Au Yuk Lin v Wong Wang Hin, Eddy

CACV 234/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 234 OF 2012

(ON APPEAL FROM HCMP NO. 272 OF 2011)

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JUDGMENT

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Hon Lam VP (giving the Judgment of the Court):

1. The Defendant in this appeal is the son of the Plaintiff. The subject matter involved is 180,000 shares [“the Shares”] in a company called Menfond Electronic Art & Computer Design Co Ltd [“the Company”]. The Shares were transferred from the Plaintiff to the Defendant on 19 December 2006. The transfer was effected by an instrument of transfer on that date and the parties also executed bought and sold notes. On the face of the documents, the transfer was for a consideration of $180,000. However, it is common ground that no payment had been made.

2. The Plaintiff said, notwithstanding the transfer, the Defendant held the Shares on trust for her. On the other hand, the Defendant said that the transfer was a gift from the Plaintiff.

3. In these proceedings, the Plaintiff sued for a declaration that the Defendant is holding the Shares on resulting trust for her. She also sought an order directing the Defendant: (1) to execute an instrument of transfer and all necessary documents for the transfer of the legal title of the Shares to her; and (2) to procure the approval of the transfer by the board of the Company.

4. After a trial which lasted 6 days, L Chan J [the Judge”] found for the Plaintiff in a judgment dated 7 September 2012. The Judge granted the relief sought by the Plaintiff. This is the appeal by the Defendant.

5. In the judgment, the Judge accepted the evidence of the Plaintiff and her witnesses and rejected the evidence of the Defendant and his witnesses. According to the evidence of the Plaintiff, the Company was set up in the following circumstances, see paras 16 and 17 of the judgment:

“16. Au also referred to the setting up of Menfond Computer by their sons in 1989. Their sons set up Menfond Computer to do business in digital animation and design. Their sons had just finished with their education and had no capital to set up the business. Everything required by the business was provided by the parents. The parents had certain premises at Kowloon Bay which were owned by them through their investment company, Menfond Company Limited (“Menfond Investment”). The parents initially were the only shareholders of this company, but some shares were later given to the sons. The sons were allowed to use the Kowloon Bay premises for the business of Menfond Computer free of charge. All funds required for the business operation in the first two years including the costs for incorporating Menfond Computer, the purchase of computers and other equipment, some HK$700,000 for decorating the premises and the salaries of two employers were met by the parents. The advances by the parents were booked as interest free loans from the parents to the company. The parents were also given shares of the company. Au further said that she and Wong also allowed their sons to create a second legal charge on the Shop in favour of WHB on 13 March 1992 to secure banking facilities for Menfond Computer.

17. The legal charges in favour of WHB were discharged on 14 May 2002 with funds borrowed from the Standard Chartered Bank (“SCB”). The Shop was then mortgaged to SCB to secure the repayment of such loan. Au said that this mortgage was made with the consent from her and Wong. They gave their consent to help their sons. Au admitted that she was aware of the risk of a mortgage over the Shop as the mortgagee would take possession of it if Menfond Computer should fail to repay the mortgage loan. She explained that though she had to look after her relatives, her sons had the first priority to use the Shop. If the sons should fail in their business, then she would have nothing to say (but to accept the consequence).”

6. On the Judge’s findings based on the Plaintiff’s evidence (which he accepted), the Shares were transferred to the Defendant in the following circumstances, see paras 22 to 27 of the judgment:

“22. Regarding the 180,000 shares of Menfond Computer that Au transferred to Eddy in December 2006, they were transferred to meet the demand of SCB for granting of banking facilities to Menfond Computer. Menfond Computer was negotiating with SCB in the last quarter of 2006 for renewal of banking facilities. Menfond Computer in fact wanted the overdraft facilities to be increased. The facilities were guaranteed by Victor and Eddy. SCB wanted the guarantors to be the majority shareholders of the company or else there should be additional guarantors.

23. The then CFO Janson Law calculated that each of Victor and Eddy would require the transfer of 180,000 shares from their parents so as to become the majority shareholders.

24. Au and Wong duly executed the share transfer documents by which each of them transferred 180,000 shares to Victor and Eddy respectively. Au said that they did so only for the purpose of showing that Eddy and Victor were the majority shareholders of Menfond Computer so that it could obtain banking facilities. They did not intend to transfer their beneficial interests in the shares to their sons. They intended that the sons would hold these shares on trust for them.

25. In oral evidence, Au clarified that she and Wong were lending the shares to their sons. Though the consideration stated in the transfer documents was HK$180,000 for each transfer, there was no discussion within the family on any payment as no transfer of beneficial interest was intended. Regarding the defendant’s allegation that Clarice had asked Au and Wong to transfer 180,000 shares to each of their sons as a gift, Au said Clarice only asked them to lend the shares to the sons.

26. After the transfers, each of Au and Wong was still holding 770,000 shares of the company. Au denied that she and Wong were holding the shares of the company ultimately for the sons’ benefit. She also maintained that the shares were their investments and had considerable sentimental value if not substantial financial value to them.

27. Regarding the undertakings given by Victor and Eddy to SCB that they would inform the bank of any change in the beneficial shareholding of the company, Au denied knowledge of the same as she and Wong were not involved in the negotiation with the SCB for the banking facilities. They had also not been shown the relevant documents from the bank which they in any event would not have been able to understand as the documents were in English.”

7. Her evidence was corroborated by the evidence of her husband, the father of the Defendant.

8. This was supplemented by the findings based on the evidence of Victor, the other son who gave evidence for the Plaintiff, see para 54.

“54. Regarding the transfers of shares by Wong and Au to him and Eddy respectively, he said SCB required him and Eddy to be the majority shareholders of Menfond Computer. Janson Law, the then CFO of the company, calculated that each of them needed 180,000 shares from their parents in order to satisfy the requirement. He then talked to his parents who promised to lend the shares to them so that they would on paper appear to own more than 50% of the shares. He added that the transfers were not meant to cover the beneficial interest. There was no discussion of valuation or payment and there was no intention for any payment to be made. The entire transaction was just to satisfy the requirement of SCB.”

9. The Defendant himself did not talk to the Plaintiff about the transfer before the documents were executed in 2006. Amongst his witnesses, only his wife Clarice had talked to the Plaintiff about it. The Judge referred to her evidence at paras 69 to 72 of the judgment:

“69. Regarding the transfer of 180,000 shares of Menfond Computer to Eddy, she referred to the requirement of SCB that Victor and Eddy should be the majority shareholders of the company or else there should be additional guarantors. She discussed this with Janson Law and came to the view that each of Victor and Eddy needed a transfer of 180,000 shares from their parents. She then informed Au about this. She asked Au for Wong and Au to transfer the shares to Victor and Eddy. Au said that that would not be a problem. There was no mention either of trust or payment. She then instructed the auditors of the company to prepare the transfer documents which were duly signed by Wong and Au.

70. In cross-examination, she said when she asked Au on the phone to transfer the shares to Victor and Eddy. She felt that Au already knew what she was asking for. She agreed that Victor, who was living with Au, had already talked to Au about the matter.

71. Regarding the transfer documents, she said she only reckoned that they were for transfer of the shares. She had not thought of the need to pay the HK$180,000 as stated in documents. She also had not mentioned the question of payment with Au and did not know or...