TSANG WING KWAI AND ANOTHER v. The Personal Representative of the estate of CHAN CHUNG HAN, the Deceased

CACV 216/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 216 OF 2015

(ON APPEAL FROM HCMP 1912/2013)

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REASONS FOR JUDGMENT

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DECISION ON COSTS

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Hon G Lam J (giving the Reasons for Judgment and Decision on Costs of the Court):

Introduction

1. At the conclusion of the hearing of this appeal, we allowed the appeal for reasons to be handed down, ordered a re-trial before a different judge after mediation had taken place, and ordered the costs below to be in the cause of the re-trial.  These are our reasons for allowing the appeal and our decision on the costs of the appeal. 

2. The appeal lay from a decision of the Court of First Instance dismissing the applicants’ claim made by originating summons. The 1^st appellant (the 1^st applicant below), Mr Tsang Wing Kwai, and the respondent here and below, Mr Tsang Wing Fai, are both sons of Madam Chan Chung Han, deceased (“Madam Chan”).  For convenience, we shall refer to them by their first names as “Kwai” and “Fai” respectively, as did the trial judge.  Fai has been named a respondent in his capacity as executor of Madam Chan’s will and representative of her estate.

3. The case concerns the beneficial ownership and validity of an allotment of shares in Open Treasure Industries Limited (“Open Treasure”), the 2^nd appellant (the 2^nd applicant below), a company which holds two landed properties in Hong Kong.  In particular, Kwai sought a declaration that Madam Chan held one of two shares in Open Treasure on trust for him and an order that there had not been a valid allotment of 4,999 shares on 19 January 2012 to each of him and Madam Chan.

The background facts

4. Madam Chan and her husband were married in 1952 and together they had three sons and two daughters.  Fai and Kwai are the first and third ranked respectively.  Their father worked as a supervisor in a trading company.

5. The parents had bought a number of properties during their lifetime.  In 1962 they bought a flat in Kiu Hing Mansion, situated at King’s Road and Tin Hau Temple Road.  In 1969 they purchased Flat 907 in Kent Mansion, in Tin Hau Temple Road.  In 1975 they acquired a ground floor shop and a mezzanine floor flat in King Tak House, located in King Kwong Street.  In 1977 they bought a ground floor shop in On Fung Building on Caine Road.

6. In 1986 the parents acquired a company called United Kesvick Limited (“United Kesvick”).  In 1987, using that company, they acquired Shop D on Ground Floor, Kar On House, on Ford Street and Cheung Hong Street.

7. In February 1986, Kwai also bought a property himself, which was a lower ground floor shop in a building on Tsat Tsz Mui Road.  He purchased it at the price of $525,000 in his own name.

8. Open Treasure was incorporated on 15 July 1988, probably by a professional firm that supplied shelf companies.  It is not in dispute on about 19 July 1988 Kwai and Madam Chan became registered as the only two members of Open Treasure, each in respect of one of the only two issued shares.  They also became the only two directors.

9. Shortly afterwards, on or about 29 July 1988, a document in English with the title “Declaration of Trust” came into being (“the Declaration of Trust”).  It was accepted below that the signature on it was that of Madam Chan.  This document states that the one share in Open Treasure standing to Madam Chan’s name does not belong to her but to Kwai.  The signature of Madam Chan was apparently attested by a witness, and the Declaration of Trust was duly stamped.  Arising in this appeal is the question, among others, of whether the judge correctly concluded that Kwai had failed to establish the “veracity” of this document.

10. Pursuant to an agreement dated 11 July 1988, completed on 31 August 1988, Open Treasure purchased a property, namely, Shop F on Ground Floor, Kar On House (“Shop F”), at the price of $639,000.  Shop F was next to Shop D which the parents had acquired via United Kesvick in 1987 as mentioned above. 

11. In May 1991, Open Treasure purchased another property, namely, Flat 908 in Kent Mansion (“Flat 908”), for $1,830,000, which was also next to the flat the parents had bought in the same building in 1969 as mentioned above.

12. Open Treasure purchased a third property in December 1994 (with completion in March 1995), being a flat in Coral Court, Cloud View Road, at the price of $3.95 million (“the Coral Court flat”).  It was later sold at a profit in 1997.

13. Some of the properties purchased in the parents’ name as mentioned above were subsequently transferred to United Kesvick.  Thus the shop and mezzanine floor flat in King Kwong Street were injected into United Kesvick in 1997.  The shop in Caine Road was injected in 2003, and the flat in Kiu Hing Mansion in 2004.  Flat 907 remained in their personal ownership.

14. On 19 January 2012, a return of allotment of shares by Open Treasure (“the Return of Allotment”), apparently signed by Madam Chan, was filed with the Companies Registry, not by the secretarial firm which had hitherto been used for preparing and filing returns, but by Open Treasure itself.  The Return of Allotment stated that 9,998 shares had been allotted on 16 January 2012 equally to Madam Chan and Kwai respectively (“the Allotment”). Shortly before the trial below, Fai also found from Madam Chan’s bedroom a document, apparently signed by Madam Chan, purporting to be minutes of a directors’ meeting of Open Treasure on 16 January 2012 resolving that 9,998 shares be allotted to Madam Chan and Kwai equally. 

15. Further, on 8 August 2012, an annual return for Open Treasure was filed by the secretarial firm with the Companies Registry (“the Annual Return”).  It was a document of 9 pages.  Kwai had signed on page 8.  Page 3 set out the members as being Kwai and Madam Chan, each holding 5,000 shares, that is to say, their respective shareholdings including the 4,999 shares allotted to each of them.

16. The other principal issue below was whether there was a valid allotment of shares in January 2012 as evidenced by the Return of Allotment, the board minutes, and the Annual Return.

17. Madam Chan passed away on 20 August 2012, while travelling in Europe with Kwai’s family.  She left a will dated 16 June 1997 in which she appointed her husband or, if he should predecease her (which he did), Fai, as executor.  By the will, she divided her residuary estate, after payment of debts and expenses, into 5 shares.  She left 2 shares to Fai, 1 share to Kwai, 1 share to a daughter, and 1 share to two named grandsons who are the sons of Fai as tenants in common in equal shares.  According to the schedule of assets in the probate, the main assets in Madam Chan’s estate are her shares in United Kesvick and 5,000 shares in Open Treasure.

18. After Madam Chan’s death, a dispute arose as to whether there was a valid allotment of the 9,998 shares in Open Treasure.  The originating summons in these proceedings was issued on 7 August 2013, by which Kwai sought an order to set aside the Return of Allotment and to rectify the Annual Return accordingly.  A further dispute later arose as to whether Madam Chan held one share on trust for Kwai pursuant to the Declaration of Trust.  By amendment of the originating summons, a claim was added in May 2015 for a declaration that 1 share in Open Treasure was held by Madam Chan for Kwai pursuant to the Declaration of Trust.

The parties’ respective cases

19.  Kwai’s case was that the Declaration of Trust was executed by Madam Chan and valid and binding on Madam Chan’s estate.  Open Treasure was wholly beneficially owned by him up to January 2012.  The acquisition of the properties held by Open Treasure was financed by him, without any contribution from Madam Chan.  His case was that he did not know about the Allotment until after Madam Chan’s death, in October 2012, and that the Return of Allotment was filed without his consent or knowledge and therefore necessarily without the proper approval of the company in general meeting.  He explained that he had signed the Annual Return without noticing the stated increase in the number of issued shares.  He did not, however, suggest that Madam Chan had filed the Return of Allotment herself.  It appears that Kwai had, at one stage, suggested that it was Fai who procured the Return of Allotment to be signed by Madam Chan in the hope that her estate would be augmented for the benefit of himself and his sons, but this allegation was withdrawn by Kwai’s counsel in closing submissions.

20.  Fai’s case advanced on behalf of the estate, in contrast, is that Kwai and Madam Chan had equally owned Open Treasure throughout.  The properties acquired by Open Treasure were financed by, or largely by, Madam Chan, who out of love and affection for Kwai had arranged for him to have a half share in that company. Fai alleged that Kwai had asked Madam Chan to sign a trust deed the effect of which was exactly the opposite of the Declaration of Trust, i.e. that Kwai was to hold the 1 share standing in his name on trust for Madam Chan.  That trust deed, however, was not intended to have legal effect, but only to be shown to the Independent Commission Against Corruption in case Kwai, a civil servant, was investigated and asked to account for the origins of his assets (“the ICAC story”).  Fai did not dispute that Madam Chan signed the Declaration of Trust, but contended that Madam Chan did not intend, and could not have intended, to execute a trust of her 1 share in favour of Kwai. 

21. There were clearly substantial disputes of fact between the parties.  That being the case, the originating summons procedure was unsuitable: see eg Wing Hang Bank Ltd v Crystal Jet International Ltd (unrep, HCMP 5014/1999, 15 April 2000), per Cheung J.  We note that leave was given for the originating summons to be set down for trial before the claim for declaratory relief concerning the Declaration of Trust was added in May 2015, increasing the complexity of the issues.  But as Lam J stated in Young’s Engineering Co Ltd v The Hong Kong and Shanghai Banking Corporation Ltd & Ors (unrep, HCMP 2676/2002, 18 June 2004) at §9, parties and practitioners who have chosen to proceed by way of originating summons should reflect on its appropriateness not only when the proceedings are launched but also as and when the case progresses with evidence filed by parties involved.  In the present case, the use of that procedure and the absence of pleadings, with the consequence that the trial judge had had to ascertain the parties’ cases from the numerous affirmations and from submissions, might have caused some of the problems mentioned below. 

The judgment below

22. Both Kwai and Fai were cross-examined on their affirmations at trial.  The judge was not impressed by either of them as a witness.  He found Kwai was “was in difficulty under cross-examination on all the major subjects”.  He found that Fai had a financial interest in the outcome and harboured a sense of animosity against Kwai, such that he had to approach his evidence “with care”.

23. The judge first dealt with the question of who financed the purchases of the properties of Open Treasure (at judgment §§33-49).  In relation to the purchase of Shop F in 1988, he rejected Kwai’s claim that, with the help of a mortgage loan, he funded entirely the payment of the price.  The judge noted the existence of a loan in the sum of $150,000 borrowed from a bank on a further charge of the parents’ flat in Kiu Hing Mansion dated 4 July 1988.  He considered the loan proceeds were Madam Chan’s money and that, by reason of the proximity to the date of the agreement for the purchase of Shop F, it was likely that she contributed the money towards the purchase of Shop F.

24. As to the Coral Court flat purchased by Open Treasure in 1994/95, the judge rejected as untruthful Kwai’s evidence that he had borrowed $450,000 from his wife’s family and $200,000 from a friend.  He inferred from this that Kwai was concealing the fact that Madam Chan had contributed to the acquisitions of properties by Open Treasure to bolster his case that she was but a nominee in the company.

25. The judge did not believe Kwai’s evidence on how he discovered the Return of Allotment and criticised him for not calling the handling person from the secretarial firm to give evidence.  He then considered the provenance of the Return of Allotment, the board minutes and the Annual Return and stated he had little doubt that Kwai knew and consented to the Allotment and that, more likely than not, he had procured it.

26. Turning to the question of the Declaration of Trust, the judge considered it raised a very difficult factual question.  The judge said there was “a ring of truth” to Fai’s evidence about the ICAC story but, given the need for evidence of sufficient cogency commensurate with the gravity of the allegation, he declined to find that Kwai had cheated Madam Chan into executing the Declaration of Trust or that it had been obtained by Kwai by other improper means.  He considered that his rejection of Kwai’s case that Madam Chan made no financial contribution undermined the foundation of Kwai’s case on the Declaration of Trust.  The judge saw no reason why Madam Chan should be allotted more shares if she was a mere nominee and therefore his finding on the Allotment constituted “another blow” to Kwai’s case on the Declaration of Trust.  The judge also thought that the absence of a transfer document attached to the Declaration of Trust cast doubt on its veracity and on Kwai’s evidence.  Taking the view that Kwai’s counsel had accepted that Kwai had the burden of proof, the judge concluded Kwai had failed to prove the “veracity” of the Declaration of Trust.

27. Accordingly the judge entered judgment against Kwai, dismissing the amended originating summons in its entirety.

The appeal

28. On this appeal, Mr Ambrose Ho SC, and with him Mr Yuen Siu Kei, both of whom did not appear below, challenged the findings made by the judge on both principal issues, contending that the judge’s approach to the Declaration of Trust was flawed, that his findings were plainly wrong and that his conclusions in a number of respects exceeded the permissible bounds of proper inferences, amounting instead to speculation.  In the amended notice of appeal, Kwai sought from this Court an order in terms of his amended originating summons, alternatively an order for a new trial.

The Declaration of Trust

29. The Declaration of Trust was, on the face of it, a document intended to have legal effect and executed by Madam Chan before a witness and duly stamped, as the judge accepted.  There was no dispute below that the signature on it was Madam Chan’s.  On that basis, Madam Chan and her estate after her death must be held to the document unless a recognized legal basis is established for concluding that her apparent consent has been vitiated or that reliance on that document by Kwai falls within some category of unconscionable conduct justifying relief: see Ming Shiu Chung & Others v Ming Shiu Sum & Others (2006) 9 HKCFAR 334 at §84 per Ribeiro PJ, a case which, albeit cited to the judge by Fai’s counsel in support of the Allotment, was unfortunately not relied upon by Kwai’s counsel before the judge. 

30. Fai stated in his affirmations that Madam Chan understood only simple English and would not be able to understand the Declaration of Trust without its having been explained to her in Chinese.  He also said that Madam Chan had told him that there was a signed trust document arranged by Kwai which stated that he held his share in Open Treasure on trust for Madam Chan.  It was not clear, however, from his affirmations what Fai’s case was as to why the Declaration of Trust should not be given effect.

31. In the closing submissions of Fai’s counsel at trial, the judge was invited to infer that the Declaration of Trust was never explained to Madam Chan, who must have signed it without knowing its contents and indeed under a serious misapprehension that it was to the opposite effect, ie that it was a document evidencing a trust over the 1 share in Kwai’s name in her favour, to be shown to the ICAC if necessary.  It appears that Fai was seeking to invoke the equitable jurisdiction of the court to set aside a voluntary disposition on the ground of mistake: see Pitt v Holt [2013] 2 AC 108.

32. On that basis it was incumbent on Fai to prove a relevant and sufficient mistake that Madam Chan was labouring under when she signed the Declaration of Trust.  Asserting that she signed it without knowing its contents was not enough for the estate to repudiate the document.  As Ribeiro PJ said in Ming Shiu Chung at §84, “the law has never regarded it as enough to show that [a person of full age and understanding] signed without knowing its contents for the document to be disavowed”.  See also Bank of China (Hong Kong) Ltd v Fung Chin Kan (2002) 5 HKCFAR 515, §51, per Litton NPJ.

33. It is clear from his judgment that the judge did not find that Madam Chan made the mistake alleged by Fai, since he had expressly declined to uphold the ICAC story.  Nor did the judge find Madam Chan to have been labouring under any other mistake when she signed the Declaration of Trust.  The case for mistake was not made out.  There was no other recognised legal basis put forward by Fai at trial, or found by the judge, to negate the legal effect of the Declaration of Trust. 

34. The judge nevertheless concluded that Kwai had failed to establish the veracity of the Declaration of Trust.  The meaning of the word “veracity” in this context is not altogether clear.  It is true that there was a burden for Kwai to prove the document he relied upon, ie the Declaration of Trust, but once it was shown, or accepted as it was at trial, that it was signed by Madam Chan and not a forged document, it was for the estate to establish proper grounds for denying legal effect to the document. The judge said that Kwai’s counsel accepted the burden of proving the Declaration of Trust (judgment §§79-80).  From the transcript, there is in our view some doubt if counsel was not merely accepting that he had to prove the formal and essential validity of the trust, including the authenticity of the document, the certainty of intention, subject-matter, and objects. 

35. Mr Chang submitted that there was ample evidence to support the judge’s conclusion on the Declaration of Trust which should not be disturbed.  We are unable, with respect, to accept this submission.  The judge did not actually make a positive finding against the Declaration of Trust.  All that the judge concluded was that the burden was on Kwai to prove the Declaration of Trust and that he was “not convinced” as to its veracity. We have already explained why this approach was in our view flawed.  Fai did not file any respondent’s notice to ask this court to find in favour of the ICAC story or to find any other legal basis on which to refuse effect to the Declaration of Trust. 

36. For the above reasons the judge’s conclusion on the Declaration of Trust was not open to him as a matter of law given his rejection of the ICAC story, and cannot therefore be allowed to stand.

37. Mr Ho has raised several further arguments against the judge’s conclusion on the Declaration of Trust.  He submitted that, given the judge accepted the two factual questions of the Allotment and the Declaration of Trust were inter-related, the judge erred in coming to a conclusion against Kwai on the Allotment issue without taking into account the Declaration of Trust, and then viewing his conclusion on the Allotment issue as “another blow” against Kwai’s case on the Declaration of Trust.  Mr Ho also submitted it was erroneous for the judge to determine the question of Madam Chan’s nomineeship independently of the Declaration of Trust, and then to use his rejection of Kwai’s case on nomineeship to undermine the Declaration of Trust.  Mr Ho further submitted that the judge’s rejection of Kwai’s evidence on the Coral Court flat was insufficient basis for inferring that Kwai did not fund the purchase of Flat 908, and that there was no evidence for the judge’s finding that Madam Chan contributed to all the acquisitions made by Open Treasure. 

38. These arguments may be arguable but since we have ordered a re-trial, it is unnecessary and, indeed, undesirable for us to go into the details of any controversial facts and evidence or to express any view on these further matters.

The Allotment

39. As mentioned above, the judge proceeded on the basis that the two issues concerning the Declaration of Trust and the Allotment respectively are inter-connected.  In particular, he accepted that the Declaration of Trust, if established, would support Kwai’s case on the Allotment (see judgment §78).  If, as we have concluded, the judge’s rejection of the Declaration of Trust was flawed, it seems to us to follow that the judge’s basis for assessing the parties’ respective cases on the Allotment would be relevantly undermined.

40. Mr Jonathan Chang, who appeared for the respondent, argued that even if this Court ordered a re-trial it should be a re-trial on the issue of the Declaration of Trust alone since, he submitted, there was ample evidence to support the judge’s conclusion on the Allotment. But with respect that is not the correct question.  The issue relating to the Allotment was not one that was discrete, stood alone and was based solely on documents.  Instead, the Allotment issue turned on the credibility of the witnesses, especially Kwai, the determination of which might well have been affected by the judge’s views and findings on the Declaration of Trust.  The inherent probabilities of the Allotment could also be affected by court’s conclusions on the question whether Madam Chan was holding 1 share on trust for Kwai.  One cannot safely say that whatever the outcome on the issue over the Declaration of Trust, there could have been only one reasonable conclusion on the Allotment issue based on the incontrovertible evidence.

41. For the above reasons we considered that there should be a re-trial of the entire originating summons before a different judge.  Since, as we were informed, the parties had not attempted mediation, we directed the parties, with their consent, to proceed to mediation within 6 weeks and to report to the court on the outcome, whereupon, if a re-trial remains necessary, leave may be given to the parties to fix an appointment before a judge of the Court of First Instance for directions on the further conduct of the matter, including directions on whether points of pleading should be filed.

Costs of the appeal

42. Mr Chang pointed to the fact that the prayer for re-trial was not added to the notice of appeal until early April 2016, but in our view this makes no difference since the respondent did not thereupon concede the appeal on the footing that there be a re-trial.  The appellants had to come to court on this appeal and eventually succeeded in setting aside the judgment below and obtaining an order for a re-trial.  We see no reason why the general rule of costs following the event should not apply.  Accordingly we order that the respondent shall pay the appellants the costs of the appeal, to be taxed if not agreed.