章晶历 v. 吴联模 AND ANOTHER

HCCT 48/2017

[2020] HKCFI 359

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 48 OF 2017

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BETWEEN

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J U D G M E N T

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1.  This is the trial of the Applicant’s claim that the First Respondent (“W”) held the beneficial interest in 612,340,000 ordinary shares (“Shares”) in Future Bright Mining Holdings Limited (“FB”), which Shares were registered in the name of the Second Respondent (“KD”), or whether the beneficial interest in the Shares vested in KD instead.

2.  The history of the matter is that on 16 June 2016, the Applicant obtained an arbitration award against W from the Beijing Arbitration Commission, for W’s payment to the Applicant of a sum of RMB 65,323,091 plus interest (“Award”). On 29 September 2017, the Applicant obtained leave of the Hong Kong Court to enforce the Award in Hong Kong. On 11 December 2017, the Applicant obtained from the Court a charging order nisi (“Order”) in respect of: (1) the Shares which were registered in the name of KD, a BVI company of which W was the registered shareholder; and (2) 155,900,000 shares in FB which were registered in W’s name. The Order was sealed on 5 January 2018 and served on W and KD on 8 January 2018.

3.  On 26 January 2018, a charging order absolute was made in respect of the shares in FB which were held by W in his personal name. KD however opposed the order absolute for the Shares on the basis that the Shares were registered in its name and it was a separate legal entity from W. Directions were made for a trial on the beneficial ownership of the Shares and pleadings were directed to be filed for the trial on such issue (Order of 16 July 2018). KD was also joined as the Second Respondent in the action which was originally commenced by the Applicant against W only.

4.  According to the Points of Claim, FB is a company listed on the main board of the Hong Kong Stock Exchange. As at the date of the Points of Claim, the value of the Shares held in the name of KD was approximately HK $132,265,440. At the date of the Order, W held all the shares of KD.  According to the Applicant, KD had no business other than to hold the Shares and on the Applicant’s case, KD was W’s nominee of which he had full control and through which he carried out his personal investment in the Shares, the full benefit of which was vested in W at all material times.

5.  The Applicant claims that after the Order had been served on W and KD on 8 January 2018, W disclosed to the Stock Exchange on 10 January 2018 that he had transferred ownership of all the shares in KD to Madam Yang Xiao Qiu (“Yang”) on 5 January 2018 (“Transfer”). The Applicant claims that the Transfer was not supported by any valid consideration, and that W retained his beneficial ownership of KD. The Applicant further claims that both W and Yang had knowledge of the Order, that the Transfer and the claim of KD being a separate legal entity were merely attempts to evade liability under the Order and the Award, that Yang was not a bona fide purchaser, such that she should be bound by the Order, which should be made absolute.

6.  By way of Defence, W denies that he held the shares of KD as at the date of the Order on 11 December 2017. He claims that he had transferred his entire legal and beneficial interest in the shares of KD to Yang on 7 December 2017. W further denies that the beneficial interest of the Shares was vested in him, claiming that he had borrowed RMB 81 million from Yang (“Loan”) under a Loan Agreement made with Yang on 18 November 2016, whereby the Loan was agreed to be repayable on 17 November 2017. Under the Loan Agreement, W further agreed to transfer the shares in KD to Yang if KD should fail to repay the Loan by 17 November 2017.

7.  According to W, the Loan was utilized to purchase the Shares. On 7 December 2017, a Repayment Agreement was made between W and Yang, whereby W agreed to transfer the shares in KD to Yang to discharge the Loan and interest accrued thereon. On the same day, W and Yang signed the documents for the transfer of W’s shares in KD to Yang.

8.  In KD’s Defence, it is claimed that the Shares had been purchased with the Loan from Yang, which Loan was guaranteed by W. KD claims that its shares had been transferred to Yang in early January 2018, pursuant to W’s guarantee under the Loan Agreement and the Repayment Agreement, for valid and good consideration. KD claims that the beneficial interest in the FB Shares belongs to it, and not to W.

The beneficial ownership of KD

9.  W and KD rely on the distinction between KD and its shareholder W, and their separate legal entities. The FB Shares were at the material time of the Order registered in the name of KD, although it has never been disputed that some FB shares were registered in W’s personal name (over which a charging order absolute has been made). KD emphasized that the Applicant’s case is that W had provided the money for the purchase of the Shares, such that he should be regarded as the beneficial owner thereof and in respect of which the order absolute should be made. In this respect, Counsel argued that in the corporate context, both the legal and beneficial interest of the Shares should be regarded as being vested in KD, relying on Lo Man Yau v Chiu Sung Fai [2018] 6 HKC 221 and Good Profit Development Limited v Leung Hoi [1992] 2 HKC 539, where the Court stated at 545A:

“The normal rule is that a company does not hold property as an agent or trustee for its members and a fortiori it does not hold property as agent or trustee for the directors.”

10.  In Lo Man Yau, the Court of Appeal referred to the part of the judgment in Re Fortune King Trading Ltd (HCCW 432/2012, unreported, 19 May 2017), as follows:

“(1) It is axiomatic that a company is in its own right a legal person having a separate and distinct identity from its shareholders. Therefore, as a general rule, a company does not hold property as an agent or trustee for its shareholder. Put differently, as a general rule, a shareholder has no legal or equitable interest in the company’s property, as opposed to a right to share in the profits of its business and to a distribution of any surplus on liquidation...

(2) It follows that when the purchase of a property is made in the name of a company, the starting point is that the purchase was intended to invest both the legal and beneficial interest in the company. This is true even if the funds for the purchase are provided by a shareholder.

(3) Both (1) and (2) are general propositions. Combined together, they give rise to a normal, but rebuttable, inference that the beneficial interest of the property acquired in the name of the company with funds provided by its shareholder was intended to pass to the company. When the shareholder claims that by providing the funds, the equitable interest in the property was intended to be vested in him personally by way of a resulting trust, he bears the burden to rebut the inference by proving that the legal interest in the equitable interest of the property were so vested in the company and him separately.

(4) The time to take stock of the respective interest taken by the company and the shareholder in the property is the time of its acquisition. The focus is on the parties’ intention at the time of purchase: whether the parties intended to vest the beneficial interest of the property in the shareholder as the provider of the funds, having regard to all the circumstances.” (emphases added)

11.  The essential question is whether, at the time of the purchase of the Shares, W had the intention to vest the beneficial interest of the Shares in KD, or in himself.

12.  On this question, I consider that the telling evidence is W’s own affirmation made at the earliest opportunity afforded to him to clarify his interest in the Shares, namely W1 made by him on 16 November 2017. This was W’s evidence filed in opposition to the application for an injunction to restrain W’s disposal of assets. In W1, W explained his dealings in the Shares, in an attempt to show that his purchases and sales of shares in FB were his regular investment activities, and that there was no risk of dissipation of assets to justify the grant of a Mareva injunction.

13.  In paragraph 3 of W1, W claims that he owned under his name 59,500,000 shares in FB, and was also in total control of KD which as at 30 June 2017 held 612,340,000 shares in FB. W went on to state that since October 2016, he had been investing his money in FB shares by buying and selling these shares in the market for the purpose of making profit. At paragraph 5, W states:

“Between 16 December 2016 and 8 September 2017, I bought and sold ordinary shares of FB in the market at various prices, either under my own name or through KD. During that period, I made 9 times of acquisition and 1 time of sale of FB’s ordinary shares in the market. As a result, through such transactions, my shareholding in FB under my own name and through KD, increased from 10.01% to 20.1% of FB’s total issued shares.” (emphases added)

14.  W further states in paragraph 6 of W1 that as at 11 October 2017, he owned 768,240,000 FB shares in his name “and through KD”, which accounted for 19.85% of FB’s total issued shares. Similarly, W referred to other transactions and in summary, states that as at the date of W1, he owned under his name “and through KD” about 19.8% of FB’s total issued shares. Bearing in mind that W1 was made in opposition to the application for a Mareva injunction to be made against W, to restrict him from dealing in the FB shares, it would have been natural for W to simply state, if it was true, that the Shares in KD’s name were not his to dispose of or deal with. Yet, nowhere in W1 did W claim that he did not have any beneficial interest in the Shares which were in the name of KD. To the contrary, W claimed in W1 that he owned 19.8% of FB’s total issued shares on 16 November 2017 (which included KD’s interests).

15.  It is clear from W1 that the whole tenor of the affirmation was that W regarded the shares registered in KD’s name as his own, paid for by him, as his own personal investment, and subject to his control and at his disposal. He only sought to argue that his sale and purchase of the FB shares were “his usual and regular investment activities”, conducted consistently throughout a considerate period of time, and were not dissipation of assets to justify the grant of a Mareva injunction. From W1, it can be inferred that at the time when W bought the FB shares, including the Shares in KD’s name, his intention was that he was to have the beneficial interest of all these shares as his personal investment. If he had at that time been asked whether the Shares were his, for him to retain or dispose of as he deemed fit, his answer at that time would naturally have been “Yes”. 

16.  The fact that KD had no other business, and served only to hold the Shares and investment of W, supports the fact that KD was a mere nominee and vehicle through which W conducted his personal investments. This, as Counsel for W sought to emphasize, in reliance on the judgment in Re Hansby Co Ltd, HCMP 4610/2003, unreported, 12 May 2004, may not be sufficient by itself to suggest that the company held all the properties it owned on trust for its shareholders, but it is one of the factors which the Court may consider in all the circumstances of the case.

17.  I agree with Counsel for the Applicant that the statements made in W1 constitute admissions against his interest, and should be given due and considerable weight by the Court (Wong Tak Yue v Kung Kwong Wai (No 2) (1997-98) 1 HKCFAR  55, at 69D-E), as compared with what may be seen as self-serving statements made in the later course of the proceedings.

18.  It may be argued that distinction should be made that as at 16 November 2017 when W1 was made, W was still the beneficial owner of all the shares in KD, which were only (on W’s case) transferred to Yang on 7 December 2017. However, as Counsel for the Applicant pointed out, W admitted in cross-examination that he knew that the Loan was repayable on 17 November 2017, such that this should also have been in the forefront of his mind when he deposed to the fact in W1 that the Shares had been acquired with his own money and were owned by him, through KD. No mention was made of the Loan Agreement and the Repayment Agreement in W1 filed to oppose the grant of an order which may have the effect of restricting transfers of the shares in KD which were subject to be transferred to Yang under the Loan Agreement if the Loan was not repaid by 17 November 2017 (the day following the making of W1), and/or affect the Shares themselves.

19.  So far as the issue of W’s intention at the time of the purchase of the Shares is concerned, the reality is that this is ultimately a question of the credibility of W’s evidence and of the supporting evidence of Yang, and whether the Court accepts their evidence as to the circumstances of the making of the Loan Agreement and the Repayment Agreement and the Transfer. In this respect, I regret to conclude from all the evidence that neither W nor Yang can be accepted as reliable witnesses. Their evidence is also unsupported or contradicted by the independent contemporaneous documents as are available.

20.  First, W and Yang have not been forthcoming about the extent of their relationship. The witness statement of W only referred to Yang as a friend, whom he approached for the Loan. The evidence of W and Yang suggested that the Loan, the Loan Agreement and the Repayment Agreement comprised a mere commercial transaction between 2 independent parties, Yang claiming in her evidence that she was interested in investing in FB shares in November 2016 because she knew the majority shareholder Liu (in an attempt to distance herself from W). However, as pointed out by Counsel, the evidence indicates that Liu was not in fact the majority shareholder of KD in November 2016, as he only became the majority shareholder in late April 2017. Yang’s evidence, in cross-examination, as to her reasons for being content to receive the Shares in the event of KD’s default or inability to repay the Loan, and her purported disinterest in making a profit from the Shares as opposed to only seeking payment of interest on the Loan, are improbable to be believable (as will be elaborated upon below). It was only in the course of cross-examination, and in response to questions raised by the Court, that W admitted that he in fact had an intimate relationship with Yang. Before such admission, W’s testimony had shifted from Yang having a “close business relationship” with him, to their being “good friends” who had come from the same hometown, to his having an intimate personal relationship with her only after April or May 2018, to cohabiting with her occasionally. Their intimate relationship may have been a reason for Yang to have been evasive in her evidence as to her residential address during her stays in Hong Kong, and to which “friend” had arranged for her accommodation in Hong Kong.

21.  The evidence given by W and Yang as to the terms allegedly agreed between them for W’s purchase and sale of shares in FB after the date of the Loan Agreement was also inconsistent and unbelievable.

22.  It was a term of the Loan Agreement that the money advanced was to be used to purchase FB shares. However, there was no probable and good reason for W and Yang to have agreed, as they alleged in cross-examination, as part of the Loan Agreement, that the FB shares purchased by W in the interim of the 12 months prior to repayment of the Loan could not be sold by him at a loss. W’s evidence was that in this interim of 12 months, he was free to buy but not to sell the FB shares at a loss. His explanation was that if he should sell the shares at a low price, he would be making a loss and this meant that Yang would also be making a loss.  On Yang’s part, her evidence was that she was afraid that if there should be a loss sustained as a result of the shares being sold at a low price, there would be no repayment of the Loan to her.

23.  Under the Loan Agreement, KD and W as guarantor agreed that if the Loan was not repaid on its due date, W will transfer to Yang the shares he held in KD and further pay any shortfall in the outstanding Loan. Any loss incurred as a result of the sale of the FB shares at a price lower than the acquisition cost would have to be made up by W to Yang. As Mr Wong pointed out on behalf of the Applicant, it was commercially unreasonable and improbable that W (a seasoned trader in shares) would have agreed not to be able to cut any losses incurred in the drop of the price of the FB shares, by selling them in the 12 months before the due date for repayment of the Loan.

24.  On Yang’s part, her testimony on the conditions imposed regarding W’s sale of the FB shares at a loss contradicts her own evidence, that her prime interest in agreeing to make the Loan was the interest payable on the Loan at 18%, and her purported disinterest in making a profit from the Shares. There was also no reason for her to be concerned to impose restrictions on the sale of the FB shares, when the shortfall would have to be paid by W to her under the express terms of the Loan Agreement.

25.  Yang’s evidence, in cross-examination, as to her reasons for agreeing in November 2016 to take the Shares as security for the Loan, and why she was content to receive the Shares in the event of KD’s default or inability to repay the Loan are full of inconsistencies, and improbable to be believable. As Mr Wong sought to emphasize, there was no commercial reason for Yang to have agreed to take the shares in KD, and in effect the FB shares, as security for repayment of the Loan, when she had no control on how W/KD would acquire and dispose of the FB shares (apart from the only condition they claim, of not selling at a loss), and no guarantee that KD would still be holding any FB shares purchased when the Loan fell due on 17 November 2017.  KD had no business or assets other than holding W’s investments. Mr Wong further pointed out that it was also improbable that Yang would have agreed to restrict the sale of the FB shares purchased, if she was merely looking to W for repayment of the Loan or the shortfall between the outstanding Loan and the value of the FB shares purchased in KD’s name. If the FB shares held by KD were of value, it would have been reasonable to expect that they would be sold by W/KD for repayment of the Loan to Yang. If KD was unable to repay the Loan, it is improbable that she would have agreed to take KD as the FB shares it held were likely to be worthless and, irrespective of the value of such shares, she had little knowledge of KD, its business and assets in 2016 (as is apparent from Yang’s evidence). The security taken by Yang under the Loan Agreement appeared to be worthless and would not appear to be something which a reasonable businessman would have agreed to.

26.  As Mr Wong also argued, if the evidence of Yang and W were to be believed as to the nature of the Loan and the intention to provide security to Yang, it would have made more sense for the parties to have agreed to transfer the FB Shares directly from KD to Yang, as opposed to the Transfer involving the KD shares from W to Yang.

27.  On the whole, the evidence of W and Yang as to the making of the Loan Agreement and Repayment Agreement is contrived, for the purpose only to explain the Transfer of KD from W to Yang on 7 December 2017, conveniently, just before the Order was made against the Shares held by KD on 11 December 2017.  In her testimony in court, Yang was hesitant and evasive in giving details in her answers to questions put to her.  Essentially, she could only echo W’s evidence and repeated her script that the purpose of the Loan Agreement and Repayment Agreement was to give her security for the Loan she had made, and that the shares in KD were transferred to her pursuant to such security. As for W, he could not even be direct and truthful on his address given in the Notice to Act and in his affirmations. 

28.  Significantly in this case, the evidence of the Loan allegedly made by Yang to W is not clear and free from doubt.

29.  In his witness statement, W claimed that Yang had arranged for the transfer of the Loan to KD’s account in Hong Kong via currency exchange providers and third parties. In support, W produced in evidence a receipt signed by him on behalf of KD, to the effect that KD had received a sum of RMB 81 million from one Mr Zhang (“Zhang”) acting on Yang’s behalf, which sum was paid into a bank account designated by W in Shenzhen and as stated in the Loan Agreement. In his testimony in court, W claimed instead that the sum was first paid into an account of his/KD in Shenzhen, and then to KD’s account in Hong Kong. According to W, a receipt was issued on the same day and given to Yang.

30.  In her witness statement, Yang did not give any details as to how the Loan was paid to KD. This is so, notwithstanding the fact that the Transfer and the beneficial interest in the FB Shares had been the issue in dispute between the Applicant, KD, and W from the start, and Yang’s Loan to KD was the consideration relied upon by KD to justify KD’s claim to the Shares, and the defence asserted that that KD and Yang had, at all material times, acted in good faith, reasonably and honestly (para 13.2.5 of KD’s Defence). Nor was Yang able, in her testimony in Court, to give a detailed account of the transfer of the Loan to KD. She initially adopted the account given by W in his witness statement, which W had actually amended in cross-examination. Yang then claimed that she had not made the transfer of the money herself, but that someone else had made the arrangements, as she did not know much about transferring money to Hong Kong, and also that she did not want to take the risk of transferring a large amount of money from the Mainland to Hong Kong. Finally, Yang claimed that she had asked Zhang to transfer the Loan because she had money with Zhang - a fact which had never been raised before and, if true, was simple enough as an explanation and could easily have been mentioned in her evidence.

31.  On behalf of the Applicant, it was also highlighted that neither Yang nor Zhang on behalf of KD had disclosed or produced the receipt of the Loan in their evidence, and that only W had produced a copy of the receipt. W’s evidence is that he had issued a receipt to Yang on the day the funds were received by KD. According to Yang, she had passed the receipt to Zhang instead, as it was he who had arranged the transfer and paid on her behalf, so it was a matter to be settled between Zhang and herself. Despite the fact that the Loan from Yang to KD is at the heart of the dispute as to whether Yang had furnished good consideration for the Transfer, Mr Wong pointed out that not only has Yang failed to disclose or produce the receipt, but there has been no other independent documents from either Yang or KD to evidence the transfer of the Loan from Yang to KD.

32.  In summary, the Loan was alleged in the Defence of W and KD to be a loan made by Yang to KD, under the Loan Agreement.  When it came to the actual evidence to establish this, what could be produced was only a payment and transfer of the sum from someone totally different, ie Zhang. To connect Zhang to Yang, W conveniently produced a receipt signed by him, to say that Zhang’s payment was made on behalf of Yang. However, the receipt was only forthcoming from W, but not from Zhang or Yang. This is totally suspicious and incredulous.                   

33.  Coupled with the overall unsatisfactory and unreliable evidence from W and Yang, the Applicant submitted that the Court should find that the Loan and consideration for the Transfer has not been established by KD, the party which bears the burden of showing cause why a charging order nisi should not be made absolute (Rosseel NV v Oriental Commercial and Shipping (UK) Limited [1991] 10 WLUK 97).

34.  In the assessment of evidence, a crucial consideration for the Court, besides the demeanour and credibility of the witnesses and the inherent probability of their assertions, is whether the parties’ assertions are consistent with their conduct and the contemporaneous documents.

35.  It is material that the contemporaneous and independent documents in this case do not support the contentions made by W and KD, that W’s beneficial interest in the shares in KD had been divested and transferred by him to Yang (according to para 13(5)(b) of W’s Defence, on 7 December 2017).  According to the Annual Report of FB for 2017, W was still recorded and stated as a substantial shareholder and W made disclosure of his interests in the Shares as at 10 January 2018. The Annual Report recorded Yang as a director appointed to the board of FB on 8 February 2018, but there was no declaration as to Yang’s interests in the Shares. Counsel for KD sought to explain this by the fact that the Transfer was only completed in January 2018 and the Certificate of Incumbency was only issued on 8 January 2018 in respect of the Transfer into Yang’s name. There is no evidence as to the completion of the Transfer only taking place in January 2018. As pleaded in paragraph 13 (5) (b) of W’s Defence, W regarded the beneficial interest in the KD shares to have been transferred to Yang on 7 December 2017. As for Yang, she also regarded and accepted in her cross-examination that the shares in KD had been transferred to her by 7 December 2017.

36.  The Report of the Directors contained in FB’s Annual Report for 2017 clearly and unreservedly states that as at 31 December 2017, W was the beneficial owner of 765,840,000 shares in FB, which included the Shares which were indirectly held by W through KD, and further, that KD was wholly owned by W.  There is nothing in the Annual Report or the Directors Report which is consistent with the fact that there had been a transfer of W’s beneficial interest in KD on 7 December 2017 (under and pursuant to the Transfer), and that Yang had any beneficial interest in any shares in FB.

37.  None of the excuses and explanations made by or for Yang, that she did not play any role in the preparation of the Annual Report or the Report of the Directors of FB, or that she could not read English, are acceptable or believable, bearing in mind that she was an executive director of the listed company, FB, at the time of its Annual Report for 2017, and must bear responsibility for the contents of these Reports.

38.  After the Transfer, it is also clear from the contemporaneous bank documents that W was still using KD’s bank accounts for payments in and out of substantial amounts of money relating to W’s own personal transactions.  Yang’s evidence was that she had agreed to this and had given standing instructions to the finance staff to allow the transfers of money from KD’s account to W’s account. As Counsel for the Applicant pointed out, this was highly unusual and improbable, when on Yang’s own evidence, W was still indebted to her for approximately HK$34 million.

39.  I have borne in mind the general principles and authorities relied upon by KD and W, as to the distinction between KD and its shareholder W, and the fact that there is a strong presumption that parties intend to be bound by the provisions of the agreements they made, such that it requires cogent evidence before the Court finds or infers that a transaction is a sham, notwithstanding any commercial imprudence of the transaction. Yet, the overall evidence adduced by W and Yang as to the Loan Agreement and the Repayment Agreement as the justification for the Transfer is so improbable and unreliable, that this Court must reject their evidence and conclude that the beneficial interest in the KD shares, and in the FB Shares registered in the name of KD, remained vested in W at the time of the service of the Order on KD. 

Disposition and orders made

40.  My conclusions on the issues framed are:

(1) The beneficial interest of the Shares rests with W.

(2) The purported Loan Agreement between W, KD and Yang and the subsequent Transfer were not genuine transactions.

(3) W had not divested his beneficial interest in the Shares on 7 December 2017, and the Repayment Agreement is not a genuine transaction.

41.  The Applicant does not seek any finding on lifting of the corporate veil, in light of the foregoing findings.

42.  The Charging Order Nisi in respect of the Shares is made absolute, with costs of the charging order applications to the Applicant, including the costs of the trial of the beneficial interests.