JIAN YU QIANG v. LI SHI LIANG AND OTHERS

HCA459/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.459 OF 2003

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J U D G M E N T

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1. This action concerns the beneficial ownership of the 10,000 issued shares in Kenson Properties Limited (“Kenson”), the 2^nd defendant herein.

The parties

2. The plaintiff is and was at all material times a businessman carrying on business activities in Hong Kong and in the Mainland.

3. The Bank of China, Guangdong Branch (“BOCGD”) was the principal banker of the plaintiff and two of his companies in the Mainland, Jade Peak Property Investment Co. Ltd (“Jade Peak”) and Zhu Hai Yi An Development Company (“Yi An”).

4. All the individual defendants were at all material times BOCGD’s officers.  The 1^st defendant was until 1998 one of the Vice-Presidents.  He has since joined Continental Mariner Investment Co. Ltd (“CMI”), a public listed company in Hong Kong, as its managing director.  The 3^rd defendant is still under BOCGD’s employ.  She used to be the deputy chief of the Investment Business Section, Assets Reservation Department of BOCGD.  The Department was recently cancelled.  At trial, her new posting is yet to be assigned.  Since 15 November 2002, she has been a director and secretary of Kenson.  The 4^th defendant joined BOCGD in 1985 and resigned in November 2003.  He has been a director of Kenson since 28 May 1995.

5. The background facts leading to this action are summarized below.

Kenson

6. Kenson was incorporated on 5 March 1992 by Madam Lau Cheung Mee and Madam Lei Man Rong (“Madam Lau” and “Madam Lei” respectively).  It was set up for the purpose of holding a development project of a piece of land situated at No.2 Guandong Dian, Chaowai Street, Chaoyang District, Beijing (“the Project”).

7. Sometime in 1993, Kenson and Beijing Dianguangyuan Corporation proposed to the Beijing authority to form a joint venture company, later known as Beijing Gaoyi Property Development Company Limited (“Beijing Gaoyi”), for developing the Project.  Such approval was later obtained on or about 30 May 1994.  On 26 July 1994, Beijing Gaoyi was formally incorporated with Kenson holding 70% of its shares.

acquiRING Kenson

8. In 1993, the plaintiff became interested in the Project.  After negotiations with Madam Lau and Madam Lei, he together with his trustee, a Mr Tong Chi Ho (“Mr Tong”), entered into an agreement with them dated 2 December 1993 to buy Kenson’s entire share capital (10,000 shares) for HK$7 million.  The sale was duly completed on 20 January 1994.  Of the 10,000 shares, 9,000 were then registered in the plaintiff’s name.  The remaining 1,000 shares were registered in Mr Tong’s name on trust for the plaintiff.

9. On 7 April 1994, Messrs Ho & Wong, solicitors acting for Madam Lau and Madam Lei issued a certificate to the plaintiff, certifying that the plaintiff had wholly owned Kenson since 7 April 1994.  On the same date, Madam Lau and Madam Lei resigned as directors.  The plaintiff and Mr Tong then took up their vacancies.

Transfer to the 1^st defendant

10. On 31 May 1994, the 1^st defendant entered into an agreement with the plaintiff (“the Agreement”), for the sale and purchase of all the 10,000 shares in Kenson at HK$10,000.  At the same time, the 1^st defendant was appointed as director and secretary of Kenson while Mr Tong resigned as director.

11. On 2 July 1994, the plaintiff transferred the 9,000 shares in Kenson registered under his name to the 1^st defendant.  Mr Tong transferred the 1,000 shares registered under his name to the plaintiff.  The plaintiff then executed a declaration of trust in favour of the 1^st defendant in respect of these 1,000 shares (“the Declaration of Trust”).  Thus on record, the 1^st defendant had since become the beneficial owner of all the 10,000 issued shares in Kenson.

Proceedings in the Mainland

12. Between 1993 and 1995, BOCGD had advanced various loans to Jade Peak and Yi An.  I will describe these loans in greater detail when I come to the defendants’ evidence.

13. In August 1997, upon default, BOCGD commenced legal proceedings in the Mainland for repayment of the loans.  In 1999, the Intermediate People’s Court of the Guangdong Province entered judgment against Yi An in the sum of US$3,600,000 with interest.  The Higher People’s Court of the Guangdong Province entered judgment in favour of BOCGD against Jade Peak in the sum of US$28,071,405.34 with interest and RMB79,074,300 with interest.  In 2001, the Supreme People’s Court dismissed Jade Peak’s appeal.  The judgments have remained unsatisfied to date.

The plaintiff’s claim

14. In January 2003, the plaintiff commenced the present proceedings.  The statement of claim alleges the plaintiff is and was at all material times the beneficial owner of all the 10,000 issued shares in Kenson.  He transferred 9,000 shares to the 1^st defendant with no consideration.  The defendant holds the shares as a bare trustee for his sole benefit.  Despite requests, the 1^st defendant has refused to transfer the shares back to him.

15. The plaintiff claims for a declaration that the beneficial ownership of the 9,000 shares in Kenson held by the 1^st defendant belong to him, specific performance of transfer of those shares to him and various injunctions.

Defence and counterclaim

16. In brief, the defendants’ defence is that the 1^st defendant holds all the shares in Kenson as a trustee for BOCGD, pursuant to an agreement made with the plaintiff and BOCGD at the time whereby the shares were to be provided as security for loans advanced to the plaintiff’s companies.  The Agreement and the Declaration of Trust were made to effectuate the transfer of the shares in Kenson by the plaintiff to the 1^st defendant as BOCGD’s nominee.  The plaintiff has however failed to take any further step to transfer the 1,000 shares.

17. The 1^st defendant counterclaims for specific performance of the transfer of the 1,000 shares held by the plaintiff or alternatively an order for such transfer.

INTERIM Injunction

18. On 13 June 2003, the plaintiff obtained an interim injunction restraining the 1^st defendant from disposing of the 9,000 shares in Kenson registered under his name.  Both the 1^st defendant and BOCGD were given liberty to apply on notice to discharge the injunction.  Neither of them had done so.

The main issue

19. It is common ground that the 1^st defendant holds the shares in Kenson as a trustee.  The only question is : who is the beneficial owner?  Is it the plaintiff or BOCGD?

Two preliminary points

20. At this juncture, I digress to deal with two preliminary points taken by Mr Harris, counsel appearing for the plaintiff.  The first point relates to resulting trust and the second, burden of proof.

A.  Resulting trust

21. Mr Harris submits that the 1^st defendant holds the shares in Kenson on a resulting trust for the plaintiff.  It is the plaintiff’s case that the shares were transferred to the 1^st defendant without any consideration.  While the Agreement provided that the 1^st defendant had paid HK$10,000 to the plaintiff, it is unlikely that the 1^st defendant had made any payment at all.  He said in his oral testimony that he could not recall he had made such payment.  Further, it is highly unlikely that BOCGD would have made any payment for the transfer of the shares.  Thus, Mr Harris submits, the evidence clearly established that the 1^st defendant received the shares without providing any consideration.  In such circumstances, a resulting trust arose.

22. In my view, this point is not open to the plaintiff both as a matter of procedure and substance.

23. On procedure, this point is not pleaded and was not raised until the opening of the trial.  Even then, no corresponding application has been made to amend the statement of claim.  In the absence of a proper plea, the plaintiff is not entitled to rely on it.

24. On substance, no resulting trust can possibly arise on the evidence before me.  Put simply, resulting trusts are founded on the presumed (but rebuttable) intention of the transferor or purchaser of property : Lewin on Trusts, 17^th edn, paragraphs 7-02 at p.181.  Where there is evidence on the parties’ common intention, the concept of resulting trust cannot be invoked : see Re Superyield Holdings Ltd [2000] 2 HKC 90, per Recorder Kotewall, SC at p.111D-F.

25. Here, as will be seen in a moment, the plaintiff alleges in his evidence that he and the 1^st defendant entered into an express agreement pursuant to which the 1^st defendant holds the shares as his trustee.  On the other hand, the 1^st defendant alleges that there was an express agreement between the plaintiff and BOCGD for the transfer of the shares.  Thus both parties contend that there was an express agreement in respect of the transfer of the shares.  The bare trust, on both parties’ case, is thus based on an express intention.  No presumed intention can possibly arise.

B.  Burden of proof

26. Mr Harris next submits that as the 1^st defendant had provided no consideration for the shares, the burden rests on him to prove he holds the shares on trust for BOCGD, failing which, the plaintiff is entitled to judgment.  In support, he seeks to rely on Seldon v. Davision [1968] 1 WLR 1083, Mak Ka Hing v. Pang Ming Chung, CACV215/2002.

27. Mr Harris rests his submission on the basis that it is the 1^st defendant’s case that he had not provided consideration for the shares.  With respect, Mr Harris has completely overlooked the tenor of the defendants’ case, which is this.  The 1^st defendant was at all material times a nominee of BOCGD.  BOCGD entered into the express agreement with the plaintiff for the transfer of the shares as security for loans advanced to the plaintiff’s companies.  Consideration had been provided, not by the 1^st defendant but by his principal, BOCGD.

28. Further, the two authorities cited by Mr Harris, when properly understood, do not assist him.  They support the proposition that a defendant bears the burden of proving that he does not need to repay if (a) he admits that the plaintiff has made the payment and (b) there is no suggestion that the money was paid to discharge an existing debt or in return for cash or anything of that sort.  This proposition will be applicable to the present case only if there is no suggestion that consideration had been provided for the transfer of the shares.  But as I have just demonstrated, the defendants’ case is quite to the contrary.

29. In El Vince Ltd v. Wu Wen Sheng [2005] 1 HKC 111, the Court of Appeal held that when there is an allegation that the payment by the plaintiff (admitted by the defendant) was a repayment of a loan, the burden of proof remains with the plaintiff : per Tang JA at paras.9-12.  Applying the same principle by analogy, the burden rests with the plaintiff to prove his beneficial ownership in the shares as alleged.

30. That said, the defendants still bear the burden to prove their case that BOCGD is the beneficial owner of the shares.  As I understand Mr Yuen, SC, counsel appearing for the defendants, he does not contend otherwise.

The plaintiff’s evidence

31. I now come to the plaintiff’s evidence.

32. In his first witness statement filed on 17 December 2003, which has been adopted as his evidence in chief, the plaintiff had this to say :

“Share transfer to the 1^st Defendant

15  On 2^nd July 1994, I transferred 9,000 shares of Kenson to the 1^st Defendant for no consideration.  It was the intention and it was expressly agreed that the 1^st Defendant would hold these 9,000 shares in Kenson on my behalf.  The 1^st Defendant was thus to hold these shares for me as the sole beneficial owner.  It was always intended that the transfer would take place as soon as the purchase was done.  I did this transfer for reasons explained hereinafter.  At no stage did the 1^st Defendant ever provide any consideration or any benefits for the purchase of these shares.  We had agreed that he would transfer these shares back under my name when I so required upon my request.

16  At the same time, I instructed Mr Tong Chi Ho (唐志豪), who was then holding the remaining 1,000 shares of Kenson to transfer the same Shares to me.  The 1,000 Shares were then transferred by Mr Tong Chi Ho (唐志豪) to me on 2^nd July 1994.  After the then date of 2^nd July 1994, I have lost contact with Mr Tong Chi Ho (唐志豪)and I have not been doing business with Mr Tong Chi Ho (唐志豪)since.

17  In the year of 1992, I and the 1^st Defendant got to know each other.  At that time, I had been doing business in Hong Kong and in the Guangdong Province.  All along, I used the Bank of China (where the 1^st Defendant has been working) as my principal bankers.  In accordance with the then banking laws and regulations in China, the Bank of China had to regularly examine and investigate the credit status, profitability, mode of operation, the ability of the person-in-charge else etc, of their major customers.  The 1^st Defendant had since the year of 1992 been the deputy executive branch manager of the Guangdong branch of Bank of China in charge of their business loans.  His job duties included contacting with persons in charge-of every one of their major customer.  Soon after the 1^st Defendant had taken his then post, we got to know and got along with each other extremely well.  I and the 1^st Defendant had been to his and my office to meet each other and we have often got together having drinks, meals and even chatting about very personal topics.  There was nearly nothing we did not talk about and we had since become very close friends.  I had shown great admiration to the 1^st Defendant’s ability and his long years of professional banking experience.  My trust for him was great especially as he was holding such a senior post in the Bank.

18  In the year of 1993, I began to consider purchasing Kenson.  At that time, I faced a difficult problem: I had all along been in Hong Kong and in Guangdong of China doing business.  Moreover I did not know people there and my mandarin was not too fluent.  At that time, the law in China was far from being as developed as it is now.  Business transactions were mostly guided by the government and ‘guan xi’ (關係).  If there had been a lack of guan-xi, a lot of governmental approval procedures would not be approved, even after a long lapse of time.  Should there be a lack of direct guan-xi, then a lot of things would be difficult to perform.  In order for the Beijing Land Project to move forward, I had wanted all the necessary governmental approvals to be obtained in a short span of time.  I sought for the advice of the 1^st defendant and understood that he knew a lot of prominent people in Beijing.  However, the 1^st Defendant told me that although he had a lot of influential friends, he could not guarantee that his connections would be able to assist me in Beijing.

19  Towards the end of the year of 1993, after careful thoughts, I put forward a rather bold proposal to the 1^st Defendant:

(1)	All the capital of the Beijing Land Project would be paid by me;
(2)	Most of the shares of Kenson would be held in the name of the 1st Defendant;
(3)	I would be known as the business partner of the 1st Defendant and would run around Beijing to administer various procedures and to organize the Beijing Land Project; in other words I would be the frontline and ‘hands on’ person;
(4)	The 1st Defendant would provide his connections (‘guan-xi’) and knowledge of local affairs to assist me;
(5)	After the completing of the Beijing Land Project, 20% of its net profit will be distributed to the 1st Defendant or his affiliated organization.

The 1^st Defendant agreed to my proposal.  It was then I accelerated my take-over of Kenson in Hong Kong.

20  Since the 1^st Defendant was at that time occupying a ‘public’ post (the Bank of China was then considered as a public employer), he could never have the HK7,000,000.00 to take-over that company or even a fraction of that amount.  In addition, taking into account his status in the Bank and the fact that he was quite risk adverse, the 1^st Defendant would never have invested even if he had the money Moreover, I believe that it would have been illegal and a breach of his employment of contract if he had invested in that Company.  In any event the Bank of China, his employer would not have allowed him.  Both of us therefore decided after discussion that I would use my name to purchase all the shares of Kenson in my own name first.  Afterwards, I would transfer most of the shares to him.  This would, on the one hand, enable the 1^st Defendant to claim that the Beijing Land Project was belonging to him in Substance, with both of us being business partners so that it would be conducive to any lobbying tasks to be done.  This would also not bring about any trouble to the 1^st Defendant who was occupying a senior post at the Bank of China.

21  The reason why I had, on the one hand, not asked the 1^st Defendant to pay for anything and, at the same time, not asking him to sign any written trust agreement are as follows :-

(1)	If there were a written agreement stating that I had just used HK7,000,000.00 to buy the shares of a company and then subsequently make a gift of the same to the 1st Defendant, this would, according to my understanding of Chinese Law amount to the 1st Defendant receiving a bribe and thus commit a criminal offence;
(2)	As the 1st Defendant had all along been in such a senior public post and because of my close friendship with him, I had great trust on his then personal integrity and ability.  I never thought he would do something like what he did i.e. refuse to transfer back to me my shares.
(3)	The 1st Defendant in any event did not have that kind of money.  The 1st Defendant had been a public servant with the Chinese government for thirty-four (34) years and his salary in aggregate was not sufficient to pay for the take-over price of Kenson of HK$7,000,000.00, let alone be able to fund the necessary working capital for the Beijing Land Project in the future.  How could he have afforded to buy the shares in Kenson?
(4)	At that time and even now, I am of the view that the 1st Defendant would not be able to produce any evidence of his payment or any document of gift.  Therefore, even though at that time, I took a certain degree of risk, I had decided after exercising my reasonable judgement that there was no need to sign any written trust document.”

33. On the Declaration of Trust, the plaintiff said in paragraph 46 of the same witness statement that he did not recall when, where, how with whom and under what circumstances he had signed it.

34. The plaintiff further made the point that there were no contemporaneous documents showing that the 1^st defendant held the shares on behalf of BOCGD.  He also alleged that BOCGD denied the existence of such security in the Mainland Proceedings.

THE DEFENDANTS’ EVIDENCE

35. The defendants’ evidence is summarised below.

A.  The 1^st defendant’s evidence

36. On his relationship with the plaintiff, the 1^st defendant denied that he had a close personal relationship with him as alleged.  He came to know the plaintiff in his official capacity and the contacts between the two of them were business in nature.  He however admitted that the plaintiff did occasionally entertain him at the latter’s expense.

37. On his alleged connection, the 1^st defendant also denied that in the early 1990s, he was well connected as alleged.  In particular, he denied that at that time, he knew certain influential individuals including the two executive directors of CMI, Mr Wang Jun and Mr He Ping, and Madam Deng Rong, the daughter of the late Deng Xiaoping.  Under cross-examination, he explained that it was pursuant to a swapping exercise of personnel between state-owned enterprises in about 1999 that he left BOCGD and joined CMI.

38. The 1^st defendant then described how BOCGD dealt with loan applications.  In brief, those matters would be dealt with at the departmental level.  Reports would then be made to the Presidents’ Office  where major decisions would be made collectively by the president and the vice-presidents.

39. The 1^st defendant then set out the financial dealings between BOCGD and the plaintiffs’ companies that led to the agreement for the transfer of the shares in Kenson to BOCGD as security.

40. On 27 February 1993, a loan of US$20 million was granted to Jade Peak million upon the security of Zhu Hai Yu Hua Yuan (“Royal Garden”) for the term of one year (“the US$20 Million Loan”).  Jade Peak guaranteed that the loan was to be applied in connection with the development of the mortgaged property.

41. On 1 March 1993, a loan of RMB10 million was granted to Yi An for the term of one year.

42. In or about October or November 1993, the plaintiff applied for a further loan.  By that time, the land at the Royal Garden project had already been charged.  BOCGD therefore assigned Mr Jin Chong Min (“Mr Jin”), a department head, to contact the plaintiff for further information.  Mr Jin later reported to the President’s Office that the plaintiff needed about US$5 million in connection with the Project.  While the application was still under process, the plaintiff issued a guarantee letter dated 3 March 1993, guaranteeing that, among other things, the land use certificate of the Project would be deposited with BOCGD once it became available.  Eventually on 27 November 1993, a loan of US$5 million was granted to Jade Peak for the purposes of developing the Project upon the security of the right to use the land at the West Side of Yingbin Avenue, Gongbei, Zhuhai.

43. In December 1993, the plaintiff applied for a loan of RMB19 million for construction costs of the Royal Garden Project.  On 25 December 1993, upon consent of the Presidents’ Office, a loan of RMB19 million was granted to Jade Peak for a term of three months upon the security of the Yuhe Qingjing project in Zhuhai, the existing office building and the restaurant of Royal Garden (“the RMB19 Million Loan”).

44. On 21 January 1994, a loan of US$2 million was granted to Jade Peak for a term of three months, upon the security of the land of the Royal Garden Project.

45. In early March 1994, both the US$20 Million Loan and the RMB19 Million Loan became due but no repayment was made.  Upon negotiations, the due date for the US$20 Million Loan was extended to 1 March 1995.

46. In early April 1994, the plaintiff asked BOCGD to extend the repayment dates for the loans made to Jade Peak.  He also hoped that BOCGD could fully support the Project.  The profits generated from the Project, after deducting costs, could be used to set off all the outstanding debts.  The plaintiff was also willing to share the balance of the profits with BOCGD.  He was willing to cause his shares in Kenson to be transferred to BOCGD or its nominee so as to protect BOCGD’s interest and to enable BOCGD to fully monitor and control the Project and the related fund raising arrangements.

47. Though not touched upon by the 1^st defendant in his witness statements, it is apparent from the documentary evidence that on 8 April 1993, two loan applications were made.  One was made by the plaintiff together with Jade Peak for US$11 million upon mortgage of the Royal Garden.  The other was by the plaintiff alone for US$20 million to be secured by the shares in Kenson.  Both applications were refused by BOCGD.

48. According to the 1^st defendant, the Presidents’ Office duly considered the plaintiff’s proposal.  It was then decided to take over the shares in Kenson in order to gain the right to monitor and control the Project and to protect BOCGD’s interest.

49. BOCGD then reached an agreement with the plaintiff in these terms :

(1)	The plaintiff would transfer all the issued share capital in Kenson to BOCGD or its nominee as security for all indebtedness owed or to be owed by Jade Peak and any other company run by the plaintiff and for advances to be made for the Project.
(2)	BOCGD would provide loans in relation to the Project as may be required.
(3)	After completion of the Project, the income and profits generated would be first applied to repay all the loans and interests BOCGD had advanced to it.
(4)	The balance of the income and profit would then be used to repay the loans due form Jade Peak and the plaintiff’s companies in 1994 or thereafter.
(5)	If need be, BOCGD could sell the Project for the purpose of repayment.

50. On 12 April 1994, BOCGD advanced a loan of US$11 million to Jade Peak by way of three cashier orders upon the security of the land certificate of the Project and Kenson as guarantor.  BOCGD requested the plaintiff to forward cashier orders to the Beijing land authority as payment for the land fees for the Project.

51. After the requisite approval had been obtained for the Project, the parties on 30 May 1994 proceeded with the transfer of the shares in Kenson.  The plaintiff’s solicitors, Messrs Ho & Wong, prepared the Agreement.  On 31 May 1994, the 1^st defendant was sent by the Presidents’ Office to Hong Kong to sign the Agreement.  The 1^st defendant was asked to do so because at that time, he was one of the few vice presidents who could travel between Hong Kong and the Mainland.

52. In his oral testimony, the 1^st defendant said that he had not received any draft of the Agreement for consideration before he came to Hong Kong.  BOCGD did not see the need to instruct a separate lawyer to prepare the Agreement as they considered the transfer a sufficient protection.

53. At that time, BOCGD had a window company in Hong Kong called Shum Ming Enterprises Co. Ltd (“Shum Ming”).  The 4^th defendant was then Shum Ming’s general manager.  The 1^st defendant explained that BOCGD did not consider acquiring the shares in Kenson or Shum Ming because they were not thinking of going into an investment or joint venture with the plaintiff.  The shares were just security.

54. In June, BOCGD discovered that the plaintiff had not paid the three cashier orders referred to in paragraph 50 above to the Beijing land authority.  Because of urgency, BOCGD paid RMB38,060,000 to the authority direct lest the land might be resumed.

55. On about 2 July 1994, the 1^st defendant came to Hong Kong again to complete the transfer of the shares in Kenson.  He went to the office of Messrs Ho & Wong to sign the instrument of transfer and the sold and bought notes for the 9,000 shares transferred by the plaintiff.  The plaintiff also executed the Declaration of Trust.  The original share certificates for the shares held by the plaintiff and Mr Tong were all cancelled.  Kenson then issued share certificates for 9,000 shares in the name of the 1^st defendant and 1,000 in the name of the plaintiff.  Since then, these new shares certificates have been kept with BOCGD to date.

56. After the transfer of the shares in Kenson had been completed, BOCGD made further loans to Jade Peak, Yi An and Kenson including :

22/8/94	To Jade Peak for RMB10 million in relation to the Royal Garden Project.
1/9/94	To Kenson for CHF27,604,000 for a term of one year in relation to the Project.
8/9/94	To Yi An for US$3.6 million for a term from 9 September 1994 to 30 January 1995.
12/9/94	To Jade Peak for US$1,071,405.34 for a term from 13 September 1994 to 13 September 1995.
10/10/94 to	BOCGD to Jade Peak for a total of RMB34,830,000.
7/4/95

57. Until early 1996, a total of about RMB949,518,000 had been advanced by BOCGD to the companies operated by the plaintiff.  Further, up until end of 2000, BOCGD had advanced to Beijing Gaoyi for the Project a total of HK$306,772,340.67 (after deducting partial repayment).

58. On 14 October 1997, the plaintiff wrote a fax letter to BOCGD (“the Letter”), stating that he had made available US$90 million and would go to BOCGD’s office on or before 20 October 1997 to discuss the matters about repayment of loans and recovering the shares in Kenson.  But the plaintiff failed to turn up as promised.

59. By the end of 1997, BOCGD was unable to contact the plaintiff.  From the operations of Kenson and Beijing Gaoyi, BOCGD began to suspect that he might have breached his duties as a director.  Accordingly, he was removed as Kenson’s director by special resolution dated 15 April 1998.

60. Before the 1^st defendant left BOCGD’s employ and in early August 1998, BOCGD instructed Messrs Robert CC Ip & Co., a law firm in Hong Kong to prepare an instrument of transfer for the 9,000 shares in Kenson to another vice-president of BOCGD, Mr Zhang Jian You and a resignation notice as director of Kenson.  The 1^st defendant duly signed those documents.  BOCGD also appointed Mr Zhang to be Kenson’s director with effect from 10 August 1998.

61. The transfer of the 9,000 shares was not completed because the instrument of transfer was not stamped.  However, the 1^st defendant is always willing to transfer the shares as directed by BOCGD.

B.  The 3^rd defendant’s evidence

62. The 3^rd defendant’s evidence is summarised below.

63. In the latter part of 1998, BOCGD instructed her to handle Kenson’s affairs.  She confirmed the 1^st defendant’s evidence on the proposed transfer of the 9,000 shares by him to Mr Zhang.  Messrs Robert CC Ip & Co. requested a financial statement of Kenson for the purpose of stamping the instrument of transfer.  However, the account of Beijing Gaoyi, while under the plaintiff’s management, was not clear.  No financial statement could be prepared.  It was not possible to stamp the instrument.  The transfer of the 9,000 shares was therefore suspended.

64. Since 1997, BOCGD had sold the shares in Beijing Gaoyi to Henderson Group for US$95 million.  In her cross-examination, the 3^rd defendant had been asked questions if the debts due from the plaintiff’s companies had been thereby discharged.  She said it was not the case.  She also explained, with reference to a schedule prepared by her, the outstanding amounts and confirmed them to be those as stated in the defence and counterclaim and repeated in the 1^st defendant’s evidence : see paragraph 57 above.

C.  The 4^th defendant’s evidence

65. In essence, the 4^th defendant said that he did not have any personal knowledge of the matters pertaining to the transfer of the shares to the 1^st defendant.  However, he maintained that but for his status as an employee of BOCGD, the 1^st defendant would not have asked him and he would not have agreed to become a director of Kenson in May 1995.

ASSESSING The EVIDENCE

66. This case turns essentially on the credibility of the witnesses and the veracity of the parties’ evidence.  I have carefully considered all the evidence with the benefit of counsel’s able submissions.  For the purpose of this judgment, I do not propose to deal with every single point taken by counsel, although I must stress that I have already considered them all.  I believe it will be sufficient to just deal with the main points arising from their submissions.

THE PLAINTIFF’S CASE UNSATISFACTORY

67. In my view, the plaintiff’s evidence is highly unsatisfactory in a number of material aspects.

A.  Why go public?

68. It is common ground that the scheme alleged by the plaintiff would constitute a serious breach of the 1^st defendant’s employment with BOCGD, a state-owned enterprise.  Common sense dictates that such a scheme must be kept in secret as far as possible.  Otherwise, the 1^st defendant would be readily exposed.  It might jeopardize not only his position but also the progress of the Project.  Both the plaintiff and the 1^st defendant were aware of the risk.  And according to the plaintiff, the 1^st defendant was quite “risk adverse”.  In the circumstances, I fail to see why the plaintiff and the 1^st defendant would agree to and in fact did register the 9,000 shares in the 1^st defendant’s name.  Why would they take such a huge risk of revealing in public record the 1^st defendant’s involvement in Kenson?

B.  Risk not addressed

69. To address the risk of exposure, the plaintiff alleged that he and the 1^st defendant agreed that the plaintiff would first purchase all the shares in his name and then transferred most of the shares to the 1^st defendant.  But the fact remains that 9,000 shares were still registered in the 1^st defendant’s name.  It does not address the exposure risk at all.  The plaintiff’s purported explanation does not make any sense.

C.  Scheme self-contradictory

70. The scheme is self-contradictory.  As observed above, it should be kept secret.  But if that were the case, it would defeat the very purpose of putting up the 1^st defendant as the “owner” of Kenson.  If it were not kept secret, it would expose the 1^st defendant and might jeopardize the Project.

D.  All or 9,000 shares?

71. The tenor of the plaintiff’s evidence in his first witness statement is that only 9,000 shares were to be transferred to the 1^st defendant.  As to the balance of the 1,000 shares, he could not recall when, why and how the Declaration of Trust was executed.  He must have implied that he is both the registered and beneficial owner of the 1,000 shares.  In his oral testimony, the plaintiff alleged that the parties had agreed to transfer all the 10,000 shares to the 1^st defendant to be held by him on trust.  This is of course inconsistent with his witness statement.

72. Mr Yuen submits that if the plaintiff’s story were true, it would not be necessary to put up the 1^st defendant as the sole owner of Kenson.  It would be sufficient if he looked like a co-owner with the plaintiff.  The change of his evidence from 9,000 shares to all shares is just an attempt by the plaintiff to explain in the box why he had executed the Declaration of Trust.  I agree entirely.

E.  No need for the Declaration of Trust

73. On the evidence before me, there is simply no credible reason at all why the plaintiff had to execute the Declaration of Trust.  If his version of the events were true, the plaintiff should have asked the 1^st defendant to execute a declaration of trust instead.

F.  No declaration of trust by the 1^st defendant

74. The plaintiff did not ask the 1^st defendant to execute any declaration of trust for the 9,000 shares in his favour.  His explanations can be found in paragraph 21 of his witness statement (quoted in paragraph 32 above).  I shall not repeat them here.  Suffice to say that I have considered them carefully.  They are just lame explanations.  For example, a declaration of trust would not turn the transfer of the shares into a gift as alleged.  By any token, investment in Kenson (and through Kenson in the Project) was significant.  It is extremely surprising indeed that the plaintiff, an experienced businessman, would take such a huge risk by relying purely on his trust in the 1^st defendant’s “personal integrity and ability”.  If the defendant had any integrity, he should not have agreed to the plaintiff’s suggestion in the first place.  The plaintiff ought to have done something more to protect his interest.

INCONSISTENT WITH SUBSEQUENT CONDUCT

75. Further, the plaintiff’s case does not sit well with the parties’ subsequent conduct.

A.  Appointing other BOCGD’s staff as Kenson’s directors

76. As noted above, the 4^th defendant was appointed as Kenson’s director in May 1995.  Under cross-examination, the plaintiff admitted that before the appointment, the 1^st defendant called him and he raised no objection.  This is telling.  First, why would the 1^st defendant appoint the 4^th defendant, another employee of BOCGD to Kenson’s board?  That would definitely expose him.  Second, the 1^st defendant was not supposed to take part in Kenson’s management.  Why did he need to appoint a further director?  Third, why would the plaintiff agree to the appointment?  The 1^st and 4^th defendant could, if they so wished, take over the daily operations and management of Kenson.  That would not serve the plaintiff’s interest at all.

77. Other than the 4^th defendant, BOCGD had appointed other staff members, namely, Mr Zhang and the 3^rd defendant, to Kenson’s board since the shares had been transferred to the 1^st defendant.  In my view, their appointments indicated that BOCGD was taking steps to take over Kensons’ management.  It is consistent with the defendant’s case but not the plaintiff’s.

B.  BOCGD’s knowledge of the transfer

78. BOCGD was aware of the fact that Kenson’s shares were registered in the 1^st defendant’s name.  In an internal report dated 16 April 1996, it was clearly stated that the 1^st defendant held 99% of the shares in Kenson and that the plaintiff held 1% on behalf of the 1^st defendant.  The percentages were wrong.  But no doubt BOCGD knew that the 1^st defendant held a majority of the shares in Kenson and the plaintiff held the balance on trust for him.

79. In the minutes of a meeting held on 14 November 1996, where the plaintiff attended with BOCGD’s personnel, it was clearly stated that BOCGD was both a creditor and boss of Kenson.  This showed that BOCGD regarded itself as the owner of Kenson.  This was possible only if the 1^st defendant was holding the shares in Kenson for BOCGD.  In his oral testimony, the plaintiff said that the minutes did not accurately reflected what was discussed at the meeting.  But he had not raised it with BOCGD because it was not a big problem.  I do not find his explanation satisfactory.  If his story were true, it would be a big problem to say that BOCGD was Kenson’s owner.

C.  Depositing the share certificates with BOCGD

80. It is not in dispute that all the share certificates of Kenson’s shares have been deposited with BOCGD.  If the 1^st defendant is a bare trustee for the plaintiff, it defies common sense that the plaintiff would agree to give the certificates to BOCGD.

81. The plaintiff alleged that the 1^st defendant initially had dealings with the plaintiff which he wanted to hide from BOCGD.  The original intention was that the Project would be sold quickly.  When that was not possible and the plaintiff’s companied began to default on the loans, the 1^st defendant must have realized that he was in a delicate position and hence revealed to some of his colleagues that he held the shares in Kenson as security for BOCGD.  BOCGD then somehow took over the shares.

82. I am unable to accept the above allegations.  Given the fact that it would be a serious breach of his employment, there is no reason why the 1^st defendant would disclose his involvement in Kenson to his colleagues at BOCGD.  This would only expose his wrongful acts.  He could have simply transferred the shares back to the plaintiff.  Alternatively, the plaintiff could have asked the 1^st defendant to do so.  In this regard, the plaintiff said in his oral testimony that he did call the 1^st defendant once in 1997 after the Mainland Proceedings had been commenced.  But apparently he was content to accept the 1^st defendant’s advice to wait for the outcome of the Mainland Proceedings.  This is hardly convincing.  The plaintiff ought to have pressed for the return of the shares, failing which, he should have taken further actions, including legal proceedings.

83. The above allegations are in fact an attack on BOCGD’s integrity and conduct.  When they became aware of the 1^st defendant’s wrongful act, they did not take any action against him.  Instead, they seized the opportunity to take advantage of the plaintiff by taking over the shares.  There is simply no evidence before me to support, directly or by way of inference, such a serious attack on BOCGD.

D.  Submissions in the Mainland Proceedings

84. In the submissions advanced on behalf of Jade Peak and Yi An in the Mainland Proceedings, it was admitted that BOCGD had Kenson’s shares as security for the subject loans.

85. To counter the effect of such submissions, the plaintiff took two points.  He first tried to distance himself from such submissions by alleging that he disagreed with them.  This I have no hesitation to reject.  No reasonable legal advisers would have advanced such submissions without first taking proper instructions from their clients.  And the instructions, most likely than not, must have come from the person having control of the companies, that is, the plaintiff himself.  In my view, the plaintiff just changed his story when it suited him most.

86. The plaintiff next contended that in the Mainland Proceedings, BOCGD denied the existence of such security.  This is incorrect.  On a proper reading of the Mainland judgments, BOCGD was only contending that that the claims for the debts against Jade Peak and Yi An were separate from the security over the Kenson shares.  BOCGD did not deny the existence of the security.

E.  Enforcing the security

87. Since 1997, BOCGD had taken steps to enforce the security over the Kenson shares by selling the shares in Beijing Gaoyi to the Henderson group.  BOCGD was no doubt asserting and enforcing its rights as a secured creditor.

F.  The plaintiff’s own proposal

88. By the Letter, the plaintiff proposed to BOCGD to recover the shares in Kenson by paying US$90 million on 20 October 1997.  If his story were true, why would he make such a proposal?  He explained in his oral testimony that once BOCGD sued Jade Peak (in August 1997), he assumed that BOCGD, who by that time had been told by the 1^st defendant that he held the Kenson shares, would take control of the Project.  There was little he could do about it.  This explanation is hardly convincing.  And I have no hesitation to reject it.

Rejecting the plaintiff’s case

89. For the above reasons, I do not find the plaintiff a reliable or credible witness.  Accordingly, I reject his version of the events.

Attacks on the defendant’s CASE

90. I now turn to the defendant’s evidence.  Mr Harris attacks their evidence on several fronts. 

A.  The 1^st defendant’s connection

91. Mr Harris submits that the 1^st defendant was probably well connected with various influential figures as alleged by the plaintiff.  I accept the 1^st defendant’s evidence in this regard and find no substance in the plaintiff’s allegation.

B.      Lack of documents

92. Mr Harris complains that there is an extraordinary lack of contemporaneous documents evidencing the defendants’ version.  There is no record showing (1) the agreement between BOCGD and the plaintiff, and (2) BOCGD appointing the 1^st defendant to hold the shares as its nominee.  Mr Harris also queries why (1) no formal agreement was executed to effectuate the transfer of the Kenson shares as security; and (2) no declaration of trust had been executed by the 1^st defendant.

93. The absence of the above documents appears to be abnormal by usual banking practice.  However, it must be considered in the context.  As I have pointed above, there were internal documents of BOCGD supporting the defendant’s version : see paragraphs 78 and 79 above.  Even the plaintiff’s own documentary evidence, namely, the Letter and the submissions made on behalf of Jade Peak and Yi An which contained the admission that the shares in Kenson had been pledged to BOCGD, supports the defendants’ case.  So does the subsequent conduct of the parties.  In the circumstances, the absence of the above documents, though somewhat unusual, is of little significance.

C.  Kenson shares not referred to in loan documents

94. Mr Harris submits that all the loans to Jade Peak and Yi An were all documented.  But the fact that Kenson shares were held as security was not mentioned at all.  Quite to the contrary, the security for the loan made in April 1994 (US$11 million) was the land certificate of the Project.  Mr Harris submits that the Kenson shares as security flies in the face of BOCGD’s documents.

95. As I understand the tenor of the 1^st defendant’s evidence, BOCGD took the Kenson shares as additional security of the loans advanced to the plaintiff’s companies.  And the way in which the security would be given was quite independent of the loans documentation.  Accordingly, it is not necessary to refer to the Kenson shares as security in any of the loan documents.

D.  Why not some other form of security?

96. Mr Harries queries why the alleged security took such a form as alleged by the 1^st defendant.  A share mortgage could be effected instead.  It is, in my view, a mere commercial decision by BOCGD.  Although it may appear somewhat unusual, nothing adverse can be made out of it.

E.  Why appointing the 1^st defendant?

97. Mr Harris submits that there is no convincing reason why Shun Ming could not be used as BOCGD’s trustee.  Shun Ming had a presence in Hong Kong.  Mr Xu, its general manager, was also present in Hong Kong at the time.  No reason had been offered as to why it was the 1^st defendant who was chosen to be the trustee.  The explanation that the 1^st defendant was chosen because he could travel to Hong Kong to execute the necessary documents is unconvincing.

98. In my view, it is again a commercial decision made by BOCGD at the time.  Mr Harris’s criticism is unwarranted.

F.  The Agreement prepared by the plaintiff’s solicitors

99. Mr Harris submits that it is unsatisfactory that BOCGD would simply leave the preparation of the Agreement to the plaintiff’s solicitors.  Again, it was a commercial decision of BOCGD.  I also accept the 1^st defendant’s evidence that they considered that the transfer of the shares in Kenson to be a sufficient protection.  It was therefore not necessary to instruct BOCGD’s own lawyers to prepare the Agreement.

G.  BOCGD taking no part in these proceedings

100. Mr Harris submits that BOCGD did not take any step to discharge the injunction or to take part in these proceedings.  Such conduct is inconsistent with its stance.

101. Mr Yuen queries if BOCGD could successfully discharged the injunction when the court would mostly likely preserve the status quo until trial.  I agree.  Mr Yun also submits that it would be a waste of costs for BOCGD to join in these proceedings.  Their stance is made known to the parties and the court.  All the witnesses have been authorized by BOCGD to given evidence on its behalf.  The conduct of the proceedings would just be the same.  Again, I agree.

H.  Enforcement of the security

102. Mr Harris submits that BOCGD has been coy in providing the information of the sale of Beijing Gaoyi to the Henderson.  He said that the plaintiff was only able to find out the sale much later.  This is factually incorrect.  According to the Letter, the plaintiff was by October 1997 aware of the sale but had apparently taken no step to stop BOCGD from doing so.

I.  Any loan outstanding?

103. Mr Harris finally submits that the sale proceeds arising from the sale to Henderson group should be enough to discharge all the debts owed by the plaintiffs’ companies.  Thus, BOCGD is not entitled to retain the shares.  I note that the amount of indebtedness due from the plaintiff’s companies has been put in issue by the pleadings.  But it is not the plaintiff’s pleaded case that the indebtedness had been discharged so that, even on the defendants’ case, BOCGD could no longer retain the shares in Kenson.  In the absence of a proper plea, this point is not open to the plaintiff. 

104. More importantly, the 3^rd defendant has explained in her oral testimony that this was simply not the case.  Mr Harris complains that BOCGD has failed to disclose the necessary documents in support of the contention that the loans are outstanding as pleaded.  The schedule relied on by the 3^rd defendant is self-serving.  Adverse inferences should therefore be drawn against the defendants and BOCGD.  I note these points but on the evidence before me, there is nothing to contradict the 3^rd defendant, who is obviously in a position to give evidence on these matters, or her schedule.  She has not been shaken under cross-examination either.  I accept her evidence.  This complaint must fail.

Accepting the defendant’s evidence

105. I have carefully considered and evaluated the defendants’ evidence.  I find each of them credible and reliable.  I note that there are certain inconsistencies in the 1^st defendant’s evidence.  But they are minor and do not affect his overall credibility.  On a balance of probabilities, I accept their version of the events.  It is well supported by the available documentary evidence and the parties’ subsequent conduct. 

Conclusion

106. For the above reasons, I find that BOCGD is the beneficial owner of all the shares in Kenson.

107. I will therefore dismiss the plaintiff’s claim.  I will enter judgment in favour of the 1^st defendant’s counterclaim and order that the plaintiff do transfer the 1,000 shares in Kenson registered in his name to the 1^st defendant or any person as he may direct.

108. I see no reason why costs should not follow the event.  I will therefore make an order nisi that the plaintiff do pay the defendants the costs of the entire action, to be taxed if not agreed.