RICCO (INTERNATIONAL) CO LTD v. LIU SIU FOON, the Administrator of the estate of CHAN KWOK HUNG, deceased AND ANOTHER

HCA 1856/2016

[2023] HKCFI 1940

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1856 OF 2016

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HCA 1858/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1858 OF 2016

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________________________

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J U D G M E N T

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INTRODUCTION

1.  The trial of these two cases were fixed to commence on 6 June 2023.

2.  However, neither Ricco (International)  Company Limited (“Ricco”)  (plaintiff in HCA 1856/2016)  nor Madam Lui Fung Yee (“Madam Lui”)  (plaintiff in HCA 1858/2016)  appeared at the trial at all.

3.  In such circumstances, their respective claims against the defendants should be dismissed with costs.

4.  What remains is the counterclaim of the 1^st defendant in HCA 1858/2016 which will be the main subject matter to be dealt with in this Judgment.  In a gist, it is the contention of the Administratrix (“Madam Liu”)  of the estate of Chan Kwok Hung (“the Deceased”)  that the estate of the Deceased and Madam Lui beneficially own 85% and 15% of Ricco respectively.

BACKGROUND

5.  The undisputed/indisputable background is as follows.

6.  The Deceased was born on 4 April 1949.  Madam Liu was his wife.

7.  The Deceased was a businessman who engaged in jewellery trading.  

8.  Madam Lui cohabited with the Deceased since about 2000.

9.  In November 2001, the Deceased was declared bankrupt.

10.  On 6 February 2002, Ricco was incorporated in Hong Kong with an authorised capital of HK$10,000 with 2 subscriber shares of HK$1 each held by Madam Lui and her daughter (“Vivien”)  respectively.

11.  In around September 2003, the issued share capital of Ricco was increased to HK$3,000,000 divided into 3,000,000 shares of HK$1 each.  Madam Lui was allotted 1,499,998 shares of Ricco.  Together with the 1 subscriber share which was transferred by Vivien to her, Madam Lui became the registered owner of 1,500,000 shares of Ricco.

12.  At around the same time, Brand New Limited was allotted 1,500,000 shares of Ricco.  Those shares were subsequently transferred to Amoris (International)  Limited (“Amoris”)  in around October 2006.

13.  Both Brand New Limited and Amoris were companies owned and/or controlled by Mr Chong Kai Sun (“Sunny”).

14.  Uni-Harvest International Limited (the 2^nd defendant in both actions herein)  (“Uni-Harvest”)  was incorporated on 21 February 2007 in BVI.  It was fully owned and controlled by the Deceased through Howsworth Nominee Limited (“Howsworth”).

15.  On 26 July 2007, Amoris transferred its 1,500,000 shares in Ricco to Uni-Harvest.

16.  On 16 August 2007, the authorised capital of Ricco was further increased from HK$3,000,000 to HK$10,000,000.  On the same day, 7,000,000 new shares of HK$1 each were allotted to Uni-Harvest (“the 2007 Allotment”)

17.  As a result of the above transactions, while Madam Lui remained the registered owner of 1,500,000 shares in Ricco, Uni-Harvest became the owner of the other 8,500,000 shares in Ricco.

18.  On 20 June 2008, the Deceased was appointed as a director of Ricco, and he had signed various directors’ report as Chairman of Ricco since then, before he passed away on 24 April 2015.

19.  On 26 April 2017, Anthony Chan J declared in HCMP 1808/2016 that the 2007 Allotment was null and void as such allotment was in contravention of section 47A of the old Companies Ordinance (Cap.32, Laws of Hong Kong), in that it was done with Ricco’s financial assistance (“Anthony Chan J’s Decision”).

20.  In other words, as the matters now stand, Madam Lui and Uni-Harvest are the owners of 50% shares each (both holding 1,500,000 shares)  in Ricco.

MADAM LIU’S CASE

21.  It is Madam Liu’s case that Madam Lui and the Deceased had expressly agreed, or at least it was their common intention, that they held 15% and 85% interest respectively in Ricco, and that the 2007 Allotment was arranged for the purpose of giving effect to such an agreement or intention.

EVIDENCE ADDUCED BY MADAM LIU

22.  To establish her counterclaim against Madam Lui, Madam Liu has called four witnesses at the trial:

(1)  Mak Wah Chi (“Mak”);

(2)  Chan Ka Lung (“Chan”);

(3)  Ho So Yung (“Ho”); and

(4)  Sunny.

23.  Mak has been working as an accountant and an auditor for over 30 years.  In summary, he told the Court that:

(1)  He first knew the Deceased in the 1980s, and they had become friends;

(2)  He assisted Madam Lui and the Deceased in the incorporation of Ricco back in 2002;

(3)  Vivien was given a subscriber share only for compliance purpose, as the Deceased was still an undischarged bankrupt at the time of Ricco’s incorporation;

(4)  The Deceased told him shortly after the transfer of shares in Ricco by Amoris to Uni-Harvest that he had agreed with Madam Lui that the Deceased should be entitled to 85% of the shares in Ricco, and that Madam Lui should be entitled to the remaining 15% interest in Ricco.  The Deceased further instructed him to prepare for the rearrangement of the shareholding by way of an increase in the share capital of Ricco so as to reflect this agreement;

(5)  The Deceased also told him at the time that it was agreed between him and Madam Lui that, despite the allotment of new shares, he would not be required to pay for the increased share capital of HK$7 million upfront, and instead, the HK$7 million would be booked as a loan to Uni-Harvest and be paid from subsequent profit distributions;

(6)  Pursuant to such instructions, he arranged for the 2007 Allotment;

(7)  Before Uni-Harvest became the 85% owner of Ricco, Madam Lui was the sole signatory of the bank accounts of Ricco.  After Uni-Harvest became a shareholder, the bank mandate was changed to the effect that those bank accounts could be operated upon the signature of either the Deceased or Madam Lui.  A few months later, the bank mandate was further changed, such that the accounts could only be operated if either the Deceased (solely)  had signed, or if Madam Lui together with Mak had signed jointly;

(8)  In about late 2008 or 2009, Vivien told him that a bank had requested for a verification over the shareholding position after the 2007 Allotment.  He therefore prepared a document known as “Beneficiary Shareholders Declaration” (“the Shareholders’ Declaration”), in which it was stated that the ultimate beneficial shareholders of Ricco were Madam Lui (15%)  and the Deceased (85%).  This document was subsequently signed by both Madam Lui and the Deceased;

(9)  The Deceased had told him how he would like to deal with the shares in Ricco after his death (“the Deceased’s Proposed Share Allocation”), and Mak had informed Madam Lui about that accordingly;

(10)  In around May 2015 (i.e. after the Deceased had passed away), Madam Lui’s solicitors prepared a draft “Deed of Family Arrangement” (“the Draft Deed”)  in which the Deceased’s Proposed Share Allocation was incorporated.  In the said document, it was expressly stipulated that Howsworth and and Uni-Harvest shall be procured to transfer 8,500,000 shares in Ricco to various beneficiaries.

24.  Chan is the son of the Deceased and Madam Liu. He admitted that he did not know much about the Deceased’s business in Ricco. I therefore do not think his evidence is of much probative value.

25.  Ho was the former employer of Madam Lui.  Her evidence, inter alia, was that:

(1)  Madam Lui did not earn much (not more than HK$200,000 annually)  when she was working for Ho’s company (Glorious Jewelry Limited (“Glorious”));

(2)  When Madam Lui worked for Glorious, she was just a sale assistant and was not a key person at all.  She had no sales network;

(3)  On the other hand, the Deceased had a strong business network in the trade with a lot of clients in different countries.  He was very sociable and was a man of hospitality;

(4)  Most of the customers of Ricco were the previous clients of the Deceased who had given her an impression that he was the key person of Ricco.

26.  Sunny is a Malaysian who has also been in the trade of jewellery for a long time.  He was a good friend of the Deceased.  He had told the Court, inter alia, that:

(1)  In around 2003, he agreed to invest HK$1.5 million in Ricco because of his friendship with the Deceased and his confidence in the Deceased’s ability;

(2)  When 1,499,998 shares were allotted to Madam Lui (in September 2003), she did not inject any capital into Ricco;

(3)  In around 2007, upon the Deceased’s request, he agreed to be bought out.  As a result, the Deceased bought him out through Uni-Harvest.

27.  Following the usual approach in the assessment of credibility of witnesses[1], I accept the evidence of Madam Liu’s witnesses.  They have given consistent evidence on the experience and status of the Deceased in the trade of jewellery. 

28.  As far as Mak is concerned, even though the most important part of his evidence (on the agreement reached between the Deceased and Madam Lui on the beneficial ownership in Ricco)  is hearsay in nature, I have no hesitation in giving full weight to the same upon my consideration of the matters set out in section 49(2)  of the Evidence Ordinance (Cap.8, Laws of Hong Kong)  as follows:

(1)  It is impossible to call the Deceased to give evidence on the agreement;

(2)  The evidence does not involve multiple hearsay;

(3)  Mak is not an interested party as far as the Ricco shares are concerned and therefore I do not think there is any motive on his part to misrepresent anything in his evidence;

(4)  His evidence is corroborated by evidence such as the 2007 Allotment, the Shareholders’ Declaration and the Draft Deed;

(5)  I cannot see any circumstances which suggest that there is any attempt on the part of Madam Liu to prevent proper evaluation of the weight of Mak’s evidence.

DISCUSSION

29.  In my view, Madam Liu’s case that Madam Lui and the Deceased had expressly agreed, or at least it was their common intention, that they should hold 15% and 85% interest respectively in Ricco is amply supported by not only viva voce but also documentary evidence.

30.  Indeed, it cannot be disputed that it was because of such an agreement/intention that the 2007 Allotment was arranged.

31.  I also accept Madam Liu’s case that it was the agreement/intention of the parties that the Deceased was not required to pay for the shares newly allotted and that the HK$7 million capital would be booked as a loan.  Indeed, there is no evidence that Ricco had ever demanded the Deceased to pay for such loan during his lifetime.

32.  As aforesaid, the agreement/intention between the Deceased and Madam Lui was originally given effect by the 2007 Allotment.  However, by virtue of Anthony Chan J’s Decision, the said allotment had been declared null and void. 

33.  The question is: what should be the effect of Anthony Chan J’s Decision on the parties’ entitlement to the shares in Ricco?

34.  In Palmer’s Company Law (Sweet & Maxwell), the learned authors stated that:

“[…] the Court of Appeal decided in Lawlor v Gray[2] that where an agreement between a vendor-controller of shares in a company and a purchaser for the sale of the vendor’s shares could have been achieved in a number of lawful ways the fact that the vendor operated in breach of financial assistance law did not prevent the purchaser from enforcing the agreement. The Court of Appeal in so deciding held that a vendor in such a position owed both a contractual duty to the purchaser and a statutory duty to the company to achieve the terms of the agreement without any breach of the section […]

35.  It is evident that before the Deceased passed away, Madam Lui and the Deceased had always assumed that the 2007 Allotment was valid and effective, which means they should be entitled to 15% and 85% of shareholding in Ricco respectively.

36.  However, upon the handing down of Anthony Chan J’s Decision, Madam Lui and the estate of the Deceased would be holding 50% each of the shareholding in Ricco.

37.  In my view, it would not be right if Madam Lui is allowed to hold on to her 50% shareholding despite the said agreement/common intention.  The said agreement/common intention can be given effect to by a suitable declaration and by ordering her to transfer 1,050,000 shares in Ricco to the estate of the Deceased so that, after the transfer, they would be holding 85% and 15% of the shares in Ricco respectively. 

38.  In the circumstances of the present case, it would also be appropriate to order Madam Lui to account for her profit derived from 1,050,000 shares in Ricco which belong to the estate of the Deceased.

ORDER

39.  By reasons of the aforesaid, I make the following orders:

(1)  Ricco’s claims in HCA 1856/2016 be dismissed;

(2)  Madam Lui’s claims in HCA 1858/2016 be dismissed;

(3)  A declaration that the estate of the Deceased and Madam Lui beneficially own 85% and 15% respectively in the shareholding of Ricco;

(4)  An order that Madam Lui shall transfer 1,050,000 shares in Ricco to Madam Liu in her capacity as the administratrix of the estate of the Deceased;

(5)  Madam Lui do file and serve an affidavit (which shall be supported by documents including but not limited to the audited accounts of Ricco)  and account for the dividends declared by Ricco (if any)  attributable to 1,050,000 shares in Ricco held by Madam Lui on constructive trust for the estate of the Deceased and all profits arising therefrom starting on 26 April 2017;

(6)  Madam Lui do pay Madam Liu in her capacity as the administratrix of the estate of the Deceased the sums found due on the taking of the account;

(7)  Interest do apply to each sum found due, which should be calculated at the rate of 1% above the prime rate of HSBC from the date which each sum is found due to the date hereof, and at Judgment rate from the date hereof until payment;

(8)  Liberty to apply.

COSTS

40.  I make the following costs order nisi:

HCA 1856/2016

(1)  the defendants’ costs of the action be paid by Ricco, to be taxed if not agreed;

(2)  Madam Liu’s costs to be taxed in accordance with the Legal Aid Regulations. 

HCA 1858/2016

(1)  The defendants’ costs of the action be paid by Madam Lui, to be taxed if not agreed;

(2)  Madam Liu’s costs to be taxed in accordance with the Legal Aid Regulations.

41.  The above order nisi shall become absolute in the absence of application to vary (which, if any, shall be made by letter, and will be disposed of on paper)  within 14 days hereof.

The plaintiff in HCA 1856/2016 was unrepresented and did not appear

The plaintiff in HCA 1858/2016 was unrepresented and did not appear

Mr Ross Yuen, instructed by Gary K. W. Tam & Co, for the 1^st defendant in HCA 1856/2016 and HCA 1858/2016

Ms Amy Chan, instructed by Gary K. W. Tam & Co, for the 2^nd defendant in HCA 1856/2016 and HCA 1858/2016

HCA 1856/2016

HCA 1858/2016

(Heard together)

[2021] HKCFI 534

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1856 OF 2016

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 LIMITED     

AND

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1858 OF 2016

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J U D G M E N T

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1.  This is an application made by the plaintiff in action numbers HCA 1856/2016 and HCA 1858/2016 to stay both sets of proceedings, together with the counterclaim which is made in HCA 1858 pending the payment by the 2nd defendant of costs orders which have been made against that 2nd defendant and in favour of the plaintiff in two different sets of proceedings, namely HCMP 1808/2016 and HCCW 229/2018.

2.  There is not a great deal of dispute between the parties as to the applicable principles concerning a stay and they have been addressed in various authorities, perhaps most recently by K Yeung J in China Forestry Holdings Co Limited v Top Wisdom Overseas Holdings Limited and Others[2020] HKCFI 526 at paragraphs 19 to 22.  Without repeating what the judge said in that case, one should start with the basic principle that the court looks at what would serve the ends of justice between the parties to the litigation and the administration of justice.  Where a claim has been started as of right, a plaintiff should not be deprived of the opportunity to carry on those proceedings unless a very good reason exists to the contrary. 

3.  The exercise of the discretion involves balancing between, (1), possible wastage of court time and resources and also parties’ time and costs if there is no stay on the one hand, and (2), possible delay of the proceedings for a time if there is a stay on the other.  The court will always bear in mind the underlying objective is to increase cost-effectiveness of court proceedings and ensure that a case is dealt with as expeditiously as is reasonably practicable.  The court will promote reasonable proportion and procedural economy. 

4.  It is relevant to note that both HCA 1856 and HCA 1858 are well advanced in preparation and I am told that they are both ready to be set down for trial.  So the question ultimately becomes where does the balance of justice lie, having regard to the various factors that are relevant.

5.  The plaintiff notes that it is really seeking to stay proceedings that it has commenced and that therefore the usual principles may be modified to reflect that.  This is not a case, it says, where a defendant is seeking to stay proceedings against it.  I am not entirely convinced that is correct because at least in HCA 1858, there is a counterclaim and the plaintiff is also seeking a stay of the counterclaim. 

6.  Mr Cheung, on behalf of the plaintiff, has accepted that if I were to take the view that the counterclaim should nonetheless proceed, then he would not seek a stay of his own claim within that action.  However, he does stress that he would nonetheless seek a stay in action HCA 1856. 

7.  The concern which the plaintiff expresses is that by refusing, or at least failing, to make payment of the various costs orders that have been made against it, the 2nd defendant has identified a risk that it will not, or at least may not, honour any judgment that this court grants.  Therefore, the plaintiff does not wish to press ahead to obtain what will, it considers, in effect become an empty judgment. 

8.  The defendants, on the other hand, do not agree.  They accept that it is unfortunate that the 2nd defendant has not paid the costs orders but they are of the view that the plaintiff is in fact seeking a rather different advantage by the stay.  According to the defendants, the plaintiff remains in control of two valuable companies through the current ownership structure of the shares in those companies.  It is that issue which will have to be resolved at least in action HCA 1858, and therefore, they say the plaintiff has every reason and incentive to defer and delay the proper resolution of the proceedings whilst she remains in control and enjoys the fruits of success of both of those two companies to the detriment of the defendants. 

9.  The plaintiff has issued a petition to wind up the 2nd defendant as a result of its failure to pay the costs orders.  The 2nd defendant applied to have that petition struck out on an abuse‑of‑process ground because it said that service of the statutory demand was defective and presentation of the petition was premature and that the plaintiff was seeking to misuse the winding-up procedure to obtain an advantage in the proceedings in which the costs order was made (HCMP 1808/2016). 

10.  Deputy High Court Judge Abraham Chan, SC, refused to strike out the petition in a judgment, [2020] HKCFI 201, on 22 January 2020 and he directed that the 2nd defendant be barred from filing, without further order, any additional evidence to oppose the petition and that the petition be restored for substantive argument on a day to be fixed in consultation with counsel’s diaries with three hours reserved.  It is not clear to me what has subsequently happened to that petition but I take it that it has for some reason not yet been heard. 

11.  In my view, it would not be appropriate to stay either of these sets of proceedings pending payment of the debt which appears, at least on the face of it, to be clearly owed by the 2nd defendant. I find it most unfortunate that the 2nd defendant has not paid the debt and that behaviour is not to be condoned in any sense by the court and no doubt will be taken very seriously at the time when that issue is before the court if it were ever to happen.  However, the plaintiff has commenced these proceedings nearly five years ago.  They are almost ready for trial.  Substantial costs are likely to have been incurred by both sides towards the resolution of the proceedings and no doubt substantial court resources and time have also been incurred.  

12.  The court cannot proceed upon the assumption that parties will refuse to comply with the court’s orders.  The court must proceed on the assumption that parties either will comply with their orders or will ultimately be forced to comply with their orders pending contempt proceedings. 

13.  The court should not, in my view, act as an arbiter of the economic benefits of proceeding or not proceeding insofar as one party is concerned.  Yet, that is what the plaintiff is asking the court to do.  It wishes not to incur further investment in these proceedings because it fears that it may be false investment because the 2nd defendant will not honour whatever the court does.  The court cannot proceed on that assumption and cannot support the plaintiff in that assessment.  There must be other reasons beyond the mere economics from one party’s perspective before a stay can be justified. 

14.  The plaintiff’s application takes no account of the economics from the court’s perspective, in other words, the costs and value of the court resources that have been incurred.  It takes no account of the economics from the defendant’s perspective and it takes no account of the proposition that the defendant makes, namely that the plaintiff is simply seeking to continue to enjoy the fruits of the shareholding and defer any resolution. 

15.  In all the circumstances, I do not think that the master was wrong when he refused to grant a stay in his decision of 7 October 2020.  To the contrary, I think he was entirely correct and I refuse to grant the stay which has been requested. 

(Discussion re costs)

16.  Insofar as costs are concerned, in the light of my decision on the substantive applications, the 1st and 2nd defendants have applied for their costs.  The plaintiff resists those applications on the basis that it was the refusal of the 2nd defendant to pay other costs orders in the other actions which have caused this application.  The plaintiff therefore seeks either that costs should be in the cause or that there should be no order for costs. 

17.  Costs is a broad discretion and the court can use costs in a way which it considers reflects the justice of the position.  I understand the defendants’ contention that the plaintiff, being in control of Ricco, has effectively denied the defendants any real means of paying the costs and has denied the defendants the fruits of the successful companies for a considerable period of time. 

18.  I also understand the plaintiff’s contention that the ability to pay costs lies in the control of the 1st defendant who ultimately, at least at present, controls the 2nd defendant.  I also recognise that I should be slow to take questions from other proceedings into account when assessing costs in these proceedings and therefore there is some force in Mr Yuen’s proposition that I should look at these proceedings on a stand‑alone basis. 

19.  In my view, taking into account all of those factors, the appropriate costs order is that the defendants’ costs should be in the cause and that will reflect that the plaintiff will not have her own costs paid on any basis.  But if the defendants win ultimately in the action they will have their costs paid.  That seems to me to be a fair and reasonable resolution. 

20.  Costs are to be taxed if not agreed. 

(Discussion re costs)

21.  There is also an order that the defendants’ own costs be taxed in accordance with the Legal Aid Regulations.