Ipsofactoj.com: International Cases  Part 5 Case 4 [CFA]
COURT OF FINAL APPEAL, HKSAR
- vs -
PBM (Hong Kong) Ltd
MR JUSTICE BOKHARY PJ
MR JUSTICE CHAN PJ
MR JUSTICE RIBEIRO PJ
MR JUSTICE LITTON NPJ
LORD MILLETT NPJ
27 MAY 2004
Mr. Justice Bokhary PJ
At the conclusion of the hearing, we dismissed this appeal, saying that we would hand down our reasons later. When asked if he could resist costs, counsel for the appellants sensibly accepted that he could not. So the appeal was dismissed with costs. Our reasons, which we now hand down, are those given by Mr. Justice Litton NPJ.
Mr. Justice Litton NPJ
This appeal focusses on that part of the formal judgment of the trial judge (Deputy Judge Lam, now Lam J) which ordered that:
the 4th defendant in HCA No. 13316 of 1997 do forthwith pay all the monies in its bank account representing the net proceeds of sale of the property at Unit C, 2nd floor, Hatton Place, Po Shan Road, Hong Kong and interest thereon to the Plaintiff.
The 4th defendant is a company called Regent Trinity Investment Ltd, the 2nd appellant on this appeal.
The proceeds in question amounted to $4,295,069.45. Dealings in those proceeds were restrained by an order of a High Court judge made in interlocutory proceedings back in December 1997. Pursuant to the defendants' unsuccessful appeal to the Court of Appeal (Rogers VP, Le Pichon JA and Sakhrani J) that sum together with accumulated interest was paid out to the plaintiff. It then amounted to $5,511,371.57. The 2nd appellant now seeks an order that the plaintiff should refund $5,511,371.57 together with interest to it.
The two registered directors of the 2nd appellant company are Mr. Wyman Chan Chun-chung (the 1st appellant on this appeal) and his wife Madam Liu Sui-yuk. They are the only registered shareholders of the company. The 1st appellant's sole interest in this appeal is in respect of an order for costs made against him. Madam Liu is not a party to the appeal. To all intents and purposes she was a mere tool of the 1st appellant. Between them they have total control of the company.
The plaintiff in this action is a company called PBM (Hong Kong) Ltd. It dealt in expensive watches. It employed a man named Allan Tang Kam-lun (Tang).
Tang embarked upon large scale embezzlement and over the years succeeded in stealing large sums, the property of his employer. By about May 1997 his employer had become suspicious and initiated an internal audit. Tang was aware of this and appreciated that his crimes would soon come to light. He resigned his position as director of finance and administration on 18 July 1997, went to Canada, and returned to Hong Kong in September 1997.
After thorough investigation by a firm of accountants, it was found that Tang had, over the years, misappropriated over $49.5 million from his employer. The plaintiff obtained a default judgment against Tang for that sum. He was also prosecuted on 8 counts of false accounting to which he pleaded guilty and was sentenced to 4 years' imprisonment.
THE PURCHASE OF THE FLAT
Tang had, for some years, co-habited with a woman called Chau Sau Lai ("Chau"). On 7 March 1997 Tang and Chau entered into an agreement to acquire all the shares in the 2nd appellant company: The company's sole asset was the flat in the Mid-Levels namely Unit C, 2nd floor, Hatton Place, Po Shan Road. The purchase price was $11.5 million which the judge found was the market value of the flat.
The purchase by Tang and Chau was financed by bank mortgage to the extent of $8,050,000: The balance, as the trial judge found, was financed by the use of misappropriated funds: It followed, as the judge said, that upon completion of the purchase, on 2 June 1997, when Tang and Chau became the sole directors and shareholders of the company, the shares held by them became the property of the plaintiff in equity. Another way of categorizing the same legal result is that Tang and Chau held the shares upon a constructive trust for the plaintiff. There has never been any challenge to this conclusion in the lower courts.
Within less than three weeks of the completion of the purchase by Tang and Chau they resigned as directors of the company. The 1st appellant and his wife were appointed as directors in their place. This took place, apparently, on 18 June 1997.
A week later, on 26 June, Tang and Chau, under a written agreement of that date, purportedly sold the company to the 1st appellant and his wife for the original price: $11.5 million. The market for residential property was, in the first half of 1997, in an intense upward spiral. The trial judge held that if Tang and Chau had sold the flat in the open market, they could easily have made a profit of about $3.5 million. Completion of the sale took place on the same day as the date of the agreement when the 1st appellant and his wife became the sole registered shareholders of the company.
SALE OF THE FLAT
In October 1997 the company sold the flat for $14,230,000. After discharging the bank mortgage and other liabilities, the net proceeds of sale came to $4,295,069.45. As mentioned earlier, that was the sum frozen by injunction in December 1997 and, together with accumulated interest, yielded $5,511,371.57 which was paid out to the plaintiff pursuant to the judgment of the Court of Appeal. The 2nd appellant by its appeal to this Court sought a refund of that sum, with interest.
BONA FIDE PURCHASERS FOR VALUE?
It goes without saying that if the 1st appellant and his wife were bona fide purchasers for value of the shares in the company, under the agreement of 26 June, without notice of the underlying equity in favour of the plaintiff, they would have acquired the company free of such equity: When the company sold the flat in October 1997, no equity in favour of the plaintiff could have attached to the proceeds of sale. The converse is, of course, equally true.
It is common ground that the shares registered in the hands of the vendors (Tang and Chau) were impressed with a constructive trust in the plaintiff's favour: Unless the 1st appellant and his wife were bona fide purchasers for value without notice of the plaintiff's equity, this appeal must fail. As to this, the burden of proof fell on the defendants: There was no onus on the plaintiff to show that the 1st appellant and his wife had acquired the shares with knowledge of the plaintiff's equity: see Snell's Equity 13th ed. Para. 4-09 and G.L. Baker Ltd v Medway Building & Supplies Ltd  1 WLR 1216.
This approach deviates in some respects from that of the lower courts: Those courts considered whether the appellants were liable in equity for dishonest assistance under principles most recently explored in Twinsectra Ltd v Yardley  2 AC 164: Assistance, that is to say, given by the 1st appellant to Tang, helping him put away money to which Tang was not entitled: Liability founded upon personal wrong-doing by the 1st appellant, giving rise to an obligation to compensate. Conceptually, this is rather different from the issue as formulated in the notice of appeal: Whether the proceeds of sale, derived from sale of the flat by the company, now in the plaintiff's hands, should be refunded to the 2nd appellant company. Compensation for wrong-doing is not the issue. It is a proprietary claim.
As to this, the facts as found by the lower courts are overwhelmingly against the appellants. Quite apart from the gross undervalue, there are other startling features of the transaction which suggest that it was not a bona fide sale:
As mentioned earlier, a week before the transaction took place, Tang and Chau had relinquished their positions as directors in favour of the 1st appellant and his wife.
The agreement and the completion of the sale took place on the same day.
A loan of $4,022,000 outstanding in the books of the company, owed to Tang and Chau, remained in the books after completion: It was never assigned to the 1st appellant and his wife.
As mentioned earlier, Tang and Chau's purchase of the shares in the company had been financed by a bank mortgage: Due to the change of shareholders in the company, a new facility had to be negotiated with the bank, resulting in a payment of $303,552.08 to the bank by way of penalty and interest: This was paid, not by the purchasers (the 1st appellant and his wife) but by Tang and Chau.
The consideration for the sale as stated in the agreement of 26 June 1997 was $3,146,447.92 (after taking into account the bank mortgage of $8,050,000): This was never paid. The 1st appellant asserted that Tang was, at that time, indebted to him for considerable sums previously borrowed: The assignment of the shares was, in effect, the alleged means for discharging those obligations. This assertion was, after an elaborate analysis of the surrounding evidence, rejected by the judge: As to this, the Court of Appeal said:
.... before even coming to Chan's cross-examination, one could say that it would be somewhat remarkable if a court had been able to come to the conclusion that Chan had been a truthful witness. Indeed, it might also be said that the account of the loans given by Chan in paragraphs 9 to 11 of his witness statement do not even accord with [counsel's] summary in the supplemental skeleton argument for this appeal. Having been taken through parts of the cross-examination I can only conclude that the judge was wholly justified in coming to the conclusion that he could not rely on one word which Mr. Chan had said ....
Within about one week of the "sale" - purportedly done to pay off the "loans" borrowed by Tang, who had supposedly no other means of discharging his obligations to Mr. Chan except by transferring, in effect, the flat at cost - Tang put into a US dollar account of Chan's the sum of US$120,000. This was on 2 July 1997.
Despite the apparent change in the ownership of the company at the end of June 1997, Tang made payment of the mortgage instalments and maintenance fees for the flat in July and August 1997, through an account in Chau's name.
Upon these facts, to have concluded that the 1st appellant and his wife were bona fide purchasers for value without notice would have been remarkable.
The judge went further and found that the purported sale of 26 June 1997 was a sham; it was an attempt to put Tang's assets out of the reach of the plaintiff; whilst Tang might have felt secure in early March 1997, when the purchase of the flat was made, that his crimes remained undiscovered, by June he clearly knew that the game was up; he resigned on 18 July and left the jurisdiction; the sale was a clumsy attempt to disguise his assets. Upon the facts as summarized, the judge was clearly justified in concluding that the transaction was a sham: This finding was emphatically affirmed by the Court of Appeal.
Not only were the 1st appellant and his wife not bona fide purchasers for value without notice: They were not purchasers at all. They remained mere nominees for Tang in respect of the shares. When they caused the company to sell the flat, the proceeds were wholly within their control as such nominees. As mentioned earlier, the net amount of the proceeds was $4,295,069.45 and dealing in those proceeds was frozen by injunction in a bank account in the name of the company: It was then paid out, with accumulated interest, to the plaintiff upon conclusion of the proceedings in the Court of Appeal. Technically, of course, the plaintiff's equity reposed in the shares which had been bought by Tang and Chau with stolen money and remained in the shares registered in the names of the 1st appellant and his wife. But, as the sole registered shareholders and directors, they had total control of the company: They could therefore have easily caused the company to pay out the net proceeds to themselves: In terms of equitable relief to the plaintiff, it was no great strain of legal principles to treat those proceeds as if they were impressed with the same trust.
In the appeal before us it was argued on behalf of the appellants that the trial judge had misplaced the burden of proof in finding that the 1st appellant had assisted Tang in laundering stolen money. Emphasis was placed on the following passage in Deputy Judge Lam's judgment:
It was said that Chan was a man of wealth and substance and there was no reason why he should participate in such illicit activities of [Tang]. It was also said that Chan has given full authority to solicitors for [the plaintiff] to investigate the accounts of Chan and [the plaintiff] could not find evidence of injection of funds from [Tang] to Chan. I agree that these are matters which I should take into account. However, I do not think these factors conclusively point to the innocence of Chan ....
It is unnecessary to consider whether this point was canvassed in the Court of Appeal or not. Clearly, in the context of the judgment taken as a whole, the trial judge was doing nothing more than responding to submissions made by the 1st appellant's counsel that factors such as his wealth were indicative of his innocence: They were not conclusive: Other factors weighed in the scales.
But, in one sense, the finding of sham was a surplusage: If the 1st appellant failed to satisfy the judge that he and his wife were purchasers for value without notice of the plaintiff's equity, they would have lost whether the sham finding was made or not.
For these reasons, the appeal was dismissed with costs.
G.L. Baker Ltd v Medway Building & Supplies Ltd  1 WLR 1216
Twinsectra Ltd v Yardley  2 AC 164
Authors and other references
Snell's Equity 13th ed
Mr. Derry H M Wong (instructed by Messrs Patrick Wong & Co) for the appellants
Mr. Joseph Fok SC and Mr. Peter Graham (instructed by Messrs Baker & McKenzie) for the respondent
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