in her name on trust for the plaintiff from March 2001 and that in about September 2001 the plaintiff had asked her to transfer those shares back into the plaintiff’s own name due to the fact that she had owed credit card debts of some $100,000.

54.  Coming now to deal with the evidence of the defendant.

55.  The defendant adopted as his evidence what was contained in his witness statement as his evidence‑in‑chief.  The gist of that evidence has already been stated above in this Judgment when dealing with the defence case and will not be repeated again here.

56.  I will only deal with the additional evidence of the defendant which emerged under cross‑examination.

57.  In cross‑examination, the defendant said that after May 2003, when the rent had been reduced to $30,000, that was paid by Tindex by two cheques, each for $15,000 and that one of those cheques was made out to the plaintiff, while the other one was made out to the defendant.

58.  The defendant also said that the plaintiff had never asked him for the return of the 50 shares of Karpex in 2007, but that at that time it was the defendant who had asked the plaintiff to honour his promise of selling the remaining 50 shares of Karpex to Tindex which had been promised by the plaintiff in 2001.

59.  In light of this evidence from the defendant, counsel for the plaintiff confronted the defendant with what was stated by the defendant in paragraph 19 of the Affirmation of the defendant affirmed on 9 November 2009 and which stated as follows :

“The plaintiff did request me to transfer the 50 shares back to him but not in the capacity of beneficiary of those shares. I refused to sell the shares to him.”

60.  Upon being confronted with these words, the only answer which the defendant could give was that the meaning of those words in paragraph 19 of his Affirmation was the same or similar to the evidence given by him and that there was no difference.

61.  The defendant also said in cross‑examination that he had agreed with the plaintiff in 2001 that the sale price of the remaining 50 Karpex shares to Tindex would be half of $1 million.

Findings of Fact

62.  I have no hesitation in accepting the evidence of the plaintiff and his witnesses as being truthful evidence.

63.  The plaintiff in particular struck me as an honest and truthful witness doing his best to tell the truth.

64.  I was greatly impressed with the answer given by the plaintiff as to why he had never caused any written declaration of trust to be executed by the defendant who, on the plaintiff’s case, held the Karpex shares on trust for him.  His answer to the effect that he did not know of such a thing and his accountants had never discussed or suggested that to him rings true since the plaintiff struck me as being a very simple businessman and who was not sophisticated sufficiently to know about matters such as trust deeds. Moreover, that answer given by the plaintiff is also consistent with the fact that even with his other family members, no declarations of trust had ever been used when they held the Karpex shares on trust for him.

65.  I also bear in mind the plaintiff’s evidence given in re-examination that if Tindex stopped renting the Property from the plaintiff, the plaintiff could either rent out the Property to someone else, or sell it or use it himself to carry on his own business there, but that he would not have considered to give 50% of the shares in Karpex to the defendant just to ensure that Tindex would continue to rent the Property from him.

66.  The only fault one may levy at the plaintiff is the fact that some parts of his evidence may have been affected by his poor memory over the years, such as forgetting which floor of the building it was that he had looked for the defendant.  However, whichever floor it was, that was a relatively minor and insignificant part of the evidence in the case.

67.  The witness Chan Chi Him is an independent witness and there was no good reason for him to have been partial to either the plaintiff or the defendant.

68.  In the absence of any concrete figures relating to the accounts being shown to him, it is not surprising that after such a long time he could only give a general picture as to the business turnover of Go Sing during the time when he was a director of Tindex.

69.  I have no hesitation in accepting all the evidence given by Chan Chi Him as being true.

70.  When coming to the evidence of the defendant, that is a completely different story.

71.  The defendant’s evidence given in cross‑examination that in May 2003 the monthly rent paid by Tindex was paid by two cheques each for $15,000 and that one of the cheque was given to the plaintiff while the other cheque was given to the defendant was not something which had been stated in his witness statement.  Moreover, that was never put by the defendant’s counsel to either the plaintiff or Chan Chi Him during their cross‑examination.

72.  I therefore view this evidence of the defendant with a great deal of suspicion as being something which was conjured up by the defendant during cross‑examination in an attempt to explain away the case put forward by the defendant that he had a fifty percent entitlement to Karpex, having absolute entitlement to the 50 Karpex shares given him by the plaintiff in 2001.

73.  Another aspect of the defendant’s evidence which I view with suspicion is his evidence that the plaintiff had never asked him for the return of the 50 Karpex shares in 2007.  This has been wholly contradicted and shown to be an utter lie by what has been stated by the defendant in paragraph 19 of his Affirmation sworn on 9 November 2009.  Most likely the defendant gave this evidence when being cross‑examined without even realizing what he had stated in his Affirmation.  Then when confronted by the contents of his Affirmation, he had no way of back-trekking from that lie which he had already given in evidence.

74.  I am also skeptical of the evidence given by the defendant that he had agreed with the plaintiff in 2001 that the price of the remaining 50 Karpex shares which the plaintiff would sell to Tindex would be half of $1 million.

75.  Once again this evidence from the defendant came out of the blue when the defendant was being cross‑examined.  This matter was never mentioned in the defendant’s witness statement nor was it put by defence counsel to the plaintiff when the plaintiff was being cross‑examined.

76.  However, the main reason for my disbelieving the evidence of the defendant is that no valid explanation has been put forward which could explain why the plaintiff, a shrewd person who had quite obviously saved up the $2 million used by him to purchase the Property as an investment and from which he had hoped to generate rental income to support his own living, would for no apparent reasons give outright to the defendant half of the total shares of Karpex (which would amount to some $1 million) on the flimsy pretext, as the evidence of the defendant goes, to ensure that Tindex or Go Sing would continue to rent the Property from the plaintiff.

77.  That being the basis of the defendant’s case, the fallacy of that is clearly and amply shown by the evidence given by the plaintiff in re-examination when he was asked what he would do if Tindex were to stop renting the Property from him.  The plaintiff answered that by saying that if Tindex were not going to continue to rent the Property, the plaintiff could rent it out to another tenant, or he could sell the Property or he could start his own business using the Property, but that he would not consider giving a 50% of the issued shares of Karpex to the defendant.

78.  This answer shows that there were a number of possibilities open to the plaintiff.  None of those possibilities open to the plaintiff would result in the plaintiff having to lose out on half of his savings which he had invested into the Property.

79.  For all the reasons given above, I wholly reject the evidence given by the defendant where those evidence differ from the evidence given by the plaintiff and his witnesses.

80.  Accordingly, I find that in September 2001 the plaintiff did request the defendant to hold for him on trust 50 shares of Karpex and that the defendant did agree to hold the 50 Karpex shares on trust for the plaintiff and further agreed with the plaintiff that the defendant would re‑transfer same back to the plaintiff if and when the plaintiff so requested or at the direction of the plaintiff.

Decision

81.  In the absence of any pleading of consideration for the sale or the transfer of the 50 Karpex shares to the defendant, this would be fatal to the defendant’s pleaded case of the transaction being a “genuine commercial transaction”.

82.  However, even on the facts as has been given in evidence, and on the findings of facts made above, the defendant’s case, in so far as it relies on there being a “genuine commercial transaction” fails completely.

83.  Having accepted the plaintiff’s evidence and found as a fact that the 50 Karpex shares were transferred by the plaintiff to the defendant upon the agreement between them that those 50 Karpex shares would be held by the defendant on trust for the plaintiff and would be returned to the plaintiff as and when requested by the plaintiff or at his direction, it follows that the plaintiff has succeeded in proving his case and judgment will be given in favour of the plaintiff for the reliefs as claimed by the plaintiff.

84.  Accordingly, there will be an order that the defendant do forthwith transfer back to the plaintiff the said 50 Karpex shares now held in the name of the defendant.

85.  I should also add that in view of the findings as to the facts made in this case, it becomes academic and is unnecessary for me to deal with the legal argument advanced by the parties in relation to resulting trust, as to whether the plaintiff is entitled to rely on resulting trust, not having pleaded his case on that footing.

Costs

86.  In so far as costs is concerned, I shall need to hear arguments from the parties as to why indemnity costs should not be ordered against the defendant in the way in which this case has been proceeded by the defendant.

87.  Accordingly, parties are to submit written submissions on costs within 14 days after this judgment is handed down and a ruling on costs will be made (in written form) after I have had a chance to consider the written submissions on costs.