____________
AND
HCA 2763/2004
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
ACTION NO. 2763 OF 2004
____________
BETWEEN
| | PACIFIC ELECTRIC WIRE & CABLE COMPANY LIMITED | Plaintiff |
| | and | |
| | HARMUTTY LIMITED | 1st Defendant |
| | HADDOWE LIMITED | 2nd Defendant |
| | CASPARSON PROPERTIES LIMITED | 3rd Defendant |
| | HU HUNG CHIU (胡洪九) | 4th Defendant |
| | YIP CHI HUNG (葉稚雄) | 5th Defendant |
| | CHUNG CHE LING (鍾子陵) | 6th Defendant |
| | TUNG YU JEH (仝玉潔) | 7th Defendant |
| | SUN TAO TSUN (孫道存) | 8th Defendant |
| | TAM, PUI NA, RAFIA (譚佩娜) | 9th Defendant |
| | WONG KUN TO (黃勤道) | 10th Defendant |
| | CHEUNG KWAN HUNG, ANTHONY (張鈞鴻) | 11th Defendant |
| | AFTERVILLE LIMITED | 12th Defendant |
| | NEE SOON LIMITED | 13th Defendant |
| | SHOWGROUND LIMITED | 14th Defendant |
| | BERRIDALE DEVELOPMENTS LIMITED | 15th Defendant |
| | JUTECH INVESTMENTS LIMITED | 16th Defendant |
| | ALL DRAGON INTERNATIONAL LIMITED | 17th Defendant |
| | BLINCO ENTERPRISES LIMITED | 18th Defendant |
| | PATAGONIA LIMITED | 19th Defendant |
| | MA KAM FOOK, ROBERT (馬金福) | 20th Defendant |
| | HU SUN MAR LI (胡孫瑪琍) | 21st Defendant |
____________
(Heard together)
Before: Hon Saunders J in Chambers
Dates of Hearing: 26 March, 30-31 August, 3-7 September, 3-4, 18, 23, October, 2007
Date of Judgment: 18 January 2008, (re-issued following correction of typographical errors on 4 February 2008)
_________________
J U D G M E N T
_________________
Introduction
1. This is an application for summary judgment.
2. The hearing of the application occupied 12 days, and the bundles of documents put before me take up 15 box files. The skeleton argument by Mr Neoh SC is set out in 128 paragraphs over 60 pages and is supported by 15 detailed annexes. His submissions in reply comprise 103 paragraphs, over 48 pages, together with a further detailed annex.
3. The skeleton argument put in by Mr Westbrook SC comprised 241 paragraphs of 106 pages, and that by Mr Smith SC, 109 paragraphs over 43 pages. Collectively, counsel have submitted more than 9 box files of authorities
4. In those circumstances it may be thought that the matter is inappropriate for summary judgement. As will be seen, at the end of the day, I am satisfied that this is a proper case for summary judgement.
5. Although the factual situation is complex, in that it is extensive, it amounts ultimately to a simple proposition which I am satisfied is unanswerable.
6. That proposition is that three former directors of the plaintiff, Pacific Electric Wire & Cable Co Ltd, (PEWC), Messrs Hu Hung Chiu, (Mr Hu), Tung Yu Jeh, (Mr Tung), & Sun Tao Tsun, (Mr Sun), have, wrongfully, by means of a complex series of companies and transactions, and using funds belonging to PEWC or funds for which PEWC is ultimately liable, acquired numerous assets in the name of companies which, although ostensibly owned by PEWC, are not in the control of PEWC, which has thereby been deprived of the benefit of its funds and the assets acquired with those funds.
7. The various defendants have failed to show a defence on the merits that is arguable. The defence mounted is, in reality, nothing more than an argument that the facts are so complex, and contain so many obscurities, that they ought to be investigated in a trial. It is well established that that is not a basis upon which O 14 proceedings may be resisted.
The property at issue:
8. The property in issue primarily constitutes commercial property constituting the West Commercial Centre of the South Horizons residential complex at Ap Lei Chau, together with car parks, together with rentals and other funds arising from those properties, (collectively called South Horizons), shares in a publicly listed company, PacMos Technologies Holdings Ltd, (the PacMos shares), and land and buildings at Shouson Hill, and sums of money arising from that property, (collectively called Shouson Hill).
9. I am told that the total value of all of the property in the three actions exceeds the sum of HK$2 billion.
10. Separate sets of proceedings have been issued in respect of each of these three groups of property. The PacMos action is HCA 2203/2004; the South Horizons action is HCA 2763/2004; and the Shouson Hill action is HCA 2746/2004. I propose to consider the three actions in their chronological order of events, rather than the order in which the three writs were issued. Consequently I shall deal first with South Horizons, next with the PacMos shares, and then with Shouson Hill.
The South Horizons action:
11. In HCA 2763/2004, (the South Horizons action), summary judgment is sought against Haddowe Ltd, the 2nd Defendant, (Haddowe), and Casparson Properties Ltd, the 3rd Defendant, (Casparson), seeking the return of the West Block and car parks of the South Horizons Commercial Centre, and accounting for rentals received and other consequential orders. Haddowe and Casparson are the registered proprietors of the land and buildings comprising the South Horizons Commercial Centre.
12. In this action, summary judgment is also sought against Blinco Enterprises Ltd, the 18th Defendant, (Blinco BVI), and Patagonia Ltd, the 19th Defendant, (Patagonia), both BVI companies, for the return of shares in a company known as PCL Holdings Ltd, (PCHL). Blinco BVI and Patagonia each own 50% of the shares in PCHL. PCHL is the ultimate owner of the shares in Haddowe and Casparson, through Harmutty Ltd, the 1st Defendant, (Harmutty).
13. In addition, summary judgment is sought against Harmutty for the return of shares it owns in Haddowe and Casparson.
14. Summary judgement is also sought against All Dragon International Ltd, the 17th Defendant, (All Dragon), for a declaration that All Dragon holds the West Block of South Horizons on trust for PEWC. This order is sought because All Dragon holds 100% of the shares in Harmutty, which in turn holds 100% of the shares in each of Haddowe and Casparson.
The PacMos action:
15. In HCA 2203/2004, (the PacMos action), PEWC seeks summary judgment against Texan Management Ltd, the 1st Defendant, (Texan), Pacific Capital (Asia) Ltd, the 3rd Defendant, (PC Asia), All Dragon International Ltd, the 4th Defendant, (All Dragon), by way of declarations that PacMos shares held by those companies were held in trust for PEWC, together with consequential orders.
16. Further, an order is sought against Super Wish Ltd, the 7th Defendant, (Super Wish), that that company previously held some 69 million PacMos shares on trust for PEWC and that it should account to PEWC for those shares or the sale proceeds thereof, together with consequential orders.
The Shouson Hill action:
17. In HCA 2746/2004, (the Shouson Hill action), summary judgment is sought against Greateam Ltd, the 3rd Defendant, (Greateam), for the return of the Shouson Hill property and accounting for dealings with that property, against Gold Global Ltd, the 1st Defendant, (Gold Global), and PCL Nominees Ltd, the 2nd Defendant, (PCL Nominees), for the return of shares those companies own in Greateam.
18. Summary judgment is sought also against Harmutty, the 8th Defendant, for the return of shares it holds in Gold Global and Greateam, together with money received and forfeited in an aborted sale of part of the South Horizons Commercial Centre.
The response to the O 14 applications:
19. In each of the actions, the defendants against whom summary judgment is sought, resist the application, and say that the matter ought to go for trial. The basis upon which they say the matter ought to go to trial is twofold. First it is contended that there is a dispute as to the facts which ought to be tried. Second, it is contended that a difficult point of law is involved, which ought to go to trial, rather than be dealt with by way of summary judgment.
The Order 18 r 19 application to strike out:
20. In the South Horizons action, Blinco BVI and Patagonia, represented by Mr Clifford Smith SC, have applied to strike out the statement of claim pursuant to O 18 r 19(1)(a), on the grounds that it discloses no reasonable cause of action.
21. In the course of argument Mr Smith acknowledged that an amendment to the statement of claim, by way of a Re-Amended Statement Claim dated 27 April 2007, is capable of supporting a claim based upon a resulting trust. In the light of this, the application to strike out is no longer pursued. Mr Smith sought his costs of the application. I will deal with the question of costs on this application when dealing with costs on the summary judgment application.
The Limitation argument:
22. Both Mr Westbrook SC and Mr Smith SC also raise an argument under the Limitation Ordinance, contending that PEWC’s claims are time barred.
Factual findings in this Judgment:
23. In this judgment, the facts as they are set out, are facts which I find to be either admitted, or not put in dispute by the affidavits filed by the relevant defendants, or to be unarguable.
24. I do not propose to deal with the facts in great detail, because I am completely satisfied that, with only one exception, dealt with in paragraph 157-167, (the Robin Willi defence) below, the defendants in the various actions, against whom summary judgment is sought, have offered no evidence at all to suggest that there might be an arguable case that the facts as alleged, the veracity of which is deposed to by appropriate affidavits from PEWC, might be contradicted.
25. The essential assertion in relation to the facts as alleged by PEWC, on behalf of all defendants before me, amounted to an assertion that the matter ought to go to trial because it is so complex that matters might be revealed in the course of the discovery and cross-examination on a trial which would cast doubt on PEWC’s case on the facts. As is well known, that is not a proper basis upon which to attempt to answer a summons for summary judgment.
The historical background:
26. In order that the claim by PEWC may be better understood, it is first necessary to set out certain background matters which are relevant to all three actions. As there was no challenge to the facts in respect of the historical background, other than the assertion that the complexity of the matter may reveal issues at trial, I do not propose to set out the historical background in detail, but by way of a broad overview.
PEWC:
27. PEWC was incorporated in 1957, and was listed on the Taiwan Stock Exchange, (TSE), in 1963. Its primary business, as its name implies, is the manufacture of electrical cable. However over the years it has expanded into various other businesses, as the cable business was profitable, and profits were available for other investments.
28. In the late 1980s, through a Hong Kong wholly owned Hong Kong subsidiary, Blinco Enterprises Limited, (Blinco HK), PEWC acquired a 50% interest in the Conrad Hotel in Hong Kong. In the usual way of a public company with the various investments held by companies established solely for a particular purpose, which companies may also be known as a special purpose vehicle, (SPV), or wholly-owned subsidiaries such as Blinco HK, the investment in the Conrad Hotel was recognised in the annual accounts of PEWC.
29. Up until the end of the financial year 2001, the annual accounts showed that PEWC was doing well and was profitable. Quite unexpectedly, the accounts for the financial year ended 2002, published in June 2003, contained a write-off in the amount of US$291 million. Of that write-off, US$266 million was attributable to a wholly-owned British Virgin Islands, (BVI), subsidiary called Moon View Ventures Ltd, (Moon View). By reason of the substantial write-off the TSE suspended trading in PEWC’s shares pending a satisfactory explanation to the TSE.
30. In the course of an investigation following the suspension, the management of PEWC were unable to locate primary accounting records or statutory records for Moon View and other related companies, except within a very limited area.
31. In October 1999, Mr Hu had resigned from his position as Chief Financial Officer and Executive Vice-President of PEWC. Prior to that time and thereafter accounting matters for PEWC in Hong Kong were dealt with by a company outside the PEWC group, initially called Trident Finance (Asia) Ltd, and subsequently renamed Trident (Asia) Ltd, (Trident). This company was run by a Mr Robert Ma Kam Fook (Robert Ma).
32. Those who had been involved, in Hong Kong, in dealing with PEWC’s financial affairs, primarily Mr Hu, and Mr Robert Ma, and those involved in Trident, refused to meet with or to cooperate with PEWC, or the liquidators of Moon View.
33. A crucial element of the investigation into the liquidation of Moon View was the discovery of the involvement of a company called Central Pacific Enterprises Ltd, (CPE). This company, established in 1994, was said to provide financing services to the PEWC Group companies in Hong Kong and surrounding regions. There was however, no real business or commercial purpose behind this company, as there were already other PEWC treasury companies in Hong Kong which could, and should be, carrying out those financing services.
34. CPE owed substantial sums to affiliates of Moon View and other wholly-owned subsidiaries of PEWC. At the time of the investigation, CPE had been liquidated and accordingly there were no longer assets available in that company. Consequently the debts of CPE, (receivables in Moon View), were irrecoverable. These receivables alone amounted to some US$266 million. Together with a further US$20 million write-off, virtually the whole of the US$291 million debt that had been shown in PEWC's accounts was accounted for.
35. However PEWC was unable to verify the transactions giving rise to the irrecoverability of the receivables because Trident, which was responsible for managing CPE at all material times, refused to hand over primary accounting records or other material CPE documents to PEWC. Consequently the auditors were required to qualify the PEWC accounts, this leading to the suspension of PEWC on the TSE.
36. Further, at the time at which PEWC learned of the involvement of Trident and CPE in their affairs in Hong Kong, CPE had been liquidated. Importantly, the appropriate time was about to pass which would lawfully entitle those holding the financial records of CPE to destroy those records.
37. Fortunately, PEWC was able to take steps to reinstate CPE, the order finally being made on 4 November 2003. With the reinstatement it became ultimately possible to obtain accounting papers. These revealed that in most accounting years, shortly before the end of the accounting period, the assets and liabilities of CPE were transferred to a company called Mae Sai, apparently owned by PCHL. By this procedure, plainly orchestrated by Mr Hu, the true extent of the debt owed by CPE to PEWC had been concealed from PEWC.
38. The final occasion on which the write-offs occurred took place in July 1999. In late 1998 and early 1999, PEWC had attempted to investigate the investments and companies which had been administered in Hong Kong under the control of Mr Hu. They faced the refusal to cooperate by Mr Hu and those controlling Trident as described in paragraph 35 above.
39. In addition to concealing the extent of the debt, the write-offs had enabled the directors of CPE to give a declaration of solvency for a members voluntary winding up to be held. Fortunately, CPE had been reinstated in sufficient time to avoid the destruction of its books and records. The ultimate discovery of those records revealed the full extent of the fraud that had been carried out.
40. This discovery, and the revelation of the hidden corporate structure, enabled PEWC’s investigators to trace most of the proceeds of the funds that had been paid out by PEWC, or borrowed in PEWC’s name, (or the name of a subsidiary), and repaid by PEWC. Following the receipt by PEWC of investigative accountants’ and solicitors’ reports demonstrating matters now relied upon, these proceedings were issued.
41. Had CPE not been reinstated, the consequential destruction of its records would have virtually buried the entire audit trail leading to the use of PEWC moneys which passed through CPE.
The hidden corporate structure:
42. Central to the case for PEWC is the contention that, between 1990 and 1995, various companies were formed, primarily by Mr Hu, ostensibly owned by PEWC, using PEWC funds, and that these companies were never reported to the full board of directors of PEWC, or properly disclosed to the board to enable them to be reflected in the financial statements of PEWC as subsidiaries.
43. At the same time, the case for PEWC goes, the various companies were represented to third parties, particularly lenders and regulators, as wholly owned subsidiaries of PEWC. However throughout the whole of this time none of these companies have been in the actual control of PEWC.
44. I am satisfied, for the reasons set out below, that no arguable case is made out by the defendants that these assertions can be challenged.
Patagonia and Blinco BVI:
45. Blinco HK had been established by PEWC during the 1980s, and was used as an SPV to hold, inter alia, PEWC’s interest in the Conrad Hotel in Hong Kong.
46. Mr Wellem Sham was an employee of KPMG when PEWC, through Mr Hu, employed him to provide consultancy services to PEWC.
47. On 18 May 1990, a BVI company, Patagonia Ltd, was established. On 18 December 1990, a second BVI company, Blinco Enterprises Ltd, (Blinco BVI), was established. There is no sensible reason suggested by the defendants why there should be two companies, both wholly owned subsidiaries of PEWC, with the same name. In order to distinguish the two companies I have referred to the BVI company as “Blinco BVI”, and the Hong Kong company as “Blinco HK”.
48. In the absence of any explanation as to the use of the identical name, and having regard to the whole tenor of the evidence, the inference arises, and is not dispelled by any evidence from the defendants, that this name was deliberately chosen in order to create a confusion, and to leave those dealing with the BVI company to believe that they were dealing with the Hong Kong company.
49. On the incorporation of Patagonia on 18 May 1990, a resolution of directors, (signed by Mr Hu and Mr Sun), resolved that the authorised capital of the company was to be US$50,000 divided into 50,000 shares of US$1.00 each. The resolution authorised the issue of one share to PEWC. A share certificate was prepared, dated 18 May 1990. The only copy available is neither signed by a director or officer of Patagonia nor does it have the seal of Patagonia endorsed to it.
50. On the incorporation of Blinco BVI on 18 December 1990, a similar resolution was prepared authorising the issue of one share of US$1.00 to PEWC. A photocopy of the share certificates is produced in evidence, dated 18 December 1990, with the seal of Blinco BVI affixed to it.
51. It should be noted that it is the law of the BVI that shares in a company may only be issued if they are fully paid-up.
52. The Articles of Association of Patagonia and Blinco BVI are identical. The following provisions are relevant:
(i) Article 4. Every person whose name is entered as a member in the share register is entitled to a certificate signed by two directors or two officers or by one director and one officer of the Company or under the common seal of the company, with or without the signature of any director or officer, specifying the shares held and the par value thereof;
(ii) Article 44. The first directors shall be elected by the subscriber(s) to the Memorandum. Thereafter, additional directors may be elected either by the members or the existing directors for such term as the members or the directors may determine;
(iii) Article 45. Each director holds office until his successor takes office or until his earlier death, resignation or removal;
(iv) Article 53(a) & (d). The office of a director shall be vacated if the director is removed from office by (a) it is in their rooms resolution of members or directors, or (d) he resigns his office by notice in writing to the company.
53. Patagonia and Blinco BVI, both as BVI companies, operate in accordance with BVI law. Neither company is required, (but is entitled if it elects), to disclose or file at the Companies Registry in the BVI the names of its shareholders, directors, or its financial records or accounts.
54. No Register of Members, and no Register of Directors has been filed at the Companies Registry in the BVI by either Patagonia or Blinco BVI.
55. A copy of the share register is required by law to be filed with the company’s Registered Agent in the British Virgin Islands, but records kept at the office of a Registered Agent are not available for public inspection.
56. The Registrar of Companies maintains, for public inspection, a file that includes a copy of the Certificate of Incorporation, a copy of the Memorandum and Articles of Association, and the record of licence fees paid by the company. Those are the only documents available for public inspection.
Shareholding in Blinco BVI and Patagonia:
57. It is clear that PEWC is a shareholder in Blinco BVI. A share certificate, issued in accordance with Article 4 of the Articles of Association forms part of the evidence. There is no evidence to suggest that any other shares have been issued in the company. It has plainly been open to the directors of Blinco BVI to establish that some other party holds the majority of shares in the company, but no evidence has been put before the court to that effect. The only evidence is that PEWC is the sole shareholder in Blinco BVI.
58. Although the only copy of a share certificate in Patagonia does not contain either the common seal of the company or the signatures of directors or officers of the company, the clear inference is that, just as with Blinco BVI, PEWC is the only shareholder in Patagonia. Again, the directors of Patagonia have put no evidence before the court to the contrary.
Directorships in Blinco BVI and Patagonia:
59. In respect of both companies the first directors were Messrs Hu, Sun and Tung. That information comes from the resolutions referred to in paragraphs 49 & 50 above.
60. There is no evidence as to the resignation of either Messrs Hu, Sun or Tung as directors of the two companies, but there can be no dispute that they were the directors of both companies at least up until May 1993. There is no evidence from the defendants to suggest that the three men resigned prior to 30 June 2005. On the evidence I am satisfied that they remained directors until 30 June 2005.
61. The evidence establishes that on 30 June 2005, new directors, two Seychellois companies, Dunsmore Services Inc, (Dunsmore), and Goldkey Inc, (Goldkey), were appointed. In affidavits made by two residents of the Republic of Panama, describing themselves as directors of Dunsmore and Goldkey, and filed by Patagonia and Blinco BVI, the assertion is made that Dunsmore and Goldkey were appointed sole directors of Blinco BVI and Patagonia, respectively, on 30 June 2005.
62. No documents are exhibited to substantiate the appointments. No assertion is made as to the identity of the person or entity who appointed either Dunsmore or Goldkey as directors of Blinco BVI or Patagonia. I shall refer to these circumstances further below, (see paragraphs 148-156).
The source of funds to establish Patagonia and Blinco BVI:
63. It is beyond argument that the funds required to establish both Patagonia and Blinco BVI came from PEWC. An invoice from KPMG, the accountants involved in the incorporation of Blinco BVI is addressed to Blinco BVI c/o PEWC. There is no suggestion, and no evidence, that funds other than PEWC’s funds were applied in payment of the establishment costs in relation to the two companies, and payment of the share capital, required to be paid in order that shares may be issued.
64. There is a separate argument, which will be dealt with separately, that funds used to acquire the various properties ultimately at issue, did not come from PEWC, but from other sources, by way of loans. That argument aside, no arguable case is made to counter PEWC’s evidence that Patagonia and Blinco BVI were established with funds from PEWC.
65. That being the case, and with PEWC holding the only issued shares in Patagonia and Blinco BVI, it must follow that Patagonia and Blinco BVI were established for the benefit of PEWC. No argument was mounted or could have been mounted on the evidence, that Patagonia and BVI were established for the benefit of someone other than PEWC.
PCHL:
66. On 6 August 1991, PCHL was incorporated in Hong Kong, originally as Time Full Ltd. It was a shelf company, with an authorised capital of $10,000, and two issued shares, one of which was transferred to Blinco BVI, the other to Patagonia.
67. The authorised capital was increased from HK$10,000 to HK$20 million on 10 September 1991, and the shares, fully paid-up, were allotted equally to Blinco BVI and Patagonia. On 16 September 1991, Mr Hu wrote to KPMG stating that Blinco BVI was a wholly-owned subsidiary of PEWC. There is no direct evidence as to the source of these funds; having regard to the whole of the evidence, and the absence of any evidence indicating the contrary, I am satisfied that the source of these funds was PEWC.
68. On 9 April 1992, the share capital was further increased to HK$70 million, with 30 million of the additional shares being allotted to Blinco BVI, and 20 million being allotted to Patagonia. The evidence of Mr Wellem Sham, effectively unchallenged, is that the source of the HK$70 million, applied in the share capital, was a sum of US$10 million, remitted from the overseas accounts of PEWC. The defendants are unable to point to any other source of funds, other than to say that some other source might be discovered in the course of a trial.
69. On 29 April 1992, the share capital was increased by a further 10 million shares, with those shares being allotted to Patagonia. Consequently, Blinco BVI and Patagonia each held 40 million shares in the company. Again, there is no evidence to suggest that the additional share capital came from any other source than PEWC.
70. The company went through a series of name changes ultimately becoming, on 24 October 1996, PCL Holdings Ltd. For convenience, throughout this judgment I have referred to the company as PCHL.
71. From 1991 onwards Mr Hu, Mr Tung, and Mr Sun made a number of substantial investments, using PEWC funds, channelled through PCHL and into subsidiary companies, owned by PCHL or other PCHL subsidiaries. They represented PCHL and the various subsidiaries to the SFC, and to various lenders, as wholly owned subsidiaries of PEWC, but as seen in paragraphs 80-84 below, when asked at a board meeting of PEWC in 1993 Mr Sun denied that PCHL had any connection with PEWC.
72. I am satisfied that the evidence justifies the submissions made by Mr Neoh, in paragraphs 30-35 of his skeleton argument, and Annexes 3 & 7 to the skeleton, that the various companies used by Messrs Hu, Tung & Sun were formed using funds of PEWC, but were never reported to the full Board of PEWC nor were they recorded in PEWC’s financial statements as subsidiaries of PEWC. There is nothing in the affidavits filed by the various defendants to detract from this conclusion. The assertion that the complexity of the matter and the large number of documents might mean that other information will rise in the course of discovery and a full trial is not a sufficient basis to avoid this finding.
73. I am further satisfied that the evidence establishes that the funds for capitalising PCHL were provided by PEWC. Neither Blinco BVI nor Patagonia, the two shareholders of PCHL, and represented in these proceedings before me, have been able to provide any serious argument that this was not so. They have filed no evidence at all to indicate an argument that the funds that might have come from some other source. Mr Neoh put it correctly when he said that it was “the quality of the evidence that was the cornerstone of their remarks in this regard”.
74. It is clear, and the contrary is not argued, that the shares in PCHL, issued to Blinco BVI and Patagonia, were fully paid-up in 1992. Neither Blinco BVI nor Patagonia, being US$1.00 companies themselves had funds to capitalise PCHL. The only inference open is that it must have been that PEWC provided the monies that capitalised PCHL.
75. There is direct evidence from Mr Wellem Sham, and Mr Anthony Cheung that PEWC provided the funds. There are, as correctly described by Mr Neoh, “countless” representations made by Mr Hu, Mr Tung and Mr Sun, directors of Blinco BVI and Patagonia, and directors of PCHL, that PCHL is a wholly-owned subsidiary of PEWC.
76. I am satisfied that where funds, other than borrowed funds were used, either by PCHL or any of the subsidiaries or SPV’s established for the purchase, to acquire the property at issue in these proceedings, those funds came from PEWC.
77. On a number of occasions, when referring to specific transactions, Mr Westbrook criticised the quality of the evidence relied upon by PEWC to support of the foregoing conclusions. It needs to be remembered that these are civil proceedings and the burden of proof is the balance of probabilities. The overwhelming tenor of the evidence is such that where, in respect of a specific transaction there is no direct evidence of the source of funds, the clear inference arises that the funds came from PEWC. That is particularly so when the defendants themselves produced no evidence upon which it might be said that there was some other source of funds in respect of a specific transaction.
78. It is not enough, in O 14 proceedings such as these, for a defendant to say there must be leave to defend because of the absence of direct evidence in respect of a specific payment, or even a number of specific payments. Instead the defendant must put before the court some evidence upon which it can be said there is an arguable case that the funds came from some other source than PEWC.
79. Quite simply, there is no such evidence.
PEWC’s knowledge of the hidden corporate structure:
80. It is convenient at this point to deal with an argument that PEWC were aware of the investments made, and cannot say that the investments were not made for the benefit of the parties presently holding the shares in the relevant companies. This “knowledge” argument is also used by the defendants, and will be dealt with later, when dealing with limitation issues.
81. The evidence upon which the “knowledge” argument is based falls into three categories.
82. First, in late 1992, there were three newspaper articles referring to the acquisition of South Horizons. Two of the articles directly refer to the fact that PCHL is a wholly-owned subsidiary of PEWC, the third refers to PCHL as a “Taiwanese-funded financial institution”. In early 1993, reports in Hong Kong and Taiwan newspapers referred to a large project on the mainland in which PCHL was involved. Mr Wellem Sham, an employee of PCHL at the time, was concerned that Taiwanese authorities would suspect, from the article, that PCHL was a subsidiary of PEWC.
83. Second, a company brochure issued by PCHL in late 1992, records that PCHL was “fully supported” by PEWC.
84. As to these two matters, both were raised at a board meeting of PEWC on 19 November 1993. Mr Hu, Mr Tung, and Mr Sun were all present. The board minutes record as follows:
“Case: Pacific Capital (Holdings) Ltd of Hong Kong has from time to time in Hong Kong and Mainland published advertisement and propaganda in the capacity of an enterprise relating to our Company. Explanation was deemed necessary as to whether there is any relation. Endorsement or guarantee should not be provided to that company.
Explanation by Mr Sun, President:
Pacific Capital (Holdings) Ltd of Hong Kong has no relation with the Company whatsoever. Written clarification has been sent to the Investment Commission of the Ministry of Economic Affairs. The Company has never provided guarantee to that company.”
That explanation was a plain deception.
85. First, the explanation completely omits to disclose that PCHL was owned as to 50% by Blinco BVI, and as to 50% by Patagonia, both of those companies being wholly owned subsidiaries of PEWC.
86. Second, while it was technically correct that no legal guarantee had been provided to PCHL by PEWC, the officers of PEWC in Hong Kong had, without reference to the board in Taiwan, prepared and signed a “Letter of Commitment”, an informal guarantee on behalf of PEWC, and a “Letter of Comfort”, an assurance that Haddowe would meet its commitments, in respect of borrowing by Haddowe and PCHL.
87. A proper answer would have disclosed both of those documents which placed a clear responsibility on PEWC in respect of very substantial borrowing, and the clear chain in the shareholding of the various companies showing PEWC’s ownership of PCHL.
88. Third, in two letters between PCHL and PEWC head office in Taiwan, in February and April 1993, funds were requested by PCHL from PEWC with reference to South Horizons.
89. It is right that these two letters were written, the funds requested and the funds transferred. But again there is no evidence to suggest that those in PEWC’s offices in Taiwan appreciated the true nature of PCHL, that, although a wholly-owned subsidiary of PEWC, it was in fact in the control of Messrs Hu Sun and Tung, who were acting independently of their obligation to PEWC. Neither is there any evidence that anyone reported the situation to the board.
90. I accept Mr Neoh’s submission that, in the whole of the circumstances, it cannot be argued that PEWC knew of the hidden corporate structure. The matters relied upon by the defendants amount to nothing more than information that the various properties at the heart of the dispute were acquired for the benefit of PEWC, but that PEWC has not in fact received that benefit.
91. In particular, it is quite clear that at no stage at all has PEWC had any, or effective, control of the various companies holding the property. Indeed, if it did, this litigation would be quite unnecessary, for PEWC could then take appropriate steps to appoint responsible directors who would be able to discharge their obligations as directors for the benefit of the true ultimate owner of the subsidiary companies.
92. It is unarguable that Messrs Tung, Sun & Hu, as the directors of PEWC and of the various subsidiaries, and in particular as directors of PCHL at all relevant times, were under a duty to ensure that the acquisitions made were accurately reported in PEWC’s financial statements. This they have demonstrably failed to do.
93. The rule is clear. PEWC is not affixed with the knowledge of directors who are acting fraudulently to, or in breach of, their duty to the company of which they are directors. Further the company’s right of action or defence cannot be affected by a director’s negligence to find out the true position. In this respect Mr Neoh is entitled to rely upon In re Hampshire Land Company [1896] 2 Ch 743, J C Houghton & Company v Northard, Lowe & Willis [1928] AC 1 and China Everbright-IHD Pacific Ltd v Ch’ng Poh, (unreported FACV 6/2002). These propositions of law were not challenged by the defendants.
94. With this background I turn now to consider the factual basis in relation to the three actions.
South Horizons:
95. The primary relief sought by PEWC by way of summary judgment is the return of shares in PCHL. The reason that this is the primary relief may be seen from a brief examination of the corporate structure involved.
96. Haddowe, is the corporate holder of the West Block of the South Horizons Commercial Centre, and Casparson is the corporate holder of the car parks and walls. PEWC is content with summary judgement against PCHL, as once it controls the shares in PCHL, a Hong Kong company, it then controls the four subsidiary companies, Ever Dragon, which in turn owns Harmutty, which in turn owns both Casparson and Haddowe, and consequently, ultimately, the commercial property it seeks to recover.
97. There was no dispute at all as to the structures used or the circumstances in which the South Horizons complex was acquired. The corporate chain, superficially complex, is straightforward.
98. Patagonia and Blinco BVI, both apparently held 100% by PEWC, (at the relevant time under the control of Messrs Hu, Tung & Sun), each held 50% of the shares in PCHL. PCHL holds 100% of the shares in Ever Dragon. Ever Dragon holds 100% of the shares in Harmutty. Harmutty holds 100% of the shares in each of Haddowe and Casparson. Haddowe hold all the shops in the West Commercial Block of South Horizons. Casparson owns car parking spaces and the external walls of the West Commercial Block.
99. The dispute was confined to the source of the funds used for the acquisition and, primarily, the legal consequences of any factual findings made in relation to the funds. Accordingly, I do not propose to review the sequence of events in fine detail but to set out briefly the circumstances.
The acquisition of the South Horizons complex:
100. On 23 November 1992, Ever Dragon entered into two contracts to purchase the West Block and the East Block of the South Horizons Commercial Plaza. An initial deposit of HK$120 million was paid on that day. On 3 December 1992, a second deposit of HK$60 million was paid. On 15 February 1993, a third deposit of HK$180 million was paid.
101. On 7 May 1993, PCHL, as the borrower, entered into a Dual Currency Facility with a syndicate of banks. The Dual Currency Facility together with further funds originating from PEWC, either directly or through Blinco HK, by way of a subordinated loan, provided the balance of the purchase price payable pursuant to the two contracts entered into by Ever Dragon.
102. In Annex 10C to his submissions, Mr Neoh has set out the precise details of the funding of the acquisition of South Horizons. He describes the net position in the following terms:
(a) Using PEWC’s funds and PEWC’s credit, South Horizons was purchased.
(b) The sales of shops and car parks in the East Block was more than sufficient to cover the $700 million borrowed to purchase the East and West Block plus interest. The $700 million borrowed from the Dual Currency Facility has been repaid from the proceeds of sale.
(c) The Blinco HK subordinated loans which were used to purchase South Horizons were never repaid, and remains, in effect, the equity in the remaining West Block.
103. The defendants did not challenge this Annex, other than asserting that the evidence did not go so far as to prove appropriately the assertions made, and offered no evidence to the contrary. I am satisfied that the evidence does in fact justify the position as described by Mr Neoh.
104. The Dual Currency Facility was supported by a “Letter of Commitment”, undated, on the letterhead of PEWC, and signed by Messrs Tung, Sun & Hu. The letter asserted that the borrower, (PCHL), was a subsidiary of PEWC and that the proposed purchasers of property, (Haddowe, Casparson, in relation to the West Block, and two other companies in relation to the East Block), were “indirect wholly owned subsidiaries of PEWC in the BVI”.
105. In the usual way of a Letter of Commitment, while not undertaking a formal guarantee, the letter asserted that PEWC fully supported the obligations of the borrower, and the obligations of the purchaser companies.
106. In December 1993, steps were taken to sell the East Block of South Horizons. The proceeds from this sale were applied in part repayment of outstanding loans that had been secured on South Horizons. This litigation is not further concerned with the East Block.
107. Between 1996 and 1997, 114 of the car parking spaces in the West Block were sold. Haddowe and Casparson remained the owners of the balance of the West Block.
108. In February 1995, a Transferable Loan Facility Agreement, with certain banks was entered into by PCHL, as guarantor, and Haddowe as borrower, in the sum of US$60 million. This sum was applied in repayment of the Dual Currency Facility.
109. In December 1996 a new Transferable Loan Facility Agreement was entered into with Rabobank, by Haddowe and PCHL for HK$475 million. The documentation records that sum was to be applied in part in repayment of the Transferable Loan Facility of US$60 million. On this occasion, a “Letter of Comfort”, again on PEWC letterhead, was signed by Mr Hu, in favour of the lender. The letter assured Rabobank that PEWC would ensure that Haddowe was at all times, in a position to meet its liabilities to the lender.
110. On 30 January 1997, the US$60 million Transferable Loan Facility was fully discharged. On 14 January 1998, the second Transferable Loan Facility with Rabobank was discharged.
111. Subsequently Haddowe and Casparson have given security to other banks in respect of new lending secured on the South Horizons property.
112. I am satisfied, and no sensible argument has been mounted to the contrary, that the funds applied in the acquisition of the interests of Haddowe and Casparson in the South Horizons property have been provided by PEWC, or borrowed and secured against the property, the borrowing by companies which were wholly owned subsidiaries of PEWC, and which was supported by letters of commitment or comfort from PEWC. I am satisfied, and no sensible argument has been mounted to the contrary, that the repayment of borrowed funds has come either from subsequent borrowing secured against the property, or from income from the property.
113. The evidence is equally plain in respect of the acquisition of the East Block. As indicated, and it was not challenged, the proceeds of sale of the East Block were applied in the repayment of loans.
114. There is no evidence whatsoever to suggest that there was any other source of funds, particularly there is no evidence to suggest that any of the defendant companies had funds of their own, (from a source other than PEWC or borrowing), or from any other person or entity unrelated to PEWC, which was applied in the acquisition of South Horizons.
The PacMos Shares:
115. Again, in respect of the PacMos shares, there is no dispute as to the structures used or the circumstances in which the shares were acquired. The defendants offered no evidence to challenge the factual basis put forward by PEWC. The argument was confined to a challenge as to the source of the funds used, and the legal consequences of the facts established.
116. The evidence establishes that it was the intention of Mr Hu and his associates to acquire a listed company into which certain assets, including South Horizons, could be injected. This appears from instructions given by Mr Hu and Mr Robert Ma to Richards Butler, solicitors, in relation to an attempt to acquire a particular public company. That particular proposal, code-named Project Lai See, was not successful.
117. That first project being unsuccessful, Mr Hu and Mr Ma sought another target. This resulted in the acquisition of the PacMos shares.
118. The acquisition of the PacMos shares began on 25 April 1995, when Mr Robert Ma sent a fax to Mr Hu on the letterhead of PCFL(Finance) Ltd, a company which was described on that letterhead as a “Member of the Pacific Electric Wire & Cable Group of Taiwan”.
119. In the fax, Mr Ma informed Mr Hu that he had located an appropriate candidate company for a backdoor listing on the Hong Kong Stock Exchange (HKSE). The company concerned was Win Win International Holdings Ltd, (Win Win). Again, Richards Butler was the solicitors instructed. It is clear from the correspondence that they regarded PEWC as their client in the acquisition, but that, while recognising that the role of PEWC in the matter would have to be disclosed, Richards Butler knew from the instructions they received that they must keep PEWC in the background as much as possible.
120. Win Win was ultimately renamed PCL Enterprises Holdings Ltd, and later renamed PacMos Technologies Holdings Ltd.
121. In order to ensure that PEWC was kept in the background, a Mr Larry Horner, a certified public accountant from the United States of America was engaged to be the ostensible individual involved in the acquisition of PacMos. At that time Mr Horner was chairman of Pacific USA Holdings Corporation, (PUSA), a company incorporated in the United States of America and a subsidiary of PEWC. Mr Horner says, and there is no challenge to his evidence, that he was asked by Mr Robert Ma to hold the shares in the public company to be acquired, on trust for PEWC, as he and Mr Hu thought that if PEWC was exposed to be the shareholder of most of the shares in the public company, it might drive up the share price making the acquisition more difficult.
122. Mr Westbrook has, extensively, criticised Mr Horner’s evidence, contained in a statutory declaration. It is right that in asserting that All Dragon was the ultimate holding company for the PacMos shares, when in reality the ultimate holding company was PEWC, it may be contended that Mr Horner was part of a fraudulent scheme.
123. But that submission, involving as it does, both an acknowledgement that there was a fraudulent scheme, and that PEWC was, in reality, the ultimate holding company for the shares, does not assist the defendants. Mr Neoh is perfectly entitled to rely on those parts of Mr Horner’s statutory declaration which assist him, and reject those parts which do not. In the whole of the circumstances those parts which are rejected simply do not coincide with the overwhelming reality of the whole of the evidence. That part of Mr Horner’s evidence may be rejected is not in my view a sufficient basis to take this matter to trial.
124. Two SPV’s were formed for the purpose of the acquisition. Mr Horner became sole shareholder in Prima Pacific (Holdings) Ltd, (PPH), and made a declaration of trust in favour of PEWC for those shares. The other was Texan Management Ltd (Texan) a BVI company. The shares of Texan were held, as to 51%, by Pacific Capital Investment Ltd, (PCI), the company incorporated in Hong Kong, and a wholly-owned subsidiary of PCHL. The remaining 49% of the shares were held by PPH.
125. It is Mr Horner’s evidence that the ultimate beneficial ownership of all of the shares in PacMos belonged to PEWC absolutely. Having regard to the whole of the circumstances, the defendants offer no reason why this assertion should not be accepted other than to say they wish to challenge it. In the whole of the circumstances of the case it is difficult to see who else should be entitled to the PacMos shares.
126. The argument for the defendants amounts to confining themselves to the ultimate corporate entity holding shares, and contending that that entity should be entitled to PacMos shares, an argument which completely ignores the identity of the persons controlling those ultimate corporate entities, and which offers no justification for those persons, whose identity the defendants are not willing to expose, being entitled to the property.
127. Texan acquired 50.1% of the shareholding in PacMos from its majority shareholders, this acquisition requiring a Mandatory General Offer to be made. This Offer was made pursuant to the Hong Kong Code on Takeovers & Mergers and Share Repurchases. The Offer Document, although offering a better price than the best trading price in the last six months, resulted in only 5,446,000 shares being tendered, with Texan consequently acquiring a total of 155,610,000 shares.
128. Texan, having been established as a SPV purely for the purpose of the acquisition, had no money of its own. On the evidence before me, it is beyond argument that the funds required for the purchase of the shares came from PEWC. As there is no evidence from the defendants to challenge the financial trail outlined by Mr Neoh it is not necessary for me in this judgment to set up precise details of that trail. I am satisfied that there could not have been any other source for the funds.
129. Despite Mr Horner’s declaration of trust in favour of PEWC, and the fact that the whole of the funds for the acquisition had come from PEWC, the investment made in PacMos was never recognised in the books or accounts of PEWC, and was never reported in the annual accounts of PEWC. Instead, the relevant funds were booked as loans by CPE to Texan, using Trident. As has been seen above, CPE did not repay any sums to PEWC or any of its subsidiaries. Instead CPE was liquidated with all of its liabilities assigned to Mae Sai thereby concealing the true nature of the underlying transactions as to which PEWC’s moneys were applied.
130. Part of the funds required came from a $30 million Floating Rate Note, (FRN) issued by PEWC (Treasury). These borrowed funds were repaid by PEWC.
The sale of PacMos shares by Super Wish to Vision 2000:
131. The original majority shareholders of PacMos had retained 69,186,000 shares in the company. In November 1996 these shares were acquired by Super Wish Ltd, (Super Wish), a BVI company which was a wholly-owned subsidiary of Texan.
132. Again, as an SPV, Super Wish had no funds of its own, and although there is no direct evidence of the source of the funds used by Super Wish to acquire the remaining shares, the only inference open is that those funds too came from PEWC. There is no evidence from the defendants that points to any other source of funds; the case is being argued on the basis that something might appear in the course of a trial.
133. Super Wish sold those PacMos shares to Vision 2000 Venture Ltd, (Vision 2000), a company controlled by Mr Hu. Super Wish has not accounted to PEWC for the proceeds of those sales. Although Vision 2000 is controlled by Mr Hu, it has not been made a party to the proceedings and no relief is sought against it. Instead, PEWC looks to Super Wish to account to it for the proceeds of the sale of the shares to Vision 2000.
All Dragon acquires the balance of the PacMos shares:
134. In the Annual Report of PacMos for the year ended 31 December 1996, All Dragon International Ltd, (All Dragon), again a BVI company, was declared as, in place of PCI, holding 51% interest in Texan, and being the ultimate holding company in relation to PacMos. All Dragon is a wholly-owned subsidiary of PEWC. The contrary was not, and could not, on the evidence, be argued.
135. In 1996, the shares in Texan, held by Mr Horner through PPH, were transferred, for no consideration, to All Dragon. In a number of documents, primarily flowing from PCHL, PEWC is shown to be the ultimate controller or owner of All Dragon. The defendants have produced no evidence to raise any arguable issue as to the ownership of All Dragon.
136. Mr Horner, having made declarations of trust of the PPH shares in favour of PEWC, and having been assured that All Dragon was a part of the PEWC group, had no hesitation in effecting the transfer.
137. Although the transfer documents between PPH on the one hand, and All Dragon on the other hand, state a monetary consideration, it is clear that no money actually changed hands.
138. Further confirmation of the ultimate control and ownership by PEWC of All Dragon comes from the “Substantial Shareholder” filings under the Securities (Disclosure of Interest) Ordinance. The disclosures demonstrate that the change of ownership of the PacMos shares from Texan to All Dragon did not mean that there had been a change of control in the ownership of the shares. Had there been a change in the ultimate control a general offer would have been required.
139. The effect of these transactions was that All Dragon obtained the entire issued share capital of Texan, (and consequently ownership of the PacMos shares), from PPH and PCI for no consideration.
140. PEWC was not repaid for the money it used to make the acquisition, by Texan, of the PacMos shares. However, between 2001 and 2003, PEWC repaid the Floating Rate Notes of US$130 million used to acquire the PacMos shares.
141. I am accordingly satisfied that the evidence establishes, and that there is no evidence to the contrary, that the acquisition of the PacMos shares was funded entirely by PEWC.
The Shouson Hill action:
142. The Shouson Hill action may be dealt with shortly, as it derives from the sale of part of the South Horizons property. Any conclusions reached as to the consequences of the method of the acquisition of the South Horizons property consequently apply equally to the Shouson Hill property. Involved in this action are both real estate, 11A Shouson Hill Road West, and funds deriving therefrom and cash. I do not understand Mr Smith or Mr Westbrook to argue to the contrary.
143. On 3 September 1997, part of the South Horizons property was sold to a company called True Union Enterprises Inc., (True Union). The consideration was a sum of HK$1,200 million, subject to an adjustment on the net asset value of Haddowe and Casparson, and the assignment of shareholders loans. In part payment, cash of HK$180 million was paid by the purchaser.
144. True Union defaulted in making a second part payment of HK$120 million on 6 February 1998, (at the height of the Asian financial crisis), and the deposit paid, of HK$180 million, was forfeited. Action was commenced against True Union, that action being settled by way of a transfer of the issued capital in a company called Greateam Ltd, (Greateam), which holds the property at 11A Shouson Hill Road West.
145. There can be no doubt that if PEWC can establish on the facts, as they have done, that they effectively provided the whole of the cash for the acquisition of South Horizons, then it must follow if, as a matter of law, they are entitled to succeed on the South Horizons action, then they will succeed on the Shouson Hill action.
PEWC has provided the monies for the acquisitions:
146. For the reasons given in the foregoing paragraphs I am satisfied that PEWC has provided all of the funds required for the acquisition of the various properties. It has done so either by the use of PEWC’s own cash, or by repaying funds borrowed, if not in PEWC’s own name, with PEWC having been represented as the ultimate source of responsibility for the funds. Where borrowed funds have not been repaid, it is clear that PEWC are liable to repay the funds.
147. Before I turn to consider the legal submissions it is necessary to review briefly certain factual matters that have occurred following the acquisition of the various properties, that impact upon the factual circumstances.
Control of Patagonia and Blinco BVI:
148. The records show that Messrs Hu, Sun and Tung were the first directors of Patagonia and Blinco BVI. There is no evidence of the resignation of those three first directors, and on the evidence the only inference to be drawn is that they remained directors until 30 June 2005. Neither Patagonia nor Blinco BVI suggest otherwise.
149. On that date, the BVI Companies Office records show that the three men were replaced as directors of Patagonia and Blinco BVI, by two Seychellois companies, Dunsmore Services Inc, (Dunsmore), and Goldkey Inc, (Goldkey), the directors of which are persons resident in Panama.
150. The Articles of Association of Blinco BVI and Patagonia provide that new directors may only be appointed by existing directors or shareholders. Despite being invited to produce either the shareholders register of Blinco BVI and Patagonia, or the relevant register and minutes appointing them, the Seychellois corporate directors of Patagonia and Blinco BVI have produced nothing at all to demonstrate the means by which Dunsmore and Goldkey were appointed as directors of those companies.
151. The submission has been made, apparently on the instructions of the current directors of Patagonia and Blinco BVI, that because the events in question occurred prior to their appointment as directors they are unable to make any affidavits as to the circumstances.
152. On any terms that is a disingenuous submission.
153. At the very least it was open to the current directors to provide the court with proper particulars as to how they themselves were appointed. The plain case for PEWC throughout has been that its money was used to fund the very substantial acquisitions in South Horizons, PacMos, and Shouson Hill, all of which, according to the corporate records, are owned by, ultimately, PCHL, the shares in which are owned by Blinco BVI and Patagonia. I have accepted that evidence. It must have been clear to both Blinco BVI and Patagonia that they were at risk that that finding might be made.
154. There is no evidence to establish who the directors of Blinco BVI or Patagonia were, other than the evidence that shows that Messrs Hu, Ting and Sun were and remained directors until June 2005. If it were not those three gentlemen who appointed, or were instrumental in appointing Dunsmore and Goldkey, then both Dunsmore and Goldkey ought to have said so. In the absence of evidence to the contrary, the inference is overwhelming that those three gentlemen, none of whom now have any connection whatsoever with PEWC, were instrumental in making the appointments.
155. No explanation is offered by either Dunsmore or Goldkey as to why Seychellois companies, with Panamanian directors, should be appointed at all, by persons who, in June 2005, had no connection whatsoever with PEWC, to crucial positions in companies which own very substantial property in Hong Kong, all of which has demonstrably been acquired with funds from, or borrowed by or repaid by, PEWC.
156. What is abundantly plain is that, despite the clear evidence that the companies were established for the benefit of PEWC, whoever it is who controls Blinco BVI, and Patagonia, and consequently PCHL and all the subsidiaries thereunder, it is not PEWC. PEWC has provided the funds, repaid the loans, but has no control over the property acquired.
Mr Robin Willi, and the attempted disposal of the PacMos shares:
157. The only possible area in which it can be argued that a substantive defence has been mounted by any of the various defendants lies in two affidavits sworn by Robin Miles Willi on behalf of Blinco BVI and Patagonia on 7 July 2006.
158. Mr Willi is described on a letterhead as the Chief Executive Officer of a company called Swissfirst Structured Bonds AG, based in Zurich. There is no evidence as to the nature or standing of that company.
159. Correspondence seized in the course of the execution of a lawfully obtained search warrant, and copied from files kept by the Taiwanese Prosecution Authority, shows that from May 2004, to July 2004, Mr Hu was in correspondence with Mr Willi with a view to Mr Hu dealing, personally, in the PacMos shares. It needs to be noted in this respect that Mr Hu had resigned from the board of All Dragon, the corporate holder of the PacMos shares, in August 2003.
160. Neither the correspondence, nor the evidence, demonstrates any proper basis upon which Mr Hu might have been able to deal, on a personal basis, in those shares.
161. In those two affidavits, each in identical terms, one sworn on behalf of Blinco BVI, the other on behalf of Patagonia, Mr Willi asserts that he is the ultimate beneficial owner of the shares in each of the two respective companies, and consequently of the shares each of those companies owns in PCHL.
162. He does not condescend to any particulars in relation to this assertion. He merely makes the bald statement. He further asserts in each affidavit that:
“The shares in PCHL are not held on trust for PEWC and, to the best of my knowledge, never have been.”
However he makes no statement as to the basis upon which this assertion is made, other than to refer to a bundle of documents and to assert that in respect of those documents:
“Nothing is said about the shares being held on trust for PEWC. In any event, none of the documents are documents issued by Blinco itself.”
163. He further asserts, in each of the two affidavits, (with appropriate adjustments for the company involved):
“I understand that in paragraph 35 of his affidavit Mr Yuan states that he believes that Dunsmore Services Inc, the corporate director of Blinco, is none other than a puppet “set up by the Iron Triumvirate [Hu, Tung and Sun] or any of them and/or their agents to hide their control over Blinco and Patagonia”. This is not correct; Dunsmore has no relation with Messrs Hu, Tung and Sun.” (original emphasis.)
164. Again Mr Willi does not condescend to particulars in relation to this assertion. Having regard to the whole of the circumstances, if he is able to assert that the statement by Mr Yuan is incorrect, and that the three gentlemen have no relationship with the new directors of Blinco and Patagonia, companies of which Mr Willi claims to be the beneficial owner, then Mr Willi ought to have set out the circumstances.
165. The circumstances to which he should have provided particulars, he asserting ultimate beneficial ownership of the shares in both Blinco BVI and Patagonia, include precisely how Dunsmore and Goldkey became the directors of Blinco Patagonia, and the basis upon which he, a person with no apparent connection whatsoever to the provider of the funds for the acquisition of the properties represented by the companies, should be able to assert beneficial ownership of the companies. He ought also to have demonstrated how payment was made by him to achieve that beneficial ownership.
166. The absence of particulars on the part of Mr Willi goes beyond merely providing a basis upon which it is open to the court to say that there is no arguable defence. If Mr Willi is in the position he is in, as he asserts, then the only conclusion that can be reached is that he has deliberately chosen to conceal the particulars from court. In the whole of the circumstances nothing he says is capable of belief, and simply does not require testing at a trial.
167. There is nothing in Mr Willi’s affirmations which provides the defendants any basis at all to assert that there might be an arguable defence. Indeed, the whole circumstances of Mr Willi’s assertions, in the light of the correspondence with Mr Hu, tends to substantiate the overall assertion of PEWC that Mr Hu and the others have wrongfully deprived PEWC of the benefit of its property.
168. To their credit, neither Mr Smith nor Mr Westbrook pressed this aspect of the argument.
Mr Hu is arrested by Taiwanese authorities:
169. On 15 November 2004, an indictment was filed by the Taiwan Prosecution Authority against Mr Tung, Mr Sun and Mr Hu and other persons.
170. Prior to the issue of the indictment, Mr Wellem Sham had given a signed statement to the prosecution authorities on 16 August 2004. On 11 November 2004, Mr Wellem Sham and Mr Hu were questioned by the prosecution authorities, together. On 12 November 2004, Mr Hu was questioned by the prosecution authorities on two occasions. On the first occasion he responded to questions. On the second occasion he exercised his right to silence. On each occasion on which Mr Wellem Sham and Mr Hu were interviewed, the interview was undertaken in circumstances in which, had false answers being given, the interview subject would have been subject to a charge equivalent to that of perjury.
171. Mr Hu was subsequently arrested, together with the others in the indictment, and is presently facing an ongoing trial in relation to fraud and deception charges in Taiwan. Those charges arise from the very activities at issue in these proceedings.
172. Transcripts of the interviews of Mr Sham and Mr Hu have been obtained, and form part of the evidence before me. A comprehensive summary of the relevant extracts appears at Annex 15 to Mr Neoh’s submissions. I am satisfied from my perusal of the transcripts that Mr Neoh was entirely justified in summarising the essential statements made the following terms:
(a) Mr Wellem Sham confirmed that Blinco BVI and Patagonia were formed for the benefit of PEWC.
(b) Mr Wellem Sham confirmed that PCHL was formed for the benefit of PEWC and that PEWC provided the funds for its capital.
(c) Both Mr Wellem Sham and Mr Hu stated that South Horizons was bought with funds of PEWC, and a loan effectively guaranteed by PEWC. They further confirmed that the South Horizons property belongs to PEWC, as did all property owned by PCHL.
173. These statements were criticised, particularly by Mr Westbrook. It is right that Mr Sham was not a director or officer of PEWC, or any of its subsidiary companies. But the evidence clearly establishes his deep involvement in the administration of the affairs of PEWC in Hong Kong, entitling weight to be placed upon his assertions.
174. In my view it is irrelevant that Mr Sham gave his statements to the prosecutor as a witness, not as a defendant in these proceedings, neither is it relevant whether or not he was given immunity from prosecution in return for making these statements.
175. The assertions that he makes, upon which Mr Neoh relies, are, in numerous instances, entirely consistent with the documentary evidence, thereby giving credibility to Mr Sham’s assertions. It is right that in some cases there is no documentary evidence to substantiate statements by Mr Sham, but having regard to the overall consistency of his statements with the documentary evidence, I accept his assertions, as relied upon by Mr Neoh, where there is no documentary evidence to support him. No basis is provided by the defendants to assert that Mr Sham himself might have been part of the fraudulent scheme, and to be protecting himself by false statements.
176. As to Mr Hu, the statements he has made to the prosecutor in Taiwan are plainly statements against his own interest. That alone provides the basis upon which they may be relied upon.
177. PEWC are perfectly entitled to rely upon these statements, from persons directly involved in the activities under question, as to the intentions of those directing the activities of the companies involved, particularly in the complete absence of any evidence from either Mr Wellem Sham or Mr Hu, disavowing those statements. The evidence was such that Mr Neoh was entitled to say that there has been contact with Mr Hu by those involved with the various defendants. There was no assertion from the defendants that they were unable to obtain evidence from Mr Hu.
The Order 14A argument:
178. The argument was made that it is not open to this court to determine a point of law, that is whether or not a resulting or constructive trust arises upon the established facts, because no application has been made pursuant to O 14A.
179. The O 14 procedure is a procedure by which a plaintiff may, having verified the truth of the allegations in the statement of claim, assert that a defendant has no defence to the claim. When such an application is made, the defendant must show cause by affidavit or otherwise to the satisfaction of the Court, in which circumstances he will be given leave to defend: see O 14 r 4. In most circumstances there will be an evidential obligation on the part of a defendant to convince the court that there exists a triable issue, so that conditional leave to defend is given, or the application for summary judgment is dismissed.
180. The O 14A procedure, not so commonly used, enables the disposal of the case on a point of law. An application under O 14A will only be appropriate where there is a discrete question of law that will dispose of the matter. In such circumstances there can be no argument on the facts.
181. I can find nothing in O 14 to suggest that a question of law may not be determined in the course of the usual summary judgment procedure. The requirement on a defendant under O 14 r 4 is to:
“show cause against an application under rule one by affidavit or otherwise to the satisfaction of the Court.”
182. A defendant may do so by a preliminary or technical objection, in which case no affidavit is required in support of such an objection: see Chinakong Manufactory Ltd v Uniden Hong Kong Ltd [1993] 1 HKLR 28 at 32 per Kaplan J. He may do so on the merits, or that a difficult point of law is involved: see Hong Kong Civil Procedure 2008, para 14/4/2, 2.
183. In my view a preliminary or technical objection must include a point of law. In Chinakong at p 32, Kaplan J. sets out examples of a number of circumstances where an O 14 application may be determined without evidence. The examples given by Kaplan J. include a contention that a plaintiff’s cause of action may be unknown to law. Such a conclusion is a determination of a point of law.
184. It was argued that the resulting trust argument was a sufficiently difficult point of law that it ought not to be determined by way of summary judgment. The argument before me has occupied 12 days, of which a good proportion has been devoted to the resulting trust argument. Over 25 authorities in relation to trusts, together with several textbooks and learned articles were cited by counsel in the course of argument. The matter has been comprehensively argued. Although Mr Westbrook suggested that the issue has not been fully argued, he did not indicate which particular areas he had not fully dealt with, or not dealt with at all.
185. While I accept that points of law involving resulting or constructive trusts, and the concept of moneys had and obtained, are difficult, I am satisfied that all relevant aspects of these points of law have been sufficiently argued before me. Further, in the circumstances of the present case, the factual basis upon which the legal principles are to be applied is, ultimately, sufficiently clear, and the principles to be applied also sufficiently clear that, at the end of the day, in this case, whilst a complex factual situation is involved, the application of the legal principles is not difficult.
186. I am accordingly satisfied that it is appropriate to deal with these legal issues in O 14 proceedings. I reject the contention that it is not open to me, in these particular proceedings, to determine points of law that might conclude the matter.
A constructive trust arises:
187. Although Mr Neoh preferred to base his case primarily on the argument for a resulting trust, I find it convenient to deal with the question of a constructive trust first because in my view that situation is quite plain, and the fact that a constructive trust arises on the facts is quite unanswerable.
188. It is first necessary to consider the nature of a constructive trust.
189. I note the following passage from Equity & the Law of Trusts, Pettit, 10th Ed, at p. 139:
“As a general principle it may be said that property subject to a constructive trust must have come into the hands of the alleged trustee as a result of unconscionable dealing or in breach of a fiduciary obligation.”
190. In the Law of Trust & Trustees, Underhill & Hayton, 17 Ed at para 33.1 it is put in the following way:
“Where a person has the management of property, as express trustee or trustee de son tort or partner or director or other person clothed with a disinterested fiduciary character, he may not make any personal gain from such property; nor may a fiduciary make a personal gain by exploiting his position in any other way; and a fiduciary who makes any such gain must account for it to his principal, in whose favour a constructive trust will be imposed on the gain or its traceable proceeds.”
191. In Snell’s Equity, 31st Ed, at para 24-01, the following statement is made:
“A trust may sometimes arise from conduct which amounts to a legal equitable wrong. The trust arising in this way is generally constructive in that it arises by operation of law rather than through the expression of any intention to create a trust.
The imposition of the trust enables the complainant to assert an equitable proprietary claim to the property held by the defendant. As an absolutely entitled beneficiary under a bare trust, he may compel the defendant to convey the property to him. The effect of the trust is therefore restitutionary, in that the defendant is stripped of the benefits accruing from his role. The imposition of the trust may also confer on the claimant a sufficient title to rely on the equitable rules of identification to follow or trace the property. It may therefore provide the foundation for a personal claim against a third party who receives the property, or a proprietary claim to its traceable proceeds.”
192. At the heart of all the transactions, and at the relevant times at which the essential steps taken in acquiring the property now at issue were taken, is the fact that Messrs Hu, Sun and Tung, or one of them, were directors of the relevant companies. One or other of them was a director of Blinco BVI, Patagonia, PCHL, Texan, Super Wish, All Dragon, Harmutty, Haddowe, Casparson, and Greateam. To this day Mr Hu remains a director of Haddowe, Harmutty, Casparson and Greateam.
193. As to the existence of a fiduciary duty, Mr Westbrook contended that the evidence was insufficient to establish that a fiduciary duty existed in the Taiwanese law. It is irrelevant in my view whether or not such a fiduciary duty existed. All of the property in issue is Hong Kong property. All of the acts upon which PEWC relies were acts carried out in Hong Kong. It simply cannot be argued to the contrary, that, at Hong Kong law Messrs Hu, Sun and Tung owed a fiduciary duty to PEWC, when dealing with the property of PEWC in Hong Kong.
194. It equally cannot be argued to the contrary that in the conduct described above they have acted in breach of that fiduciary duty. The overwhelming inference from the whole of the facts is that it is Mr Hu, who is controlling the companies presently owning the proper relevant property, and that he is doing so for his own benefit, and the benefit of Messrs Tung & Sun.
195. It is that breach of fiduciary duty that entitles PEWC to pursue its property in the manner sought by the relief pleaded.
196. It is no answer to argue, as Mr Westbrook does, that Messrs Hu, Tung and Sun are not parties to the O 14 proceedings, and that none have admitted a breach of fiduciary duty. The court in considering the O 14 proceedings is perfectly entitled where there is evidence upon which appropriate inferences may arise, to make any factual findings where the defendants, the subject of the O 14 proceedings offer no evidence to the contrary.
197. It is right that recourse has usually been had to a constructive trust in circumstances where trust property has become intermingled with other property. But there is nothing in the law that limits the use of a constructive trust to those circumstances. It is equally applicable in circumstances where the whole of the property at issue arises as a result of wrongful conduct.
198. It has been plainly established that the whole of the property at issue has been acquired with PEWC’s funds, and that, by virtue of the devices used by Messrs Hu, Sun and Tung, the companies now owning that property, although wholly-owned subsidiaries of PEWC, are not in control of PEWC. That circumstance has arisen through a breach of fiduciary duty on the part of Messrs Hu, Sun and Tung, which in my view unarguably gives rise to a constructive trust.
199. On this basis alone, PEWC must succeed in the South Horizons action, subject to the limitation argument, against PCHL, Harmutty, Haddowe, Casparson, All Dragon, Blinco BVI and Patagonia. At the relevant times Messrs Hu, Sun and Tung were directors of those companies which are impressed with the knowledge of those directors as to the circumstances in which each company acquired the property. Each company did so as a constructive trustee.
200. At the time Greateam acquired property arising from the aborted sale of South Horizons, neither Messrs Hu, Sun and Tung were directors of that company. Mr Hu subsequently became a director of the June 2000. From that time on Greateam became impressed with Mr Hu’s knowledge of the circumstances in which the property had been acquired originally.
201. As to the Shouson Hill action, although it may have been arguable that at the time Greateam acquired the property it was a stranger to the trust, equity imposes a constructive trust from the time the stranger knows of the claimant’s proprietary right in the trust property: see Underhill & Hayton, at para 34.1. No similar issue arises in respect of Harmutty.
202. In the PacMos action, where Texan was acquired by All Dragon for no consideration, Mr Hu became a director of Texan in December 1996, and on the same basis, All Dragon became subject to the constructive trust, subject only to the limitation argument. In any event, Mr Hu was, prior to and at the time of the acquisition of Texan by All Dragon, a director of All Dragon which company consequently was impressed with the knowledge of the circumstances in which Texan had acquired the PacMos shares.
203. As to Super Wish, which acquired shares in PacMos on 8 November 1996, it is plain that all funding for the acquisition of the shares was arranged by Mr Hu, who was a director of Super Wish between 10 December 1994 and 1 November 1996. The knowledge that may be imposed upon Super Wish of the true circumstances of the source of the funds to acquire the shares plainly continues, even following the resignation of Mr Hu.
A resulting trust arises:
204. The primary argument made by Mr Neoh is that in each of the three actions, it having been demonstrated that the funds used for the acquisition of the various assets came either from PEWC itself, or were borrowed and have either been repaid by PEWC, or PEWC remains liable for repayment, a resulting trust arises in favour of PEWC.
205. I adopt the following statement of principle as to the concept of a resulting trust from Equity and the Law of Trusts, 10th Ed, Petitit at p175:
“Whenever someone buys either real or personal property and has it conveyed or registered or otherwise put into the name of another, or of himself and another jointly, it is presumed that the other holds the property on trust for the person who has paid the purchase money. The classic statement of the law is to be found in the judgment of Eyre CB in Dyer v Dyer (1788) 2 Cox Eq Cas 92 at 93:
“The clear result of all the cases, without a single exception, is that the trust of a legal estate, whether freehold, copyhold, or leasehold; whether taken in the names of the purchaser and others jointly, or in the names of others without that of the purchaser; whether in one name or several; whether jointly or successive - results to the man who advances the purchase-money.”
This passage was approved by Lord Upjohn in Pettit v Pettit [1970] AC 777 at 814.
206. The central argument mounted by Mr Westbrook and Mr Smith against there being a resulting trust was the argument that if, as contended by Mr Neoh, PEWC did not know what had been taking place, it could not be established that PEWC intended that the property be held by way of trust.
207. The argument fails to appreciate the essential nature of a resulting trust, namely that the intention of the settlor of the trust is not an actual intention, but a presumed intention. That this is so appears from the following passage in Resulting Trusts, 1997, Robert Chambers, at p. 11:
“The presumptions of resulting trust and advancement are presumptions of fact, the fact being the intention of the person who has provided property to another. As Lord Diplock said in Pettit v Pettit [1970] AC 777 at 823, the presumptions are instances of the courts’ ‘technique’ of:
‘imputing an intention to a person whenever the intention with which an act is done affects its legal consequences and the evidence does not disclose what was the actual intention with which he did it…. When the act is of a kind to which this technique has frequently to be applied by the courts the imputed intention may acquire the description of a ‘presumption’ - but presumptions of this type are not immutable. A presumption of fact is no more than the consensus of judicial opinion disclosed by reported cases as to the most likely inference of fact to be drawn in the absence of evidence to the contrary.’”
208. Mr Chambers, in Resulting Trusts, also deals with the question of ignorance. In so doing he also provides an even clearer and more precise answer to the proposition by Mr Westbrook and Mr Smith that if PEWC did not know what had taken place, there can be no resulting trust. It is convenient to set out the following passage from pp 116-117:
“As discussed above, the word ignorance is used here not in a pejorative sense, but to describe those cases in which ‘wealth is transferred to the defendant wholly without the knowledge of the plaintiff’; see Birks , An Introduction to the Law of Restitution, revised edn, 1989 140. The resulting trust should apply when ever someone obtains title to another’s property in the circumstances. In many cases, the provider will retain the legal ownership of the property taken without consent, but there will be many others in which title does pass, e.g. where stolen money is used as currency or deposited in a bank account. The resulting trust ought to arise from the moment title to the provider’s property, or its exchange product, passes to the recipient.”
and further, at p 117:
“There are two misconceptions about the resulting trust which have tended to inhibit its application to cases of ignorance. The first is the belief that resulting trust is dependent on the implied intention to create them. The second is the belief that, where the provider’s money is used by the recipient to acquire other property, the provider must have intended to purchase that property. The realisation that the resulting trust depends not on any positive intention, but on the lack of intention to benefit the recipient, clears away the impediments.”
209. It being unarguable in my view that the evidence establishes that the property in dispute was acquired with funds provided by PEWC, in the circumstances in which that company was entirely ignorant of the acquisitions, and in circumstances in which the acquisitions were affected by a breach of fiduciary duty on the part of Messrs Hu, Sun & Tung, in my view it inevitably follows that there must be a resulting trust.
210. The circumstances of any required knowledge on the part of the various companies now holding the property, as set out in paragraphs 199-230 above, in relation to the discussion on constructive trusts must apply equally to the circumstances of a resulting trust.
211. Mr Smith relied upon the following proposition from Underhill & Hayton at para 31.64:
“Where an asset is purchased in the name of a company which is formed for the purpose and controlled by the provider of the funds, then it has been held to be perverse to presume an intention that the provider of the funds does not wish the company to take the property beneficially for itself, since the likely intention of the provider of the funds is to use the company to deal with the property.”
In reliance upon this statement Mr Smith contended that there could be no resulting trust.
212. There can be no doubt that the proposition is correct. But it can only be applicable where the company formed for the purpose, (e.g. Haddowe and Casparson), is controlled by the provider of the funds. Demonstrably that is not the case here. If, as I have noted previously in this judgment, PEWC controlled the companies holding the suit properties, there would be no litigation.
213. The proposition relied upon by Mr Smith is simply inapplicable because PEWC demonstrably does not control the relevant defendant companies.
214. I gain support for the conclusion that there must be a resulting trust from the following passage from an article by Millett JA, as he then was, entitled Restitution and Constructive Trusts, (1998) 114 LQR 399 at 415:
“The other (situation where a resulting trust arises), very common, and familiar to Chancery judges, is the three-party case where a fiduciary, in breach of his fiduciary duty pays away his principal’s money. The rule of equity is that the beneficial interest is not defeated by a breach of trust or fiduciary duty. Liability to make restitution is strict, for it is not a fault based.” It is enforceable against anyone who takes the property in which the interests subsists except a bona fide purchaser for value. (The emphasis is mine.)
215. In the case of each of the companies which beneficially hold the property in dispute, it cannot be argued that they are bona fide purchasers for value. In respect of each, at the relevant times, each company was under the control of directors who knew precisely what was happening. Essentially, Texan, Haddowe and Casparson, by their then directors knew that PEWC’s moneys were used to purchase the property, the subject of the proceedings. Those directors knew too that the three companies had provided, themselves, no consideration for the monies provided by PEWC to enable the property to be taken in their names.
216. There is no evidence to substantiate a submission that Mr Robin Willi, or some person on his behalf, was a bona fide purchaser for value.
217. For these reasons I am satisfied that a resulting trust arises to the benefit of PEWC, against each of the parties presently holding the property.
The consequence of Taiwanese law:
218. Mr Westbrook contended that the concept of constructive or resulting trusts, not existing in the law of Taiwan, the court ought not to make findings upon those bases in favour of PEWC.
219. Whether constructive or resulting trust is relied on, the existing law of Taiwan is simply irrelevant to property in Hong Kong. An overseas company is perfectly entitled to come to Hong Kong, to do business here, and to rely upon the courts of Hong Kong to enforce Hong Kong law in relation to property acquired being the assets of that company in Hong Kong. Whether or not there is a constructive or resulting trust in Taiwan is not a matter that impacts in any way upon these O 14 proceedings.
Monies Had and Received:
220. By the end of the case, Mr Neoh placed little emphasis on this aspect of the claim. Accordingly, I need say little about this aspect of the case.
221. From the foregoing analysis of the evidence and the law, and as may be seen from the conclusions I have reached below, I am satisfied that PEWC has established a proprietary right in the suit property. The concept of money had and obtained is in reality an expression of the right of a person to trace and follow an asset. This process is best described in the judgment of Lord Millett in Foskett v McKeowen [2001] AC 102 at 127B-C, as follows:
“The process of ascertaining what happened to the plaintiffs’ money involves both tracing and following. These are both exercises in locating assets which are or may be taken to represent an asset belonging to the plaintiffs and to which they assert ownership. The processes of following and tracing are, however, distinct. Following is the process of following the same asset as it moves from hand to hand. Tracing is the process of identifying a new asset as a substitute for the old. Where one asset is exchanged for another, the claimant can elect whether to follow the original asset into the hands of the new owner or to trace its value into the new asset in the hands of the new owner. In practice is choice is often dictated by the circumstances.”
222. Having established a proprietary right in the suit property, by way of demonstrating that PEWC either provided, or has repaid, or is liable for, the funds provided to acquire the suit property, PEWC is then entitled to trace and follow its funds to the assets so acquired. In relation to trust funds, Lord Millett puts it this way in Foskett v McKeowen at p 127G:
“A beneficiary of a trust is entitled to a continuing beneficial interest not merely in the trust property but in its traceable proceeds also, and his interest binds everyone who takes the property or its traceable proceeds except a bona fide purchaser for value without notice.”
223. For the reasons I have given I am satisfied that both a constructive trust and a resulting trust arise. Those trusts arose from the moment Messrs Hu, Tung and Sun applied PEWC’s funds in the steps that ultimately resulted in the acquisition of the suit property. It must follow that PEWC is entitled to trace and follow those funds by way of remedy.
224. This being merely a remedy, no limitation issue arises.
The borrowed funds argument:
225. It is now necessary to consider the argument made on the part of the defendants that as part of the funds applied in the purchase of the various properties were borrowed funds, no resulting trust can arise. The submission arises from the following passage in Pettit, at p 176:
“Evidence must also show that the money was intended to be advanced by the person and alleging the resulting trust in the character of purchaser: if the evidence merely established a loan of some or all of the money used for the purchase, there would be no resulting trust and the person lending the money would be a mere creditor.”
226. It was submitted by the various defendants that, even if it could be argued that funds had come from PEWC to acquire properties, it could not be argued that the whole of the funds required to acquire the property had come from PEWC because there had been lending by PEWC to its subsidiaries, and separate borrowing by PEWC.
227. I understand the argument to be advanced in two ways. First, it is argued that as funds were borrowed from outside sources, then a resulting trust may not arise, because of the interest of the lender of the funds. Second, it is argued that as the corporate accounts show that the funds from PEWC were advanced by way of loan to the subsidiary companies, the intention was that it should be the subsidiary company that benefits, and that PEWC is merely a creditor of the subsidiary for the amount of the advance.
228. I am satisfied that both arguments must fail.
229. Where there were borrowed funds from outside sources, they were either borrowed by PEWC, or entities represented to lenders as PEWC wholly-owned subsidiaries, and then applied in the acquisition of the assets.
230. When funds are borrowed for the acquisition of property those funds become the property of the borrower who is liable to repay the funds, but is no less the owner of the whole of the property. It cannot be argued that if a company borrows funds from the bank, and gives a mortgage to the bank, or some other form of security, (such as in this case a Floating Rate Note), and then applies the funds to the acquisition of a property, that the company does not become the owner of the whole of the property.
231. Chambers, at p. 13, refers to the circumstances where borrowed money is used to acquire an asset in the following terms:
“A contribution to a purchase can be made by accepting a liability to pay the purchase price, e.g. by way of mortgage. In this situation the resulting trust is not necessarily affected if the loan is later repaid by other persons, Cowcher v Cowcher [1972] 1 WLR 425; Crisp v Mullins [1976] EGD 730 CA. In Caverly v Green (1984) 155 CLR 242, a house was purchased in the joint names of the plaintiff and defendant. One third of the purchase price was paid by the defendant as a deposit and the remainder was borrowed by way of a joint mortgage of the house. Even though the defendant had paid all of the mortgage instalments, the plaintiff was held to have contributed to the purchase price by undertaking the obligation to repay the loan. Mason and Brennan JJ stated:
‘It is understandable but erroneous to regard the payment of mortgage instalments as payment of the purchase price of a home. The purchase price is what is paid in order to acquire the property; the mortgage instalments are paid to the lender from whom the money to pay some or all of the purchase price is borrowed.’”
232. Clearly, the fact that funds were borrowed from outside sources to provide part of the purchase price is simply irrelevant to the argument as to whether or not a resulting trust arises.
233. The second situation in which the borrowed funds argument was advanced was in relation to funds transferred between companies to effect the purchases. Funds provided by PEWC to PCHL are recorded in the books of both companies as a loan by PEWC, and consequently an asset in PEWC’s books, and borrowing by PCHL, and consequently liability in the books of PCHL. As the funds pass through the chain of subsidiary companies the matter is recorded in the same way.
234. There are two answers to this proposition.
235. The first is simple. That the transfer of the funds were booked by way of loans between the companies was plainly a decision of Messrs Hu, Sun and Tung. It simply cannot now be said that the defendant companies which they control can avail themselves of that decision to their advantage. The decision to book the transfer of funds by way of loans was not an act on the part of PEWC , and does not in any way indicate an intention on the part of PEWC that it intended the character of money used to be that of a loan.
236. The second answer requires an examination of the purpose for which the sums are shown in the accounts of the companies. While being formally recorded in accounts in this manner, the reality of the situation is that these sums are not loans in the true character of the expression, but are merely recorded in that way in the accounts.
237. In circumstances where A provides funds to B, both being private individuals, and the funds are applied in the acquisition of property, the circumstances being found to be a resulting trust of the property on the part of B, in favour of A, it could not be said that the provision of funds was a loan by A to B. Because they are private individuals there is no requirement that there be a set of accounts prepared between them, and accordingly no formal description is given to the transaction in which the funds are provided.
238. Where a company uses a subsidiary, or an SPV, to acquire property on its behalf, the clear intention is that the SPV holds the property for the company, in other words on a trust for the company. Such a trust arises, not from the fact of the company’s shareholding in the SPV, but form the circumstances in which the property is acquired. Thus, to say that there is a trust, is not objectionable to the rule in Macaura v Northern Assurance Co Ltd [1925] AC 619, (see paragraphs 244-255 below).
239. However, invariably it will not be necessary to have resort to questions of trusts in dealing with such property, because the company will usually control the SPV, either by way of directorships, or shareholding.
240. But the movement of the funds will be required to be recorded in the books of both companies. In the absence of any other available accounting method, the sum provided by the company to the SPV to acquire the property will usually be recorded as a loan between the two companies.
241. The description of the transaction as a loan is a mere accounting device, and is not conclusive of the true nature of the transaction.
242. I am satisfied that, in circumstances where a company provides funds to an SPV for the acquisition of property, in the circumstances where, in the case of private individuals, it would be appropriate to find that the one holds the property on trust for the other who paid the purchase money, the recording of the transaction of the movement of funds between the company and the SPV as a loan, does not render the company a mere creditor. In such circumstances the company will be entitled to enforce a resulting trust against the SPV, should the SPV refuse to transfer the property upon demand to the company.
243. I accordingly reject the proposition that the fact that the various assets were acquired, in part with borrowed monies, means that the argument of PEWC cannot succeed.
The Salomon argument:
244. The rule in Salomon v Salomon & Co [1897] AC 22 is well known. It is simply that a company is a separate and distinct entity from its shareholders. The classic statement is contained in the judgment of Lord Macnaghten, at p 51, in the following terms:
“The company is at law a different person altogether from the subscribers to the memorandum; and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them. Nor are the subscribers, as members, liable in any shape or form, except to the extent and in the manner provided by the Act.”
245. This rule must be read together with the fundamental proposition that a shareholder does not have any legal or equitable interest in the assets of the company. This proposition is found in Macaura v Northern Assurance Co Ltd [1925] AC 619 at 625-627 & 630 in the following terms:
“…. no shareholder has any right to any item of property owned by the company, for he has no legal or equitable interest therein.
He [the shareholder] stood in no legal or equitable relation to the [company’s assets] at all. ….. His relation was to the company, not to its goods…..”
246. These propositions are good in Hong Kong: see Terrian Ltd & Ors v Oriental Peer Co Ltd [1988] 1 HKLR 246 CA and Good Profit Development Ltd v Leung Hoi [1993] HKLR 176.
247. Both Mr Smith and Mr Westbrook relied upon these propositions, and contended that they were a bar to any claim by PEWC. I am satisfied that in neither case do these propositions provide an answer to PEWC’s claim.
248. In the first place, it is the argument for Blinco BVI and Patagonia that the beneficial owner of the shares in the two companies is Mr Robin Willi. That is an assertion that PEWC is not a shareholder in Blinco BVI or Patagonia. If PEWC is not a shareholder in those companies then quite simply the principle enunciated in Salomon does not stand in the way of a contention that the shares are held in trust for PEWC.
249. If PEWC is a nominal shareholder in Blinco BVI and Patagonia then at first sight the Salomon principal is a bar to an assertion that property owned by Blinco BVI and Patagonia is held by those companies upon trust for PEWC.
250. Again, the argument may be made that property held by Blinco BVI and Patagonia, (principally in this case it refers to the shares they hold in PCHL), is owned on trust for PEWC. As I have set out in paragraph 238 above, that is a trust which arises quite independently of any ownership of shares by PEWC in either Blinco BVI to Patagonia. It is a trust which arises by virtue of the circumstances in which Blinco BVI and Patagonia have acquired and hold their shares in PCHL. That a trust arises in the circumstances in no way offends the rules in Salomon or Macaura because it arises independently of the ownership of the shares.
251. Further, the propositions in Salomon and Macaura need to be carefully examined. The circumstances in which the principles in these two cases arose are quite different from the present circumstances.
252. Here, while PEWC is apparently the sole shareholder in both Blinco BVI and Patagonia it is demonstrably unable to assert control over either company. As I have already said, were it able to do so this litigation would simply not exist. Were PEWC able to assert control over those two companies, it could rapidly take control of PCHL and all the subsidiary companies thereunder, and assert control over the suit assets. The litigation would simply be unnecessary.
253. When that situation is examined the conclusion must be reached that it cannot be that the principles in Salomon and Macaura could be applied to deny PEWC a right to the property in question. It would be quite against conscience that either Blinco BVI or Patagonia could rely upon those principles to deny PEWC their rights.
254. If it were necessary I would hold that in circumstances where, without the knowledge of a party, that party’s assets are applied in the acquisition of shares in a company in the name of that party and subsequently assets by that company, then an exception to the principles in Saloman and Macaura arises, and the assets of the company, in which the party is a shareholder, are held on a trust by the company for that party. However, for the reasons set out in paragraph 238 and 250, it is not necessary to have resort to an exception to those rules.
255. In so far as the remaining defendants, (Mr Westbrook’s lay clients), are concerned, the answer to the Salomon and Macaura arguments is simple. PEWC is not a shareholder in any of the companies in that category. Consequently neither Salomon nor Macaura are a bar to finding that any of those companies hold property on a constructive or resulting trust for PEWC. It may well be that PEWC is ultimately entitled to ownership of the shares in those companies, but as it is not directly a shareholder in those companies, the principles relied upon do not assist the defendants.
The limitation argument:
256. By s 20(1) Limitation Ordinance, Cap 347, the usual rule is that there is no period of limitation to an action by a beneficiary under a trust being an action:
“(a) in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy; or
(b) to recover from the trustee trust property or the proceeds thereof in the possession of the trustee, or previously received by the trustee and converted to his use”.
257. Mr Westbrook submitted that in any event s 20(1)(b) could not apply as it is limited to an action against trustees. He said that the trustees were the former directors. In my view this is not correct. The companies against whom an action may be brought in the circumstances of this case, where those companies presently holding the suit property have knowledge, by way of the former directors, of the circumstances in which the property was acquired, are themselves trustees, and in these O 14 proceedings, it is those companies against whom relief is sought.
258. An argument is available to a defendant on a trust action that notwithstanding those provisions there is a limitation period. That argument arises from the decision in Paragon Finance v Thakerar [1999] 1 All ER 400. There is conflicting authority in Hong Kong as to the effect of this decision: see Peconic International v Chio, (unreported, HCA 16255/99 per A Cheung J), and Akai Holdings v Domine Ko, (unreported, HCCL 20/2005, per Stone J).
259. In my view it is not necessary in these proceedings to attempt to resolve those complex issues. I am satisfied that even if there is a limitation period, the provisions of s 26(1)(b) Limitation Ordinance, ought to apply. This provision postpones a limitation period in the case of fraud, concealment or mistake.
260. I am satisfied that, having regard to the fact that the whole of the circumstances of this case, the acquisition of the suit properties were concealed from PEWC by Messrs Hu, Tung & Sun, until they were discovered following the reinstatement of CPE during 2003, resulting in the write-off in the 2002 accounts, published in June 2003. That appears from the affidavit of Jennifer Tse, Treasurer and Assistant Financial Controller of Pacific Overseas Investment Management Ltd, (POIM), a wholly-owned subsidiary of PEWC, which is a company responsible for the management of PEWC’s operations and investments in Hong Kong.
261. It is right, as Mr Westbrook submits, that if a plaintiff could, with reasonable diligence have discovered the matters earlier, then the postponement will not apply.
262. Mr Westbrook is correct too in submitting that the plaintiff bears the burden of proving the concealment. Bearing in mind the appropriate standard of proof I am satisfied that it has done so. Mr Westbrook has pointed to a number of matters, in particular the receipt by PEWC of certain documents on 20 October 1998, from which certain of the fraudulent transactions effected by the former directors may be seen. But that does not demonstrate that reasonable diligence would have enabled PEWC to determine the matters earlier.
263. I have already outlined the difficulties faced by PEWC from 1998 until 2001, in ascertaining what had happened. The deliberate concealment of debt by way of the transactions between Mae Sai and CPE effectively concealed matters from PEWC until the final writing off in July 1999. It was shortly thereafter, in 2000 and 2001, that PEWC were able to take the necessary steps to restore CPE from liquidation and establish what had happened, leading to the write-off in the 2001 accounts published in 2002.
264. POIM took over the management of PEWC’s Hong Kong subsidiaries from Trident in September 1998. Numerous requests were made to Trident for the delivery of all the books and records relating to the PEWC group which had been under the management of Trident. This included companies such as PCHL, Moonview, and other companies. From September 1998 to September 2002, Mr Robert Ma of Trident, plainly acting on the instructions of Mr Hu, failed to deliver the accounting papers to POIM, thereby concealing from PEWC the true situation. I say that Mr Ma “plainly” acted on the instructions of Mr Hu, because the evidence establishes clearly a long-standing association between the two, with Mr Hu giving instructions to Mr Ma in relation to numerous PEWC matters. There is no suggestion at all that Mr Ma received instructions from anyone, properly authorised by PEWC. There is no suggestion from the defendants to this effect. He was not acting on his own behalf and the only inference is that he acted on the instructions of Mr Hu.
265. Further, it is clear from the evidence that the existence of the write-off in the accounts of PEWC placed the company at risk of suspension from the TSE until the write-off was properly explained. There can probably be no greater penalty, short of receivership or liquidation, that may be faced by a publicly listed company, other than suspension. It has a drastic effect on the company’s shares and shareholders. Plainly, as soon as PEWC knew of the need to make the write-off it knew that it faced the risk of suspension. That occurred during 1999. It was not until after the reinstatement of CPE in 2003, upon a subsequent availability of the records of CPE, that PEWC were able to discover what had actually happened. That they were able to discover what happened was as a result of considerable diligence; I have no doubt that the efforts to avoid suspension must have been frantic.
266. There is no evidence to suggest that PEWC had slept on its rights, but rather that it had diligently investigated the matter, and when the proper picture was revealed to it after the reinstatement of CPE in 2003, appropriate steps were taken.
267. Other than to point to the documents received by PEWC on 20 October 1998, no evidence is put before the court by the defendants upon which an argument can be mounted that PEWC had failed to apply due diligence in learning what had happened. The importance of the burden of proof in limitation matters is demonstrated in Paragon. There, in the absence of evidence, the plaintiffs failed to discharge the burden showing that they were entitled to the postponement of the limitation period. In the present case I am satisfied that the plaintiff has discharged that burden, and has established that by virtue of the concealment undertaken they could not have discovered the fraud without exceptional measures which they could not reasonably have been expected to take. The defendants have failed to discharge the burden upon me to establish an arguable case to the contrary.
268. I am satisfied that unlike the situation in Paragon, (see p 418 thereof), there is ample evidence in the present case to hold that PEWC could not, with reasonable diligence, have discovered the fraud before the relevant date.
269. I am accordingly satisfied that if there is a limitation period, and in the proceedings have been commenced outside that period, PEWC is entitled to a postponement of the limitation period, and that accordingly the proceedings have commenced within time.
A final word:
270. In Lipkin Gorman v Karpnale [1991] AC 548 at 559, Lord Templeman cited these words, [of Lord Wright in Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd [1943] A.C. 32, 61]:
“It is clear that any civilized system of law is bound to provide remedies for cases of what has been called unjust enrichment or unjust benefit, that is to prevent a man from retaining the money or some benefit from another which it is against conscience that he should keep.”
271. The evidence in this case clearly establishes that the companies holding the suit properties, while having been entirely funded by PEWC, are under the control of persons now quite unrelated to PEWC, and of whom no argument can be mounted that they were intended to be benefited by PEWC. Mr Robin Willi, having had the opportunity to demonstrate that he is a bona fide purchaser for value of the assets he claims to own or to be beneficiary entitled to, has signally failed so to do.
272. In all of these circumstances there is no logical argument or suggestion that any of the companies holding the suit properties, or those in control of those companies, or Mr Robin Willi, should be beneficially entitled to the assets held by those companies.
273. Were any of those parties to be beneficially entitled to the assets, to the exclusion of PEWC, they would plainly be unjustly enriched, having themselves provided nothing to the acquisition suit properties. It would be quite against conscience that they should be able to keep that property.
274. The position of those represented by the Westbrook and Mr Smith was plainly reflected in an exchange between myself and Mr Westbrook on the last day of the hearing, when Mr Westbrook was obliged to acknowledge that the position adopted by the various defendants amounted to an acknowledgement that there may be liability to PEWC but it was not the liability pleaded.
275. Mr Westbrook said in terms that he did not say that PEWC did not have a proper cause of action. I accept that there was no obligation upon Mr Westbrook to say what that proper cause of action was.
276. I am satisfied that in the circumstances the proper cause of action open to PEWC is that which they have pleaded, namely in constructive or resulting trust, with consequent tracing orders. It is in that area of the law that may be found remedies for plain cases of unjust enrichment or unjust benefit.
Conclusion:
277. In the conclusion to his submissions Mr Neoh invited me to make a number of findings. I am satisfied that he was entitled to do so and that the findings that he has set out accurately reflect those which may be properly made by me.
278. Consequently, in summary, I hold as follows:
(a) That the moneys raised by PEWC (Treasury) and Blinco HK, which were guaranteed by PEWC, were in law and in fact PEWC’s monies;
(b) That these monies have been repaid by PEWC between 2001 and 2003;
(c) That PEWC’s moneys were used to fund the purchase of the suit properties and the formation and capitalisation of the corporate structures used by Messrs Hu, Tung and Sun to make the acquisitions;
(d) That the purchase of the suit properties and the corporate structures so used were hidden from PEWC and its shareholders, and, in breach of their fiduciary duty, not reported by Messrs Hu, Tung and Sun to PEWC and consequently not reported in the Financial Statements of PEWC;
(e) PEWC is and continues to be denied the control of the corporate structures used to acquire the suit properties;
(f) That Blinco BVI and Patagonia, standing at the top of the concealed corporate structure were formed with PEWC’s monies, for the benefit of PEWC;
(g) That PEWC is the sole beneficial owner of PCHL’s shares, held upon trust for it by Blinco BVI and Patagonia;
(h) That PEWC is the sole beneficial owner of the property holding companies, (i.e. Texan, Casparson, Haddowe);
(i) That PEWC is the sole beneficial owner of Greateam, that property having come from the aborted sale of the South Horizons Commercial Centre;
(j) Texan holds the PacMos shares it owns, upon trust for PEWC;
(k) Super Wish, having previously held 69 million PacMos shares for the benefit of PEWC, and having sold those said shares, now holds the proceeds thereof on trust for PEWC;
(l) That Haddowe and Casparson hold the West Wing of the South Horizons Commercial Centre upon trust for PEWC.
Leave reserved in respect of the form of order:
279. I anticipate it will be necessary to discuss with counsel the precise form of the order to be made, and the precise defendants against whom particular orders should be made. As the case developed I did not understand Mr Neoh to press for an order against all of the defendants against whom relief had been sought in the O 14 proceedings. For that purpose, and for any other matter arising from this judgment, leave is reserved to apply.
Costs:
280. Pending any further submissions that may be made in respect of orders, all questions of costs are reserved.
| | (John Saunders)
Judge of the Court of First Instance
High Court |
Mr Anthony Neoh SC and Ms Barbara Wong, instructed by Messrs W K To & Co., for the Plaintiff in all actions
Mr Simon Westbrook SC and Mr Jeevan Hingorani, instructed by Messrs Laracy Gall, for the 1st, 3rd, 4th, 5th, & 7th Defendants in HCA 2203/2004; and the 1st, 2nd, 3rd, and 8th Defendants in HCA 2746/2004; and the 1st, 2nd, 3rd, 12th, 13th, 14th, 15th, 16th, and 17th Defendants in HCA 2763/2004
Mr Clifford Smith SC and Ms Rachael Lam, instructed by Messrs Tanner de Witt, for the 18th and 19th Defendants in HCA 2763/2004