FAN, LAP KAY FRANK v. TSANG MO CHING MARGARET

DCCJ 2882/2019

[2024] HKDC 1452

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 2882 OF 2019

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BETWEEN

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JUDGMENT

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Introduction

1.  This is the trial of a dispute arising from 2 payments totalling HK$1,200,000.00 (the “Sums”) made by the Plaintiff to the Defendant concerning a business venture to open and operate a restaurant business in Xiamen, Mainland China (the “Project”) which ultimately failed.

The undisputed background

2.  At the material times, the Plaintiff and the Defendant were both business persons with experience in the catering/‌restaurant business. The Defendant and his business partner, Mr Danny Lam (“Danny”) were formerly managers of the Marco Polo Xiamen Hotel (the “Hotel”).

3.  Sometime in 2017, the Plaintiff, his former colleague Rhoda Yeung (“Rhoda”), the Defendant and Danny entered into discussions to open a Thai restaurant (“Thai Restaurant”) at the Hotel as part of the Project.

4.  For the purpose of the Project:-

(1) Legendary Gourmet Holdings Co Limited (“Legendary”) was incorporated in Hong Kong on 21 December 2017. The Plaintiff, the Defendant, Danny and Rhoda became Legendary’s initial directors and shareholders.

(2) A mainland company, Legendary Gourmet (Xiamen) Catering Co Ltd (“Legendary Xiamen”) was incorporated as a subsidiary of Legendary. Legendary Xiamen was intended to be the operating vehicle of the restaurant(s) under the Project.

5.  Although the precise roles and involvement were disputed, it is not seriously disputed that:-

(1) The Plaintiff was primarily responsible for funding for the Project; and

(2) On the other hand, given their prior experience and relationship with the owners of the Hotel, the Defendant and Danny would (amongst other roles) be responsible for handling the negotiation of the lease with the Hotel.

6.  The Project did not come to fruition and no restaurant ever came into operation as a result thereof. The parties also subsequently fell out and the Defendant and Danny were removed as directors of Legendary on 10 June 2019.

The dispute

7.  The subject matter of the claim is the Sums which were paid in the course of the Project. It is not disputed that the Plaintiff paid the Sums (in two instalments of HK$600,000 each) from his bank account at HSBC to the Defendant’s bank account (also at HSBC) (“Defendant’s HSBC Account”) on 23 May 2018 and 20 June 2018 respectively. However, the parties are in dispute as to the purpose of the payments:-

(1) According to the Plaintiff:-

(i) In or about October 2017, the Defendant represented to the Plaintiff of the availability of a suitable vacancy for opening a restaurant at the Hotel and that a rental deposit equivalent to HK$1,200,000.00 was required to reserve the vacancy (the “Rental Deposit”).

(ii) In or about April 2018, the parties reached an oral agreement whereby the Plaintiff would transfer the Sums for the sole and exclusive purpose of paying the Rental Deposit (the “Oral Agreement”).

(iii) The Sums were paid pursuant to the Oral Agreement.

(iv) There was no record of payment of the Rental Deposit to the Hotel.

(v) Accordingly, the Defendant has wrongfully retained the Sums and is liable (i) as trustee of the Sums for the Plaintiff; and/or (ii) for unjust enrichment.

(2) On the contrary:-

(i) The Defendant denied the existence of the Oral Agreement and the need to pay the Rental Deposit to the Hotel. She alleged that the Sums were advanced by the Plaintiff to her on the common understanding that such Sums were used for the preparation of the restaurants of Legendary Xiamen (which were not limited to the Thai Restaurant).

(ii) In any event, the Sums have already been spent on the preparation for setting up the restaurants in Xiamen.

8.  Based on the Joint List of Issues dated 30 June 2020, the issues to be determined at the trial are as follows:-

(1) Whether the parties reached the Oral Agreement?

(2) Whether the Defendant applied the Sums in the specific manner as per the Oral Agreement?

(3) Whether the Defendant has been unjustly enriched by retaining the Sums without lawful cause or reason to receive and/or retain the Sums?

(4) Whether the Defendant is liable to refund and/or repay the Sums to the Plaintiff?

(5) Whether the Defendant is liable to pay interest and costs?

The trial

9.  Although the Defendant filed two short written submissions where she repeated her denial of the existence of the Oral Agreement[1], she did not turn up at the trial (which commenced on 9 April 2024). No explanation has been put forward for her absence.

10.  The Defendant was clearly aware of the trial on account of the written submissions filed by her for the trial. Yet, she decided not to attend the trial. Accordingly, I am satisfied that the trial should proceed in the absence of the Defendant.

Issue 1 - Whether the Oral Agreement exists

11.  The determination of this issue falls on an assessment of the credibility of the Plaintiff and the Defendant.

12.  The approach to the assessment of the evidence was considered by Deputy High Court Judge Eugene Fung SC in Hui Cheung Fai v Daiwa Development Ltd HCA 1734/2009 (unreported, 8 April 2014) at §§77-83, of which the following are particularly relevant:-

(1) Generally speaking, unless allegations of forgery have been raised, contemporaneous written documents and documents which came into existence before the problems in question emerged are of the greatest importance in assessing credibility.

(2) In deciding whether to accept a witness’ account, importance should also be attached to the inherent likelihood or unlikelihood of an event having happened, or the apparent logic of events.

(3) The Court should also attach importance to the consistency of the witness' evidence with undisputed or indisputable evidence, and the internal consistency of the witness’ evidence.

(4) The Court should caution itself from too readily drawing conclusions about truthfulness and reliability solely or mainly from the appearance of witnesses or from the witnesses’ character.

13.  In this case, the Plaintiff attended trial to confirm the contents of his witness statements and answered questions from the Court. I accept that the Plaintiff is an honest and reliable witness.

14.  I am also satisfied that his factual account in relation to the circumstances in which the Sums were paid is consistent with the undisputed events and contemporaneous communication:-

(1) On 15 June 2018, the Defendant sent to the Plaintiff details of an account in the name of Legendary Xiamen at China Merchants Bank, Xiamen Branch (“Legendary Xiamen Account”). The Defendant emphasised that the funds paid to the Legendary Xiamen Account had to be specified as investment funds (投資款) when filling in the form for telegraphic transfer.

(2) In the message from the Defendant to the Plaintiff on 18 June 2018 at 12:52 pm, she expressly differentiated between two categories of funding: (i) the general investment funds of RMB2,000,000 and (ii) funds paid to the Defendant’s personal account in Hong Kong, where she referred to a payment already made and she requested the remaining sum of RMB500,000 to be paid to her bank account in Hong Kong (“所以剩返五十萬呢，你都好似上次咁先轉咗去比我個香港戶口…”). In my view, this is consistent with the payment of the Sums being separate from the RMB2,000,000 sum as general investment funds:-

(i) The Sums were made to the Defendant’s HSBC Account (“我個香港戶口”) rather than the Legendary Xiamen Account.

(ii) The reference to “last time” (上次) in the above message is clearly to the first instalment of the Sums (HK$600,000, being equivalent to RMB500,000[2]) was paid on 23 May 2018.

(iii) Together with reference to the remaining RMB500,000 in the above message, they add up to RMB 1 million (or HK$1.2 million), being the Sums.

(3) The express differentiation between Sums and the RMB 2 million payment (as general investment funds without any indication that the use was limited for any specific purposes) was emphasised again by the Defendant in her message to the Plaintiff on 19 June 2018 at 3:25 pm, in which she said that the RMB2 million was to be paid to the Legendary Xiamen Account after capital verification, but the Sums (in two instalments of HK$600,000 each) were to be paid to the Defendant’s HSBC Account (with no capital verification) (“兩百幾萬嘅人民幣驗資款就係經過公司戶口上，另外呢，你再俾多，好似上次轉六十萬嘅港紙，或者係五十萬，唔好啦，唔好人民幣，六十萬嘅港紙落我原身個戶口。咁即係話驗資就驗二百萬先，有一百萬人民幣唔驗住喇”).

(4) As documented by bank records, the Plaintiff subsequently caused Legendary to transfer RMB 2 million to the Legendary Xiamen Account on 5 July 2018. In the circumstances, the inference is that the purpose of the Sums were different from the RMB 2 million which was paid as general investment capital. This contradicts the Defendant’s case that the Sums were to be used generally for Legendary Xiamen’s restaurant business.

(5) Most importantly, there were clear indications in the Plaintiff’s messages at the material time which suggests that the purpose of the payment of the Sums was for the payment of the Rental Deposit to the Hotel:-

(i) In the audio message sent by the Defendant to the Plaintiff on 19 June 2018 at 1:56 pm, she mentioned that she needed funds to pay a rental deposit to the Hotel (“…我要啲錢嚟周轉落去比Marco Polo啲押金”).

(ii) Similarly, in her subsequent message to the Plaintiff on the same date at about 3:25 pm, the Defendant requested the Plaintiff to pay HK$600,000 (ie the 2^nd instalment of the Sums) because she was in the final stage of negotiation of the lease agreement with the Hotel (“你同我搞咗六十萬港紙先，因爲我已經去到final stage，要同Marco搞掂張Contract呀嘛”).

(iii) The Plaintiff paid the second instalment of the Sums (HK$600,000) to the Defendant’s HSBC Account the next day on 20 June 2018.

(6) The Defendant’s messages in (5) above also contradict her factual case that at the time no Rental Deposit was required by the Hotel.

15.  I note that the Defendant and Danny, who each gave witness statement(s), failed to attend the trial to confirm the contents of their witness statements on oath and subject themselves to cross examination. No explanation has been put forward in the Defendant’s written submissions for their absence. Accordingly, I give no weight to the contents of these witness statements[3].

16.  Having considered the evidence in totality, I find on the balance of probability that:-

(1) The Plaintiff and the Defendant did enter into the Oral Agreement.

(2) The Sums were paid by the Plaintiff to the Defendant in reliance of the representation by the Defendant that the Sums were to be used for the purpose of payment of the Rental Deposit.

(3) Given the specific purpose of the payment of the Sums (in contrast to the RMB 2 million which was for general investment capital of Legendary Xiamen), in the circumstances the natural inference to be drawn is that the Sums were to be used for the sole and exclusive purpose of payment of the Rental Deposit.

Issue 2 - Whether the Defendant had applied the Sums in the specific manner as per the Oral Agreement?

17.  It is in fact common ground (albeit for different reasons) that the Defendant did not apply the Sums as per the Oral Agreement. It is the Defendant’s own pleaded case that there was no need to pay the Rental Deposit as she had used the Sums for the preparation of setting up the restaurants of Legendary Xiamen[4]. In her witness statement (at §15), she claimed that after she received the Sums, she arranged for the RMB equivalent of HK$1,200,000 to be “applied to various aspects of the setup of the Restaurants in the mainland” and then she went on to elaborate how such Sums were spent for the aforementioned purposes (at §§17-28).

18.  The fact that the Rental Deposit was not actually required by the Hotel is also consistent with contemporaneous documents. In a commercial premises lease termination agreement (解除《商鋪租賃合同》協議書) between the Hotel and Legendary Xiamen dated 30 May 2019 (“Lease Termination Agreement”), it was expressly stated that apart from a renovation deposit of RMB20,000, Legendary Xiamen had not pay any other sum to the Hotel (“乙方承租之後，遲遲未能按照合同約定的時間，將租賃房屋裝修完畢開始營業，除裝修押金2萬元，未向甲方支付任何費用”).

19.  For completeness, I note that it was adduced in evidence that there was a ledger entry[5] of Legendary Xiamen recording a purported payment of RMB159,840.00 by the Defendant on behalf of Legendary Xiamen as a rental deposit to the Hotel on 31 December 2018 (ie about 6 months after the Sums were paid). However, in view of the absence of any proper explanation from the Defendant on the discrepancy with the Lease Termination Agreement and the lack of corresponding documentary evidence of the relevant transfers and receipt by the Hotel, I am not satisfied that such part of the Sums was paid as rental deposit to the Hotel.

20.  Accordingly, I find that the Defendant has failed to apply the Sums to pay for the Rental Deposit as required under the Oral Agreement.

Issue 3 - Whether the Defendant has been unjustly enriched by retaining the Sums without lawful cause or reason to receive and/or retain the Sums?

21.  As pleaded by the Plaintiff, two bases were advanced in support of his claim for return of the Sums, namely Quistclose trust and unjust enrichment.

Whether the Oral Agreement gave rise to a Quistclose trust

22.  Having found the existence of the Oral Agreement, it remains for me to consider whether it gives rise to a Quistclose trust.

Legal principles

23.  The general principles on what would give rise to a Quistclose trust were set out in the recent judgment of the Court of Final Appeal in China Life Trustees Limited v China Energy Reserve and Chemicals Group Overseas Company Limited & ors [2024] HKCFA 15:-

(1) A Quistclose trust comes into existence where X pays money (or transfers other property) to Y by way of loan or otherwise, with the parties objectively intending the money to be applied for a specific purpose (and no other). That clothes the transferred funds with a trust subject to their being properly applied by the recipient for the designated purpose. If for any reason that purpose fails to be achieved, the funds are simply held on such trust for the payer. Such restriction on the use of the funds is the key consideration: the payer must have intended, with the recipient’s agreement or acquiescence, that the money should be used only for that specific purpose and should not be at the recipient’s free disposal (at §20).

(2) Where, as a matter of objective fact, such restrictive intention has been established, since the money may only be applied for a specific purpose and no other, in the absence of an indication of a contrary intention, it is implied that if the purpose fails the money will be repaid. Equity will restrain mis-application of such funds. To the extent that the specific purpose fails, the recipient holds the funds on a resulting trust to restore them to the payer (§§21-24).

(3) The requisite intention can be established where the payment is made in circumstances which, on the evidence, objectively justify the inference of a restrictive intention without the need for an express stipulation of the restrictive intention (§§34, 91). In order to give rise to a Quistclose trust, it is also not necessary to establish any intention that the transferor should retain a beneficial interest in the property (§§8, 57-58).

24.  Further, although segregation of funds is an indicia of the existence of a trust, it has been recently held by Mimmie Chan J in Hip Hing Construction Company Limited v Hong Kong Airlines Limited [2024] HKCFI 370 at §57 that the absence of segregation by itself does not mean that no trust can be intended.

25.  Given my findings on the existence of the Oral Agreement, I am also satisfied that a Quistclose trust has arisen. According to the Oral Agreement, the Sums were paid to the Defendant for the sole and exclusive purpose of payment of the Rental Deposit. In the circumstances, the implication is that if the Defendant has failed to apply the Sums in accordance with the Oral Agreement or if the purpose fails, the Defendant shall repay the Sums to the Plaintiff. As the parties understood that the payment of the Sums were made to the Defendant’s HSBC Account but would be applied for the agreed purpose, the fact that the Sums were paid and may have commingled with the Defendant’s own funds in such bank account does not therefore negate the clear intention that gives rise to the Quistclose trust.

26.  In light of my finding on the existence of a Quistclose trust over the Sums, it is not necessary for me to decide the Plaintiff’s alternative claim of unjust enrichment.

Issue 4 - Whether the Defendant is liable to refund and/or repay the Sums to the Plaintiff?

27.  As I have found that the Sums were held by the Defendant on a Quistclose trust and that the Defendant has failed to apply the Sums for the specific purpose pursuant to the Oral Agreement, the Defendant is liable to repay the Sums to the Plaintiff who is the beneficial owner.

Issue 5 - Whether the Defendant is liable to pay interest and costs?

28.  I consider it appropriate to order the Defendant to pay pre-judgment interest on the Sums at the usual rate of 1% above HSBC prime rate from the dates of payment by the Plaintiff to the Defendant (ie 23 May 2018 and 20 June 2018 respectively) up to the date of judgment. Interest shall accrue on the Sums at judgment rate thereafter until full payment.

29.  Given that the Plaintiff is successful in his claim, there is no reason why costs should not follow the event. Hence, I make an order nisi that the costs of the action (including any costs reserved and with certificate for counsel) be paid by the Defendant to the Plaintiff, to be taxed if not agreed.

30.  Lastly, it remains for me to thank Mr Law for his helpful assistance.