YU MAN FUNG ALICE v. CHIAU SING CHI STEPHEN AND ANOTHER

CACV 50 of 2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CIVIL APPEAL NO 50 OF 2013

(ON APPEAL FROM HCA 1584 OF 2012)

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R E A S O N S   F O R   J U D G M E N T

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Hon Poon J (giving the judgment of the Court of Appeal) :

A. INTRODUCTION

1.  There were two appeals before the Court.

2.  CACV 50/2013 was the 2^nd defendant’s appeal against the order of Deputy High Court Judge Burrell dated 7 February 2013, dismissing its application to strike out the plaintiff’s claim against it.

3.  CACV 69/2013 was the plaintiff’s appeal against the order of Chung J dated 25 March 2013 whereby :

(1) the plaintiff’s amended statement of claim (“ASOC”) was struck out;

(2) the plaintiff’s action against the 1^st defendant was to be dismissed unless the plaintiff filed and served a re-amended statement of claim within 42 days; and

(3) the plaintiff’s application to re-amend the ASOC (“the Proposed RASOC”) by summons dated 14 March 2013 was dismissed.

4.  On 25 March 2014, after hearing the parties, with reasons to be handed down later, which we now do, we disposed of the appeals as follows.

5.  In respect of CACV 50/2013, we allowed the 2^nd defendant’s appeal as per its notice of appeal dated 18 March 2013.

6.  In respect of CACV 69/2013, we varied Chung J’s order to the extent of giving the plaintiff leave to apply to a judge of the Court of First Instance for leave to re-amend the ASOC within 42 days for the date of the present hearing.  Save as aforesaid, we dismissed the plaintiff’s appeal.

7.  We then heard submissions on costs and reserved our decision to be dealt with in these Reasons for Judgment.

8.  The background may be summarized as follows.

B. BACKGROUND

B1. The parties

9.  The 1^st defendant is a well-known actor and movie producer.  The plaintiff, who claims to be an experienced and skilled investor in finance and property development, was the 1^st defendant’s girlfriend between 1997 and 2010.

10.  The 1^st defendant and the Ryoden Group were involved in a property development known as the Skyhigh Project.  A 50/50 joint venture between the 1^st defendant and the Ryoden Group, the Skyhigh Project involved the redevelopment of No. 10 Pollock’s Path into four houses, Houses 10, 12, 16 and 18, between 2004 and 2007.  After their completion, each of the four Houses was registered in the 2^nd defendant’s name.

11.  The 2^nd defendant is the corporate vehicle for the Skyhigh Project.  It was incorporated in Hong Kong on 10 November 2000 with the two sisters of the 1^st defendant as subscribers and first directors.  After the transfer of their shares by the 1^st defendant’s sisters and further allocation of shares by the 2^nd defendant, Create Magic Limited, a BVI company (“Create Magic”), became the sole shareholder of the 2^nd defendant as of 31 May 2004.

12.  As for Create Magic, it was incorporated in March 2004 for the purpose of the Skyhigh Project.  As of June 2004, it was equally held by Sharp United International Ltd, A BVI company (“Sharp United”) and Allied Top Development Limited (“Allied Top”).  Sharp United, renamed as Whiskey Investments Limited (“Whiskey”) in 2007, is held by a discretionary family trust in which the 1^st defendant has an interest.  Allied Top is a wholly owned subsidiary of Ryoden Property Development Company Limited (“RPD”).

13.  A diagrammatic representation of the 2^nd defendant’s corporate structure appears thus :

14.  The directors of the 2^nd defendant are Mr Raymond Hu and Mr Herman Hu, sons of the founder of the Ryoden Group, Mr Hu Fa Kuang, Ms Kelly Chow, sister of the 1^st defendant (“Ms Chow”), and a Mr Lam Chi-wah.

C. THE PLAINTIFF’S CLAIMS

15.  The plaintiff pleaded that she and the 1^st defendant, each through a company owned by them, entered into a written agreement dated 1 April 2002 whereby she, in consideration of a monthly remuneration, became the 1^st defendant’s personal financial consultant, providing overall strategic planning and corporate financial advisory services to him.[1]  In about 2002 and early 2003, they made a further oral agreement that :

“on top of the monthly remuneration, the 1^st defendant would pay the plaintiff commission in terms of profit sharing at ten percent (10%) after tax profits on the successful investments”.[2]

16.  Pursuant to the parties’ agreement, between May 2007 and January 2010, the 1^st defendant paid the plaintiff a total of HK$19,525,101.44 of which HK$14,942,001.00 came from the Skyhigh Project.[3]

17.  The plaintiff’s case with respect to the commission referable to the Skyhigh Project is supported by documentary evidence.  According to the profit and loss account of the 2^nd defendant for the years between 2002 and 2009, the sale of Houses 16 and 18 in October and September 2009 respectively had generated a total profit after tax of HK$298,840,022.00.  The 50% profit distributed to the 1^st defendant was HK$149,420,011.00.  The 1^st defendant then caused Whiskey to pay the plaintiff the 10% commission in the sum of HK$14,942,001.00 by cheque dated 1 December 2009.  The payment was acknowledged by a receipt, which stated that :

“Re : Sale of Pollock Path No. 16 & 18

As per the instruction of Mr Chiau Sing Chi and Ms Chow Man Ki, we paid the commission to Ms Alice Yu as follows :

Half share of profit of Star Royale Limited from Y.E. 2002 to Y.E. 2009 (HK$298,840.022/2) is HK$149,420,011.00.

Thus, 10% commission paid to Ms Alice Yu is HK$14,942,001.”

The 1^st defendant and Ms Chow then signed on the receipt as the approving party, the plaintiff, as the receiving party.

18.  The plaintiff’s case is that the 1^st defendant and the Ryoden Group then divided Houses 10 and 12 as between themselves.  The date of the division is not apparent from the evidence.  But according to Mr Sarony SC, for the plaintiff, it took place in February 2008.[4]

19.  In August 2011, the 2^nd defendant sold House 10 for HK$800 million.  The sale, the plaintiff pleaded, left the 1^st defendant as the sole beneficial owner of House 12 through his beneficial interest in the 2^nd defendant.[5]

20.  The 2^nd defendant did not sell House 12.  Instead, it took out a mortgage on House 12 from HSBC dated 9 May 2011 to secure an all monies general banking facility in favour of Whiskey to the extent of HK$250 million.  The plaintiff said that 1^st defendant then applied part of the loan to purchase shares and convertible bonds of a list company, Bingo Group Holding Limited.

21.  In around the end of 2011, the 1^st defendant moved to live in House 12 and, according to the plaintiff, has been staying there for free.

22.  The plaintiff pleaded in the ASOC :

“9. House No. 12 is still registered in the name of the 2^nd Defendant and the 1^st Defendant is its entire beneficial owner by virtue of his beneficial ownership of the 2^nd Defendant. The net worth of House No. 12 is valued in excess of HK$800 million. By reference to the price of HK$800 million obtained for house number 10, the estimated value of House No. 12 would be no less and probably more. Hence, the Agreed Commission payable to the Plaintiff would be at least HK$80 million.

10. On or about a date unknown but in about the end of 2011, the 1^st Defendant commenced occupation of House No. 12, which occupation constituted an act of proprietary ownership equivalent to sale of the property or realization of its monetary worth thereby crystallizing the 1^st Defendant’s obligation to pay the Agreed Commission to the Plaintiff.

11. Further and in the alternative, the 1^st Defendant’s said occupation of House No. 12 and crystallization of the obligation to pay the Plaintiff the Agreed Commission created a constructive trust in him of the Plaintiff’s said interest in the proceeds of sale, which the 1^st Defendant as the beneficial owner of the legal estate in House No. 12 through the 2^nd Defendant thereby held on trust for the Plaintiff (‘the Trust’).

12. Further, by reason of the facts and matters set out under paragraphs 9 to 11 above, the Plaintiff holds an equitable interest in House No. 12 equivalent to so much of the 10% Agreed Commission as has not been paid to her.

13. By virtue of the verbal Agreement and under which the 1^st Defendant agreeing to pay the Agreed Commission, the 1^st Defendant owes the Plaintiff thea sum of HK$80 million being 10% of the after tax net profits on the House No. 12 calculated to be 10% of the after-tax profit on the sale of House No. 12 over which the 1^st Defendant exercised his proprietary right (the ‘House Commission’).”

23.  The plaintiff went on to plead that upon demand, on 1 March 2012 the 1^st defendant paid the plaintiff a sum of HK$10,000,000.00 as part payment of the House Commission.  But later on 30 March 2012, he wrote to say that it was only a gratuitous payment and denied that he owed the plaintiff the House Commission.[6]

24.  The plaintiff then pleaded :

“By reason of the 1^st Defendant’s refusal and/or failure to pay the Plaintiff the House Commission in full, the 1^st Defendant is in breach of the Trust.”[7]

25.  The plaintiff claimed against the 1^st defendant for the balance remaining of the House Commission to be assessed, giving credit for the HK$10,000,000.00 received; a declaration that the 1^st defendant holds the balance remaining of the House Commission on trust for the plaintiff; and a declaration that he was in breach of the Trust.

26.  As against the 2^nd defendant, the plaintiff claimed for a declaration that she holds an equitable interest in House 12, equivalent to the balance remaining of the House Commission has not been paid to her, free from encumbrance; and a declaration that the plaintiff is entitled to at least 8.75% of the value of House 12.

D. JUDGMENTS BELOW

D1. Burrell DJ’s judgment

27.  The learned Deputy Judge was then dealing with the 2^nd defendant’s application to strike out.  Although it has not been so pleaded in the ASOC, the debate before the Judge concerned the issue whether the corporate veil of the 2^nd defendant could be lifted.  The Judge summarized Mr Sarony’s submission thus :

“8. Mr Sarony, SC leading Ms Angel Lau, counsel for Ms Yu, accepts that his only claim for damages or other financial relief lies against Mr Chiau pursuant to the agreement. It is not contended that Star Royale is a party to that agreement. Ms Yu’s claim against Star Royale is purely declaratory in nature. In practical terms it seeks to put a charge on the property in Ms Yu’s favour equivalent to the amount she claims to be owed. If she loses her case against Mr Chiau there can be no declaration against Star Royale, because the declaration sought depends on the existence of the agreement. If she wins against Mr Chiau, the declaration against Star Royale is not, in practical terms required. Thus, again acknowledged by Mr Sarony, the real purpose of keeping Star Royale in the litigation is to register a lis pendens charge on the property to secure the plaintiff’s claim and thereby protect her interest pending and post trial.

9. The plaintiff, at trial, would invite the court to consider who directs and controls the activities of Star Royale so as to determine that the corporate structure, upon which Ms Lisa Wong, SC leading Mr Wilson Leung, counsel for the 2^nd defendant relies in support of the submission that House No.12 is immune from any declaratory interest by the plaintiff, is a façade.”

28.  After setting out Ms Wong’s submissions, the Judge had this to say :

“Ms Yu’s position comes down to this: if, given her day in court against Star Royale, does she have any grounds for lifting the corporate veil (regardless at the moment of any deficiencies in the pleadings)?

Mr Sarony acknowledges that Ms Yu’s case depends entirely on establishing that Mr Chiau has a beneficial interest in No.12.  Further, that he is, at least in part, the real owner and that, if so, a declaration that she is entitled to a proportion of its value due to his breach of contract, is an appropriate remedy.”

29.  Acknowledging that it might be a tall order for the plaintiff, the Judge nevertheless found that there are matters which are relevant to this issue which is a question fit to be decided at trial :

“(a) Mr Chiau lives at No.12 and there is no evidence of any lease or rental agreement with Star Royale.

(b) Ms Yu has been paid $10 million, over and above the $15 million she received on the sales of numbers 16 and 18. It is her case that it was paid by Mr Chiau in respect of House No.12 as a “part payment”.

(c) The cheque for $15 million was from the family trust, Whiskey Investments, and signed by Mr Chiau’s sister. Inferences of true “control” may be drawn.

(d) On 30 March 2012 Mr Chiau wrote to Ms Yu disclaiming that the cheque for $10 million represented a part payment of any money due to her under their agreement.  However the letter does say ‘we agree to discuss if I sell my residence at No.12 Pollock’s Path on the Peak and reap a net profit and will consider how to reward you’.”

30.  He therefore refused to strike out the plaintiff’s claims against the 2^nd defendant.

D2. Chung J’s judgment

31.  Shortly before the hearing before Chung J, the plaintiff put in the Proposed RASOC attached to the summons dated 14 March 2013. Initially, Mr Whitehead, SC, for the 1^st defendant, took the view that the Proposed RASOC had sufficiently addressed his concerns over the ASOC.  He therefore did not pursue the striking out application.  He only sought costs against the plaintiff.  However, after some discussion with the learned Judge, Mr Whitehead decided to press on with the striking out application.

32.  Upon analysis, the Judge categorized the plaintiff’s claims against the 1^st defendant as the service fee claim for the House Commission and a trust claim.  He disposed of the service fee claim in these terms :

“18. As set out above, the service fee claim depends entirely on the validity of her case that D1’s occupation of the subject property constitutes:

(i) a sale; or

(ii) a realization of the market value,

of the subject property (at the end of 2011). They will respectively be called ‘deemed sale’ and ‘deemed profit realization’ below.

19. Having so pleaded her claim for service fee, strangely in her written submissions, the plaintiff contends:

(a) the event which is said to render the plaintiff’s service fee to accrue is D1’s rejection of her request for payment (para 13, plaintiff’s written submissions);

(b) D1 allegedly breached the said agreement (i) when he refused her request for payment on 28 July 2011 and/or (ii) when he failed to respond to her solicitors’ letter of demand dated 9 December 2011 and/or (iii) by his letter dated 30 March 2012 (para 14 to 15 and 19, amended S/C).

20. Damages for breach of contract become payable upon the occurrence of the breach: Chitty on Contracts (2012) 31^st Ed, Vol 1, para 24-049, citing Photo Production Ltd v Securicor Transport Ltd [1980] AC 827, 849. They should also be assessed as of that time: Chitty, Vol 1, para 26-014.

21. In relation to a contractual obligation to pay, the breach occurs when the paying party fails to do so in accordance with the contract terms.

22. Consequently, according to the amended S/C, D1’s payment obligation should arise on the deemed sale or deemed profit realization (that is, the end of 2011) (para 10 thereof). Such being the case, it is hard to understand why her written submissions contend instead that the service fee became accrued in July 2011 and/or December 2011 and/or March 2012 (D1’s refusal of the plaintiff’s request to pay).

23. Reference has also been made to D1’s payment of $10 million on 1 March 2012 (para 17, amended S/C) but this is more probably pleaded as D1’s acknowledgement of his obligation to pay the service fee than an act which constitutes a cause of action.

24. As a matter of ordinary language and daily experience, a ‘sale’ involves a transfer of ownership (or at least some proprietary interest) in property to a purchaser (or purchasers) in exchange for something else (usually money). Examples of statutory definitions of ‘sale’ can be seen at s 3(1), Sale of Goods Ordinance (Cap 26); s 2, Stamp Duty Ordinance (Cap 117) (‘conveyance on sale’); s 2, Conveyancing and Property Ordinance (Cap 219). A ‘realization of market value’ would involve a similar transaction. Both are in the nature of a bipartite (or even multipartite) transaction.

25. Merely because an owner exercises his right of occupation of his own property comes nowhere near such kind of transactions. It is not an act which involves another party (or other parties) either.

26. By reason of the above matters, the service fee claim is either obviously unsustainable, or at the very least incomprehensible (and thus ‘embarrassing’).”

33.  Turning to the claim based on trust, the Judge took the view that the 1^st defendant’s obligation to pay the service fee is in the nature of a personal contractual liability.  Consequently, the trust claim has no legal basis.  He further said :

“30. Further, it has not been pleaded that the said agreement involved the transfer of property or proprietary interest inter partes (whether from the plaintiff to D1 or vice versa). In other words, it has not been pleaded that the said agreement intended:

(1) the plaintiff was to transfer any of her properties to D1;

(2) D1 was to transfer any of his properties to the plaintiff;

in relation to D1’s investments (acquired as advised by the plaintiff).

31. Such being the case, there is no known legal principle in support of the rather bold averment in the amended S/C to the effect a constructive trust can somehow be created in relation to the service fee for which D1 is said to be liable.

32. Thus, the trust claim is also obviously unsustainable.”

E. DISCUSSION

34.  In our view, there are two crucial issues which, once resolved, would determine the outcome of the appeals before us.

35.  The first issue is : when did the plaintiff’s cause of action against the 1^st defendant for the balance of the House Commission accrue?

36.  The second issue is : whether the plaintiff has a proprietary claim against the 1^st defendant?  If she does not, then whether the 1^st defendant is the beneficial owner of House 12 or whether the corporate veil of the 2^nd defendant should be lifted is neither here nor there.  For the plaintiff cannot possibly assert any proprietary claim against House 12 or the 2^nd defendant.

E1. Issue 1 - Accrual of the plaintiff’s cause of action against the 1^st defendant

37.  On the plaintiff’s pleadings, her claim against the 1^st defendant for the unpaid House Commission is contractual.  It is based on the profit realized by the 1^st defendant in respect of House 12.  In other words, her entitlement to payment of commission only arose when the 1^st defendant realized his profit in respect of House 12.  However, her case as to when that happened, whether it is based on the ASOC or the Proposed RASOC, is confusing.  Several possibilities were alluded to in the course of Mr Sarony’s submissions, including when Ryoden Group and the 1^st defendant divided Houses 10 and 12 (February 2008), when the 1^st defendant caused the 2^nd defendant to take out the mortgage in favour of Whiskey (May 2011) ; and when the 1^st defendant went into occupation of House 12 (end of 2011).

38.  The inability on the plaintiff’s part to plead exactly when her cause of action against the 1^st defendant for the unpaid House Commission arose has rendered her pleadings defective and embarrassing.

E2. Issue 2 - Proprietary claim against the 1^st defendant

39.  On her pleaded case, the plaintiff simply does not have any proprietary claim against the 1^st defendant in respect of the House Commission.  As noted, her claim is purely contractual.  Although the quantification of her commission is based on the profit realized by the 1^st defendant, the claim remains personal in nature.  No trust claim can possibly arise against the 1^st defendant.  It must follow that even assuming that the 1^st defendant is the beneficial owner of House 12 the plaintiff simply has no proprietary claim whatsoever in respect of House 12 or against the 2^nd defendant.

E3. Conclusion

40.  For the above reasons, the plaintiff’s claim against the 2^nd defendant must be struck out, the action against it must be dismissed, and the registration of the lis pendens against House 12 must be vacated.  We therefore allowed the 2^nd defendant’s appeal against Deputy High Court Judge Burrell’s order in terms of its notice of appeal.

41.  We agree with Chung J that the plaintiff’s claims against the 1^st defendant should be struck out.  The proprietary claim against him is unarguable, and the contractual claim is embarrassing for the reasons explained above.  But as fairly accepted by Mr Whitehead, the deficiency as to the plea on the accrual of her cause of action against the 1^st defendant can be cured.  After taking instructions, Mr Sarony proposed the following plea to be inserted in the ASOC to cure the defect :

“Division of ownership of Houses 10 and 12 in or about February 2008 was the moment when the 1^st defendant realized profit in the Skyhigh Project represented by House 12, giving rise to the obligation to pay the plaintiff the agreed commission.”

42.  We noted this proposal but took the view that the matter should be dealt with by way of a properly formulated application for leave to re-amend the ASOC, to be taken out in the Court of First Instance.  We therefore varied Chung J’s order by giving the plaintiff leave to take out the necessary application for re-amending the ASOC within 42 days.  Save as aforesaid, we dismissed the plaintiff’s appeal against Chung J’s order.

43.  To avoid any misunderstanding, we would make it clear that any proposed re-amendment by the plaintiff should be limited to the accrual of her contractual claim for the House Commission against the 1^st defendant.  It is not a license for her to resurrect the proprietary claim against him or the 2^nd defendant.  Any proposed re-amendment to the ASOC should not, therefore, contain any such proprietary claim.

44.  We would add that where a pleading is struck out, but it is thought to be appropriate to permit the party whose pleading is struck out to have an opportunity to put forward an amendment to cure the defects, leave to amend should only be granted where a properly formulated draft amendment has been put forward for the other party’s, and the court’s, consideration.  Where no properly formulated draft is available at the hearing, the appropriate order to make is one striking out the defective pleading, but giving leave for an application to amend to be made within a stated period of time, failing which appropriate consequences should follow.

F. COSTS

45.  We can see no basis to depart from the usual rule that costs are to follow the event.

46.  As between the plaintiff and the 1^st defendant, we order costs against the plaintiff for the proceedings here and below, to be paid forthwith and taxed on a party and party basis if not agreed.

47.  As between the plaintiff and the 2^nd defendant, Ms Wong asked for indemnity costs on the ground that the plaintiff’s claim against the 2^nd defendant is wholly unmeritorious, amounting to an abuse of process.  While we can see no merits in the plaintiff’s claim against the 2^nd defendant, we cannot dismiss it as an abuse of process.  We think most probably the plaintiff took a bad tactical move based on erroneous legal advice.  She should not be visited with indemnity costs.  We therefore order the plaintiff to pay the 1^st defendant costs here and below forthwith, to be taxed on a party and party basis if not agreed, with a certificate for two counsel.