YU MAN FUNG ALICE v. CHIAU SING CHI STEPHEN AND ANOTHER

HCA 1584/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO. 1584 OF 2012

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BETWEEN

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D E C I S I O N

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1.  This is an application by the 2^nd defendant (“Star Royale”) to strike out the plaintiff’s (“Ms Yu”) claim against it. The 1^st defendant (“Mr Chiau”) has also issued a strike out summons. The plaintiff, on 10 January 2013, invited the 2^nd defendant to consent to the two summonses being consolidated and heard together when Mr Chiau’s application is listed, on 19 March 2013, but the 2^nd defendant declined because the suggestion had come too late and the issues in the two strike out summonses were very different.

2.  Ms Yu was Mr Chiau’s girlfriend between 1997 and 2010.  It is Ms Yu’s case (as against Mr Chiau) that early in their relationship they entered into an agreement (which for the purpose of these proceedings is called the “Commission Agreement”) whereby Ms Yu would provide investment advice to Mr Chiau.  For this service she would receive a monthly remuneration plus, according to the Statement of Claim, 10% of the after-tax profits resulting from any successful investment. It is her case that under this agreement she was paid various sums over the years totalling about $19 million.

3.  By far the most successful investment has been the Skyhigh Project.  It is this project which is at the centre of this litigation and both summonses.

4.  In a nutshell the Skyhigh Project was a 50-50 joint venture between Ryoden Development Ltd and Mr Chiau “through the 2^nd defendant” (Star Royale) (Statement of Claim paragraph 7).  It concerned the purchase (for $320 million) and development of a site at Pollock’s Path on the Peak.  Four houses were built on the site.  It is Ms Yu’s case that after the sale of two of the four houses she was paid nearly $15 million pursuant to the Commission Agreement.  This payment is therefore the lion’s share of the $19 million she has received since the agreement commenced.

5.  It was decided to account for 100% of the purchase and development costs after the sale of the first two houses before calculating Ms Yu’s 10% of the after-tax profits earned by Star Royale’s 50% of the joint venture.  Thus, after deducting from 50% of the proceeds of sale, all purchase costs, all development costs and all tax liabilities, 10% of the remaining profit equalled $15 million.  That meant that the remaining two houses (numbers 10 and 12 Pollock’s Path) when sold would be all profit to the joint venture.  Number 10, the property of the other 50% joint venture partner, Royden, was sold in 2011 for $800 million.

6.  No.12 remains unsold and is occupied by Mr Chiau.  Ms Yu submits that his occupation of No.12 represents a sale of it to him and therefore she has a valid claim under the agreement to her 10% ‘commission’ as against Mr Chiau.  The registered owner of No.12 is Star Royale.  Her claim against Star Royale is for:

(1)   A declaration that the plaintiff holds an equitable interest in House No.12 Pollock’s Path, The Peak equivalent to the balance remaining of the House commission as has not been paid to her free from all encumbrances.

(2)   Further and in the alternative, a declaration that the plaintiff is entitled to at least 8.75% of the value of House No. 12.

(The reference to 8.75% is based on her claim that she is entitled to “at least” $80 million under the agreement, of which she has already received $10 million which reduces her 10% down by 1/8^th to 8.75%).

7.  The basis of her claim against Star Royale is (i) that Mr Chiau is now the entire beneficial owner of House No.12 “though his beneficial interest in Star Royale” and (ii) that Mr Chiau’s occupation of No.12 and treating it as his own created a constructive trust of the proceeds of sale of No.12 in favour of Ms Yu by “Mr Chiau as the beneficial owner of (No.12) through Star Royale”.  The argument continues that Ms Yu holds an equitable interest in No.12 equivalent to the amount she is owed and that Mr Chiau’s failure to pay amounts to a breach of trust.

8.  Mr Sarony, SC leading Ms Angel Lau, counsel for Ms Yu, accepts that his only claim for damages or other financial relief lies against Mr Chiau pursuant to the agreement.  It is not contended that Star Royale is a party to that agreement.  Ms Yu’s claim against Star Royale is purely declaratory in nature.  In practical terms it seeks to put a charge on the property in Ms Yu’s favour equivalent to the amount she claims to be owed.  If she loses her case against Mr Chiau there can be no declaration against Star Royale, because the declaration sought depends on the existence of the agreement.  If she wins against Mr Chiau, the declaration against Star Royale is not, in practical terms required.  Thus, again acknowledged by Mr Sarony, the real purpose of keeping Star Royale in the litigation is to register a lis pendens charge on the property to secure the plaintiff’s claim and thereby protect her interest pending and post trial.

9.  The plaintiff, at trial, would invite the court to consider who directs and controls the activities of Star Royale so as to determine that the corporate structure, upon which Ms Lisa Wong, SC leading Mr Wilson Leung, counsel for the 2^nd defendant relies in support of the submission that House No.12 is immune from any declaratory interest by the plaintiff, is a façade.

10.  The corporate structure, which is not in dispute is as follows:

11.  Star Royale is the legal registered owner of House No.12.  Star Royale is 100% owned by Create Magic which is also the one and only shareholder.  Mr Chiau’s only interest in this corporate structure is through “Whiskey Investment” which is a discretionary family trust involving a number of his siblings and other family members.

The case for a strike out

12.  Ms Wong’s argument is premised on the basis that Mr Chiau has no legal or beneficial interest in No.12 and therefore it cannot be charged with an interest in favour of Ms Yu arising out of contract between herself and Mr Chiau.  She emphasizes that Ms Yu’s claim can only be a personal contractual claim.

13.  It is correct that in order to establish an equitable interest it must be proved that Mr Chiau enjoys beneficial ownership of No.12 through his shareholding in Whiskey Investments Ltd and that he holds that beneficial interest on a constructive trust for Ms Yu, limited to the amount she claims that she is owed by him.

14.  It is common ground that the shareholders of a company have no legal or equitable interest in the company’s property.  Create Magic is the company’s only shareholder.

15.  In order to defeat this principle Ms Yu would have to persuade the court to “lift the corporate veil”.  It is also common ground that the Statement of Claim contains no specific pleading in support of lifting the corporate veil.

16.  In any event, the corporate veil will only be lifted if it can be shown that it was put in place for a fraudulent purpose or the evasion of a legal obligation.  This too has not been pleaded.  The corporate structure (as above) has been in place since 2004 when the joint venture was first created.  It cannot be said therefore that it was put in place to hide Mr Chiau’s beneficial interest in No.12.

17.  In short, Ms Wong submits that No.12 is clearly owned by Star Royale and no grounds exist to lift the corporate veil.  That alone is sufficient to strike out the claim.

18.  Ms Wong submits further that the reliance placed on a constructive trust is also misplaced.  There is no suggestion of any sharing agreement between Ms Yu or Mr Chiau in relation to No.12 and none is pleaded.

Lifting the corporate veil?

19.  Ms Yu’s position comes down to this: if, given her day in court against Star Royale, does she have any grounds for lifting the corporate veil (regardless at the moment of any deficiencies in the pleadings)?

20.  Mr Sarony acknowledges that Ms Yu’s case depends entirely on establishing that Mr Chiau has a beneficial interest in No.12.  Further, that he is, at least in part, the real owner and that, if so, a declaration that she is entitled to a proportion of its value due to his breach of contract, is an appropriate remedy.

21.  It may be a tall order but the starting point is the principle in striking out applications as per Silke JA in Ha Francesca v Tsai Kut Kan (No.1) [1982] HKC 382:

“…striking out should only be done in plain and obvious cases, there should be no trial upon affidavit. Disputed facts are to be taken in favour of the party sought to be struck out. The claim must be obviously unsustainable, the pleadings unarguably bad and that it be impossible, not just improbable, for the case to succeed before a court will strike out. If the court does not think the matter to be clear beyond doubt or if it fails to be satisfied that there is no reasonable cause of action or that the proceedings are frivolous or vexatious, then, there should be no striking out. One must be careful not to drive a plaintiff from the judgment seat nor should the court decide difficult points of law in proceedings such as this.

But that having been said, however difficult it may be, if the issue is plain, then, the court can accede to a striking out application. There lies a discretion in the judge which discretion must, of course, be exercised judicially, these proceedings being interlocutory…”

22.  The notes in RHC Order 18/19/6 add these words “the mere fact that the case is weak and not likely to succeed is no ground for striking it out.”  The prerequisite is that some cause of action or question fit to be decided by a judge has been disclosed.

23.  Mr Sarony cites a number of authorities in support of his starting point which is that the court should look for the realities of the case which, he submits, are plainly apparent on the other side of the corporate veil.  For example:

“there is one well-recognised exception to the rule prohibiting the piercing of ‘the corporate veil’, which is when the corporate structure is ‘a mere façade concealing the true facts’”

per Slade LJ in Adams & Others v Cape Industries [1991] 1 AER at p.1022.  Similarly, Dankwents LJ in Merchandise Transport v British Transport Commission [1961] 3 AER at p.518:

“where the character of a company, or the nature of the persons who control it, is a relevant feature the court will go behind the mere status of the company as a legal entity, and will consider who are the persons as shareholders or even agents who direct and control the activities of a company which is incapable of doing anything without human assistance.”

24.  In Revlon Inc v Cripps & Lee [1980] FSR 85 Buckley LJ referred to the broad principle as follows:

“This view does not, in my opinion, constitute what is sometimes called ‘piercing the corporate veil’; it recognises the legal and factual position resulting from the mutual relationship of the various companies.”

25.  The following factual matters, whilst not necessarily being directly relevant to Ms Yu’s attempt to establish a constructive trust, are nonetheless matters which persuade this court that it should not, at this stage, strike out the plaintiff’s claim for a declaration against Star Royale. They are matters which are relevant to the ‘corporate veil’ issue which is, in my judgment, a “question fit to be decided by a judge” by evidence.  Taken as a whole they demonstrate, in my judgment, that the 2^nd defendant has not established that this is a “plain and obvious” case which merits the bold and final step of striking out.

(a)   Mr Chiau lives at No.12 and there is no evidence of any lease or rental agreement with Star Royale.

(b)   Ms Yu has been paid $10 million, over and above the $15 million she received on the sales of numbers 16 and 18.  It is her case that it was paid by Mr Chiau in respect of House No.12 as a “part payment”.

(c)   The cheque for $15 million was from the family trust, Whiskey Investments, and signed by Mr Chiau’s sister.  Inferences of true “control” may be drawn.

(d)   On 30 March 2012 Mr Chiau wrote to Ms Yu disclaiming that the cheque for $10 million represented a part payment of any money due to her under their agreement.  However the letter does say “we agree to discuss if I sell my residence at No.12 Pollock’s Path on the Peak and reap a net profit and will consider how to reward you”.

26.  The 2^nd defendant would be quick to respond to the above by submitting that these factual allegations are solely relevant to the contractual issues between the plaintiff and the 1^st defendant. In support the observations of Deane J in the Australian case of Muschinski v Dodds (1985) 160 CLR at p.615 would be cited:

“The fact that the constructive trust remains predominantly remedial does not, however, mean that it represents a medium for the indulgence of idiosyncratic notions of fairness and justice. … proprietary rights fall to be governed by principles of law and not by some mix of judicial discretion, subjective views about which party ‘ought to win’ and ‘the formless void of individual moral opinion’…”

27.  However as stated, I regard the above facts as having a wider relevance which may touch on the very issues raised in plaintiff’s claim against the 2^nd defendant.  Those at the forefront being — is it a case for lifting the corporate veil, is it a facade?

28.  The words of Silke JA merit repetition “one must be careful not to drive a plaintiff from the judgment seat nor should the court decide difficult points of law”.  I agree that to do so in this application would be precipitate because the answer requires the evidence to be tested.

29.  For all these reasons, I decline to make the order sought.  I further make a costs order nisi that the plaintiff’s costs of and arising from the summons be paid by the plaintiff in any event, to be taxed if not agreed.