CHOY CHI KEUNG, FRANKIE v. WU KAI KWONG

HCA 631/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO. 631 OF 2012

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J U D G M E N T

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1. In 2008, the plaintiff (“Choy”) parted with a sum of HK$7,000,000, which was invested in the company of the defendant (“Wu”). Choy says that that was conceived and agreed to be a bogus investment for an ulterior purpose. The purpose was illegal; and in any event the purpose not carried into effect. He now seeks to recover the money paid.

UNDISPUTED FACTS

2. Wu was and is the shareholder and director of Siubo International Limited (“SIL”) and Siubo Education Limited (“SEL”).  SIL was basically the corporate vehicle through which Wu held his investments in shares, foreign currencies and real properties since 2003.  As at 2007,  the issued and paid up share capital of SIL was HK$10,000 at HK$1 per share.  Wu’s wife was the other shareholder.

3. Choy’s elder brother, Choy Chi Hung David (“David”), was and still is Wu’s working partner since 2006; as well as the 50% shareholder and director in SEL. Through David, Choy came to know Wu in 2007.  Choy and Wu subsequently entered into an agreement whereby Choy apparently agreed to invest HK$7,000,000 in SIL. Choy also drew a cheque for the sum payable to SIL dated 25 August 2007 (“the Cheque”)

4. The Cheque was deposited in January 2008.  In the same month, Wu’s wife withdrew from SIL; and her shares were transferred to him.  The share capital of SIL was increased from HK$10,000 to HK$15,000.  Beside the 10,000 shares so held by Wu, an additional 500 shares at HK$1 each were issued and allotted to him.  The remaining 4,500 newly issued shares were allotted to Choy but at HK$1,111 or a premium of HK$1,110 each.  The total paid up capital injected by Choy was thus HK$4,999,500. The balance of the HK$7,000,000 from Choy was apparently applied as Choy’s loan to the company.  Since July 2008, SIL had repaid Choy a monthly sum of HK$20,000-35,000.

5. All the documents incidental to the above share arrangement and loan repayments bore Choy’s signatures.  Choy had also signed some financial statements and audit confirmations of the company.

6. In February 2010, Choy apparently transferred his 4,500 shares in SIL to Wu at HK$1 each; and the consideration was said to HK$2,000.  In this connection, Choy signed an instrument of transfer as well as the bought and sold notes dated 9 February 2010.

7. SIL’s repayment to Choy stopped in August 2011.  The total repayments to Choy were HK$1,140,000.  Hence the sum of HK$5,860,000 claimed.

8. The parties have different accounts of how the above events came about.

CHOY’S CASE

9. According to the statement of claim, it was about the end of 2007 when Choy, at the instigation of Wu and David, agreed to deposit HK$7,000,000 as a bogus investment in SIL for the purpose of defeating the ancillary relief claim of his then wife in his divorce proceedings.  It was agreed that upon determination of the divorce proceedings, Wu would repay a monthly sum of HK$20,000-35,000 for some period of time; and eventually Wu would repay the balance of the sum to Choy (“the Agreement”).

10. By way of further and better particulars, Choy adds that it was sometime between 11 December 2007 and 14 January 2008 when the parties entered into the Agreement. The Cheque was drawn in January 2008 and deliberately backdated to create the impression that it predated the commencement of the divorce proceedings.  As to the repayment of the sum, it was represented to him that a lump sum repayment would raise suspicion of the authorities, and therefore the repayment would be by way of monthly instalments.  Wu then orchestrated the issue and allotment of new shares in SIL to Choy.

11. Choy says the abovementioned purpose of the Agreement was illegal.  In any event, Choy’s shareholdings in SIL were disclosed as part of his assets by way of Form E in the divorce proceedings.  Choy says that the illegal purpose of the Agreement was not carried into effect, and his ex-wife was not cheated.  The proceedings were settled by consent in September 2008.

12. Choy further says that it was in June 2008 when Wu agreed to start repaying Choy HK$20,000 per month with effect from July 2008; and the balance of the HK$7,000,000 would eventually be repaid after 3 years of the determination of the divorce proceedings.  In December 2008, Wu increased the monthly repayment to HK$30,000 with effect from January 2009.

13. In December 2009, Choy demanded a lump sum repayment of his money, but Wu refused to do so, referring to the financial turmoil.  In March 2010, Choy repeated the demand, but Wu only agreed to increase the monthly repayment to HK$35,000 from September 2010.  Choy repeated the demand in March 2011 but in vain.  Since September 2011, the repayment stopped altogether.

14. As to the documents in the above connection, Choy claims that he signed them but without knowledge about their nature and content.  When it came to the documents for the transfer of his shares to Wu in 2010, Choy claims to have signed them upon Wu’s threat not to repay his money, if he refused to do so.  In fact he had never received the consideration for the transfer.

WU’S CASE

15. According to his pleading (and further and better particulars), Choy and Wu first met on as early as 10 March 2007 upon the introduction by David.  Choy allegedly represented that he was interested in making investment in real estate and shares.  The parties had 3 further meetings in April and May 2007.  David was present in the first two meetings.  The parties eventually entered into an agreement for Choy to invest HK$7,000,000 into SIL on 25 August 2007.  The parties signed a written agreement (“the Written Agreement”).  It was further agreed that HK$2,000,000 of the total investment would take the form of Choy’s loan to SIL.  Choy deposited the HK$7,000,000 with SIL in January 2008.  The allotment of new shares in SIL to Wu and Choy followed.

16. Wu denies knowledge about the matrimonial dispute or proceedings of Choy.  He denies knowledge about the alleged undue influence of David on Choy, which, he says, is in any event irrelevant.  He also denies knowledge or any part in the alleged scheme to defeat the ancillary relief claim of Choy’s ex-wife.

17. Essentially Wu says that this was a genuine investment by Choy into SIL.

ABOUT CHOY’S PLEADED CASE

18. Choy’s pleaded case is premised on the Agreement, as defined, and, pursuant to the same, he became a purported shareholder of SIL as mentioned above; but the money purportedly invested would be returned to Choy some time after the determination of the divorce proceedings.  Choy’s primary pleaded case is that the Agreement, so defined, is void for illegality.  Further he had effectively withdrawn from the Agreement.  Therefore he should have his money back[1].

19. Choy also claims that he entered into the Agreement under the undue influence of David, upon whom he reposed trust, and of which Wu is said to have notice.  On this basis, he claims to have rescinded the Agreement by the commencement of the present action[2]. What Choy seeks to vitiate is still the agreement to make a bogus investment, so defined as the Agreement.

20. Then there is the alternative claim on the basis that the Agreement, as defined, is not null and void, and is legally binding on the parties.  Choy is claiming that pursuant to the Agreement, Wu is nevertheless obliged to repay him the money paid or the balance in the sum of HK$5,860,000[3].  This is effectively enforcement of the Agreement.

21. The pleaded case of Choy seems coherent so far.

22. Choy further claims that as the purpose of the Agreement had not been carried into effect, Wu held the HK$7,000,000 on trust for him[4]. By refusing to repay him, Wu is said to be in breach of trust[5].  Such claim is conceptually problematic.

23. As submitted by his counsel, Mr Chiu, Choy is alleging resulting trust arising out of the failure of the purpose of his payment of the HK$7,000,000.  But according to Choy’s own case, this happened because of the disclosure of his investment in SIL in the matrimonial proceedings, which was in February 2008 and therefore subsequent to his payment to SIL and becoming a shareholder of SIL.  There is no factual basis for alleging breach of trust on the part of Wu by parting with Choy’s money being held on trust arising upon the failure of the purpose of the Agreement.

24. Then Choy seeks to set aside the Agreement as an unconscionable bargain in that he was unable to apprehend the true nature of the Agreement, and that it was oppressive because he had to acquire the shares in SIL at a premium amounting to HK$1,111 per share[6]. This sounds like a complaint about the Agreement vis-à-vis Choy and Wu and/or the terms of the investment.

25. So far, Choy’s claim is premised on the Agreement whereby the parties agree to concoct a bogus investment and the money purportedly invested by Choy would be repaid to him afterwards.  Whilst the Agreement, as defined, may be criticised as being unconscionable because of its ulterior purpose, it is odd for Choy, who consciously agreed to it, to complain that it was unconscionable vis-à-vis Wu, his counterpart.  Further, there is no pleaded alternative case on the basis that the agreement so defined as the Agreement is found not to exist.  Choy cannot be heard to complain about the terms of the investment as being unconscionable, as if he were accepting that it was a genuine investment.

26. As to the documents of transfer of shares that Wu allegedly forced him to sign, Choy pleads duress and/or lack of knowledge about their nature and content.  The short point is that the alleged threat by Wu to refuse to return the money of Choy, if proved, did not constitute duress as it is properly understood.  Further, in view of his primary case, it is not surprising that Choy does not seek relief such as rectification of the transfer of his shares.  However, this remains a relevant factual allegation in the dispute.

ISSUE

27. Notwithstanding the parties’ respective lists of issues, the core of the matter is whether this was a bogus or genuine investment.

THE EVIDENCE

28. Beside the parties themselves, Wu called Kan Tan Cheng, Kancan (“Kan”) as a witness.  She was and is the company secretary of SIL and SEL.  She also had contact with Choy on social basis.  She is said to have been involved in the preparation of various documents in the evidence.

29. Choy was born in 1972.  The evidence is that he graduated in biology and chemistry from university in Scotland in 1995.  He reads and understands English.  Since graduation, he has had no real occupation except for a handful of short-lived part-time jobs in fast food, cleaning and low clerical work.  It could be said that he was always taken care of financially.  His grandmother had given him a property; while he acquired another property with the funds provided by his grandmother and mother.  He let one of them out for rental income.  His mother also gave him money.  On average, he lived on a monthly income of about HK$40,000-50,000.

30. Choy married his ex-wife, a Vietnamese through the introduction of a marriage consultant in 2002.  According to Choy, he was so anxious to get married at the age of 30 that he did so after knowing his ex-wife for 2 weeks.  The couple had since lived in 2 apartments.  One of them was rented by his father.  The other one was owned by his father, where they were allowed live rent free.  In 2005, Choy’s ex-wife gave birth to a daughter.  The marriage did not work; and Choy would avoid argument with his ex-wife by seeking refuge in frequent travel for leisure around Southeast Asian countries.  His ex-wife and infant daughter eventually left him in March 2007[7]. In court, Choy admitted that he anticipated that his ex-wife would seek divorce.  In September 2007, his ex-wife commenced divorce proceedings, but he claims he did not get to read the court documents until November 2007.

31. According to Choy, when he sought legal advice from a firm of solicitors regarding the divorce proceedings, David interposed himself and instigated to him the concoction of the bogus investment scheme with a view to defeating his ex-wife’s ancillary relief claim.

32. The evidence shows that by then, Choy had committed to sell one of his properties, and, according to him, to the then tenant in possession.  The Land Registry record shows that the formal sale and purchase agreement was dated November 2007 and the assignment was dated December 2007.  He expected to receive the sale proceeds in the sum of HK$8,600,000.

33. In court, Choy was led to explain his spending with reference to the statements of his bank account transactions in 2007.  Choy said that he would rather use up his money instead of having to share with his wife.  According to him, he would, as he did so, withdraw some HK$1,000,000 from the bank so as to hide it at home from his wife.  Similar thing happened even after the divorce proceedings were over.

34. Choy gave evidence that he considered that their brothers’ relationship was average.  They were not particularly friendly with each other; and seldom saw each other or talked on the telephone.  He would not necessarily ask David for help.  Miss Yue for Wu questions the credibility of Choy’s contention that he reposed trust and confidence in David so that he had acted upon David’s undue influence.  Nevertheless it remains common ground that it was David who brought Choy and Wu together, which resulted in Choy’s apparent investment into SIL.

35. Wu admitted by his statement that he did learn from David and Kan about the unsatisfactory marital relationship and intention to separate from his ex-wife of Choy.  In view of the interaction expected among Wu, David and Kan at all material times, I do not believe Wu had no idea about that as he apparently suggests by his pleading.

36. Undeniably a key figure in the dispute, David was not called as a witness.  In view of Choy’s assertions against David and Wu, there is all the more reason for Wu to call David to testify to contradict Choy.  Yet according to Wu, he had asked but David refused to come forward.  Wu left it at that without even asking David for an explanation.  This is most surprising.  The premise for drawing adverse inference exists.

37. Choy says that he and Wu first met upon the introduction by David in December 2007. In January 2008, they met again together with David; and on that occasion, the Agreement was made and the Cheque was drawn and backdated as suggested by Wu/David.

38. On the contrary, according to Wu and Kan, they first met Choy in March 2007, when Choy already represented that he was interested in investing HK$3,000,000 into SIL. In the subsequent meetings in April and May 2007, Choy initiated the idea of investing HK$7,000,000.

39. Wu and Kan rely on the minutes of the various meetings, a note written by Choy allegedly during the meeting in April 2007 and eventually the Written Agreement dated 27 August 2007.

40. As mentioned, Choy had a couple of properties by 2007.  One of them was let for rental income.  He had placed part of his bank savings into term deposit.  He might have kept some RMB currency.  Other than that, there is no evidence that Choy was a professional investor of any kind.  Wu did not suggest otherwise.  In the circumstances, that Choy allegedly initiated the idea of investment in millions in early 2007 would effectively be a new, if not sudden, development. Further, notwithstanding his evidence in respect of his relationship with David, which Miss Yue highlights, Choy allegedly approached his brother with a view to investing in Wu’s company.

41. The evidence shows that by early 2007, Choy did not have such amount of cash at his disposal to make the alleged investment.  However, according to Wu, Choy voluntarily wrote a Chinese note in the meeting in April 2007, which Wu described as Choy’s handwritten agreement.  Wu understood that to be Choy’s gesture of sincerity to make the investment.  On the contrary, Choy says that it was not an agreement but a note written at the instigation of Wu during the period between December 2007 and January 2008 when they met.

42. What does the note say?  In the note, Choy made reference to the drawing of the Cheque in August 2007.  He somehow raised the question of how he managed to do that, when he had only HK$1,000,000 cash.  Oddly he proceeded answer himself by pointing out that he had real property, which he might sell at more than HK$7,000,000.  He concluded by stating that he succeeded in selling his property on 11 December 2007 at HK$8,600,000.  He could therefore make payment in January 2008.  This was the property Choy sold to his then tenant in possession mentioned above.

43. The note looks and its content sounds odd.  Its nature is by no means clear but certainly connotes no sense of an agreement as that alleged by Wu.  Further, if what Wu says were true, what was written in the note would be Choy’s projection of things that were yet to happen.  There is no evidence that the parties somehow agreed or contemplated in April 2007 that Choy would draw the Cheque in August 2007.

44. Even assuming that the note was written at the same time when the Cheque was allegedly drawn in August 2007, still even Choy could not have known then that his property would be sold on 11 December 2007 at HK$8,600,000.  According to Choy, he received an offer from the then tenant in possession to purchase that property only in late 2007.  Wu have no evidence to contradict that.  The provisional sale and purchase agreement disclosed just before the trial was dated 2 November 2007.  Even in the absence of that, the Land Registry record does show that the formal sale and purchase agreement was dated 12 November 2007 and completion was dated precisely 11 December 2007.

45. Not only is it implausible that Choy could somehow foretell in April 2007 the completion of the sale of the property at HK$8,600,000 on 11 December 2007, but it also sounds strange for Choy to suggest that the funds would be available only in January 2008 as if he also somehow foresaw the future reality that HK$7,000,000 out of the sales proceeds would be placed under time deposit and not to mature until January 2008.

46. Reference to the minutes of the alleged meetings between the parties as contemporaneous documentary evidence only serves to create more queries.  By their statements, Wu and Kan explained that the former arranged the latter to take minutes of the 4 meetings.  Kan did so, and handed in the 4 sets of minutes, which Wu respectively read and approved.  What is now referred to at the trial as the minutes of those meetings is but a single document containing sketchy statements about the 4 alleged meetings.  Further, it was not prepared by Kan. According to Kan, it was prepared by David, but allegedly as the English translation of the notes of points that she took during the meetings.  The alleged notes were nowhere to be seen in the evidence.  Kan explained that the minutes in English were prepared for more formal record.  The minutes do not impress me as such at all.

47. The content of the alleged minutes of the meetings does not serve to corroborate what Wu says either.  Some dates of the alleged meetings were admittedly wrong.  On the day of one of the alleged meetings, the travel document of Choy reveals that he was not even in town. Nowhere in the minutes can one find mention of the Chinese note allegedly written by Choy or what Wu says the note represented in any of the alleged meetings.  If Choy’s handwritten note came about at the meeting in April 2007, projecting how and when he would obtain the necessary fund to make the investment, one wonders how it was recorded under the subsequent meeting in May 2007 that Choy “initiated” when he would deposit the money as he “might not have sufficient funds in cash”.  The decision in this respect was stated “to be finalised on 2 June”.  Curiously there was the entry “June” but no record under it whatsoever.

48. The so-called minutes did apparently record that Choy eventually signed the Written Agreement and drew the Cheque in August 2007.  Yet for the purpose of corroborating Wu’s case, the Written Agreement does no better.  The evidence of Wu and Kan as to whether Kan prepared the Written Agreement with or without the involvement of David is unsatisfactory.  It should be noted that the parties to the Written Agreement were Choy and SIL.  Wu seemed to realise that an agreement of the nature contended should have been one between shareholders.

49. More importantly, it was said that the parties agreed that HK$5,000,000 of the HK$7,000,000 investment would be share capital while the remaining HK$2,000,000 was agreed to be Choy’s loan to SIL.  The shares in SIL were allegedly agreed to be held by Wu and Choy in a ratio of 70:30.  4,500 shares would be issued to Choy at a premium at HK$1,111 each.  Nevertheless the Written Agreement was completely silent on such alleged agreed distribution and allotment of the new shares.  That the Written Agreement was home-made is not an answer.  Nor is the assertion by Wu that the details could be set out during the allotment.

50. The evidence of Wu and Kan in respect of the application of the investment sum between share capital and loan to the company mentioned above is also incoherent.  Wu stated in his statement that it was only after the Written Agreement had been signed that he allegedly reviewed the need of the company and initiated the above application of the investment[8].  This is at odd with what he said in court; and in fact what he also stated in the same statement[9].

51. The Written Agreement was entered into allegedly in August 2007.  By then it was allegedly the understanding of the parties that Choy would have the necessary funds not earlier than January 2008.  Yet the payment terms of the Written Agreement were at variance with such understanding.  Clause 1.3 of the Written Agreement provided that Choy agreed to settle the cash sum for the shares in SIL within 30 days upon the signing of the agreement.  Choy would somehow draw the Cheque, which was dated 27 August 2008 instead of one post-dated for 30 days or, as the parties understood, to no earlier than January 2008.

52. According to Choy, he drew the Cheque only in January 2008.  It was at the instigation of David and Wu that the Cheque was backdated.  Again, one cannot overlook the significance of David not coming forward to testify, now that his alleged involvement, on Choy’s case as well as Wu’s case, apparently did not stop at conceiving the investment or introducing the parties to each other, but continued in the actual preparation of these documents for committing his brother to the investment.

53. Considering the evidence as a whole, I find the evidence of Choy to be more in line with the probable reality than that of Wu or Kan.  I have grave doubt about the evidence of Wu and Kan as to how Choy came to apparently invest in SIL.  I also have grave reservation about attaching any weight to the documentary evidence that Wu relies on in corroboration of his case.

54. The alleged bogus investment scheme was said to defeat the ancillary relief claim by Choy’s ex-wife.  However, the parties were not concocting the disposal of Choy’s assets, but to change their form from cash to interest in a company.  In the circumstances, how the ulterior purpose would be achieved by the investment is actually unclear.  Further it is unrealistic to expect to hide such asset, albeit not cash, from Choy’s ex-wife or the Family Court.  It should also be noted that Choy was represented, though by another firm of solicitors recommended by Kan in place of the one Choy originally instructed.

55. Indeed in his Form E filed in February 2008 in the matrimonial proceedings, Choy was required to, and he did, disclose his interest in SIL as part of his assets. Together with the other information contained in Form E, it would be subject to the scrutiny and request for further discovery by his opponent[10].  That Choy became a shareholder of SIL only after the divorce petition and one month before the filing of Form E is a matter of public record.

56. At the end of the day, the matrimonial proceedings were settled by way of consent in September 2008.  To the extent that needs to be disclosed for the present purpose, Choy would pay to his ex-wife approximately half of the proceeds of sale of the other real property of his together with maintenance for his child.

57. Miss Yue submits that the ulterior purpose had been carried into effect.  Among other factors, she refers to Choy’s admission that the information contained in the Form E was inaccurate.  As far as disclosure of his investment in SIL is concerned, indeed the HK$2,000,000 loan to the company, and thus his prima facie receivables from the company, was left unmentioned.  However, it should be noted that the receipt of HK$8,600,000 from the sale of his property, which is said to have funded the investment and the loan, was disclosed.  The accuracy of the other information unrelated to the investment is immaterial for the present purpose.

58. Then one may argue that what transpired in respect of the disclosure in the matrimonial proceedings of Choy’s interest in SIL calls into question whether the plot alleged by Choy in fact existed.  Even Choy contends that the ulterior purpose behind the bogus investment was not carried into effect, in view of the disclosure in the Form E.  However, Choy’s case is premised on what he was led to believe, namely, that the bogus investment scheme would serve the ulterior purpose.  The circumstances impress me that notwithstanding his belief that his ex-wife would thus be cheated, Choy did not really have any idea about how the scheme represented to him would actually work.

59. The one significant factor that Wu holds against Choy boils down to the fact that he had signed the documents incidental to the investment, the financial statement, the repayments and eventually the transfer of all his shares in SIL to Wu.  Absent factors such as fraud, misrepresentation, mistake, duress, undue influence or mental incapacity that would vitiate a binding legal document, that the person signing a document without reading or understanding its contents is wholly immaterial to its binding effect: see Ming Shiu Chung v Ming Shiu Sum (2006) 9 HKCFAR 324 (at §§84-87, per Ribeiro PJ).

60. The law in this respect is trite.  In the present case, that Choy claims that he signed the documents provided by Wu/Kan without reading them is not surprising, in view of the background and character of Choy that the evidence reveals.  One may not feel particularly impressed that Choy has been the responsible type of person in his life.  Yet it is the circumstances in which Choy signed those documents that are crucial.  Choy’s case is that he believed that this was a bogus investment and acted upon such belief.  It was in these circumstances that he signed the documents as what he considered to be part and parcel of the plot; and expected full repayment some time after the conclusion of the divorce proceedings.

61. Mr Chiu describes his client as a simple-minded person, lacking prudence and responsibility in minding his interest.  Considering the evidence as a whole, I share such observation.  It should be readily apparent to any objective person that the terms of the deal were dodgy.  The percentage share of the shareholdings and the allotment of the shares at a substantial premium were dictated to Choy, while the financial situation of the company was negative equity and there was no contrary valuation of the assets of the company at the time.  Soon after the deposit of the HK$7,000,000 into SIL, substantial part of it was utilised to reduce the amount of Wu’s substantial indebtedness to the company. Eventually, Wu dictated transfer of the shares of Choy at HK$1 each.  That Choy was said to insist on withdrawing from the company and agreed to such buy-out on top of losing over HK$5.8 million sounds bizarre.

CONCLUSION

62. I find that Choy entered into the Agreement with Wu on the basis that this was a bogus investment at the instigation of David and Wu.  Choy was led to so believe; and acting on such belief, he signed the documents incidental to and arising out of such bogus investment as part of the façade.  It is not so much Choy taking advantage of his own lack of responsibility and prudence, but more David and Wu taking advantage of his character.

63. Upon the finding that this was a bogus investment, it must follow that Wu has no right to any part of the money from Choy.  Mr Chiu submits that for the purpose recovering the money, Choy does not need to rely on the illegality of the ulterior purpose other than for the purpose of providing for the circumstances in which the money had been paid to Wu, and that it was not meant to be a gift: see Tinsley v Milligan [1994] 1 AC 340; Cheerbond Development Ltd v Tung Kwok Yu [2010] 2 HKLRD 546 (at §9, per Cheung JA).  I agree.

64. Much is argued about the precise legal basis of Choy’s entitlement to his claim.  Irrespective of that, the only fair outcome in the circumstances must be for Wu to return the money to Choy.

ORDER

65. I give judgment in favour of Choy against Wu for the sum of HK$5,860,000 with interest from the date of writ until payment at the judgment rate.

66. Following this event, Wu shall pay Choy’s costs of this action, to be taxed, if not agreed.  In the absence of application to vary, the costs order shall become absolute.

67. I thank counsel for their assistance.