AU YUK LIN AND ANOTHER v. WONG WANG HIN, EDDY

HCMP 59/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 59 OF 2011

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HCMP 272/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 272 OF 2011

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(Heard Together)

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J U D G M E N T

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1. These two sets of proceedings have been ordered on 6 July 2011 to be tried together. The parties involved are parents and son. The plaintiffs, Madam Au Yuk Lin (“Au”) and Mr Wong Man (“Wong”) are the mother and father respectively. The defendant, Mr Wong Wang Hin Eddy (“Eddy”) is the younger son. Also involved in these proceedings are Eddy’s wife, Ma Kit Luk (“Clarice”) and the elder son Wong Wang Tat Victor (“Victor”).

2. The issue in HCMP 59/2011 (“the 1st proceedings’), in which both parents are the plaintiffs, is the ownership of the beneficial interest of a shop at G/F, Nos 836 to 838, Canton Road (“the Shop”).  The Shop was purchased in September 1988 in the names of Victor and Eddy.  It is still held in their names.  Wong, Au and Victor claim that the Shop is held by the sons on trust for the benefit of the parents.  Eddy claims that the parents purchased the Shop as a gift to him and Victor.

3. The issue in HCMP 272/2011 (“the 2nd proceedings”), in which Au is the only plaintiff suing Eddy, is the ownership of the beneficial interest of 180,000 shares of Menfond Electronic Art & Computer Design Co Ltd (“Manfond Computer”) transferred by Au to Eddy in December 2006. Wong also transferred 180,000 shares of Menfond Computer to Victor on the same day.  The parents and Victor say that the transfers did not affect the beneficial interests in the shares which remain vested in Wong and Au, but Eddy and Clarice say that the shares were transferred as gifts by the parents to the sons.

4. Apart from the parents, the sons and the daughter-in-law Clarice, one Janson Law, a former Chief Finance Officer (“CFO”) of Menfond Computer was also a witness.  He gave evidence for Eddy.

5. Eddy gave evidence as DW2.  He in the course of his evidence agreed to return all his interests in the Shop to his parents but did not admit liability.  That resolved the subject matter in the 1st proceedings save as to costs.  The trial of the 1st proceedings is therefore only for resolving the incidence of costs therein.

Au’s evidence in chief

6. The parents are the owners of a paper product business called Hing Kee.  The business used to be owned by Au’s father.  Au said in oral evidence that his father had lost money in the business and did not want to continue with it.  He gave it to Au and Wong for them to run it.

7. In 1988, Au and Wong wanted to buy a shop for use as the permanent base of Hing Kee.  After having considered a few premises, they decided to buy the Shop.  The sons were not involved in the choice of premises.

8. Au and Wong also decided to make the purchase in the sons’ names but to hold for their benefit.  Au said they were advised to do so by an accountant friend so that the Shop would be shielded from their potential liability for Hing Kee’s debts as Hing Kee was unincorporated.  The sons at that time were studying outside Hong Kong. 

9. Au obtained general powers of attorney from her sons.  She and Victor executed the sale and purchase agreement for the Shop on 12 September 1988.  She signed the agreement as Eddy’s attorney.  Victor and Eddy then executed the assignment to complete the purchase on 28 October 1988.  They also executed a legal charge over the premises on the same day in favour of Wing Hang Bank (“WHB”) to borrow a sum of HK$1.38 million to finance the purchase.  There is no dispute that all the payments for purchase of the Shop including all the mortgage payments to WHB and all costs and expenses of the purchase were paid by the plaintiffs from their earnings in Hing Kee.  Au said in oral evidence that she thought the powers of attorney would enable her to decide whether and when to sell the Shop to the exclusion of her sons as she had asked her solicitors to prepare such documents for her.

10. Au also said in oral evidence that WHB, in advancing the mortgage loan to the sons, only trusted the parents as the bank had years of business experience with Hing Kee.  WHB did not rely on the sons’ ability to repay as they were still studying and had no income.  Au was not challenged on this.

11. The mortgage payments were debited from a savings account opened in Victor’s name with WHB and numbered 115-711-100 (“the Savings Account”).  Au said in her witness statement that Victor opened the Savings Account on trust for her.  This account was to facilitate repayment of the mortgage loan.  She drew cash from Hing Kee and deposited it into this account for paying the mortgage instalments to WHB.  She also kept the passbook of the account.  In oral evidence, she clarified that the passbook was kept at Hing Kee and the money in the account belonged to her and Wong.

12. After the Shop was purchased, it was used as Hing Kee’s business premises.  All costs and expenses for maintaining the Shop were met by Hing Kee.  Though the Shop was held in the names of the sons, they never demanded any rent and no rent was ever paid to them as Au and Wong were the true beneficial owners.

13. Eddy married Clarice in December 1995.  Since the marriage, Clarice was responsible for the accounting and tax matters of Hing Kee.  It was also on Clarice’s advice that rental was booked in the books of Hing Kee in favour of the sons.  Au said that this was done for tax efficiency and at the suggestion of Clarice, but no rent had in fact been paid.

14. Au regarded Hing Kee as their life-time endeavour.  It provides job opportunities for her close relatives who are old and disabled.  Her elder brother and his wife are deaf and dumb.  They have a family of five and are supported mainly by the brother’s employment at Hing Kee.  Au is also responsible for paying the university education of her elder brother’s son.  Her younger sister, who is suffering from some eye disease (or half blind as Wong put it) and has recovered from cancer, and the husband of the sister are also working at Hing Kee.  Her other sister, who is half deaf, and her husband, who had been unemployed for a long time, are also employed by Hing Kee.  If Hing Kee’s business should suffer, these relatives may have difficulty in finding another job.  Au and Wong intend to keep Hing Kee running for as long as they could for the sake of the relatives.  They need a permanent base for Hing Kee. 

15. Au said that she would not have given the Shop to her sons in 1988 as it was intended to be the permanent base of Hing Kee.  She and Wong had throughout the years always referred to the Shop as their property and her sons never complained of it.  Back in 1988, the financial position of Au and Wong was also tight as they had to support their sons and relatives. They were not in a position to make a gift of the Shop to their sons.

16. Au also referred to the setting up of Menfond Computer by their sons in 1989.  Their sons set up Menfond Computer to do business in digital animation and design.  Their sons had just finished with their education and had no capital to set up the business.  Everything required by the business was provided by the parents.  The parents had certain premises at Kowloon Bay which were owned by them through their investment company, Menfond Company Limited (“Menfond Investment”).  The parents initially were the only shareholders of this company, but some shares were later given to the sons.  The sons were allowed to use the Kowloon Bay premises for the business of Menfond Computer free of charge.  All funds required for the business operation in the first two years including the costs for incorporating Menfond Computer, the purchase of computers and other equipment, some HK$700,000 for decorating the premises and the salaries of two employers were met by the parents.  The advances by the parents were booked as interest free loans from the parents to the company.  The parents were also given shares of the company.  Au further said that she and Wong also allowed their sons to create a second legal charge on the Shop in favour of WHB on 13 March 1992 to secure banking facilities for Menfond Computer.

17. The legal charges in favour of WHB were discharged on 14 May 2002 with funds borrowed from the Standard Chartered Bank (“SCB”).  The Shop was then mortgaged to SCB to secure the repayment of such loan.  Au said that this mortgage was made with the consent from her and Wong.  They gave their consent to help their sons.  Au admitted that she was aware of the risk of a mortgage over the Shop as the mortgagee would take possession of it if Menfond Computer should fail to repay the mortgage loan.  She explained that though she had to look after her relatives, her sons had the first priority to use the Shop.  If the sons should fail in their business, then she would have nothing to say (but to accept the consequence).

18. Au also said that she and her husband wanted to have the Shop back since 2006 as they began to worry that they might lose it as the finance of Menfond Computer was not good.  However, the Shop was then mortgaged to SCB and Menfond Computer had not paid off the loan.  The business of Menfond Computer made an upturn in 2008.  By late 2009, it had substantially repaid the loan to SCB.  Au and Wong then wanted Menfond Computer to repay the loans to them.  They also wanted their sons to return the Shop to them.  They wrote on 23 October 2009 to the three directors of Menfond Computer seeking repayment of the interest free loans totaling HK$720,000 and the return of the Shop.  Two of the directors were their sons and the 3rd director Cliff Cheung was a representative of some outside investors who invested in Menfond Computer in 2003.

19. The letter said:

“本人黃敏、區玉蓮乃萬寬電腦藝術設計有限公司的創業股東之一，而公司創業至今已近二十年，本人在經濟上亦無間斷地支持公司。現今，萬寬電腦藝術設計有限公司業務昌隆，而嘉兆臺亦已高價獲利出售。因此，萬寬電腦藝術設計有限公司尚欠本人之七十二萬圓港幣無息貸款速請盡快清還給本人。

   此外，本人經營的興記紙號是本人四十多年的心血，而多年以來本人亦借出位於廣東道838號地舖的物業以作為萬寬電腦藝術設計有限公司向銀行借貸透支額的抵押品。現速請萬寬電腦藝術設計有限公司向有關銀行取消此抵押品及交還業權於本人。如有疑問，歡迎親臨興記紙號與本人商討。”

They agreed translation of the letter reads:

“We, Wong Man, Au Yuk Lin are one of the founding members of MEA (Menfond Computer). MEA has been incorporated for nearly 20 years, we have been providing financial support to MEA since then. These days, MEA’s business is successful, The Grand Panorama was sold at high price with profit, please therefore repay to us the sum of HK$720,000.00 being interest free loan owing by MEA to us as soon as possible.

Further, Hing Kee Company, which is operated by us, is the fruit of over 40 years of our effort.  Over the years, we have lent the property situated at Ground Floor, 838 Canton Road as a security for the facilities granted by the bank to MEA.  I now urge MEA to cancel this pledge with the bank and return the title of the property to us.  Should you have any query, please come to Hing Kee Company and discuss with us.”

None of the three directors of Menfond Computer responded to this letter.  However, Victor was willing to meet the parents’ demands.  He also procured repayment by Menfond Computer of the loans to the parents.

20. In about 2008, Victor and Eddy were having disputes on the management of Menfond Computer.  The outside investors were on the side of Eddy whilst Au and Wong were on the side of Victor.  Au said when the dispute intensified, she and Wong were worried that the Shop might be jeopardized.  That would affect the viability or operation of Hing Kee. 

21. When the mortgage with SCB was discharged, they asked the sons to return the Shop to them which the sons agreed.  They then consulted a firm of solicitors in November 2010 on the transfer of the Shop by the sons to them.  The solicitors suggested that the transfer could be effected in the form of a sale and purchase at a consideration of HK$5.1 million (admitted by Eddy to be the then market price) which was not supposed to be paid.  All parties accepted this suggestion.  However Eddy later refused to execute the necessary documents to implement this scheme.  Eddy claimed that he owned the interest in the Shop beneficially and not as trustee for his parents.  Eddy also said that the parents were using the Shop and the loans as a bargaining chip in the negotiation of settlement of the shareholder’s dispute.

22. Regarding the 180,000 shares of Menfond Computer that Au transferred to Eddy in December 2006, they were transferred to meet the demand of SCB for granting of banking facilities to Menfond Computer.  Menfond Computer was negotiating with SCB in the last quarter of 2006 for renewal of banking facilities.  Menfond Computer in fact wanted the overdraft facilities to be increased.  The facilities were guaranteed by Victor and Eddy.  SCB wanted the guarantors to be the majority shareholders of the company or else there should be additional guarantors.

23. The then CFO Janson Law calculated that each of Victor and Eddy would require the transfer of 180,000 shares from their parents so as to become the majority shareholders.

24. Au and Wong duly executed the share transfer documents by which each of them transferred 180,000 shares to Victor and Eddy respectively. Au said that they did so only for the purpose of showing that Eddy and Victor were the majority shareholders of Menfond Computer so that it could obtain banking facilities.  They did not intend to transfer their beneficial interests in the shares to their sons.  They intended that the sons would hold these shares on trust for them. 

25. In oral evidence, Au clarified that she and Wong were lending the shares to their sons.  Though the consideration stated in the transfer documents was HK$180,000 for each transfer, there was no discussion within the family on any payment as no transfer of beneficial interest was intended.  Regarding the defendant’s allegation that Clarice had asked Au and Wong to transfer 180,000 shares to each of their sons as a gift, Au said Clarice only asked them to lend the shares to the sons. 

26. After the transfers, each of Au and Wong was still holding 770,000 shares of the company.  Au denied that she and Wong were holding the shares of the company ultimately for the sons’ benefit.  She also maintained that the shares were their investments and had considerable sentimental value if not substantial financial value to them.

27. Regarding the undertakings given by Victor and Eddy to SCB that they would inform the bank of any change in the beneficial shareholding of the company, Au denied knowledge of the same as she and Wong were not involved in the negotiation with the SCB for the banking facilities. They had also not been shown the relevant documents from the bank which they in any event would not have been able to understand as the documents were in English.

Wong’s Evidence

28. Wong adopted the witness statements of his wife Au.  He in particular pointed out that Clarice had been responsible for the accounting and tax matters of Hing Kee since 1995.  He said it was Clarice who suggested the booking of rental expenses in the accounts of Hing Kee in favour of Victor and Eddy.  He denied of having discussed with Clarice on whether this practice should be stopped. 

29. He added in oral evidence that he had been using the Savings Account to pay the mortgage instalments to WHB.  The bank statements of Hing Kee between April 1996 and April 1997 showed that there were monthly withdrawals of HK$16,800.  Wong said such sums were for paying the mortgage instalments.  These withdrawals were recorded as rental payments by Hing Kee and would have been assessed by the IRD for property tax payable by Victor and Eddy.

30. Wong also said he was the head of the family and was at liberty to give his income to whoever he pleased.  I understand that he meant he was lending his money to his beloved ones who were in need.  Wong and Au jointly owned their assets.  When Au sometimes referred to her assets, she was referring to the assets owned by her and Wong jointly.  Wong behaved in the same way though Wong was the more dominant decision maker on the application and disposal of their wealth.  Mr Robin D’souza, counsel for Eddy also shared this view in his closing submissions.  Wong also referred to his responsibility in taking care of his handicapped relatives.  He took the responsibility seriously.

31. Before acquiring the Shop, Hing Kee operated in rented premises, but the rental went up from HK$2,800 per month to HK$35,000 per month.  If Hing Kee could not carry on its business, the life of those whom Wong had to support would be tough.  When the Shop was available for purchase, he immediately grabbed hold of the opportunity.

32. He also explained further the reason for putting the Shop in the sons’ names.  He said when he purchased the Shop, he and Au already had a property in Kowloon Bay and two residential flats in Canton Road.  The Kowloon Bay property was held by Menfond Investment (nd was later used for the operation of Menfond Computer).  He had previously been fined for a taxation problem.  His accountant friend, one Mr Leung then advised him that he should not acquire premises in his own name anymore and it was better to put the same in his sons’ names.  He also said that the sons knew that the Shop belonged to the family. 

33. Victor revealed more about this fine resulting from a taxation problem.  He said when he went to USA to further his study, Wong had to deposit some money in a bank account as proof of Wong’s financial capability to support his education.  As a result of the deposit of money, Wong was fined by the IRD for over HK$100,000.  Victor added that Wong had not revealed this matter to him and he only learnt of it some years later.  He thought the fine of over HK$100,000 was a very dear sum to his father at the time (in the mid to late 1980s).  I suppose Wong was fined for evading profits tax because he did not report the money he deposited it into the bank account as the profits of Hing Kee.  Hence, Wong was later advised not to purchase any more property in his name and the name of Au.  I suppose the same would apply to purchasing property in the name of their company Menfond Investment. 

34. Such evidence was proffered for the first time by Wong and Victor when they were in the witness box.  However, the defence did not object to their admission at the time or seek an adjournment to deal with it. Nor did Eddy and/or Clarice attempt to contradict it in their oral evidence.

35. Regarding rental, Wong said that every year he had to settle all wages for the relatives, pay the suppliers and to take care of the mortgage loans.  Nobody mentioned anything about payment of rental.  They were all in a family and all income belonged to him.  If the Shop should be sold, the proceeds would belong to him and his wife.  However, if anyone in the family should have financial problem, he could assist that person by giving him money according to his will. 

36. He gave an explanation on the $8,000 per month that he deposited into the Savings Account which Eddy and Clarice said was the rent paid to Victor.  He said that Victor had made a wrong investment decision causing loss to Menfond Computer.  As a result, Menfond Computer gave Victor only HK$20,000 per month as salary.  Wong helped him by giving him HK$8,000 per month.  He later clarified that these payments were loans.  Wong further said that the rental expenses were just entries in the accounts.  No actual rental was paid to Victor.  He further said that he deposited the HK$8,000 per month as a reserve.  If a beloved one should be in need, he would take out some of it to assist him or her. 

37. In this connection, I would refer to Hing Kee’s bank statement and accounts.  The repayment schedule of the mortgage issued by WHB for 29 May 2000 to 29 September 2000 (last payment) showed that the monthly installments were slightly below HK$16,800.  I have already referred to the monthly withdrawals shown in Hing Kee’s bank statements for the period from April 1996 to April 1997 at HK$16,800.  These monthly sums were deposited into the Savings Account for debit by WHB for the mortgage installments.  The accounts of Hing Kee filed with the IRD also showed rental payments to Victor and Eddy for the Shop at HK$16,800 per month.

38. However, after the mortgage was discharged, Wong still made monthly deposits of HK$8,000 into the Savings Account which was opened in Victor’s name.  I have already referred to Wong’s evidence that the deposits would be used to relieve his dear ones who might encounter financial difficulty.  Eddy however said that that was rental paid by Hing Kee to Victor. 

39. The accounts of Hing Kee filed with the IRD no doubt showed rental paid by Hing Kee for the Shop up to 31 March 2003 at HK$8,000 per month.  There was however no more such rental expenses in Hing Kee’s accounts from 1 April 2003 onwards.  Clarice also agreed with this.  She said it was the auditor’s advice that such claim of expenses should not have been made as Hing Kee was not making profit and such rental expenses, which attracted property tax, was unnecessary.  However, despite the stoppage of Hing Kee’s practice of claiming rental expenses in its accounts, Wong continued to deposit HK$8,000 per month into the Savings Account.  This monthly sum was increased to HK$10,000 from June 2005 until June 2011 when the passbook as produced in evidence had expired.  This shows that there was no correlative relationship between Hing Kee’s claim of rental expenses and Wong’s deposit of money into the Savings Account at least from April 2003 onwards.  The so called rental paid by Hing Kee up to September 2000 were also for discharge of the mortgage.  The payments thereafter were Wong’s deposit of money as a reserve for the financial needs of his beloved ones.  Victor had indeed benefitted from this, but Wong said it was not paid to him as rental payments to him for occupation of the Shop. 

40. Regarding the transfer by him and his wife of 180,000 shares of Menfond Computer to each of Victor and Eddy, he said the shares were lent to their sons for them to satisfy the requirement of SCB that they should become the majority shareholders of Menfond Computer.  He denied that he and Au had given the shares to their sons or had the intent to do so.  There was also no discussion of consideration for the transfers as the transfers were only for the purpose of showing to SCB that Victor and Eddy were the majority shareholders. 

41. He also said that when Clarice went to Hing Kee to ask him and Au to effect the transfers, she asked them to lend the shares to Victor and Eddy and not to give the shares to them as gifts.  In fact before Clarice went to Hing Kee to ask them to effect the transfers, Victor had already discussed the matter with them.

Victor’s evidence

42. Victor said in his witness statements that he and Eddy never treated the Shop as their property.  He more or less repeated the evidence of Wong and Au on the history of the purchase of the Shop.  I have already referred to his evidence about Wong having been fined for over HK$100,000 by the IRD for undisclosed profit and hence Wong wanted to purchase the Shop in the sons’ names.

43. He denied of having received any rental from Hing Kee.  He said the passbook of the Savings Account was kept by Au though he himself used the current account numbered 115711-001.  He said the money paid by Hing Kee into the Savings Account was used for payment of the mortgage of the Shop.  He also said that the booking of rental expenses in Hing Kee’s accounts was for accounting purpose and no rent had been paid to him or Eddy.

44. He explained how he had used some of the deposits made by Wong into the Savings Account.  He did so by expanding on what he had said in para. 13.1 of his witness statement in the 2nd proceedings.  He said as a result of certain investment decision made by him and the resulting failure of a company called CyberNation Company Limited (“CCL”), a subsidiary of Menfond Computer which resulted in loss to Menfond Computer, Eddy and Clarice only gave him HK$20,000 per month as salary.  Previously, both Victor and Eddy were drawing HK$80,000 per month as salary from Menfond Computer. There came a time when CCL received some outside investment.  Victor then drew his HK$80,000 per month salary from CCL while Eddy continued drawing his HK$80,000 per month salary from Menfond Computer.  After CCL had failed, Victor returned to work for Menfond Computer, but was only given HK$20,000 per month as salary.  That was from November 2000 to December 2002 and was before there was any outside investor investing into Menfond Computer. 

45. During that period, Victor was in a dire financial condition.  He had to support his wife, son and daughter.  Wong later learnt of his difficulty and allowed him to withdraw money from the Savings Account for his use.  From time to time when Victor needed money, he would seek Wong’s consent to make a withdrawal from the Savings Account.  After Wong had consented, he would then use internet banking to transfer some money from the Savings Account to his current account.  Though both accounts were in his name, the passbook of the Savings Account was kept by Wong (though he said in his witness statement that it was kept by Au).  After the transfer of money into the current account, he could then withdraw the money by cheque.  He sometimes also carried out the same exercise to issue a cheque for Wong’s purposes upon Wong’s request.  For the money he so withdrew for his own use, he had to repay it to Wong.

46. What he said however was not corroborated by contemporaneous documents as the passbook of the Savings Account as produced only covered the transactions from September 2002 to July 2011.  There were however in the passbook many withdrawals which were effected over the internet.  The entries in the passbook also show that there were regular monthly deposits of $8,000 which was increased to $10,000 from June 2005 onwards plus some irregular deposits.  The withdrawals were however irregular and mostly only occurred once every few months.

47. I have also referred to the cessation by Hing Kee of the practice of booking rental expenses for the Shop from 1 April 2003 onwards.  The evidence of Au, Wong and Victor corroborates one another that the moneys paid into the Savings Account were not meant to be rental in respect of the Shop in favour of Victor.  I accept Wong’s evidence that he deposited the money into this account to cater for the rainy days of his dear ones.  I also accept that he kept the passbook at Hing Kee and had permitted Victor to withdraw money from this account through the internet.

48. I also note here the admission by Clarice that the property tax return signed by Victor for the year of April 2002 to March 2003 acknowledging receipt of rental had been paid by Hing Kee to him and Eddy for renting the Shop was in fact prepared by Clarice for Victor’s signature.  This return was to tally with Hing Kee’s claim of rental expenses in its accounts filed with the IRD.

49. Victor also said that when he and Eddy had to mortgage the Shop to raise finance, they had to seek consent from their parents first.

50. On the question of ownership of the Shop, Eddy however relied on the mortgage documents signed by him and Victor in favour of WHB and SCB.  They both confirmed in the documents to be the beneficial owners of the Shop.

51. Victor explained that he had not taken independent legal advice when executing the mortgage documents.  He also had not paid any attention to the terms of these documents as they were standard terms.  He was therefore unaware of his confirmation in those documents of being the beneficial owner of the Shop.

52. I however think that even if Victor and Eddy were holding the Shop on trust for their parents and they were also aware of the confirmations of beneficial ownership in the mortgage documents, they would still have executed the mortgage documents in those terms.  The obvious reason for the execution of the 1st legal charge in favour of WHB was that the loan was needed to complete the purchase and the purchase had to be made in the sons’ names for Wong’s tax reasons.  Regarding the 2nd legal charge in favour of WHB, it was to raise funds for the operation of Menfond Computer.  Regarding the mortgage to SCB, that was a transfer of mortgage and for raising more finance for the operation of Menfond Computer.

53. Victor and Eddy could of course assign the Shop back to their parents and for their parents to mortgage the Shop to raise loans for their company.  But that would have made the arrangement more complicated and exposed their parents to unlimited liability under the mortgage to SCB.  It was also not known if SCB would have accepted such an arrangement bearing in mind that the parents were only minority shareholders of Menfond Computer and the potential argument of undue influence by the sons over the parents could not be ruled out.

54. Regarding the transfers of shares by Wong and Au to him and Eddy respectively, he said SCB required him and Eddy to be the majority shareholders of Menfond Computer.  Janson Law, the then CFO of the company, calculated that each of them needed 180,000 shares from their parents in order to satisfy the requirement.  He then talked to his parents who promised to lend the shares to them so that they would on paper appear to own more than 50% of the shares.  He added that the transfers were not meant to cover the beneficial interest.  There was no discussion of valuation or payment and there was no intention for any payment to be made.  The entire transaction was just to satisfy the requirement of SCB.

55. Eddy however referred to the settlement negotiations which were conducted to solve the differences between him and Victor over the fate of Menfond Computer and for them to go their respective ways.  There were discussions of buying out by one or the other of their shares of company.  All these discussions were conducted on the basis that Eddy’s beneficial shareholding included the 180,000 shares transferred by Au to him.  Eddy relied on these as evidence of the understanding of Au, Wong and Victor that the two transfers of 180,0000 shares each were gifts.

56. Victor, who was in charge of the negotiation for himself and the parents, explained in his witness statement that the question of trust over the shares was not brought up in the negotiations as it was not conducive to an amicable settlement.  It might complicate matter and create further ill-will between the parties.  He further added in oral evidence that if Eddy should sell his shares in a settlement, he would have to account to Au for the value of the 180,000 shares lent to him.

Eddy’s evidence

57. Eddy said he was told a number of times by his parents that the Shop would be purchased in his name and the name of Victor. He had been told and understood that it would be for him and Victor, otherwise his parents would have purchased it in their own names.  But he did not seem to know about Wong’s problem with the IRD in the past.  He said his family was not familiar with the concept of trust until this litigation arose.  However, I think the idea of having another person to hold a property for oneself for the purpose of concealing the true ownership of the property is a common notion that ordinary people would understand.

58. Eddy also referred to the mortgage documents in which he and Victor confirmed their beneficial ownership of the Shop.  He said his parents were aware of such terms and would not have deceived WHB.  I have already made some observations on this argument above.

59. Eddy also referred to the Savings Account as Victor’s account.  He said that Hing Kee paid rent for the Shop to Victor by depositing regular sums into this account.  He also referred to Victor’s property tax return for the year of 2002 to 2003.  He did not say that this form was prepared by his wife Clarice for Victor’s signature.  He did not explain why there were still regular deposits into the Savings Account despite the cessation of booking of rental expenses by Hing Kee from 1 April 2003.  I have already dealt with this matter above in Victor’s evidence.

60. I have referred to the joint demand letter by Wong and Au dated 23 October 2009 in Au’s evidence.  The letter was addressed to the three directors of Menfond Computer in which Wong and Au claimed beneficial interest of the Shop.  Eddy did not reply to this letter at all.  His first claim for the beneficial interest in the Shop was only made by his solicitors’ letter dated 15 December 2010.  He explained in his witness statement his failure to reply to his parents’ demand letter.  He said that Menfond Computer did not consider it necessary to reply to the letter as the Shop was owned by him and Victor. 

61. I consider this a lame excuse.  If he indeed believed himself to be a half beneficial owner of the Shop in October 2009, I can see no reason why he would not have replied and asserted his interest.  He could have done so through his solicitors as he did in December 2010.

62. Eddy further referred to a letter from his parents’ solicitors and dated 23 November 2010 which proposed to purchase the Shop from him and Victor at HK$5.1 million.  He argued that if Wong and Au truly believed that they were the beneficial owners of the Shop, they would not have instructed their solicitors to make such offer to them.

63. I have already referred to Au’s explanation that the consideration was suggested by their solicitors and was not supposed to be paid.  I think in the light of Eddy’s failure to deny their claim of beneficial interest in the Shop in their letter dated 23 October 2009, it was unlikely that the parents would have suddenly abandoned their claim and offered to purchase the Shop from the sons.  There was also no need for them to incur the market price of HK$5.1 million to acquire the Shop when Hing Kee was already operating from it free of rental.  There was simply no reason or need for Wong and Au to agree to incur so much money to purchase the Shop from the sons.  The fact that Eddy had to resort to such lame argument shows the frailty of his defence.

64. I therefore accept the evidence of Wong and Au that the letter of 23 November 2010 was issued after Victor and Eddy had promised to return the legal title of the Shop to them.  I also accept that the consideration of HK$5.1 million was not supposed to be paid by Wong and Au.  The consideration, which Eddy agreed to be the market price, was probably suggested as a device to masquerade the transaction as a sale of the Shop by Victor and Eddy at market price to prevent the application of the law on voluntary dispositions and fraudulent preference to the transaction.

65. Regarding the transfer of 180,000 shares of Menfond Computer by each of Wong and Au to Victor and Eddy respectively, Eddy admitted in oral evidence that he had not talked to his parents about the matter.  He at one time agreed that he knew he had to pay Au $180,000 for the shares as stated in the transfer documents.  But he quickly changed his evidence and said his parents would not calculate with him on money matters. However, he said in the next breath that if had to pay anything for the shares, the CFO would have told him what to do.  Nevertheless, his next answer was that he felt that his parents would not ask him for the money.  Regarding his intention, he said if he had to pay, he would pay and if the CFO did tell him to pay, he would try his best to pay.  He then agreed that he had no doubt that he had to pay for the shares.  Later on, he said since Au was his mother, he reckoned that he did not have to pay her for the transaction.  Finally, he said that he all along wanted the parents to transfer all their shares of Menfond Computer to him and Victor and he and Victor should pay for them.  That would include the 360,000 shares already transferred.  He regarded the shares as a liability to his parents and wanted to takeover such liability from them. 

66. Despite his intent to pay, he never even offered any money to Au for the 180,000 shares.  His evidence on this matter is confusing and contradictory to say the least.  He however accepted that the question of whether the transfer of the 180,000 shares to him was meant to be a gift should have been mentioned by Victor and/or Clarice with Au.

67. In fact, it was the evidence of Janson Law that Eddy should have paid HK$180,000 to Au for the transfer and that Law had reminded Clarice about this sometime after the transfer was made though Law could not remember when.

Clarice’s evidence

68. Clarice in her witness statement referred to the issue of payment of rent by Hing Kee to Victor.  She said Hing Kee’s finance was getting worse in 2002/2003.  She told her father in law Wong that he did not have to pay rent to Victor as that simply meant tax liability for Victor and Eddy whilst Eddy was not receiving any rent.  After having talked to Wong, she thought that that was the end of the matter.  In fact, Hing Kee stopped claiming any rental expenses for the Shop since 1 April 2003.

69. Regarding the transfer of 180,000 shares of Menfond Computer to Eddy, she referred to the requirement of SCB that Victor and Eddy should be the majority shareholders of the company or else there should be additional guarantors.  She discussed this with Janson Law and came to the view that each of Victor and Eddy needed a transfer of 180,000 shares from their parents.  She then informed Au about this.  She asked Au for Wong and Au to transfer the shares to Victor and Eddy.  Au said that that would not be a problem.  There was no mention either of trust or payment.  She then instructed the auditors of the company to prepare the transfer documents which were duly signed by Wong and Au.

70. In cross-examination, she said when she asked Au on the phone to transfer the shares to Victor and Eddy.  She felt that Au already knew what she was asking for.  She agreed that Victor, who was living with Au, had already talked to Au about the matter.

71. Regarding the transfer documents, she said she only reckoned that they were for transfer of the shares.  She had not thought of the need to pay the HK$180,000 as stated in documents.  She also had not mentioned the question of payment with Au and did not know or thought that the shares had to be paid for.  Though she wanted the shares to be transferred, she said she did not intend to benefit from them.  She agreed that the transfer was to satisfy SCB’s requirement for granting of facilities.

72. However, after a break, she changed the tenor of her evidence.  She said she had not thought of the need to return the shares to Au after the repayment to SCB of the loan.  She even wanted the court to believe that she had the understanding that the shares, after having been transferred to Eddy, could not be transferred back to Au.  This is a far-fetched idea.

Janson Law’s evidence

73. Law’s evidence is only on the transfers of shares to Victor and Eddy.  He learnt from Clarice that SCB required Victor and Eddy to be the majority shareholders of Menfond Computer.  He calculated that each of Victor and Eddy would require 180,000 shares from their parents.  He suggested that the transfers should be at par value of HK$1 per share.  He was not involved in the documentation.  He did not say that the transfers were to create trust interests over the shares.  He said if Victor, Eddy and Clarice were considering the idea of trust, they would have consulted him.  He did not believe that SCB’s requirement would have been satisfied if the shares were lent to Victor and Eddy.  He believed that the transfers were complete in that both legal and beneficial interests in the shares had passed.

74. In oral evidence, he insisted that each of Victor and Eddy had to pay HK$180,000 for the transfers and he believed that they had paid by some arrangement if not in cash.  Law further said that he had at sometime after the transfers reminded Clarice the need for each of Victor and Eddy to pay HK$180,000 as stated in the transfer documents, though he could not recall when he had said it.  This evidence is in stark contrast with that of Clarice who said she never thought of the need to pay.  However, Law eventually admitted that he was satisfied that the transfers were complete simply by looking at the documents as there was no cause for him to have considered otherwise.  So he was only concerned with formal validity to satisfy SCB’s requirements.

Analyses and findings on the Shop

75. Eddy has agreed to assign his interest in the Shop to his parents but without admission of liability and thus left the costs issue in the 1st proceedings to be resolved by me.  Ms Chan, counsel for the parents submitted that in disposing of this costs issue, I should follow the practice of ordering costs upon discontinuance of claims.

76. However, this is not a case of discontinuance but a settlement of the subject matter on a without admission of liability basis by the defendant.  Eddy also contests liability on costs.  I must therefore deal with this issue by considering the merits of the parents’ claim against Eddy in the 1st proceedings.

77. I have already referred to the contents of the mortgage documents wherein Victor and Eddy confirmed to be the beneficial owners of the Shop.  My view is that such confirmations are not indicative of the true nature of their interests in the Shop as it was likely that they would have signed the same documents regardless of whether they owned the beneficial interests of the Shop.

78. I have also dealt with the issue of payment of rent by Hing Kee and Wong’s deposit of money into the Savings Account.  After considering the overall picture, I accept Wong’s evidence on this matter.  My conclusion is that the payments into the Savings Account were not rentals to Victor.

79. I have also dealt with the parents’ demand letter dated 23 October 2009 to which Eddy did not reply.  That is a strong indication of his admission to the parents’ claim.

80. I have also dealt with the offer letter from the parents’ solicitors of 23 November 2010 to purchase the Shop at HK$5.1 million.  I take the view that there was no reason for the parents to have offered the market price to purchase the Shop that Hing Kee was occupying without the need to pay rent.  I accept that the parents wanted to take back the legal title of the Shop for fear that the battle between the brothers might jeopardise Hing Kee’s business.  I also accept that the letter was written after Victor and Eddy had agreed to assign the title of the Shop back to them and that the consideration was not meant to be paid but was a device to masquerade the transaction as a genuine sale at market price.

81. It was also Victor’s evidence that Wong had been fined by IRD for more than HK$100,000 when he deposited some money into a bank account to serve as evidence of his financial capability to send Victor to study in the USA.  That was obviously before the purchase of the Shop.  Putting the jigsaws together, the fine imposed by the IRD was obviously an important reason for Wong to have purchased the Shop in the names of the sons.  But for the need to conceal the funding by Hing Kee of the purchase price, I doubt if the parents would have purchased the Shop in the names of the sons rather than in their own names or in the name of Manfond Investment.  The Shop was of grave importance to the business of Hing Kee and Hing Kee was most important not just to Wong, Au and their sons, but also to their relatives many of whom were handicapped.  When the Shop was bought, the parents had already purchased three properties.  None of them was in the names of the sons.

82. Mr D’souza, counsel for Eddy submitted that the powers of attorney that Au obtained from her sons did not create any trust interest over the Shop in favour of Wong and Au.  The powers of attorney were also revocable by the sons too.  However, the two powers did empower Au to deal with the Shop without recourse to the sons.  If Wong and Au did not want the beneficial ownership of the Shop to be documented, they might have to be satisfied with the powers.  These powers were also very powerful too as they were general powers given by the sons under section 7 of the Power of Attorney Ordinance and encompass all the properties of the sons.

83. Counsel further submitted that the mortgage of the Shop in the sons’ names contradicted the parents’ claim of putting the Shop in the sons’ names to prevent the parents from incurring further liability.  If counsel was referring to liability imposed by IRD, then I can see no contradiction as submitted.  To mortgage the Shop to raise a loan would not create tax problems for Wong or Hing Kee.  If counsel was referring to the risk that the Shop was being exposed to under the mortgage which could defeat the parents’ scheme of shielding the Shop from liability, then I would note Au’s evidence that her sons would enjoy high priority in the use of the assets to build their future.  The parents did not simply provide the Shop to be mortgaged, they in fact provided everything for the setting up and running of the Menfong Computer and they also provided the premises for the company’s use free of charge.  I accept Au’s evidence that she and Wong were prepared to do everything for the advancement and well-being of their sons which included their permission for the sons to mortgage the Shop.  However, when the sons were having serious disputes in relation to the running of Menfong Computer and could no longer work together in the company, then it was reasonable for them to have taken steps to protect the Shop and hence the operation of Hing Kee.

84. On the whole, I accept the evidence of Wong, Au and Victor that the Shop was held by Victor and Eddy for their parents and that its beneficial interest was owned by the parents.  I reject the evidence of Eddy and Clarice on this issue to the extent that such evidence is in conflict with that of the parents and Victor.  I hold that the parents have rebutted the presumption of advancement and the sons are holding the Shop on resulting trust in favour of the parents (see Lavelle v Lavella [2004] 2 FCR 418 at 421f to 424e and Lee Tso Fong v Kwok Wai Sun [2008] HKLRD 270 at paras. 23 to 25).

Analysis and findings on the transfer of 180,000 shares by Au to Eddy

85. Eddy could not tell if the 180,000 shares were transferred to him as a gift or were merely lent to him to provide prima facie satisfaction to the requirement of SCB.  He had not discussed this matter with his parents.  His evidence on his belief of whether he had to pay for these shares was most confusing.  He purported to rely on Janson Law’s advice on whether he had to pay, but Law had not given him any.  Law only said that he had told Clarice sometime after the transfers that Eddy had to pay the sum of HK$180,000.  But Law was not corroborated by Clarice.  In any case, Law was only concerned about formal validity of the two transfers.

86. Eddy’s evidence that the Menfong Computer shares owned by the parents constituted a burden to them is ridiculous.  He has been in business since 1989 and has been managing Menfong Computer since then.  He cannot be so ignorant as to regard the fully paid shares of Menfong Computer as a liability to his parents.

87. For Clarice, she was not the first person to talk to Au about the transfers to Victor and Eddy.  She agreed that when she talked to Au about this matter, she felt that Au was already aware of it.  She agreed that Victor should have talked to Au about it beforehand.  

88. Au’s evidence was that Clarice had asked her and Wong to lend the shares to Victor and Eddy but Clarice said she used the expression “轉比佢地” which simply means “to transfer to them”.  That expression can accommodate a transfer of all interests in the shares or a transfer of the legal title only.  The actual meaning depended on the context of the discussion.  It was Victor’s evidence that he only asked his parents to lend the shares to him and Eddy to satisfy SCB’s requirement and his parents agreed. If Victor had secured his parents’ agreement to lend the shares, the subsequent mention by Clarice of the transfers would not have converted the loan agreement to an agreement to make a gift or gifts.

89. The 360,000 Menfond Computer shares were part of the 1,900,000 or 24.26% shares held by Wong and Au before the transfer.  There is no evidence on when exactly these shares were allotted to them.  The evidence in general suggests that they were allotted the shares at about the time of or shortly after the incorporation of the company.  The allotments were in recognition of their support of the company.  There is no suggestion that they had parted with any of these shares until the two transfers to their sons in December 2006.  When they were asked to transfer 180,000 shares to each of their sons, they did so, but they did just that.  They did not transfer a rounded up quantity of 200,000 shares each or the whole of their holdings of 950,000 shares each.  There is every indication that they wanted to keep the shares save to the extent of meeting SCB’s requirement that the sons should jointly be the majority owners. 

90. Eddy and Clarice wanted to paint a picture that the parents were at anytime willing and ready to make gifts of any or all of their Menfond Computer shares to the sons.  Hence, they took the two transfers of 180,000 shares each to Victor and Eddy as gifts and did not even think of the payment obligation. 

91. Victor was clear that he only asked his parents to lend the shares to him and Eddy for them to satisfy SCB’s requirement.  He was only concerned with formal validity to satisfy SCB’s requirements.  Hence, he only asked his parents to lend the shares to them.  After all the help that the parents had already given them, if he should have asked for the beneficial interest in the shares, I suppose he would have offered to pay for them.  But nobody had ever mentioned payment for the shares.  Hence, I am inclined to think that he only asked for loans of the shares from the parents rather than gifts.  I agree that formal validity of the transfers without passing the beneficial interest in the shares was not a genuine satisfaction of SCB’s requirement.  However, that was what they were prepared to do so as to get the facilities from SCB.  Even the CFO Janson Law was concerned with formal validity only.

92. Eddy’s counsel referred to the tremendous support that the parents had provided for the sons which included all the funding and the provision of premises for the setting up and operation of the company. However, all monetary supports were recorded as loans from the parents to the company rather than as gifts to the sons.  I also reiterate that if Victor should have asked for all the interests in the shares to be transferred, he would have offered to pay for them rather than asking for them as gifts.

93. Counsel also submitted that Wong regarded it as reasonable to help his sons to satisfy SCB’s requirements.  Even so, Wong would not have thought it necessary to part with the beneficial ownership of the 180,000 shares.  Nobody advised him about this.  Lending shares or other property by one person to another by transferring the title of the shares or property to the latter for satisfaction by the latter of certain qualifications/requirements of appointment is not unheard of (see Childers v Childers (1857) 2 De G & J 482 and Re Gooch (1890) 62 LT 384).

94. Counsel also referred to Wong’s deposit of HK$8,000 per month into the Savings Account as a reserve to help out his dear ones in times of their difficulty.  But such assistance, as testified by Wong and Victor, was by way of loans rather than gifts.  Wong is very kind to his sons and relatives.  His keeping a reserve and being ready to lend it to them to meet their needs is already a generous arrangement.  To assume that he would dish out the reserve as gifts may be expecting too much from him. 

95. On the whole, the picture that Eddy and Clarice want to paint about the parents is not in conformity with the parents’ obvious intent to hold on to the shares.  The parents accepted that the shares might not have substantial financial worth.  They however attached great sentimental value to the shares because they represent the fruits of their sons’ labour and their support to their sons.

96. Counsel also referred to Clarice’s evidence that she did not consider it unfair for the parents to make gifts of the shares to the sons as in so doing, the parents did not have to become guarantors of Menfong Computer.  I think such submission was made on a wrong assumption that the parents would either have to become guarantors of the company or to transfer the shares to the sons.  Clarice in fact agreed that her parents in law had the liberty to refuse to transfer the shares or to become guarantors of the company.  Clarice has also said that she (which I understand her to mean “she and Eddy”) did not intend to benefit from the transfer of shares by Au to Eddy. That fits in with the transfers being for the legal title only.

97. Finally, counsel for Eddy referred to the buyout negotiations.  Counsel submitted that Victor, who had discussed with his parents on what buyout proposal to make, had in the proposal treated the 180,000 shares transferred to Eddy as shares owned by Eddy beneficially.  Wong, Au and Victor said in their witness statements that to raise the question of trust on these shares would complicate the negotiations.  Victor also added in oral evidence that if Eddy should realise a value for the 180,000 shares in the buyout, he would have to pay it back to Au.

98. I do not think it strange for the trust arrangement over the shares not to be mentioned in the buyout negotiation/proposal as there were outside shareholders in the negotiations.  It was quite unnecessary for the outsiders to be apprised of such arrangement made within the family.  The presence of outside shareholders thus made the explanation by Wong, Au and Victor sound more reasonable.  I do not think that this submission of the defendant, whether made alone or together with other points, can rebut Au’s case of trust over the shares.

99. Having considered all the evidence, I again accept the evidence of Wong, Au and Victor and reject the evidence of Eddy, Clarice and Law to the extent that the two versions are in conflict.  I also reject the picture that Eddy and Clarice wanted to paint of the parents.  I hold that Au has rebutted the presumption of advancement in respect of the 180,000 shares.  I further hold that these shares are held by Eddy on trust for Au.

Costs orders

100. I also make a costs order that Eddy do pay the costs of the 1st proceedings to Wong and Au to be taxed if not agreed.

101. I further make a costs order nisi that Eddy do pay Au the costs of the 2nd proceedings to be taxed if not agreed.