CYBERLAND (CHINA) LTD v. ZHANG WEI BING AND ANOTHER

CACV 266/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 266 OF 2015

(ON APPEAL FROM HCCL NO. 3 OF 2014)

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JUDGMENT

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Hon Yuen JA:

1.  I agree with the judgment of Chu JA.

Hon Chu JA:

Introduction

2.  This is the appeal of the plaintiff (“Cyberland”) against the judgment (“the Judgment”) of Chow J (“the Judge”) given on 10 November 2015, dismissing its claim against the 1^st defendant (“Zhang”) with costs.

3.  Cyberland’s claim concerns the beneficial ownership of a convertible bond (referred to as “the 3^rd CB”, see [12] below) in the principal amount of HK$50 million issued by the 2^nd defendant (“Code Agriculture”) to Zhang.  The crux of the dispute between the parties, as the Judge put it, relates to the circumstances under which Code Agriculture came to cancel what was referred to as the 1^st CB (see [11] below) and issued the 3^rd CB to Zhang.  The Judge rejected the respective factual case of Cyberland and Zhang and held that Cyberland has failed to prove on the evidence the necessary ingredient for the application of the presumption of resulting trust, namely, the transfer to Zhang was voluntary or gratuitous, with the consequence that Zhang is entitled to the convertible bond as its legal owner.   

4.  The core issue in this appeal is whether the Judge should have held that the transfer to Zhang was voluntary or gratuitous having regard to the non-payment of the consideration stated in the Form of Transfer (i.e. HK$50 million), which, on both sides’ case, does not represent the true consideration for the transfer.

The facts

5.  The detailed background facts have been set out in [6] to [24] of the Judgment.  For the purpose of understanding this appeal, it is only necessary to highlight the following.

6.  Cyberland is a private company incorporated in Hong Kong in 2003.

7.  At all material times, Cyberland had three corporate shareholders, namely, Rise Enterprise Limited (“Rise Enterprise”), Stepwise International Holdings Limited (“Stepwise”) and Wealth Way Investment Limited (“Wealth Way”). The largest indirect shareholder was Shan Xiaochang (“Shan”), followed by Jing Quan Ying Zi (“Ying Zi”).  The three corporate shareholders were also the corporate directors, and represented by three individuals, namely, Wu Zhong Xin (“Wu”) representing Rise Enterprise, Shan representing Stepwise, and Ying Zi representing Wealth Way.

8.  Code Agriculture is a public company listed on the GEM board of the Stock Exchange of Hong Kong.  Cyberland discontinued its claim against Code Agriculture shortly after the action was commenced.

9.  Zhang is a financial consultant.

10.  Cyberland had a wholly owned subsidiary called Kang Yuan Universal Investment Limited (“Kang Yuan”), a company incorporated in Hong Kong.  Kang Yuan held 100% equity interest in a PRC company called Jiangsu Kedi Modern Agriculture Company Limited (“Jiangsu Kedi”), which was engaged in the production of tobacco drying machines.

11.  By a share transfer agreement dated 30 November 2009, Cyberland agreed to sell, and Code Agriculture agreed to purchase, the entire issued share capital of Kang Yuan for the total consideration of HK$1,398 million.  The transaction was completed on 1 February 2010. Code Agriculture paid for the purchase price by means of (i) cash of HK$300 million, and (ii) a convertible bond which it issued on 25 March 2010 to Cyberland in the principal amount of HK$1,098 million (“1^st CB”). 

12.  On 11 August 2010, Code Agriculture cancelled the 1^st CB.  In its place, Code Agriculture issued (i) a convertible bond in favour of Cyberland in the principal amount of HK$1,048 million (“2^nd CB”); and (ii) another convertible bond in favour of Zhang in the principal amount of HK$50 million (“3^rd CB”).  The terms and conditions of the 2^nd CB and 3^rd CB are the same as those of the 1^st CB.  The 3^rd CB forms the subject matter of the claim in the action below. 

Litigation history

13.  In May 2012, Zhang through his solicitors wrote to Code Agriculture to demand payment of unpaid interest and principal under the 3^rd CB.  On 19 December 2012, Zhang served a statutory demand on Code Agriculture demanding payment of HK$51,250,000 under the 3^rd CB. 

14.  On 25 January 2013, Zhang presented a winding-up petition against Code Agriculture in HCCW 31/2013 on the basis of the unpaid 3^rd CB. Pursuant to Harris J’s order dated 15 April 2013, Code Agriculture paid HK$51,230,137 (“the Amount in Court”) into court on 8 May 2013.  On 13 May 2013, Harris J dismissed the petition on terms, inter alia, that the Amount in Court be paid out to Zhang unless Cyberland obtained an order restraining payment out or as otherwise ordered.

15.  On 11 October 2013, Cyberland obtained an order in HCA 776/2013 restraining the payment out of the Amount in Court until after the final judgment in the action or until further order.  HCA 776/2013 was subsequently transferred to the commercial list and became HCCL 3/2014.  After the delivery of the Judgment, agreement was reached between Cyberland and Zhang whereby Cyberland paid HK$3 million into court as security for Zhang’s costs in the action below, and Zhang undertook not to obtain payment out of the Amount in Court, pending the conclusion of this appeal.[1]     

Cyberland’s case

16.  At trial, the dispute between Cyberland and Zhang centred on the circumstances under which Code Agriculture came to cancel the 1^st CB and issued the 3^rd CB to Zhang.    

17.  Cyberland’s pleaded case[2] is that in about July 2010, Shan, Wu, Ying Zi, and Zhang had a meeting in Yixing in the Mainland to discuss how Zhang could assist Cyberland to raise funds.  During the meeting, Zhang, who was said to be aware of Cyberland’s interest under the 1^st CB, proposed that Cyberland should transfer to him part of the 1^st CB in the principal amount of HK$50 million so that he could demonstrate his financial standing to potential financial institutions when seeking to raise funds for Cyberland.  Zhang proposed to charge 2% of the amount raised as commission if the fund-raising exercise was successful, and nothing if it failed.  Zhang also warranted that he would not use the convertible bond and would return it to Cyberland at the end of the fund-raising exercise, which was anticipated to be completed in one month’s time.  Cyberland (through its representatives, Shan, Wu, and Ying Zi) agreed to the proposal (“the Bond Borrowing Agreement”).

18.  Pursuant to the Bond Borrowing Agreement, Zhang prepared the relevant Form of Transfer.  It was pleaded that Ying Zi signed it on behalf of Cyberland on the condition that the transfer was made only for the purpose of enabling Zhang to raise funds for Cyberland and that Zhang would not use the convertible bond and would return it to Cyberland.  Zhang then submitted the form to Code Agriculture.  On or about 11 August 2010, Code Agriculture cancelled the 1^st CB and issued the 2^nd CB to Cyberland and the 3^rd CB to Zhang.

19.  In or about November 2010, Zhang informed Ying Zi that the fund-raising exercise failed.  Zhang, however, refused to return the 3^rd CB to Cyberland for the reason that he had previously helped Shan in acquiring a listed company in Hong Kong and Shan had not repaid or reimbursed him the expenses incurred.  Ying Zi protested that the 3^rd CB was Cyberland’s property, not Shan’s.  Despite the protest, Zhang refused to return the 3^rd CB to Cyberland.  Accordingly, Cyberland claimed that Zhang was liable to return the 3^rd CB in accordance with the Bond Borrowing Agreement.

20.  Cyberland’s claim against Zhang is encapsulated in [13] and [19] of the Statement of Claim.  In [13], it was pleaded:

“In the event, the 3^rd CB was transferred to the 1^st Defendant pursuant to the Bond Borrowing Agreement only and solely for the purpose of showing the 1^st Defendant’s financial standing in order to raise the fund for the Plaintiff and, in any event, it would not be used by the 1^st Defendant and would be returned to the Plaintiff.Further, the said transfer of the 3^rd CB to the 1^st Defendant was not supported by any consideration at all or the consideration for the same (if any, which is denied) has totally failed. In the premises, the 1^st Defendant was at all material times and is still holding the 3^rd CB on trust for the Plaintiff.”

21.  In his oral submission before us, Mr Wong SC, who together with Mr Lin appeared for Cyberland, sought to clarify and confine the plaintiff’s case to the plea of no consideration and not the plea of total failure of consideration.

22.  [19.1] and [19.3] of the Statement of Claim went on to state:

“19.1 The Plaintiff has at all material times been the beneficiary owner of the 3^rd CB and the 1^st Defendant has held the same on trust for the Plaintiff;”

“19.3 The 1^st Defendant is liable to return and transfer the 3^rd CB to the Plaintiff and account as trustee to the Plaintiff for the same;”

Zhang’s case

23.  Zhang denied[3] holding the 3^rd CB on trust for Cyberland.  Specifically, he denied that there was the Bond Borrowing Agreement, that the 3^rd CB was transferred to him to enable him to demonstrate his financial standing to the potential financial institutions, or that he was liable to return the 3^rd CB to Cyberland under any circumstances.  Zhang’s case is that the 3^rd CB was in payment of his consultancy fee in connection with the sale of Cyberland’s shareholding in Kang Yuan to Code Agriculture.

24.  On Zhang’s pleaded case[4], in around June and July 2009, as a result of a request from Shan, Zhang agreed with Shan (representing Cyberland and himself) to provide independent consultancy services to Shan and Cyberland regarding the sale of Cyberland’s shareholding in Kang Yuan to Code Agriculture, in return for which Zhang was to be paid service fee amounting to 3% of the consideration under the transaction.

25.  Zhang pleaded that between July and December 2009, he had provided various consultancy services.  I pause here to note that, on the Judge’s finding[5], Zhang was engaged by Shan to be Shan’s personal consultant and he provided consultancy services to Shan and not to Cyberland.  

26.  On Zhang’s case, after the completion of the transaction on 1 February 2010, Cyberland was unable to pay Zhang as agreed.  Consequently, Shan (representing Cyberland) orally agreed with Zhang that Cyberland would transfer to Zhang a proportion of the 1^st CB in the principal sum of HK$50 million in lieu of the consultancy service fee (“the Bond Payment Agreement”).

27.  Zhang accepted that there was a meeting in Yixing in July 2010 (see [17] above) but denied that Wu was present at the meeting.  His case is that, at the meeting, Shan introduced Ying Zi to him and they discussed the transfer arrangement under the Bond Payment Agreement.  The transfer documents were then prepared by the staff of Code Agriculture.  On 11 August 2010, Zhang attended the office of Code Agriculture and signed two sets of identical transfer documents.  Later that day, one set of the original transfer documents, together with a copy of Code Agriculture’s register of convertible bonds, were returned to Zhang.  The Code Agriculture’s register showed that Zhang’s name was entered as the holder of the 3^rd CB.

The Judge’s decision

28.  For reasons set out in [66] to [95] of the Judgment, the Judge was of the view that neither Cyberland nor Zhang had proved its/his case to the requisite standard.  He rejected both Cyberland’s case and Zhang’s case.  Accordingly, he held, the parties’ rights and obligations fell to be governed by such default legal rules as might be applicable to the facts of the case. 

29.  The Judge then proceeded to consider whether the presumption of resulting trust could arise in favour of Cyberland.  He accepted that as a matter of principle, the presumption of resulting trust could apply in favour of a party even if that party’s primary case regarding the underlying reason for the transfer was rejected.  The Judge held that the party who sought to invoke the presumption in his favour had to prove the necessary facts for the presumption to arise.  In the present case, it would be for Cyberland to prove that the transfer of the 3^rd CB to Zhang was voluntary or gratuitous. 

30.  The Judge considered that no presumption of resulting trust could arise from the mere fact that a property was transferred by one person to another. On the facts of the present case, while there was a transfer of the 3^rd CB to Zhang, Cyberland had not established that the transfer was voluntary or gratuitous.  The Judge therefore held that the presumption of resulting trust had no application with the consequence that Zhang is entitled to the 3^rd CB as its legal owner.

Cyberland’s appeal

31.  At the beginning of the hearing of this appeal, Mr Wong applied to abandon paragraph 11 of the Notice of Appeal (which challenged the Judge’s rejection of the Bond Borrowing Agreement) and to make minor amendments to paragraphs 7e and 9 of the Notice of Appeal.  Mr. Man SC, who together with Ms Ho appeared for Zhang, did not oppose the application.  We accordingly gave leave to Cyberland to amend its Notice of Appeal.

32.  The principal ground of Cyberland’s appeal[6] is that the Judge erred in holding that it had failed to establish that the transfer of the 3^rd CB to Zhang was made voluntarily or gratuitously, and that the presumption of resulting trust did not arise.  It is sought to argue that Cyberland only has to prove that the transfer of the 3^rd CB was made with “pretended consideration” in that the consideration stated in the Form of Transfer was not paid or never intended to be paid.  Once Cyberland establishes this, it is for Zhang to prove that the transfer was made for valid consideration.  Since it is common ground that the consideration stated in the Form of Transfer was never paid or intended to be paid, and the consideration in relation to the consultancy service asserted by Zhang was rejected, the Judge should have found that the transfer of the 3^rd CB was voluntary or gratuitous and that the presumption of resulting trust applies. 

33.  An alternative ground relied on by Cyberland is that the transfer was for a purpose[7]. It is argued that since the Judge was unable to ascertain the relevant purpose for the transfer, he should have held that the purpose was uncertain which would lead to a trust in favour of Cyberland. 

Zhang’s Respondent Notice

34.  Zhang has filed a Respondent’s Notice seeking to uphold the Judge’s dismissal of the claim on the ground that the Judge should have accepted Zhang’s evidence and his case regarding the provision of consultancy service to Cyberland and the Bond Payment Agreement.

35.  Mr Man’s position is that the Respondent’s Notice will not be pursued if we do not accept Cyberland’s appeal.    

Discussion

36.  The core question of this appeal is whether the Judge was right to hold that Cyberland failed to establish on the evidence that the transfer of the 3^rd CB to Zhang was voluntary or gratuitous.  The primary ground of Cyberland’s appeal is that it has discharged its burden of proving that the transfer of the 3^rd CB to Zhang was voluntary or gratuitous in that it is common ground that the consideration stated in the Form of Transfer was not paid and was never intended to be paid.  Considerable reliance is placed on the decision in Tribe v. Tribe [1996] Ch 107 and the judgment of Millett LJ.

37.  In Tribe v. Tribe, the father transferred to his son the shares in his company for a consideration which was not, and was not intended to be, paid. The trial judge found that the purpose of the transfer was for an illegal purpose which had not been carried into effect, and that there had been an agreement that the son would hold the shares on trust for the father.  He granted a declaration that the father had the beneficial interest in the shares.  The Court of Appeal dismissed the son’s appeal, holding that since it was a voluntary transfer between father and son for no consideration, the presumption of advancement applied, and that since the underlying illegal purpose had not been carried into effect, it was open to the father to lead evidence on the underlying purpose to rebut the presumption of advancement.

38.  At 122F-H, Millett LJ said,

“The plaintiff transferred his shareholding in his family company to his son, the defendant, for a pretended consideration which was not paid and was not intended to be paid. The transfer was, therefore, made for no consideration. If the transferee had been a nephew or a trusted stranger, the transaction would have given rise to a resulting trust. In such a case equity places the burden of proving that the transfer was intended to be by way of gift upon the transferee. If he cannot discharge that burden, he holds the shares as nominee and in trust for the transferor. The plaintiff, however, transferred the shares to his son, and accordingly the transaction gave rise to the presumption of advancement. In such a case the transfer is presumed to have been intended by way of gift. The burden of proving that it was not intended as a gift lies upon the transferor.”

39.  Having referred to the judgment in the court below, Millett LJ went on to consider the availability of the doctrine of locus poenitentiae in a restitutionary context to rebut the presumption of advancement, and said (at 125B),

“It is convenient to consider first the position at common law. It is important to bear in mind that the common law starts from the opposite premise from that on which equity bases the presumption of resulting trust. In an action for money had and received, for example, whatever the relationship between the parties, the burden lies on the plaintiff to prove that the money was not paid by way of gift or pursuant to an enforceable contract. Absence of consideration is not of itself a ground of restitution: it is for the transferor to show that no gift was intended.”

40.  Relying on these passages, Mr Wong argued that since Zhang did not dispute that the $50 million consideration stated in the Form of Transfer was never paid, the transfer of the 3^rd CB to Zhang was prima facie voluntary or gratuitous, and gave rise to a presumption of resulting trust in favour of Cyberland.  There was nothing more for Cyberland to prove and it was for Zhang to rebut the presumption by proving that there was some consideration for the transfer other than that stated in the legal instrument.  As the Judge had rejected Zhang’s case on the consideration for the transfer (i.e. as payment of consultancy fee pursuant to the Bond Payment Agreement), Cyberland should have succeeded in its claim.          

41.  I am unable to accept this submission.  It is important to examine the basis of Cyberland’s case that the transfer of the 3^rd CB to Zhang was voluntary or gratuitous.  It is based not on the fact that the consideration stated in the Form of Transfer (i.e. $50 million) had not been paid.  Instead, Cyberland’s pleaded case[8] is that the transfer was made pursuant to the Bond Borrowing Agreement, and for the purpose of facilitating Zhang’s attempt to raise funds for Cyberland.  On Cyberland’s case, Zhang was not required or expected to pay the $50 million or anything in return for the transfer of the 3^rd CB, though he was obliged under the Bond Borrowing Agreement to return the 3^rd CB after the fund raising exercise was completed.  Mr Wong’s argument that Cyberland’s case of resulting trust is based simply on the Form of Transfer and the non-payment of the consideration stated in it, and is independent from the Bond Borrowing Agreement, is not supported by the pleading. 

42.  The present case is different from Tribe v. Tribe, where it was not disputed that the shares were transferred by the father to the son for no consideration.  In this case, both Cyberland and Zhang contend that the transfer of the 3^rd CB was pursuant to an agreement – the Bond Borrowing Agreement on Cyberland’s case, and the Bond Payment Agreement on Zhang’s case.  The passages in Millett LJ’s judgment referred to above do not establish a rule that whenever the consideration stated in the document of transfer was not paid, a resulting trust will arise unless the transferee can rebut the presumption. The reliance on Tribe v. Tribe is therefore misplaced. 

43.  Moreover, it is clear from the pleading that Cyberland’s complaint against Zhang is not that he did not pay the consideration stated in the Form of Transfer.  Rather, the thrust of Cyberland’s complaint is that, despite requests, Zhang refused to return the 3^rd CB after the fund raising exercise failed.[9] On Cyberland’s case, the trust claim arose not by reason of the non-payment of the $50 million stated consideration, but by reason of the Bond Borrowing Agreement and/or the breach of it.[10]  When the Judge rejected Cyberland’s case on the Bond Borrowing Agreement,[11] the very basis of Cyberland’s trust claim falls away, and the claim is simply not made out. 

44.  Even though the Judge also rejected Zhang’s case that the 3^rd CB was transferred pursuant to the Bond Payment Agreement, the fact remains that Zhang is the legal owner of the 3^rd CB and prima facie also holds the beneficial interest.  Insofar as Cyberland contends that by reason of the Bond Borrowing Agreement and/or Zhang’s breach of it, the beneficial interest of the 3^rd CB does not reside in Zhang, the burden of proof is on Cyberland to make good its claim: Stack v. Dowden [2007] 2 AC 432, at [56] and [68]; Juliet Bellis & Co v. Challinor [2015] EWCA Civ 59 at [65]; and Big Island Construction (HK) Limited v. Wu Yi Development Company Limited & Anor (2015) 18 HKCFAR 364 at footnote 43.  With the Judge’s rejection of the Bond Borrowing Agreement, Cyberland has failed to discharge its burden.    

45.  Mr Wong also seeks to rely on the Judge’s finding that the consideration alleged by Zhang on the totality of his evidence was to benefit Shan, not Cyberland, as supporting the presumption of resulting trust.  However, the Judge’s reasoning is that Ying Zi would not have agreed to the Bond Payment Agreement because the consideration underlying the agreement was intended for the personal benefit of Shan, and not that of Cyberland.[12]  Hence, Ying Zi’s signing of the Form of Transfer could not be treated as her acknowledgement or acceptance of the Bond Payment Agreement.  The Judge’s view on the consideration relied on by Zhang was proffered as part of the reasons for rejecting Zhang’s case on the Bond Payment Agreement.  This part of the Judge’s judgment cannot be taken as providing support to Cyberland’s contention that the transfer of the 3^rd CB was voluntary or gratuitous, giving rise to the presumption of resulting trust.

46.  On the other hand, as the Judge has noted, Ying Zi’s conduct is inconsistent with Cyberland’s assertion that Zhang merely holds the legal title of the 3^rd CB.  Even after she knew that Zhang was claiming the beneficial interest in the 3^rd CB, Ying Zi took no step to rectify the contents of the Disclosure of Interests and the 2011 and 2012 Annual Reports, in which there is no mention of Cyberland owning the beneficial interest of the 3^rd CB.  If indeed the transfer of the 3^rd CB was entirely gratuitous and it was not intended that it would enure to the benefit of Zhang, Ying Zi, as the director of a listed company, would no doubt have grave concern about the inaccurate picture given in the company documents relating to beneficial ownership of the 3^rd CB, and would have caused the necessary rectifications to be made forthwith.  It is inexplicable that she had done nothing of the kind.   

47.  For these reasons, the primary ground of Cyberland’s appeal cannot stand.

48.  As to Cyberland’s alternative ground that the transfer was made for a purpose, it can be disposed of shortly.  As Mr Man rightly pointed out, this argument has never formed part of Cyberland’s pleaded case or submissions in the court below.  This new point is, accordingly, not open to Cyberland on appeal.  This ground must be rejected.

49.  For the reasons given above, the Judge was correct to hold that Cyberland has failed to establish a presumption of resulting trust in its favour.

50.  Given the conclusion reached on Cyberland’s appeal, it is not necessary to deal with the Respondent’s Notice.  In any event, it does not appear to me that Mr. Man has made out any special circumstances for this Court to exceptionally interfere with the factual findings of the Judge.

Conclusion

51.  For the above reasons, I would dismiss the appeal with costs to the 1^st defendant with certificate for two counsel, and order that the Amount in Court be paid out to Zhang. 

52.  Mr Wong has indicated that, in the event the appeal is dismissed, Cyberland will seek leave to appeal to the Court of Final Appeal, and he asked us to stay the payment out of the Amount in Court. I will therefore order that the payment out order will not take effect until after 14 days from the handing down of this judgment, so that Cyberland may make the necessary applications, if so advised, in the interim period.

Disposition

53.  I will make the following orders:

(1) The appeal is dismissed.

(2) The plaintiff pays the 1^st defendant the costs of the appeal, to be taxed if not agreed, with a certificate for two counsel.

(3) The amount of HK$51,230,137 paid into court by the 2^nd defendant on 8 May 2013 be paid out to the 1^st defendant together with all interest accrued.

(4) Paragraph (3) above shall not take effect until after 14 days from the date of this order or otherwise ordered by the court.

 

Hon McWalters JA:

54.  I agree with the judgment of Chu JA.