SPEED SOURCING LTD AND OTHERS v. RAINBOW STATE INVESTMENTS LTD AND OTHERS

HCA 2298/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2298 OF 2013

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D E C I S I O N

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Introduction

1. There are two adjourned summonses before the court: (1) the plaintiffs’ summons (issued on 3 January 2014 and subsequently amended pursuant to the order of Au-Yeung J made on 10 January 2014) which seeks injunction orders against the defendants (“the Injunctions Summons”); and (2) the defendants’ summons (issued on 9 January 2014) which seeks an order to strike out the plaintiffs’ claims against the 2^nd and 3^rd defendants (“the Striking-out Summons”).

2. The orders sought by the plaintiffs in the Injunctions Summons concern three separate and distinct subject matters, namely, (1) the Po Shan Road Property; (2) the shares in the 3^rd defendant (“Nice Gain”) and (3) the Workshops.

3. The part of the plaintiffs’ application in respect of the Po Shan Road Property has never been opposed by the defendants (and as a result of an order made by consent when the matter last came before the court on 10 January 2014, the only outstanding matter in respect of this part of the Injunctions Summons is costs).  Hence, the only remaining live issues on the Injunctions Summons are: (a) whether an injunction should be granted to restrain the 2^nd defendant (“Colonial Charm”) from dealing with the shares of Nice Gain and (b) whether an injunction should be granted to restrain Nice Gain from dealing with the Workshops.

4. In this regard, the order sought by the plaintiffs under the Injunctions Summons is to restrain Colonial Charm and Nice Gain from:

(1) disposing of or dealing with or diminishing the value of the following properties of Nice Gain, namely:

(i) Workshop 7 on 3/F, Hong Leong Plaza, No 33 Lok Yip Road, Fanling, New Territories;

(ii) Workshop 8 on 3/F, Hong Leong Plaza, No 33 Lok Yip Road, Fanling, New Territories

(together, “the Workshops”); and

(2) transferring, or registering the transfer of, the shares in Nice Gain which were transferred by the 3^rd plaintiff (“Shirley Wong”) to Colonial Charm on 31 August 2004 (“the Nice Gain Shares”) to any person.

5. The Injunctions Summons and the Striking-out Summons are inter-related in that it is the defendants’ case that the plaintiffs’ pleaded causes of action against the 2^nd and 3^rd defendants are bound to fail and for that reason, the court should not only refuse to grant the injunctions sought by the plaintiffs in respect of the Nice Gain Shares and the Workshops but should strike out the claims against the 2^nd and 3^rd defendants.

Background  

6. Shirley Wong is a businesswoman who has been working in the textiles industry since 1986. She bought the Speed Sourcing Group, of which the 1^st plaintiff is part, which manufactures and designs products for the American ladies-wear market. The Speed Sourcing Group is a successful business, and had revenues of US$40 million in 2012.

7. Shirley Lam was responsible for the management and sales of her companies, but she was not tax savvy or familiar with technical corporate matters.  Instead, she hired Kurtis Lam to assist her in managing the accounts audits and tax matters of the Speed Sourcing Group.

8. Kurtis Lam and his wife, Alice Lam, are the controlling mind and will of Colonial Charm, a company incorporated in the BVI. 

9. In relation to Nice Gain:

(1) Nice Gain’s directors are Alice Lam and Colonial Charm; and

(2) Its 100% shareholder is Colonial Charm.

10. The relevant history of Nice Gain is as follows:

(1) Nice Gain was initially held by a Ms Li Lam and a Mr Cheng Chi Tai, each holding 5,000 shares.

(2) On 27 September 1993, Shirley Wong and her former husband each purchased 3,500 shares from Li Lam and Cheng Chi Tai for the price of HK$1,923,600.

(3) After the shares were transferred, Shirley Wong and her former husband each held 3,500 shares and Cheng Chi Tai held 3,000 shares.  Later, Shirley Wong and her former husband transferred their shares to Mellow Brook Limited (a company controlled by them), and Cheng Chi Tai transferred his 3,000 shares to Rich Source Limited (a company controlled by him).

(4) On 31 December 1996, Rich Source Limited sold its shares in Nice Gain to Mellow Brook Limited.  From then onwards until 2004, Shirley Wong and her former husband were the ultimate beneficial shareholders of Nice Gain (in 1998, Shirley Wong and her former husband retook their shares in Nice Gain from Mellow Brook Limited).

(5) In the meantime, Shirley Wong funded all the mortgage payments for the Workshops, and they were fully repaid on 23 April 2003.

11. On 31 August 2004, Shirley Wong and her former husband each transferred their 5,000 shares in Nice Gain to Colonial Charm.

12. Shirley Wong only moved out of the Workshops in the summer of 2007, when she relocated to Lai Chi Kok.

13. The relationship between Shirley Wong and Kurtis Lam broke down in April 2013.

14. Shirley Wong’s solicitors sent various letters to Kurtis Lam and Colonial Charm requesting return of the Workshops. There was no reply from Colonial Charm or Kurtis Lam.

15. On 26 November 2013, a lis pendens was registered on behalf of the plaintiffs against the Po Shan Road Property and the Workshops.

Respective cases of the plaintiffs and the defendants

16. Shirley Wong’s case is simple:

(1) On 31 August 2004, Shirley Wong transferred 5,000 shares of Nice Gain to Colonial Charm.

(2) There was no consideration paid, and Shirley Wong did not intend to make a gift of the Nice Gain Shares to Colonial Charm.

(3) Colonial Charm accordingly holds the Nice Gain Shares on resulting trust for Shirley Wong.

17. Indeed, paragraph 26.5 at page 10 of the plaintiffs’ Statement of Claim filed on 3 January 2014 pleads that: “No consideration was paid by Colonial Charm to Shirley Wong or [her former husband]”.  This averment of no consideration having been paid for the Nice Gain Shares is also contained in paragraph 69(9) at page 33 of the first affidavit of Shirley Wong filed on the same day in support of the Injunctions Summons.

18. On the other hand, the defendants’ case is that the Nice Gain Shares were purchased by Colonial Charm for consideration, so that there can be no resulting trust.  In support of their case, the defendants have exhibited the following documents in their affidavit evidence:

(1) A sale and purchase agreement (“the SPA”), Instrument of Transfer, and Bought and Sold Notes (together referred to as “the Transaction Documents”).

(2) A cheque stub for HK$1,750,000 (“the Cheque”).  In this regard, it is noteworthy that in her subsequent affidavit evidence, Shirley Wong produced a Deposit Form, which appears to confirm that the Cheque was indeed deposited into her personal bank account maintained with the HSBC.

19. Shirley Wong’s response to the Transaction Documents and the Cheque is contained in her second affidavit filed on 14 March 2014.  Her response has, in my view, been fairly summarised in paragraph 8 of the third affirmation of Kurtis Lam as follows: -

“ In the 2^nd Affirmation of Shirley Mae Wong dated 14 March 2014 which was filed inter alia in opposition to the Defendants’ striking-out application…, Shirley Wong did not dispute the authenticity of the said documentary evidence (i.e., the Agreement and the cheque stub); nor did she offer any credible explanation for the Agreement and the payment of HK$1,750,000 to her personal bank account. In respect of the cheque deposit of HK$1,750,000 into her personal bank account, Shirley Wong has not been able to deny having received the money although she tried to obfuscate matters by categorically denying any recollection of the payment and further claimed that the HK$1,750,000 was in fact her own money, an assertion which is wholly unsubstantiated. The acknowledgement of receipt of the HK$1,750,000…is plainly inconsistent with the Plaintiffs’ pleaded case, that the transfer of Nice Gain’s shares was unsupported by consideration”.

Discussion

20. I agree with Mr Michael Yin, counsel for the defendants, that as far as the claim against the 2^nd defendant (Colonial Charm) is concerned, the plaintiffs’ case rested entirely on Shirley Wong’s bare assertion that the transfers of the Nice Gain Shares to Colonial Charm were not supported by any consideration, which is clearly contradicted by indisputable documentary evidence, namely, the Transaction Documents and the Cheque.  In the light of such evidence, it is clear that the plaintiffs’ only pleaded case in respect of the Nice Gain Shares (ie, a trust arising from a transfer of property which is not supported by consideration in circumstances where the transferor did not intend to make a gift to the transferee) is bound to fail and the plaintiffs’ claim is for that reason frivolous and vexatious or otherwise an abuse of the process of the court.

21. In her second affidavit, Shirley Wong has produced some e‑mails allegedly sent by Kurtis Lam, which are supposed to show that Kurtis Lam continued to regard Shirley Wong as having some interest in the Workshops after the date of the SPA.  The plaintiffs seek to argue that these e-mails somehow raise a triable issue so as to make it not such a plain and obvious case for striking out the plaintiffs’ claim against the 2^nd and 3^rd defendants.

22. However, it must be remembered that the question before the court is not whether there is evidence to suggest that the plaintiffs might conceivably have some claim against the 2^nd and 3^rd defendants.  The question is whether there is evidence before the court in support of the plaintiffs’ pleaded case.

23. The plaintiffs’ pleaded case is that no consideration was paid by Colonial Charm to Shirley Wong for the Nice Gain Shares.  It is clear from the pleadings that the plaintiffs’ case cannot be sustained without impugning the SPA, yet there has been no attempt by the plaintiffs to dispute the authenticity of the SPA.  The plaintiffs even went so far as to produce a bank slip to show that HK$1,750,000 was indeed deposited into Shirley Wong’s bank account pursuant to the terms of the SPA.  I agree with Mr Yin that, in this connexion, it is pertinent to note that it is not the plaintiffs’ pleaded case that the SPA for the transfer of the Nice Gain Shares to Colonial Charm was a sham.  Hence, whatever may be the interest of Shirley Wong supposedly alluded to in the e-mails from Kurtis Lam, it cannot be referable to the plaintiffs’ pleaded case.

24. Properly analysed, it is plain beyond argument that the e-mails do not in fact help to advance the claims as pleaded against the 2^nd and 3^rd defendants (inasmuch as the plaintiffs have failed to demonstrate the relevance of the e-mails to the plaintiffs’ pleaded case against the 2^nd and 3^rd defendants).

25. Mr Julian Lam, counsel for the plaintiffs, submitted that notwithstanding the existence of the Cheque and the Transaction Documents, the court can still consider the evidence as to whether the consideration was real or whether the transfer was in fact intended as a voluntary conveyance.  In particular, Mr Lam submitted that the court is entitled to look at circumstances beyond the SPA and apparent payment of money to determine whether there was in fact real consideration for the Nice Gain Shares.  In this regard, Mr Lam referred to the decision of Stuart VC in Coultwas v Swan (1870) 22 LT 539 at 540.

26. Mr Lam further submitted that the plea of “no consideration” in paragraph 26.5 of the Statement of Claim should be broad enough to include a case of “no real consideration” moving from Colonial Charm.  Further, if necessary, the Statement of Claim can be amended to incorporate a plea to the effect that “Colonial Charm was not a purchaser for value of the Nice Gain Shares because no consideration or, alternatively, no real and/or valuable consideration was paid”.

27. In my view, Mr Lam’s reliance on the Coultwas case is misplaced.  In the Coultwas case, evidence was adduced by the plaintiff to the effect that on the occasion of the execution of the conveyance, the owner of the house in question handed the purchase price (£500) to his wife, who handed it just before the transaction to the purchaser, who handed it to the owner’s solicitor, who handed it back again to the owner: in other words, the whole transaction was a sham, which the court found to have been executed for the purpose of placing the property out of the reach of the liquidators of the bank in which the owner was a shareholder.

28. In the present case, it is not the plaintiffs’ pleaded case that the SPA was a sham.  Further, Shirley Wong has certainly not explained in her affidavit evidence why, if the Nice Gain Shares were transferred to Colonial Charm to be held on trust for her and her former husband, it had to be done by way of a sham SPA, supported by apparent payment of valuable consideration, as opposed to a transfer followed by a simple declaration of trust by Colonial Charm in their favour.  To put it in a slightly different way, Shirley Wong has wholly failed to plead or explain why she says the consideration is not real, notwithstanding the apparent payment of HK$1,750,000 to her.

29. In conclusion, for the reasons stated above, I hold that the plaintiffs have not raised any serious issue to be tried such as to justify the grant of the injunctions sought in respect of the Nice Gain Shares or the Workshops (or the refusal to strike out the plaintiffs’ pleaded case against the 2^nd and 3^rd defendants).

Dispositions

30. I order that the Amended Writ issued on 4 December 2013 and the Statement of Claim filed on 3 January 2014 be struck out as against the 2^nd and 3^rd defendants.

31. I further order that the application under paragraph 3 of the Injunctions Summons be dismissed.

32. The costs of the application under paragraph 3 of the Injunctions Summons and the costs of this action (including the Striking‑out Summons) be to the 2^nd and 3^rd defendants, such costs to be taxed if not agreed.

33. In view of the fact that the claims against the 2^nd and 3^rd defendants herein have been struck out, I make no order on the inspection summons filed by the defendants on 10 April 2014.

34. On the basis that costs should follow the event, I order that the costs of the application under paragraphs 1 and 2 of the Injunctions Summons be paid by the 1^st defendant to the plaintiffs in any event, such costs to be taxed if not agreed.

35. The above orders as to costs are nisi and shall become absolute in the absence of any application within 14 days to vary the same.

36. Lastly, I express my gratitude to counsel on both sides for their very helpful assistance in this matter.