CHOW CHUNG HEI AND OTHERS v. CHU TIK KWONG

DCCJ2063/2003

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 2063 OF 2003

____________

____________

_______________

J U D G M E N T

_______________

Introduction

1. In this case 1st and 2nd Plaintiffs ("P1 and P2") claimed for declarations against the Defendant ("D") that D holds 206,250 and 37,500 shares of Master Machinery Engineering Limited ("Company") on trust for P1 and P2 respectively. By a Consent Order dated 23rd September 2003, D and the 3rd Plaintiff ("P3") have compromised their dispute in the present proceedings, therefore P3's claim against D is no longer in issue before me.

2. D was all along legally represented until he filed a Notice to Act in Person on 5th June 2004. D was absent at the trial hearing. Indeed, D sent a letter dated 8th June 2004 to P's solicitors with a copy to the court. In this letter, D referred to an earlier letter from his former solicitors to P's solicitors (which according to Mr Tsu, solicitor for P1 and P2, should be a letter of 5th June 2004) stating that D would not proceed to defend P1 and P2's claim or to pursue his counterclaim in the present proceedings. In his letter dated 8th June 2004, D informed P's solicitors that he did not intend to attend the trial on 9th June 2004 or contest all or part of P1 or P2's claim. Mr Tsu urged me to proceed with the trial. As D was well aware of the present proceedings and trial dates, there was no reason not to proceed with the trial. P1 and P2 then proceeded to prove their case.

3. Only P1 and P2 gave evidence. Pursuant to the Memorandum of Agreed Directions and Orders dated 10th July 2003, the parties agreed that witness statements do stand as evidence in chief of the relevant witnesses unless the trial judge otherwise directs. In the present case, P1 and P2 adopted their witness statements as part of their evidence in chief. Items 19, 21-23, 36-38, 40-43, 45, 50-51 and 55-58 of the documents in the trial bundle were produced as evidence and the trial bundle documents page references are marked as "TB" herein. I summarise the evidence adduced by P1 and P2 as follows.

P1 and P2's evidence

4. P1, P3 and D were cross-border lorry drivers in or about 1985 and they became good friends. In 1989, P1 joined City Concrete Pump Company Limited ("City") as director and he maintained regular contact with P3 and D. In 1993, he introduced D to work as a machinery operator for City.

5. P2 joined City as a machinery repairer from 1993 to 1999. During that period, he came to know P1 and D. P2 knew that D was a director of City and he understood P1 introduced D to work as a machinery operator at City. Thereafter, P1, D and P2 became good friends and had regular contact.

6. However, at that time, P1 and P2 did not know that D had 2 companies in the names of Kong Chung (or Chun) Transport Company ("Kong Chung") and Master Engineering Company (TB/118 and Exhibit P1).

7. In March 1997, Mo Chi Kwun ("Mo"), Lam Chi Wah ("Lam"), P2, D and P1 agreed to join an unlimited company known as Master Machinery Engineering Company ("Master Machinery") set up by Cheng Man Chung ("Cheng"). Each of them including Cheng owned 1/6 of Master Machinery and contributed HK$150,000.00 as working capital. However, on the face of the company documents, D was recorded as 3/6 owner of Master Machinery and as having contributed HK$450,000.00 out of the total working capital of HK$900,000.00. In fact, D only owned 1/6 share of Master Machinery and held 1/6 share of the company for each of P1 and P2 respectively pending P2's resignation from City and joining Master Machinery as machinery repairer, which P2 eventually did. P2 said he subsequently paid HK$150,000.00 to D. For his share, P1 drew a personal cheque dated 14th March 1997 drawn on Hang Seng Bank Limited and payable to Master Machinery for the sum of HK$150,000.00 (TB/147). As P1 was City's director, he gave the said cheque to D and requested D to hold P1's 1/6 share in Master Machinery on trust for P1.

8. In November 1997, on D's advice, Master Machinery was incorporated and changed its name to Master Machinery Engineering Limited, ie Company. Company's authorised share capital of HK$900,000.00 was divided into 900,000 ordinary shares of HK$1.00 each, all of which were issued and paid up at par value.

9. It was pleaded in the Statement of Claim that each of Cheng, Mo, Lam and P1 was treated as having contributed HK$150,000.00 to the capital of Company and D contributed HK$300,000.00. Each of Cheng, Mo and Lam became registered and beneficial owners of 150,000 shares of Company. D became the registered owner of 450,000 shares and P1 was not the registered owner of any share of Company. However, P1 was the beneficial owner of 150,000 shares held in D's name and D himself was the beneficial owner of only 300,000 shares. It was at P1's request that D consented to be the registered owner of P1's 150,000 shares. This is reflected in columns 1, 2 and 7 of Table A annexed to this judgment ("Table A"). There is no reference in the Statement of Claim to P2's beneficial ownership of any share of Company at this stage.

10. However, P1 and P2's evidence was that the shares of the owners in Master Machinery were converted into shareholdings in Company so that each of Cheng, Mo, Lam, P1, P2 and D became beneficial owners of 150,000 shares of Company. Therefore implicitly, although D was the registered owner of 300,000 shares, he only held 150,000 shares beneficially and he held 200,000 shares on trust for P1 and P2 equally. This is reflected in columns 1 and 7 of Table B annexed to this judgment ("Table B").

11. On 21st November 1997, D asked P1 to lend him HK$120,000.00. P1 said that as he did not have his chequebook with him at that time, he gave HK$20,000.00 in cash to D and asked P1's god-child, Chui Leung Kam (who happened to be D's sister-in-law) ("Chui"), to draw a cheque in the sum of HK$100,000.00 to D on P1's behalf, which she did. P1 understood from Chui that when she gave D the said cheque, she was asked to make it payable to Tak Lee Machinery Engineering Company (TB/119-120). P1 subsequently repaid the sum of HK$100,000.00 to Chui.

12. On 19th February 1998, D asked P1 to lend him HK$100,000.00. So P1 drew a cheque of the same date and in such sum payable to D drawn on Hang Seng Bank Limited (TB/121).

13. In the evening of 3rd April 1998, D suddenly came and asked P1 to lend him HK$30,000.00 cash. P1 did not have his chequebook or so much cash with him at that time. D and P1 therefore went to an auto teller machine nearby to draw such sum. However, P1's banking card only allowed him to draw HK$10,000.00 each time with a maximum sum of HK$20,000.00 per day. So P1 drew HK$10,000.00 twice and gave HK$20,000.00 to D. He also transferred HK$10,000.00 to Kong Chung's bank account, a company held or managed by D (TB/148-149 and 123). Therefore by that time, D owed P1 monies ("Debts") which amounted to no less than HK$250,000.00.

14. On 16th July 1998, P1 asked D to transfer HK$20,000.00 to his wife's bank account to set-off part of Debts (TB/24). D did so, leaving an outstanding sum of HK$230,000.00 of Debts unpaid.

15. In November 1999, due to personal reasons, Cheng wanted to sell 75,000 shares of Company and wished to have someone hold his remaining 75,000 shares on trust for him. Lam also wanted to sell his 150,000 shares and quit Company. P3 joined Company as shareholder.

16. It is pleaded in the Statement of Claim that the then shareholders of Company together with P1 and P2 agreed inter alia that (a) D, Cheng and Mo would each sell 150,000 shares of Company (totalling 450,000 shares - "1st Sale Shares") and (b) D and P1 would each purchase 18,750 1st Sale Shares, P2 and P3 would each purchase 168,750 1st Sale Shares and Mo would purchase 75,000 1st Sale Shares ("1st Agreement"). Pursuant to 1st Agreement, the purchasers together paid and the vendors together received the price of 1st Sale Shares except that Mo held 75,000 1st Sale Shares purportedly purchased by him on trust for Cheng. The above is reflected in columns 1 and 8 of Table A.

17. However, P1 and P2 in their evidence said that the re-arrangement of the shareholding in Company was effected as follows :

(a) D was to transfer 150,000 shares held under his name to P2;

(b) Cheng was to sell 75,000 shares by dividing them into 4 equal parts (ie 18,750 shares for each part) at the price of HK$27,500.00 for each part to D, P1, P2 and P3;

(c) Cheng was to authorise Mo to hold his remaining 75,000 shares on trust for him; and

(d) Lam was to sell all his 150,000 shares to P3.

For (b), (c) and (d) above, they are reflected in columns 1 and 8 of Table B.

18. P1 suggested and D agreed that P1's share of HK$27,500.00 for his 1/4 beneficial share of Cheng's 75,000 shares (ie 18,750 shares) was to be settled by set-off against Debts, leaving an outstanding sum of HK$202,500.00 unpaid by D.

19. Irrespective of the differences between P1 and P2's pleadings and their evidence, the consistent position adopted by P1 and P2 was that at this stage in 1999, D, P1, P2 and P3 were each beneficial owners of 168,750 shares, and Mo and Cheng were beneficial owners of 150,000 and 75,000 shares respectively. This is reflected in columns 1 and 9 of both Tables A and B.

20. P1 requested D to settle part of Debts and D transferred two sums of HK$50,000.00 each to P1's bank account on 19th and 20th November 1999 (TB/26), thus leaving an outstanding balance of Debts in the sum of HK$102,500.00 still due to P1.

21. In early December 1999, D again asked P1 to lend him HK$100,000.00. P1 therefore drew a cheque dated 3rd December 1999 drawn on Hang Seng Bank Limited in such sum and made payable to Kong Chung (TB/27-28), thus increasing Debts to HK$202,500.00.

22. In or about January 2000, D advised that the shareholders should each contribute HK$60,000.00 to Company. P1 asked D to pay such sum for and on his behalf and set off the same against outstanding Debts. D agreed and thereby reduced outstanding Debts to HK$142,500.00.

23. In or about August 2000, Mo wanted to sell all his shares and quit Company. By a further agreement between the then shareholders of Company, Mo agreed to sell 150,000 shares of Company beneficially held by him ("2nd Sale Shares") to D, P1, P2 and P3 in equal shares (ie 37,500 shares each) ("2nd Agreement") and each of the purchasers paid 1/4 of the agreed price (ie HK$57,500.00 for each 1/4 portion of shares) to Mo. Further, Mo transferred 75,000 2nd Sale Shares to P3 to be held on trust for Cheng. This is reflected in columns 1 and 10 of both Tables A and B.

24. P1 suggested and D agreed that P1's share of the agreed price in the sum of HK$57,500.00 was to be set off against outstanding Debts, thus reducing the outstanding sum to HK$85,000.00 payable by D to P1. P2 said he paid the sum of HK$57,500.00 to D by transferring HK$50,000.00 to Kong Chung's account at D's request and paying HK$7,500.00 in cash to D out of HK$10,000.00 which he drew from his bank account on 28th August 2000 (TB/139 and 123 and Exhibit P2).

25. By reason of the aforesaid, D, P2 and P3 were recorded in Company's books as the registered owners of 487,500, 168,750 and 243,750 shares of Company (totalling 900,000 shares) and Mo and Cheng no longer held any shares. This is reflected in columns 1 and 6 of Table A. Further, each of D, P1, P2 and P3 was a beneficial owner of 206,250 shares and Cheng became the beneficial owner of 75,000 shares. Mo no longer held any shares of Company as beneficial owner. This is reflected in columns 1 and 11 of Tables A and B. Such registered and beneficial ownership of the shares of Company insofar as relates to P1 and P2 reflect the current status. P1 and P2 also claimed that they are respectively the current beneficial owners of 206,250 and 37,500 shares of Company held and registered in D's name.

26. P1 said he did not owe D any money and in fact it was D who owed him money. P1 said that since incorporation of Company in 1997, P1 had at D's request made advancements of money to Company for its general operations on many occasions. P1 said that the accounting records prepared by D showed that cheques representing interest payments were paid to P1 from time to time (TB/154-160). P1 said that at one stage the maximum amount he lent to Company was HK$1,410,000.00.

27. P1 and P2 said that since the incorporation of Company in 1997, D managed and handled the secretarial, accounting and office works. P1, P2, P3 and Cheng did not participate in these matters until 30th September 2001 when D resigned after the other shareholders and directors of Company pressed and demanded D to allow inspection of Company's accounting records kept by D.

28. The former solicitors of P1 and P2 issued a letter dated 2nd February 2002 to D demanding D to inter alia transfer 206,250 and 37,500 shares of Company held in his name to P1 and P2 respectively but D failed and/or refused to do so (TB/124-128). P1 and P2 claimed that D held the said shares on trust for them.

29. P2 said that D lodged a claim in the Small Claims Tribunal (SCTC042875/03) against him for a dishonoured cheque in the sum of HK$12,983.20 which P2 said was for the purpose of forming a new company. P2 said he countermanded payment of the said cheque due to D's persistent failure to allow Company's shareholders and directors to inspect the accounting records kept by D, and the matter was referred to the police for investigation. In fact, P2 paid the said sum into court on 20th August 2003.

30. D in his Defence and Counterclaim claimed that after Company's incorporation, he lent HK$20,000.00, HK$70,000.00, HK$50,000.00 and HK$50,000.00 to P1 on 16th July 1998, in or about October 1999, and on 19th November and 20th November 1999 respectively ("1st Loans") at the agreed interest rate of 12% pa ("1st Loan Agreement"). D further claimed that in consideration of 1st Loans, P1 agreed that 150,000 shares of Company acquired by him but held in D's name would be held as security pending full repayment of 1st Loans. As P1 failed to repay 1st Loans with interest thereon or any part thereof, D was entitled to hold onto the said 150,000 shares as security pursuant to 1st Loan Agreement. D also counterclaimed for repayment of 1st Loans totalling HK$190,000.00 with interest thereon at 12% pa.

31. P1 in the Reply and Defence to Counterclaim denied D's allegations in respect of 1st Loans and averred that he had lent no less than HK$220,000.00 to D prior to July 1998 (ie HK$120,000.00 in or about November 1997 and HK$100,000.00 in or about February 1998 as described above). P1 further claimed that 1st Loans were not loans from D to P1 but were (as explained in P1 and P2's evidence above) directions by P1 to D on the relevant dates to make advancements to Company being agreed set-off against Debts. P1 denied owing D any money.

32. D in his Defence and Counterclaim accepted that each of D, P1, P2 and P3 was to purchase 1/4 of 2nd Sale Shares. D claimed that he paid the purchase price payable by P1, P2 and P3 in respect of their respective portions of the total purchase price of 2nd Sale Shares (ie HK$55,000.00 per portion) in or about August 2000 ("2nd Loan") and it was agreed by the parties that D was to charge interest on 2nd Loan at the rate of 12% pa. Only P3 repaid to D his share of 2nd Loan and P1 and P2 failed and/or refused to repay their shares of 2nd Loan or any part thereof. By reason thereof, D denied that P1 and P2 were entitled to the shares of Company as claimed by them. In any event, D argued that he had a lien over 37,500 shares alleged to be beneficially owned by each of P1 and P2 as they failed and/or refused to pay their respective shares of 2nd Loan and D had paid the relevant purchase price of such shares to Mo. D counterclaimed against each of P1 and P2 for their respective shares of 2nd Loan each in the sum of HK$55,000.00 with interest thereon at 12% pa.

33. P1 and P2 in the Reply and Defence to Counterclaim also denied 2nd Loan. They accepted that D told them he had on behalf of himself and P1, P2 and P3 paid to Mo a total sum of HK$230,000.00 under 2nd Agreement and that each of P1, P2 and P3 was required to pay D HK$57,500.00 in respect of their shares of 2nd Sale Shares. However, P1 and P2 gave evidence that they had paid or settled their portions of the price payable to D as described above. In respect of P1, the sum of HK$57,500.00 payable to D was set off against outstanding Debts in August 2000 and P2 paid the sum of HK$57,500.00 to D in August 2000.

Assessment of the evidence

34. In my view, there is no reason to disbelieve the evidence adduced by P1 and P2. Although there are some discrepancies as to how the transfers of registered and beneficial ownership of shares were effected, that is understandable because prior to September 2001 D (and not P1 or P2) handled the secretarial work and corporate documentation. Further, I note that P1 and P2's evidence and their pleadings were consistent as to the status of the shareholders' registered and beneficial ownership as at 1997, 1999 and 2000 irrespective of the differences in relation to the said transfers. This can be seen from columns 1, 2, 4 and 6 in Table A and columns 1 and 2 of Table B in relation to the registered ownership of shares of Company, and columns 1, 9 and 11 of Tables A and B in relation to the beneficial ownership of such shares.

35. Mr Tsu also submitted that such discrepancies were immaterial in the present case because of D's admissions in his Defence and Counterclaim. D admitted in paragraph 3 of the Defence and Counterclaim that D, Cheng, Mo, Lam and P1 had contributed to the capital of Company and were the registered owners of the respective shares as pleaded paragraph 3 of the Statement of Claim (see paragraph 9 above). D further admitted in paragraph 3(2) of the Defence and Counterclaim that P1's initial acquisition of shares of Company was 150,000 shares. In paragraph 4 of the Defence and Counterclaim, D admitted that in or about November 1999, a total of 450,000 shares of Company were transferred amongst the parties as pleaded in paragraph 4 of the Statement of Claim (see paragraph 16 above). D also admitted in paragraph 6 of the Defence and Counterclaim that in or around August 2000 each of D, P1, P2 and P3 was to purchase 1/4 of Mo's 150,000 shares at an agreed price.

36. In the circumstances, Mr Tsu argued that D had admitted that P1 acquired 150,000, 18,750 and 37,500 shares of Company in 1997, 1999 and 2000 respectively totalling 206,250 shares, that P2 acquired 37,500 shares in 2000 and that these shares were held in D's name on behalf of P1 and P2. The issues raised by D were only whether P1 and P2 had paid for such acquired shares and whether they owed D any money.

37. On the basis of the evidence adduced by P1 and P2, I accept on the balance of probabilities that D held 206,250 and 37,500 shares of Company in his name on trust for P1 and P2 respectively. I also accept P1 and P2's evidence that they had fully paid for such shares and that they did not owe D any money. I therefore make the declarations sought in paragraphs (A) and (B) of the prayer of reliefs in the Statement of Claim accordingly.

38. D's counterclaim against P1 and P2 is dismissed. Mr Tsu asked for costs in favour of P1 and P2. There is no reason why costs should not follow event. I therefore order that D shall pay P1 and P2's costs of the action including the counterclaim (together with all costs reserved) to be taxed if not agreed on a party and party basis.

Table A - Registered and Beneficial Ownership of Shares in Company as shown in Statement of Claim

Legend :

Table B - Registered and Beneficial Ownership of Shares in Company as shown in P1, P2 and P3's witness statements