CHINA WEAL LTD. v. LAM SAU WAH

HCA 12281/1997

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 12281 OF 1997

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J U D G M E N T

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1. In these proceedings the plaintiff seeks a declaration that a property in Tai Koo Shing purchased in 1992, and assigned to the defendant on 21 February 1992, is held by the defendant on trust for the plaintiff. The plaintiff also seeks consequential orders for the transfer or sale of the property.

2. It is not in dispute that the defendant entered into a provisional sale and purchase agreement in respect of the property, Flat G, 27th Floor, Yee Shan Mansion, Kao Shan Terrace, Tai Koo Shing, on 24 January 1992. The purchase price of the property was $2,405,000.00 and the defendant paid an initial deposit of $50,000.00 to the vendors and the estate agent's commission of $24,050.00. A further payment in respect of the deposit of $190,500.00 was made by way of a cheque from the plaintiff to the defendant's solicitors on 30 January 1992 and a formal sale and purchase agreement signed by the defendant and the vendors the same day. On 17 February 1992, the plaintiff issued a further cheque payable to the defendant's solicitors for $2,249,147.50, which included the balance of the purchase price, and gave it to the defendant, and on 21 February 1992 the property was assigned to the defendant. She and her husband then spent some $630,000.00 decorating and furnishing the property and moved in with their family, paid all outgoings by way of rates and management fees, and remained there as their residence until emigrating to the USA in 1997.

3. The plaintiff's case is that the property was purchased with its money to assist a Mr Yuen Hau Ting (Yuen), an acquaintance of its chairman and chief executive officer, Mr Deng Liu Gen (Deng), as Yuen, who was then resident in Foshan, Guangdong, China, where he was what is referred to in evidence as "Chief" of the branch of the Bank of China, and who intended to shortly move to Hong Kong. Upon his arrival in Hong Kong, it was intended that he should reimburse the plaintiff and the property would be reassigned to him, and that the assignment in the name of the defendant was merely temporary. The plaintiff further maintains that the defendant, apart from the $50,000.00 deposit, contributed nothing to the purchase price.

4. The defendant's case is that, at the request of Deng, she made a loan to him of $2,440,000.00 in cash and received the cheques in exchange, for the purchase of the property which she had already arranged, and for which she had paid the deposit.

5. The plaintiff relied almost entirely on the evidence of Deng to support its case. He said that he had had business dealings with Yuen, presumably in his official capacity, for about two years before the events in question here, and regarded him as good friend. At some time in late 1991 or early 1992 Yuen told him that he was coming to Hong Kong in about two months to take up a position in a company here, and asked Deng to help him purchase a property in Tai Koo Shing and hold it on his behalf. Deng said that he was told by Yuen that it was inconvenient for him to be named as legal owner as he was then a resident of China. Why this should be was never explained, particularly as Yuen had already, Deng said, set up a company here called Eastern World Co. Ltd, which he controlled and which Deng believed had assets here. Deng's evidence at first was that the property was for Yuen. However, he later claimed that he believed it was being purchased on behalf of the Bank of China. I am therefore left with the further query as to why the Bank of China would need the assistance of Deng or the plaintiff.

6. Deng went on to say that he told Yuen that the plaintiff did not wish to be named as legal owner of the property, and, as he states in his witness statement, to be subject to the burden that comes with legal ownership. He explained this in evidence to mean the liability for management fees and rates and that it may involve a change in value. He accordingly agreed with Yuen that the property would be paid for by the plaintiff and put into the defendant's name, who he says he did not know well. He also says that he discussed the matter with his other directors, who also knew Yuen, and they agreed to it. Indeed, at least one other director would have to sign the cheques. However, no other director gave evidence about this, or what transpired when the cheques were signed.

7. It is not in dispute that the defendant is also a friend of Yuen. Indeed, her acquaintance with Deng seems to have been largely through Yuen, although Deng disputes the number of times that they met. In particular, he says that the first time they met was with Yuen at an apartment in Convention Plaza owned by the plaintiff, while the defendant says that this was in fact the fourth time, the first having been over a year earlier. Deng also denied meeting the defendant more than once after the property transaction. This again the defendant disputes, saying that they met on at least three occasions with others. This is supported by one other witness, Mr Lam Ling Tak, whose evidence I have no reason to disbelieve, and who says that he was present at two meetings in 1992, well after February when the transaction was completed. The defendant says that she became well acquainted with Deng and that they were good friends. Having heard both give evidence, and Mr Lam, I accept her evidence and prefer it where it differs from that of Deng.

8. The defendant's account of the events leading up to the purchase of the property is that she and her husband had been looking for a larger apartment for themselves and their two young children and had found the property through an agent at Midland Realty. They viewed the property twice before deciding to buy it, and paid the deposit of $50,000.00. In order to pay the balance the defendant and her husband had kept at their residence the sum required in cash. At the same time, at one of the defendant's meetings with Deng she had told him of the proposed purchase and the price in the course of discussion. She said that she was telephoned by Deng about 25 January when he told her he was in urgent need of a large sum in cash and asked if she would do him a favour by lending him the cash in exchange for a cheque or cheques from the plaintiff company. The defendant knew Deng by this time, knew that he was a successful businessman, and a friend of Yuen, and consequently trusted him. She was also telephoned by Yuen who asked her to help Deng, and who told her that if she wanted to buy shares in the plaintiff later she would have an advantage. She accordingly agreed to give him the money and he came to their flat to collect it, taking about an hour to count it and giving her a receipt, telling her he would reward her with shares later. The sum loaned was $2,440,000.00. There is evidence that the promise as to shares was later carried out. Mr Lam Ling Tak, a shareholder and director of a company called Smart Hero Ltd, gave evidence that there was a discussion with Deng in about June 1992 at a meeting over dinner, which Deng hosted, at which Yuen, the defendant, and a number of others were present, as a result of which an investment was made by Smart Hero in a company in which Deng had an interest, and the defendant gave a sum of money to Smart hero which was included in the money invested. Although Deng had guaranteed his investors a profit, it appears that this has not in fact materialised.

9. The defendant says that her husband had already worked out, on a piece of headed notepaper from a company with whom he used to work, the total cost of the purchase with legal fees, commission and stamp duty, and calculated how much the total cost per square foot would be. As the defendant was concerned when she did not receive a cheque as promised in two or three days, she met Deng and took the paper and the provisional sale and purchase agreement with her to show how important it was to have the money back and when she had to pay for the flat, as she might lose her deposit.

10. She went to collect the first cheque from Deng on 30 January 1992, and he wrote on the paper the words: "Agree to pay, charge it to my account", and signed it. He also put a yellow post-it note on the paper, upon which he wrote the following:

"Accounting Department:

Please issue cheques and pay on the dates specified according to this agreement and to take party to the contract Lam Sau Wah to be the purchaser of this property."

He then signed and dated that.

11. The defendant also gave him a copy of the provisional sale and purchase agreement. A cheque for $190,500.00 was issued by the plaintiff's accounts department payable to the defendant's solicitors. She signed the sale and purchase agreement the same day. However, the cheque was not issued in time for it to be cleared by the defendant's solicitors, so the defendant's husband issued a cheque for the same sum direct to the vendors' solicitors, and the plaintiff's cheque paid to the defendant's solicitors was paid into their account and later refunded to her.

12. The second cheque was issued on 17 February 1992 for the sum of $2,249,147.50. Deng's account of this occasion is that on that day the defendant came by herself but with a note from Yuen which read as follows:

"Deng General (Manager): the balance of the total sum for the payment of the living quarters for Miss Lam Sau Wah is $2,249,147.50. For auspicious purposes she wants to pay earlier. Please act accordingly. See you later."

This was signed by Yuen and dated 16 February 1992. Deng wrote on it:

"Agreed: Accounting Department please act accordingly."

Deng signed this and dated it 17 February 1992. A cheque was issued in the sum requested in Yuen's note, payable to the defendant's solicitors, again signed by two directors.

13. The defendant's agrees that she was given the cheque although she says that she did not see Deng that day but dealt with a lady in the accounts department. She says that she had brought forward the date of completion, and was concerned that the balance of the money owed had not been paid, so she asked Yuen to assist by writing a note to Deng to expedite the payment.

14. With this payment, the total paid by the plaintiff via Deng was $2,439,647.50. The loan the defendant says she made to Deng was $2,440,000.00.

15. There are a number of unusual aspects to this matter, and several left unexplained by both sides, which might have been clarified by other witnesses who were not called. On the plaintiff's side, the evidence of the other directors who, Deng says, agreed to the purchase, would have been useful, if that account is true, or a minute of a board meeting agreeing to it, of which there is none. The evidence of Yuen would probably have settled the matter once and for all. However, Yuen, I am told, was arrested in China later in 1992, was under house arrest for some time, until he was convicted of unspecified offences in 1998 and sentenced to 15 years imprisonment. For the defendant, her husband could have supported her version of these events, and did sign a witness statement, but was not called. However, I accept her explanation that relations between her and her husband have not always run smoothly, and he blames her for the trouble this incident has caused. Both accounts are extremely odd stories which beg a number of questions, and to decide which is more likely to be the truth I find that I must decide which is least credible. On this basis, I have to say that I prefer the account of the defendant to that of the plaintiff for the following reasons.

16. Deng's evidence was that, although the plaintiff was buying the property for Yuen, it would be the property of the plaintiff until Yuen came to Hong Kong and bought it back. However, it was never recorded in the company's accounts as an asset of the company. The only entry in the accounts was under "Amounts due from Directors" showing a debit due from Deng to the company, with no reference to the property at all, nor to the precise amount paid. All the accounts show is that on 1 April 1992 he owed the company $8,400,000.00, and by 31 March 1993 that had reversed to a credit due from the company of $714,424.00. It is clear from the evidence of the plaintiff's accounting officer, Miss Seto Yee Mai, Kimmy, that no other record of the transaction being a purchase for the plaintiff exists. Although all documents over 7 years old are destroyed, the evidence of the payments made here were kept and handed to their solicitors, and I have no doubt that if there was any document showing the plaintiff's interest as owner in this property, that would have been kept also. There is however no evidence that such a document exists, nor that the sum debited to Deng's account was for purchase of the property. This was a company whose business, or part of it, involved dealing in and owning property, and those properties it owned were recorded in the accounts. There is no record of this property. I accept that it could not be listed as a fixed asset while the plaintiff had no legal title to it, but the fact that there is no mention of it in any accounts, or notes to the accounts, indicates to me that the plaintiff had no beneficial interest in it.

17. Deng tried to say that it was not unusual for such a purchase to be made in someone else's name and placed temporarily in a director's account, but he could give no example of it ever being done before, except an incident in relation to purchase of shares, of which there was no documentary evidence, and there was no evidence from Miss Seto or the plaintiff's accountant, Mr Wong Wing Hon, of a similar incident. Indeed, Mr Wong pointed out that if the plaintiff had a property held on trust by another, there would be a "note" in the accounts. Here there is none. The obvious inference is that the payment by the plaintiff of these cheques were at the personal request of Deng, for his own purposes, and the most telling of the documentary evidence is the note from him saying "charge to my account".

18. A further inexplicable aspect of this is that, if this was a purchase for the plaintiff, I would expect some attempt to protect its position as owner. After all, Deng may not have been a lawyer but was an experienced businessman. Yet there is no deed of trust, no written acknowledgement at all that the defendant is not the beneficial owner. It would have been a simple matter merely to request the deposit with the plaintiff of the title deeds to protect its position, yet this too was not even suggested. After the payments were made, and the property assigned to the defendant, the plaintiff and Deng appear to have lost all interest in the property until shortly before these proceedings were commenced. His reason for this, that he was waiting for Yuen, who he thought would still come to Hong Kong and settle the matter, does not make sense considering the time that had passed.

19. Miss Catton for the plaintiff has submitted that the note from Yuen referring to the property as "living quarters for Miss Lam Sau Wah" is evidence that Yuen was planning to employ the defendant in his company when he came to Hong Kong. I cannot accept that. There is no convincing evidence that Yuen intended to employ the defendant, and, even if he did, I can see no reason why he should supply her with quarters. She was not coming here as an expatriate employee, and already had a flat of her own. I am of the view that the words in the note meant exactly what they say, that this property was to be the defendant's and where she intended to live.

20. As against this, the defendant's evidence that she was buying this property for herself and her family is fully supported by the evidence. She and her husband paid the deposit and the estate agent's commission, which the plaintiff has never suggested refunding, paid for the decoration and furnishing, and moved in to live there and remained there undisturbed until leaving Hong Kong in 1997. During this time they accepted all the responsibilities of ownership, paying management fees, rates and utilities, and permitting it's use by friends after their departure, and then renting it out.

21. In an effort to cast doubt on the defendant's version of these events, Miss Catton has pointed to the unlikelihood of the defendant having such a sum of money at her disposal. The defendant was cross-examined at some length on this aspect and her apparent rapid accumulation of wealth.

22. The defendant said that, coming from a comparatively modest background in Fujian, China, she came to Hong Kong in 1982, and had for a few years prior to 1992 been engaged in a business arranging emigration for residents of the area from which she came, and where she still had contacts, to Europe, USA and Japan. The head of the organization is an overseas Chinese living in USA and the defendant's role is to make introductions, and, more importantly, to collect the fees for the service in cash from the emigrants who pass through Hong Kong. It is clear from her evidence that a great deal of money is involved, which appears to be brought from China in cash. The defendant's responsibility was to collect and keep the money paid until a representative of the person in charge of the business came to collect it, keeping for herself a commission which varied from US$5,000.00-10,000.00. It was clearly a profitable business for her, as she had accumulated several million dollars by 1992. She said that she kept no records, paid no tax, and that her savings were usually kept in cash at home in a secret compartment that they had had built in their flat.

23. While I agree with Miss Catton that it is an extraordinary story, the defendant and her husband were obviously not poor, already owning their own flat with no mortgage, and I do not find it impossible to believe that they were going to buy the property with cash and had that amount available. However, for the reasons given above, I do find the account of the plaintiff so unbelievable that I have no hesitation in preferring that of the defendant.

24. I accordingly find that, although the property was paid for largely by way of cheques provided by the plaintiff, it was not in circumstances that gave rise to a resulting trust and was by way of repayment of a loan from the defendant to Deng, who was then solely responsible to the plaintiff to account for the payments made by the cheques.

25. The plaintiff's claim will therefore be dismissed and there will be judgment for the defendant on her counterclaim for a declaration that the plaintiff is and was not entitled to register the writ of summons herein against the property, and an order that that registration be vacated. There will also be an order that the plaintiff pay the defendant damages to be assessed by a Master, and an order nisi for costs in favour of the defendant to be taxed.

HCA 12281/1997

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 12281 OF 1997

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D E C I S I O N

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1. This is the Defendant's appeal against the order of Master Lung dated 3 December 1999 where he dismissed the Defendant's application for specific discovery of documents which are listed in the Schedule to the summons and the Schedule to the Notice of Appeal.

2. The Plaintiff brings this action against the Defendant seeking a number of relief which in essence is aimed at recovering a unit in Tai Koo Shing from the Defendant. The Plaintiff alleges that it paid for this unit and the Defendant was only holding the unit on trust for the Plaintiff. The price paid in about January 1992 and February 1992 for the unit totalled $2,405,000. The Plaintiff claims that it paid the price by way of 2 cheques, one of $190,500 and the other of $2,249,147.5. The total of the 2 cheques was $2,439,647.5.

3. The Defendant denies these allegations. She admits that the Plaintiff paid the 2 cheques for purchasing the unit. However, she claims that this was because she had in January 1992 paid the Plaintiff cash in the sum of $2.44 million. These cheques were in effect repayment to the Defendant of the cash sum she paid to the Plaintiff earlier.

4. On 6 September 1999, the Defendant took out a summons asking for specific discovery of the following documents:-

(a)	the Plaintiff's minutes of board meeting authorizing payment of the purchase price of the suit property;
(b)	the Plaintiff's instruction vouchers and/or slips to issue the 2 cheques;
(b)	the Plaintiff's certified and audited accounts for the periods 1992/93 and 1993/94.

The Plaintiff resisted this application essentially on the ground that the documents requested for are not related to any matter in question in the cause or matter and/or not necessary.

5. The Plaintiff does not dispute that the requested documents are or had been in the Plaintiff's possession, custody or power. This is not surprising as there is good basis for believing that they are or have been in the Plaintiff's possession, custody or power.

6. The test for deciding whether a document is related to "any matter in question" between the parties is summarized in The Supreme Court Practice 1999, para 24/2/11. The learned editors said: "They are not limited to documents which would be admissible in evidence ... nor to those which would prove or disprove any matter in question: any document which, it is reasonable to suppose, 'contains information which may enable the party (applying for discovery) either to advance his own case or to damage that of his adversary, if it is a document which may fairly lead him to a train of enquiry which may have either of these two consequences' must be disclosed".

7. In one of the Defendant's affirmations in support of the application, it was alleged that the audited accounts may show that the unit was a real property held by the Plaintiff. I do not think that this is a well-founded belief. It is part of the Plaintiff's case that the reason why the Defendant was asked to hold the unit was exactly because the Plaintiff did not want the burden of being the legal owner of the unit: see para. 5 of the Statement of Claim. Therefore it is possible that the audited accounts may not show the unit as being held by the Plaintiff as its real property. Having said that I consider that the requested documents (save as to one item which will be referred to later) fall within the test summarized in The Supreme Court Practice 1999 (see above). The treatment of the total sum of $2,439,647.5 in the audited accounts and the Plaintiff's minutes of the board meeting and the Plaintiff's instruction vouchers and/or slips relating to the 2 cheques, may fairly lead "the Defendant to a train of inquiry" which may enable the Defendant either to advance her case or to damage that of the Plaintiff.

8. Ms Catton's arguments in opposition can be summarized as follows:-

(a)	the requested documents are irrelevant;
(b)	this application is a "fishing expedition";
(c)	the Defendant delayed in making this application.

9. In relation to point (a), she argues that the issue in the action is whether the Defendant had paid cash of $2.44 million to the Plaintiff under what in effect was a "loan" agreement. The requested documents have nothing to do with this "loan". I do not agree. While the court may also have to decide whether there was a "loan" advanced by the Defendant in cash, the issue of what was the reason (or purpose) for drawing the 2 cheques would be another issue which needs to be decided. The Plaintiff pleaded that the reason for doing so was that Defendant agreed to hold the suit property as the Plaintiff's trustee whereas the Defendant pleaded that the reason for doing so was to repay the cash "loan".

10. The learned Master apparently accepted Ms Catton's point (a) because Ms Catton told me the learned Master observed that the Defendant had the burden of proving the existence of the cash loan. I do not think that the burden of proof necessarily lies with the Defendant but even if it does, it does not mean that the requested documents are "irrelevant" as that word is understood in the context of discovery of documents.

11. Ms Catton's point (b) is that the party applying for specific discovery needs to provide more information about the contents of the requested documents, otherwise the application can be regarded as a "fishing expedition". This argument has to be decided having regard to the circumstances of each case. In the present case, I consider the Defendant has provided sufficient details of the existence and the nature of the requested documents, and why they relate to a matter in question between the Plaintiff and the Defendant. I therefore disagree that this application is a "fishing expedition".

12. As regards point (c), the following chronology is relevant:

(1)	the Lists and Supplemental List of Documents of the Defendant were filed in June 1998, September 1998 and November 1998 respectively. The Lists and Supplemental List of Documents of the Plaintiff were filed in May 1998 and October 1998 respectively;
(2)	the Plaintiff applied for specific discovery of documents in November 1998;
(3)	the action was set down for trial in November 1998;
(4)	the Defendant applied for specific discovery of documents in September 1999;
(5)	the trial of this action was scheduled to commence on 1 March 2000.

In these circumstances, although the Defendant's application can be regarded as late, taking into account the relevance of the requested documents to the matter in question, the nature and number of the documents requested, the time between the order to be made herein and the commencement of the trial, I do not find the delay to be excessive or undue.

13. For the above reasons, I do not agree with the learned Master's conclusion. The appeal is allowed and the learned Master's order is set aside. An order is made in terms of the paragraphs 1 and 2 of the Notice of Appeal. However, I do not consider that the 1993/94 audited accounts are relevant because the relevant transaction occurred in about January 1992 or February 1992. This item is therefore to be deleted from paragraph 2c of the Notice of Appeal.

14. Subject to this exception, the appeal is allowed as stated earlier.