CHEUNG HING v. WONG CHOR CHEUNG AND OTHERS

HCA 925/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 925 OF 2010

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1.  In 1991 the plaintiff and the 1^st defendant, who had been friends since schooldays, agreed to make a joint investment by purchasing a property. They agreed to use the 3^rd defendant as a corporate vehicle for the purchase of the 3^rd floor flat, 23 Plantation Road, the Peak, Hong Kong (“the property”) in February 1991.  The property has been the 3^rd defendant’s only asset since (apart from rental income).  In 1992 the plaintiff and the 1^st defendant became equal shareholders in the 3^rd defendant.

2.  These proceedings concern the purported sale of the property to Best Century Holdings Ltd, the 2^nd defendant.  It is a fact that the provisional sale and purchase agreement between the 3^rd defendant and the 2^nd defendant came into being (in May 2010) without the plaintiff’s knowledge or consent.

3.  In a nutshell, it is the plaintiff’s case that the purported sale was a fraudulent sham orchestrated by the 1^st defendant whereby a sale would have taken place at gross undervalue to a company in fact controlled by the 1^st defendant so that he would retain control of the property to the exclusion of the plaintiff.

4.  The reason that a sale was embarked on at all was because, also in May 2010, the plaintiff and the 1^st defendant had been parties to a “Consent Order” in different proceedings (HCA 336/2008) in which it was agreed that the property would be sold.  The plaintiff contends, inter alia, that the purported sale is in breach of the Consent Order and seeks an order that it is set aside and further that the property is now marketed and sold by consent in pursuance of the Consent Order with the plaintiff’s knowledge and approval.

BACKGROUND HISTORY

5.  This litigation has had a chequered history.  Primarily because there are allegations of fraud and sham transactions, it is necessary to refer to the history of the matter in a little detail.  All matters referred to hereafter under this heading may be regarded as factual findings based on the evidence.  The evidence comprises the totality of the documentary evidence and the oral testimony of the plaintiff.  No other witnesses from the 1^st, 2^nd or 3^rd defendant gave any oral testimony.

(1) The 3^rd defendant’s directorships

6.  (i) In August 1997 without the plaintiff’s knowledge or consent, the 1^st defendant appointed his wife and Chan Shu King and Chan Siu Fung as directors of the 3^rd defendant.

7.  (ii) In March 2000 without the plaintiff’s knowledge and without his consent, the 1^st defendant resigned as a director and appointed two corporate directors a month later, namely, Hopewell Investment (incorporated in Mauritius) and Success Consultants (incorporated in the BVI).  No board meetings were held.

8.  (iii) By August 2001 the directors were Wong Yuen Wai, Hopewell, Success Consultants, the 1^st defendant’s wife, Chan Siu Fung, Chan Shu King and the plaintiff.  With the exception of the 1^st defendant’s wife these directors were strangers to the plaintiff.

(2) Unauthorized mortgages

9.  All without the plaintiff’s knowledge or consent the following mortgages or legal charges were taken out.

10.  In January 1992 the 1^st defendant executed a second legal charge over the property on behalf of the 3^rd defendant to secure a $2.55 million loan.  The money was lent to a company called Wah Fu Corporation, a company owned by the 1^st defendant.  This legal charge was discharged in September 1995.

11.  In September 1995 the 1^st defendant executed a second mortgage on the property with the Liu Chong Hing Bank.  The money again went to Wah Fu Corporation.  This was discharged in August 2000.

12.  In August 2000 the 1^st defendant executed a third mortgage with the Dah Sing Bank.  Again the borrower was Wah Fu Corporation.  This mortgage remains undischarged.

13.  As recently as November 2013 a second legal charge was executed in favour of a company called “Hong Kong Finance Company”.

(3) Rental income

14.  The plaintiff was never consulted about tenants or rents.  There had been tenancy agreements with Home Essentials Ltd (2002 to 2005), Yeung Fut Nai (2007 to 2009) and Jinrong Investment Development Ltd (2009 to 2013).

15.  The plaintiff has on many occasions requested details of rental incomes and mortgage expenses.  None have been forthcoming.  If the rental income had ever exceeded the mortgage costs the plaintiff was not informed.  The plaintiff has not received any income from the property since it was purchased.

(4) Other proceedings and their connections to this action

 (i) HCA 336/2008

16.  The plaintiff commenced this action seeking, inter alia, a declaration that he held a 50% interest in the property through the 3^rd defendant.  He launched it as a result of his frustration in being unable to obtain any information from the 1^st defendant about the property, its mortgages, its tenants, the directors of the 3^rd defendant and so on.

17.  The trial was heard in March 2010.  Both parties were unrepresented.  After discussion in open court between the judge and the parties a consent order was agreed.  The true construction of the consent order is at the heart of the present action.  It was in the following terms:

“ AND UPON READING the affirmation of the Defendant respectively filed on 21^st day of April 2009, 12^th day of June 2009, 30^th day of December 2009 and 22^nd day of January 1010 together with exhibits therein mention AND UPON READING the witness statement of the Defendant filed on the 30^th day of October 2009

The Plaintiff and the 1^st Defendant both consent for the Court to make an Order in accordance with the terms to follow, so that the 3^rd Floor, No.23 Plantation Road and its ground floor car parking space B1 (separately called car parking space) being part of it (‘the Property’), to fully and finally resolve the present legal proceedings and all claims (if any)

BY CONSENT OF THE PARTIES, IT IS ORDERED AS FOLLOWS :-

(1). The Plaintiff and the 1^st Defendant consent for the 2^nd Defendant to immediately sell the Property; all proceeds after deduction of all expenses incidental to the sale [sic] of the Property, must immediately be paid into court. In order that the Property can be sold, all pending cases of this action be dismissed;

(2) In respect of the Property holding by the 2^nd Defendant, accounts are to be prepared. Further, within 60 days counting from this Order, the Plaintiff and the Defendant to file in Court and serve on the relevant party the accounts, setting out the closing of the accounts and stating the dates or until the day when the Property is sold with all the income and expenses;

(3) either party to the proceedings can make applications to Court; and

(4) Regarding costs, no order be made”

18.  Thus, the parties agreed that the property be sold.  In short, it is the 1^st defendant’s submission in the present action that such a sale could, within the terms of the consent order, be negotiated, arranged and completed without the knowledge or consent or the plaintiff.

 (ii) Post Consent Order events

19.  The consent order was made on 24 March 2010.  One week later the plaintiff’s solicitors wrote to the 1^st defendant asking for the name of his solicitors and for advance notification of any proposed sale for his approval.  The 1^st defendant did not reply.  The plaintiff’s solicitors then wrote to the 3^rd defendant along the same lines.  The 3^rd defendant replied saying that there could be no sale because of the lis pendens of HCA 336/2008 against the property.

20.  On 16 April 2010 the plaintiff’s solicitors wrote again reminding the 3^rd defendant that, inter alia, the property can only be sold at market price and with the plaintiff’s approval.  No reply was received.

21.  Under “liberty to apply” the plaintiff took out a summons for directions as to any proposed sale which the 1^st defendant opposed.  It was at the hearing of that summons, 5 June 2010, that the plaintiff learnt, for the first time, of a provisional sale and purchase agreement to sell the property to the 2^nd defendant for $15 million with an option for the 3^rd defendant to buy 30% of the purchaser’s shareholding within six months of the end of the current tenancy.  There were a number of curious features about this transaction which I shall deal with later in this judgment.  For present purposes the key factor about it was that the plaintiff knew nothing of it.

22.  Concurrently, also unknown to the plaintiff until early June 2010, the property was in an auction list with a reserve price of $30 million (said by the auctioneers to be “30% below estimated market price”).

23.  On 11 June the 3^rd defendant’s solicitors wrote indicating they intended to proceed with the sale and purchase agreement for $15 million.

 (iii) The commencement of this action

24.  As the 2^nd defendant was not a party to the consent order the plaintiff took out this action (HCA 925/2010) by specially endorsed writ.  In concurrent injunction proceedings it was ultimately agreed that the proposed sale of the property to the 2^nd defendant be stayed until trial or until further order.  The proposed auction was also withdrawn.

25.  On 2 September 2010 the 1^st and 3^rd defendant took out a summons to stay this action pending a determination of another case (HCA 829/2010) referred to as the “Sidepec” action.  I shall refer to this later under the heading of “Events leading up to trial”.  Briefly, it involved an allegation by Sidepec that the plaintiff had sold its shareholding in the 3^rd defendant in 2006 to it.  The plaintiff has always denied this alleged transaction.  The 1^st and 3^rd defendant’s argument simply being that if the plaintiff had disposed of his shareholding he had no locus standi to prosecute his claim in HCA 925/2010.  In November 2010 the stay application was withdrawn and thus HCA 925/2010 was scheduled to proceed.  Ultimately, the trial date of 12 March 2014 with seven days reserved was fixed.

26.  Before referring to “Events leading up to trial” I now briefly mention a number of other proceedings.  Although not directly relevant to the issues in HCA 925/2010 I consider them relevant as part of the overall picture; particularly the 1^st defendant’s conduct in the affairs of the 3^rd defendant and other related companies.

 (iv) Other proceedings

27.  Mr C Y Li SC, leading Mr Adrian Butt, counsel for the plaintiff, described these other proceedings as “vexatious” and designed to launch “a collateral attack” on the plaintiff.  There is some merit in this description.

(a) The Sidepec action (HCA 829/2010)

28.  The unusual features of the Sidepec trial are outlined below at page 11 of this judgment.  In short, there was no evidence before the court to contradict Mr Cheung’s (the defendant in that action) contention that he had never agreed to dispose of his shareholding in the 3^rd defendant.  The position remains today that he is the registered owner of 6,000 or 5,544 of the shares in the 3^rd defendant.

(b) HCMP 3460/2013

29.  The plaintiff discovered in November 2013 that 456 of his shares in the 3^rd defendant had been registered in Sidepec’s name (hence the reference to “6,000 or 5,544 shares” above).  This was done without the plaintiff’s knowledge.  The instrument of transfer has been requested by the plaintiff but none has been forthcoming.

30.  It has been necessary therefore for the plaintiff to commence this separate action for the rectification of the share register to reflect his true shareholding.

(c) HCA 814/2010

31.  A few days after the purported provisional sale of the property to the 2^nd defendant a Mr Hui Shu Leung, a resident of Mainland China, commenced this action claiming repayment of money allegedly lent to the 1^st/3^rd defendants. The 3^rd defendant took no steps to defend these proceedings and thus the plaintiff suspected it was a ploy by the 1^st defendant to redirect funds to himself.  He accordingly is now seeking an order to represent the 3^rd defendant in this action so as to protect its interests.

(d) HCA 1666/2009

32.  In this action the 1^st defendant issued a writ against the plaintiff, his solicitors, his barrister and the 3^rd defendant seeking, in a 34 page statement of claim, damages for conspiracy to defraud, for slander and for unlawful interference in the affairs of the 3^rd defendant. The action was discontinued about two months after the writ had been issued.

(e) HCA 910/2010

33.  After HCA 1666/2009 was discontinued a Mr Koo Cheng Kit commenced this action against two solicitors from the plaintiff’s solicitors firm, the firm itself and the plaintiff.  It was struck out for want of prosecution.

(f) HCMP 2433/2012

34.  Finally the plaintiff has commenced this statutory derivative action to (on behalf of the 3^rd defendant) recover monies misappropriated by the 1^st defendant, to regularize rental income and to remove unlawfully appointed directors.  The leave application in these proceedings is scheduled for July 2014.

35.  Thus, taking a broad view of the matter the plaintiff complains that the 1^st defendant has interfered with his shareholding (HCA 829/2010 and HCMP 3460/2013), put his own directors into the company to the exclusion of the plaintiff (HCMP 2433/2012), used the company as his cashier and refused to provide information (HCMP 2433/2012), instituted bogus litigation (HCA 814/2010), instituted frivolous litigation (HCA 910/2010 and HCA 1666/2009) and refused to comply with disclosure obligations.

 (v) Events leading up to trial

36.  These also are relevant to the issue of the 1^st defendant’s conduct in the proceedings as a whole.

37.  On 3 March 2014 the 1^st and 3^rd defendants made an application to vacate the trial dates pending a decision in HCA 829/2010 (the ‘Sidepec’ action) which had been heard on 1 August 2013.  In that action Sidepec sought, inter alia, specific performance of an alleged transfer of the plaintiff’s entire shareholding in the 3^rd defendant to it in 2006.  If Sidepec were to succeed in HCA 829/2010 the plaintiff would have no locus, so it was submitted, to claim against the defendants in the present proceedings.

38.  Regardless of the fact that a decision in HCA 829/2010 has not yet been made (inspite of a request in December 2013), the facts of what occurred on 1 August 2013 are telling.  The trial which had been listed for six days in fact took only one day.  Sidepec applied to be represented by a Mr Wong Ka Fai.  Mr Wong claimed to have been recently appointed as a director of Sidepec but the judge refused his application.  Mr Wong Ka Fai also informed the court that the 1^st defendant in the present case was to testify in that trial (HCA 829/2010) but he was in hospital in China having been involved in a car accident.

39.  Nonetheless, the trial proceeded and the plaintiff company was unrepresented and called no evidence.  This court was informed during the adjournment/stay application on 3 March 2014 that should the decision in HCA 829/2010 go against Sidepec there would be an appeal.  The situation therefore was that (a) Sidepec had adduced no evidence to further its contention that Cheung held no shares in the 3^rd defendant company and (b) there was little prospect of an early conclusion to that particular litigation.  The situation on 3 March and on the first day of this trial was that Cheung held either 5,544 or 6,000 (50%) shares in the 3^rd defendant.  The application for an adjournment was refused.

40.  On 10 March 2014, two days before the first day of trial, there were two summonses before the court from the solicitors from both the 1^st and 3^rd defendants and also the solicitors for the 2^nd defendant applying for leave to cease to act.  The 1^st and 3^rd defendant’s summons was withdrawn.  Ms K Chan, their solicitor, informed the court that her firm had now received the funds requested and would continue to represent the 1^st and 3^rd defendants at trial.  The 2^nd defendant’s summons was granted.

41.  On 12 March 2014, the first day of the trial, the court was informed of the following matters:

(i) the 1^st defendant had filed a notice of intention to act in person;

(ii) the 1^st defendant had applied for legal aid;

(iii) the 1^st defendant, at 9:35am, had telephoned the court from Queen Elizabeth Hospital informing the court that he had had a suspected stroke; and

(iv) solicitors for the 2^nd defendant had not been able to serve the ‘cease to act’ order on the other parties in time and so were still instructed to appear for the 2^nd defendant but only in relation to two further summonses which had been filed by the 1^st and 3^rd defendants on 10 March 2014 (to which I refer later).

42.  The trial was adjourned to the next day, 13 March 2014, for enquiries to be made.

43.  On 13 March the court was informed of the following matters:

(i) Solicitors for the 3^rd defendant, WK To & Lee (who have throughout represented both the 1^st and 3^rd defendants) had now been re‑instructed to represent the 1^st defendant as well as the 3^rd defendant.

(ii) The 1^st defendant was therefore no longer acting in person and was not applying for legal aid.

(iii) The 1^st defendant had been transferred to a different hospital.  

(iv) Counsel for the 1^st and 3^rd defendant, Mr Alex Fan, informed the court that he did not oppose the plaintiff’s application to proceed with the trial in the 1^st defendant’s absence.  He had already, in a written submission, indicated that the 1^st defendant did not intend to testify at trial and he was fully instructed to proceed.

44.  The trial commenced.  A preliminary issue was heard first, namely the two summons filed by the 1^st and 3^rd defendants on 10 March 2014.  By the first summons a direction was sought: “whether the plaintiff has authority and/or locus standi to bring this action for enforcing his personal right and for enforcing and protecting the rights and interest of the 3^rd defendant.”  By the second summons leave was sought to amend the defence.  The amendments sought were amendments which naturally flowed from the first summons.

 (vi) The pre‑trial summonses

45.  After hearing submissions from Mr Alex Fan, counsel for the 1^st and 3^rd defendants and from Mr C Y Li both summonses were dismissed.

46.  Mr Li objected both on the grounds of timing and on the merits.  I upheld the objections on the grounds of timing but will here deal briefly with the objections on the merits as well.

47.  The summonses are dated 11 March 2014, the eve of the first day of trial.  There was no supporting affirmation.  Three years and eight months had passed since the filing of the specially endorsed writ.  There had been two applications for a stay and the usual case management conferences and pre‑trial reviews.  A challenge to the plaintiff’s locus standi or the court’s jurisdiction to hear the case was never made until 11 March 2014.  

48.  In Secretary for Justice v Times Square Ltd [2011] 2 HKLRD 409 the basic principle is clearly stated:

“…an order under O.33, r.3 for trial of preliminary issues should only be made in special circumstances or on special grounds (Hong Kong Civil Procedure 2011, Vol.1, p.698 para.33/3/1, p.701 para.33/4/9). The Court should be extremely cautious before acceding to pleas for such orders…”

49.  Since the filing of the writ nothing has changed in the plaintiff’s case.  It is and always has been a claim firstly, brought in his personal capacity to enforce his proprietary rights and to enforce his personal claim in contract flowing from the alleged breach of the consent order.  Secondly, it is a common law derivative action brought to protect the interests of the 3^rd defendant as a 50% shareholder thereof.

50.  There has been no change in the plaintiff’s position which might merit an 11^th hour challenge to the plaintiff’s capacity to sue.  The principles concerning a challenge to a plaintiff’s locus standi were considered extensively by Cheung JA in Liquidation Committee of Foshan Hongda Development v East Legend Investment Ltd [2009] 1 HKLRD 169 as follows:

“The Principles

18. The principles concerning the challenge on the lack of standing by a plaintiff to commence an action is well established and they are:

1) the challenge cannot be raised by way of defence;

2) it must be raised at the outset or when it comes to the attention of the court or of the defence in the course of the proceedings;

3) once the issue has been raised it must be decided;

4) it would be wrong to allow the action to go on without deciding the issue of standing: this is because the defendant will not have a further chance to challenge the issue; and

5) once it is clear that the action was improperly constituted it must be brought to an end either by way of dismissal, striking out or stay.”

and later:

“21. The crux of the principles on the challenge of the plaintiff’s standing to sue is the requirement of an early determination of the issue. This makes perfect sense because otherwise the plaintiff would be incurring substantial costs in the preparation of the case for trial which may be totally wasted if the issue was decided against him. If, as in this case, the contest is to be decided only at the beginning of the trial the rationale behind these principles would be defeated. In my view, the importance of the rationale had not been properly recognized in the present case when the Judge decided to deal with the issue at the trial.”

51.  In the present case the defendant is raising the challenge by way of defence in that it seeks to amend its defence to plead lack of locus standi.  But, more importantly the timing is wholly unacceptable.  No special or exceptional circumstances have been advanced to explain the lateness of the application.

52.  Further I find there to be no merit in the application.  I shall briefly refer to the merits of the applications because Mr Fan’s defence at trial (as contained in his final written submissions) focuses primarily on the same issue, namely the plaintiff’s capacity to sue.  The only witness at trial, the plaintiff, had produced a witness statement of nearly 100 pages.  Mr Fan’s cross‑examination was succinct, focusing on the plaintiff’s lack of involvement in the running of the 3^rd defendant, his lack of knowledge of the 2^nd defendant and his lack of knowledge of a proposed development scheme in 2008 and his understanding of the consent order. Mr Fan’s primary argument in seeking to persuade the court to dismiss the plaintiff’s claims concerned the plaintiff’s locus standi and the court’s jurisdiction.

53.  Mr Fan seeks a dismissal of the common law derivative claim on the following grounds (taken from his written submission):

(a) The plaintiff does not bring his claim “on behalf of himself and the other shareholders except 1^st defendant” or “on behalf of 3^rd defendant” (ie in a representative capacity).

(b) The statement of claim is defective in the sense that it fails to support a derivative action brought on behalf of the company.

(c) The plaintiff has, on evidence, failed to establish any of the exception to the proper plaintiff rule founded in Foss v Harbottle.  It is submitted, amongst others, that:

(i) the 1^st defendant did not commit any fraud on the plaintiff;

(ii) the 1^st defendant was not in control of the 3^rd defendant;

(iii) if (which is denied) some wrong has been done to the 3^rd defendant, the 1^st defendant did not obtain any benefit; and

(iv) if (which is denied) some wrong has been done to the 3^rd defendant, there would be alternative remedy without resort to derivative action.

54.  In spite of Mr Fan’s extensive research and citations from and references to much legal authority the preliminary summonses must fail because of their lateness and also for the following reasons:

(i) The plaintiff’s primary claim is and has always been stated as a personal claim arising out of the consent order.

(ii) It is open to the plaintiff, in addition, to launch, without leave being necessary, a common law derivative action.  He does so on the basis that he pleads himself to be a shareholder, the 1^st defendant to be in control of the 3^rd defendant and that the 1^st defendant has embarked on a sham and fraudulent transaction by attempting to sell the property to another company which was and is the alter ego of the 1^st defendant.

55.  The plaintiff’s witness statement contains evidence in support.  Whether that evidence is sufficient to discharge the onus of proof is for the court to decide.  There is no contradictory evidence from defence witnesses.  In my judgment the only way for the plaintiff to protect the 3^rd defendant’s interests is by way of the common law derivative claim and it is legitimate.

56.  Mr Fan further relies on the “reflective loss” principle that the plaintiff has no right to sue in a personal capacity if his loss is merely a reflection of the loss suffered by the company.  On the facts this is unsustainable.  Mr Li describes it as a “red hearing”.  Put simply, if the Best Century agreement is not set aside the plaintiff suffers personal loss flowing from his personal claim for which he has pleaded personal damages.

57.  Finally, Mr Fan invites the court to consider the question of jurisdiction on its own initiative, regardless of the unacceptable and unexplained lateness of the defendant’s applications to do so. He relies on a  proposition cited from Heyting v Dupont [1963] 1 WLR at page 1195:

“Now, it is clear that a court is not only entitled but bound to put an end to proceedings if at any stage and by any means it becomes manifest that they are incompetent. It can do so on its own initiative, even though the parties have consented to the irregularity.”

58.  In the present case the clear and unambiguous pleas of fraud, sham transactions and breaches of fiduciary duty, supported by evidential material, plainly enables the court to have jurisdiction over the matter as a whole within the confines of the pleaded case, of which it cannot be said that it has “become manifest that it is incompetent”.

THE ISSUES AT TRIAL

59.  It is perhaps unusual to commence consideration of the first issue at trial after 19 pages of historical background.  However this is a case where the issues at trial depend to a significant degree on them being assessed in the overall context of the entire history of the matter.

60.  The outcome of this action depends largely on factual findings.  The evidence upon which such findings may be made is that of the plaintiff,   contemporaneous documents and other exhibits.

61.  Broadly speaking I found the plaintiff’s evidence to be inherently plausible, uncontradicted, detailed and reliable.  His grievances about the 1^st defendant’s conduct were supported by other evidence.  For example, his failure to respond to correspondence, his failure to comply with disclosure orders, his unilateral and plainly unjust interpretation of the consent order, his private use of the property to raise loans and mortgages, the commencement of proceeding only to withdraw them soon afterwards and his unmeritorious stay applications.

62.  Based on the totality of the evidence and for the reasons which follow I find that the plaintiff has proved to a high degree of probability the following:

(1) The Best Century agreement should be set aside as it is in breach of the consent order

63.  The consent order has already been recited at page 5 of this judgment.  The 1^st defendant submits that on a proper construction he was not required to inform the plaintiff or seek his consent for the proposed sale to the 2^nd defendant. In my judgment such a construction is plainly wrong.  HCA 336/2008 was a case in which the plaintiff took his former friend to court to establish his shareholding in the company and his interest in the property.  With the help of the judge they agreed that the property should be sold, the proceeds paid into court and an account be made before the net proceeds were distributed.  To suggest that the true nature of this agreement entitled the 1^st defendant to conduct a sale and keep it secret from the other 50% shareholder in the company is untenable.  Any shred of possible misunderstanding of the true nature of the order was promptly dispelled as a result of two letters from the plaintiff’s solicitors requesting (initially as a mere formality) the name of the 1^st defendant’s solicitors in any future conveyancing matters and the name of any proposed buyer for the plaintiff’s approval.

64.  The consent order settled the plaintiff’s interest in the property.  For the quantum of that interest to be solely within the 1^st defendant’s control is plainly unreasonable.  It is not the 1^st defendant’s case that he believed he had the right to sell the property on his own because he had always run the company on his own, it is his case that the consent order permitted it.  His failure to answer correspondence from the plaintiff’s solicitor soon after the consent order is consistent not with an honest belief in his rights but with a deliberate attempt to shut the plaintiff out.

65.  A consent order is a contract and should be construed in the same way.  The following test is applicable:

“The reasonableness of the result of any particular construction is a relevant consideration in choosing between rival construction” (Lewison, The Interpretation of Contracts, 4^th ed)

66.  The 1^st defendant’s interpretation of the words, in context, lead to a construction that is both unreasonable and lacking common sense.  The 1^st defendant undoubtedly knew that the plaintiff would object to the sale to the 2^nd defendant had he known of it.  He nonetheless intended to complete the sale without the plaintiff’s knowledge and was only prevented from so doing by the anxious endeavours of the plaintiff and his solicitors and their use of the “liberty to apply” provision.

67.  Two further matters merit consideration under this heading before moving on to the next issue.  Firstly, in a normal conveyance the 2^nd defendant would have been alerted to the existence of the consent order. (and of the writ in HCA 336/2008 which had been registered against the property) and would have made further enquiries about them and of the plaintiff.  One reason that this did not happen is because, as I find later in this judgment, the 2^nd defendant was the alter ego of the 1^st defendant.  The 2^nd defendant was a party to the secrecy.

68.  Conduct of conveyancing matters are precisely laid down and strictly applied as the following citation confirms:

“In the field of conveyancing the law had historically set a very high standard. The standard of knowledge was that a man had constructive notice of matters which he would have discovered if he had made those enquiries which he ought reasonably to have made. Sun Sek Haw & ors v Au So Kum, above, per Rogers JA, at 21E‑22D. ‘Taking that test as a guideline, the question which should be asked is would the enquiries which a conveyancing solicitor would have made as a matter of prudence have revealed the fact which would have given the purchasers constructive notice.’”

(per Deputy Judge Au‑Yeung inKong Lin Yeung v Lai In Peng[2012] 4 HKC 128)

69.   Secondly, the registration of the writ in HCA 336/2008 remains in place.  As things currently stand the sale would not be enforced in any event.

(2) The Best Century agreement is a sham

70.  The submission that the purported sale to the 2^nd defendant as a bone fide transaction must plainly fail because of the cumulative effect of the following facts (which are either undisputed or found to be true on the evidence):

(i) The original purchaser was to be a company called “Mighty Dragon”.  The purchaser changed to “Best Century” at the last minute.  Both companies were incorporated overseas in May 2010.  A director of Best Century was “Acota Services”.  This directorship was later changed to “Sino Oriental Ltd”, another BVI company.  No other valuable information about these companies is available.  A sham transaction is likely to be one in which untraceable corporate vehicles are used.  The entire picture (including all the matters referred to below) is one in which the court is entitled to “pierce the corporate veil”. 

(ii) The test concerning “the corporate veil” is taken from the following two authorities:

Firstly, Sir Andrew Morritt V‑C in Trustor v Smallbone (No 2) [2001] 1 WLR 1177:

“In my judgment the court is entitled to ‘pierce the corporate veil’ and recognize the receipt of the company as that of the individual(s) in control of it if the company was used as a device or façade to conceal the true facts thereby avoiding or concealing any liability of those individual(s).”

and secondly, Lord Sumption JSC in Petrodel v Prest [2013] 2 AC 415:

“I conclude that there is a limited principle of English law which applies when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control. The court may then pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obrained by the company’s separate legal personality.”

I am satisfied that this is a case in which the corporate veil should be pierced and I am further satisfied that, once pierced, it is revealed that Best Century is a company within the 1^st defendant’s control and utilized by him to orchestrate a sham transaction.

(iii) The following factors are relevant. Firstly, his manipulation of the directorships of the 3^rd defendant as already outlined.  Secondly, his continued control of the 3^rd defendant after his apparent resignation in 2000, again as already outlined, including a mortgage, as recently as 2013 (the “Hong Kong Finance Co” mortgage).  Thirdly, his refusal to account for rental income and his failure to comply with a court (discovery) order.  Fourthly, the clear inference that he was behind vexatious legal proceedings.

(iv) Turning to the transaction itself it should be viewed in the light of Lord Diplock’s definition in Snook v London and West Riding Investments Ltd [1967] 2 QB 786:

“…acts done or documents executed by the parties to the ‘sham’ which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. But one thing, I think, is clear in legal principle, morality and the authorities (see Yorkshire Railway Wagon Co v Maclure and Stoneleigh Finance Ltd v Phillips), that for acts or documents to be a ‘sham’, with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating.”

The purported beneficiary of the sale was a Mr Gary Ko Cheong Hung.  He made a short witness statement on October 2012 stating that he was the owner of the 2^nd defendant. He did not give evidence.  No explanation was given for his absence.  No suggestion was ever made, for example in the stay applications, that his attendance at trial might be problematic.

The 2^nd defendant, through its solicitors, has always supported the 1^st defendant’s applications to avoid a trial, including the stay applications and the preliminary legal agreements.  However, at the time of the commencement of the trial its solicitors applied to cease to act and so the 2^nd defendant was unrepresented at trial.  It seems however that the 2^nd defendant is still instructing its solicitors on certain matters as, on 17 March 2014, the court received a notice of appeal against the court’s refusal to stay the proceedings on 3 March 2014 leave for which was due to be heard on 25 March 2014 (before this decision is handed down).  However, the 2^nd defendant soon after applied to vacate the leave application date which was granted.

(v) The price of the sale agreement and the purported “buy back” agreement:

Had the sale have been completed it would have been for $15 million.  The property is a 2,000 sq ft 3^rd floor flat (with garage space) in Plantation Road on the Peak.  One of the reasons given in an attempt to justify this price was that it had to be sufficient to clear the outstanding mortgage(s) of $13.5 million. This makes no sense.  The amount of a mortgage is wholly irrelevant to the valuation of a property.

The 1^st defendant relied on a valuation report from Clarence Chen & Co valuing the property at $14 million.  This report is dated May 2009 (a year before the transaction) and was prepared on instructions from a Mr Wang Qiguo, the chairman of Ningbo Dixing Investments Ltd in Zhejiang, China.  He appears to have no connection to this case.

This must be balanced against the following facts.  In 2004 the 1^st defendant marketed the property through Midland Realty at $28.8 million.  There is evidence that in 2010 auctioneers had a reserve price of $30 million, said to be “30% below market value.”  In May 2010, Centaline valued the property (for the plaintiff) at $44.3 million. In short, it is not difficult to conclude that $15 million is a gross undervalue.

An attempt to justify the undervalue is made by reference to the purported “buy back” arrangement whereby the 3^rd defendant had the option to buy back, within a defined period, 30% of the shares in the 2^nd defendant.  This also was a sham.

The argument was that there was a potential development of the property which, if done, would be highly lucrative and the 3^rd defendant would, accordingly, benefit from that development.  The so‑called development potential came from a single letter from Frank Knight & Co in 2008 exploring possibilities.  No 23 Plantation Road is not a detached building, it is in a terrace.  There are a total of 23 flats between Nos 23‑27 Plantation Road.  Letters were, presumably, sent to all of them.  Nothing further of note happened.  To argue in 2013 that there is no evidence that the development idea has been abandoned is unworthy.

Moreover, even if it were genuine, the plaintiff asks the telling question, if the 3^rd defendant sold its only asset for barely more than the mortgage on it how would it have any money to buy the 30% shares when the time come?

The following simple explanation is the more plausible by a significant degree.  Had the sale gone through the 1^st defendant would still have control of the property through his alter ego the 2^nd defendant, to the exclusion of the plaintiff.

(vi) Further miscellaneous factors:

(a) Of the $750,000 deposit in the provisional sale and purchase agreement $100,000 was paid in cash (the reason given being that Best Century had no bank account at the time) and no evidence has been provided in support of the payment of the balance.

(b) There is no evidence that enquiries were made by the proposed purchaser, Best Century, concerning either the writ in HCA 336/2008 or the other encumbrances registered against the property.  One would have expected a bone fide purchaser to have done so.

(c) The property was not marketed by a Hong Kong estate agent.  The agreement was apparently drafted and executed in Shenzhen and yet the alleged beneficiary, Mr Gary Ko, provides a Hong Kong address in his witness statement.  There is no satisfactory explanation as to why a property in a prime location in Hong Kong is only marketed in Mainland China.

(3) Does the Best Century agreement contravene section 60 of the Conveyancing and Property Ordinance, Cap 219?

71.  Mr Li seeks a ruling on this question as a separate issue in this trial.  Section 60 provides as follows:

“60. Voidability of dispositions to defraud creditors

(1) Subject to subsections (2) and (3), every disposition ofproperty made, whether before or after the commencement of this section, with intent to defraud creditors, shall be voidable, at the instance of any person thereby prejudiced.
(2) This section does not affect the law of bankruptcy for the time being in force.
(3) This section does not extend to any estate or interest in property disposed of for valuable consideration and in good faith or upon good consideration and in good faith to any person not having, at the time of the disposition, notice of the intent to defraud creditors.”

72.  I have considered Mr Li’s submission on this matter but have decided that the issues in this trial are fully answered by the two questions already addressed, namely, was the agreement in compliance with the consent order and was it a sham.  I have decided therefore not to address this final question in the context of this litigation.

(4) The 2^nd defendant’s role

73.  For the sake of completeness it is necessary to state the finding on the evidence that the 2^nd defendant was not a bona fide purchaser.

74.  I further find that the 2^nd defendant knew or ought to have known that the transaction was for the ultimate benefit of the 1^st defendant who was acting independently of his fellow director, the plaintiff and thereby in breach of his fiduciary duty to the 3^rd defendant.

75.  Much of this judgment follows and accords with the oral and written submissions advanced by Mr Li and Mr Butt.  I have accepted those submissions as, in my judgment, they represent a proper evaluation of the whole of the evidence and proper inferences drawn therefrom.  Mr Fan faced an uphill task.  His submissions were nonetheless valiantly made in a measured way. I commend the legal representatives on both sides for their industry, preparation and presentation.

RELIEF

76.  I make the following order

(1) The Best Century agreement is declared void and of no effect.

(2) The registration of the Best Century agreement at the Land Registry be vacated.

(3) There shall be an injunction until further order restraining the 1^st defendant whether by himself or his agent or otherwise from entering into any agreement for the sale of the “property” whether in the name of the 3^rd defendant or otherwise without the prior written consent of the plaintiff.

(4) There shall be an injunction until further order restraining the 3^rd defendant whether by its director(s) or otherwise from entering into any agreement for the sale of the “property” whether in the name of the 3^rd defendant or otherwise without the prior written consent of the plaintiff.

(5) The 2^nd defendant is permanently restrained, whether by its director or agent or otherwise from proceeding with the Best Century agreement.

(6) Damages to the plaintiff to be assessed.

(7) Liberty to apply.

77.  Having given both parties an opportunity to address the court on the question of costs I order that the costs of the action and other summons where costs has hitherto been reserved be to the plaintiff against the 1^st and 2^nd defendants on an indemnity basis with a certificate for two counsel, such costs to be taxed if not agreed.