HCK China Investments Ltd v Solar Honest Ltd
[1999] FCA 1156
•23 AUGUST 1999
FEDERAL COURT OF AUSTRALIA
HCK China Investments Ltd v Solar Honest Ltd [1999] FCA 1156
CONTRACT – where contracts executed in breach of Corporations Law – where Corporations Law provides for consequences of breach – whether contracts unenforceable for illegality
DEED – where efficacy of document as a deed determined by foreign law – where document not executed in accordance with company’s articles of association – principles governing execution of a document by affixation of a corporate seal – indoor management rule – whether a document which is inoperative as a deed can operate as a contract – principles governing consideration in contract
STAMP DUTY – Duties Act 1997 (NSW) – where duty payable on a mortgage – whether a mortgage is unenforceable by reason of payment of the incorrect amount of duty
EQUITY – trusts – whether transfer of legal title for no consideration gives rise to a presumption of resulting trust – whether transfer of legal title by way of mortgage rebuts a presumption of resulting trust – whether a mortgage can exist in the absence of a debt or obligation – principles governing rebuttal of a presumption of resulting trust
Corporations Law ss 103, 232, 236, 243F, 243H, 243Q, 243ZE, 243ZF, 257C, 260A, 260B, 260D, 613, 615, 623, 703, 737 and 1308
Duties Act 1997 (NSW) ss 204, 205, 206, 207, 210, 211 and 304Evidence Act 1995 (Cth) ss 38 and 42
Conveyancing and Property Ordinance (Hong Kong) ss 19 and 20
International Business Companies Act 1984 (British Virgin Islands) s 72
Companies Act 1862 (UK) s 55Nelson v Nelson (1995) 184 CLR 538 applied
O’Neill v O’Connell (1945) 72 CLR 101 referred to
Bassin v Standen (1946) 46 SR (NSW) 16 referred toFitzgerald v Leonhardt (1997) 189 CLR 215 cited
Batoka Pty Ltd v Jackson (1998) 30 ACSR 67 cited
MYT Engineering Pty Ltd v Mulcon Pty Ltd (1997) 15 ACLC 1057; 25 ACSR 78 cited
MYT Engineering Pty Ltd v Mulcon Pty Ltd [1999] HCA 24 cited
Ernest v Nicholls (1857) 6 HLC 401 cited
D’Arcy v The Tamah, Kit Hill and Callington Railway Co (1867) LR 2 Ex 158 cited
Equity Nominees Ltd v Tucker (1967) 116 CLR 518 applied
Woo Turhan & Anor v Taiwan Fuji Trading (HK) Ltd (1995) 2 HKC 481 referred to
The Royal British Bank v Turquand (1856) 6 El & Bl 327 [119 ER 886] considered
Pitt, Son & Badgery v The Municipal Council of Sydney (1907) 8 SR (NSW) 1 cited
Westpac Banking Corporation v Dawson (1990) 19 NSWLR 614 cited
Ellison v Vukicevic (1986) 7 NSWLR 104 cited
Shamu Patter v Abdul Kadir Ravuthan (1912) TLR 583 cited
Northside Developments Pty Ltd v Registrar-General (1989-1990) 170 CLR 146 referred to
195 Crown Street Pty Ltd v Hoare [1969] 1 NSWR 193 referred to
Story v Advance Bank Australia Ltd (1993) 31 NSWLR 722 cited
County of Gloucester Bank v Rudry Merthyr Steam & House Coal Colliery Company [1895] 1 Ch 629 cited
Laws Holdings Pty Ltd v Short (1972) 46 ALJR 563 cited
Hooker Corporation Ltd v The Commonwealth of Australia (1985) 82 FLR 321 cited
Corin v Patton (1987) 13 NSWLR 15 referred to
Corin v Patton (1989-1990) 169 CLR 540 referred to
Beaton v McDivitt (1987) 13 NSWLR 162 cited
Howard v Patent Ivory Manufacturing Co (1888) 38 ChD 156 cited
Davies v R Bolton & Company [1894] 3 Ch 678 cited
Re Horizon Pacific Ltd (1976-1977) 2 ACLR 495 cited
Re Wakim; Ex parte McNally [1999] HCA 27 cited
McKay v National Australia Bank [1998] 1 VR 173 cited
Boothey v Boothey (unreported, Supreme Court of Western Australia, 13 March 1997) cited
Wigan v Edwards (1973) 47 ALJR 586 applied
Collins v Godefroy (1831) 1 B & Ad 950 [109 ER 1040] cited
Westdeutsche Bank v Islington LBC [1996] AC 669 considered and applied
Saunders v Vautier (1841) 5 Beav 115 [49 ER 282] referred to
Kathleen Investments (Aust) Ltd v The Australian Atomic Energy Commission (1977) 139 CLR 117 cited
Whitehouse v Carlton Hotel (1982) 7 ACLR 329 cited
Westpac v Mousellis (1985) 17 ATR 49 considered
Handevel Pty Ltd v Comptroller of Stamps (Victoria) (1985) 157 CLR 177 applied
Jacobson v Williams (1919) 48 DLR 51 followed
GM Industries Pty Ltd (in liq) and the Companies Act (1980) ACLC ¶40-665 followed
Lincoln v Wright (1859) 4 De G & J 16 [45 ER 6] referred to
Inre Vandervell’s Trusts (No 2) [1974] 1 Ch 269 applied
Vandervell v IRC [1967] 2 AC 291 referred to
Charles Marshall Pty Ltd v Grimsley (1956) 95 CLR 353 referred to
Shephard v Cartwright [1955] AC 431 referred to
House v Caffyn [1922] VLR 67 referred toMorrison and Goolden, Norton on Deeds (2nd ed), Sweet & Maxwell, 1928
Carter and Harland, Contract Law in Australia (3rd ed), Butterworths, 1996
Sykes and Walker, The Law of Securities (5th ed), Law Book Co, 1993
Waldock, The Law of Mortgages (2nd ed), Stevens & Sons and Sweet & Maxwell, 1950HCK CHINA INVESTMENTS LIMITED v SOLAR HONEST LIMITED & ORS
NG 1400 OF 1998
HELY J
23 AUGUST 1999
SYDNEY
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
NG 1400 OF 1998
BETWEEN:
HCK CHINA INVESTMENTS LIMITED
ApplicantAND:
SOLAR HONEST LIMITED
First RespondentINVESTMENT AUSTASIA LIMITED
Second RespondentANGELA WANG PRACTISING AS ANGELA WANG & CO, SOLICITORS
Third Respondent
JUDGE:
HELY J
DATE:
23 AUGUST 1999
PLACE:
SYDNEY
REASONS FOR JUDGMENT
The second respondent, Investment Austasia Limited (“IAL”), is a company incorporated in New South Wales, whose shares are listed on the Australian Stock Exchange (“ASX”). IAL’s principal activity was investment in infrastructure projects in the Peoples Republic of China (“PRC”), consisting of toll highways and bridges. This activity was undertaken by subsidiaries of IAL.
Wah Nam Group Ltd (“WNG”) is a company registered in Hong Kong. In about 1995 WNG acquired a controlling interest in IAL. WNG, and other parties friendly to WNG, owned about 89 percent of the issued capital of IAL.
Andrew Chen (“Andrew”) is the principal and director of Aachen (Asia Pacific) Consultants Ltd (“Aachen”), which is a corporate finance consultant and business broker operating in Hong Kong. He acted as a consultant to WNG when it acquired its controlling interest in IAL.
Prior to the events with which this case is concerned, the issued capital of IAL consisted of 50,231,632 shares of 50 cents each. The directors of IAL were William Chan, Samson Chen (“Samson” – not related to Andrew Chen), and Terence Ho (“Terence”). They were also directors of WNG.
The applicant (“HCK”) is a company incorporated in the British Virgin Islands. Its directors were Khoo Ee Liam (“Liam”) and Khoo Ee Ping (“Ping”). HCK was beneficially entitled to the shares in Golden Glory (International) Ltd (“Golden Glory”), which was the owner and operator of two cable car installations at Badaling PRC, which provided access to the Great Wall of China. The Khoo brothers resided in Kuala Lumpur, Malaysia. Phuan Au Lek (“Phuan”) was a Malaysian accountant, and a friend of the Khoo brothers.
In about August or September 1997 Phuan approached Andrew on behalf of the Khoo brothers and/or HCK with a view to acquiring a listed company in Hong Kong into which the Badaling cable car project could be injected. Andrew suggested that an Australian listed company should be acquired instead. He was aware that WNG might be interested in disposing of its investment in IAL. Accordingly, in about September 1997 he approached Samson to see whether WNG would dispose of its shareholding in IAL. Samson expressed interest in the proposal.
The preliminary dealings
Samson and Andrew met in either late September, or early October 1997, when there was a discussion as to which of the shareholders in IAL would be likely to be interested in selling their shares in IAL to HCK. A list of the largest twenty shareholders from the 1996 annual report of IAL was produced (Exhibit A p 3). Andrew was able to indicate from his previous experience which of those shareholders were, in his view, likely to be friendly to WNG.
Amongst the shareholders identified as “friendly parties” were Charmlink International Ltd (“Charmlink”) and Wise Spencer Ltd (“Wise Spencer”). Charmlink was beneficially entitled to 1,708,000 shares in IAL. 50,000 shares were held in its name, and 1,658,000 in the name of a nominee, Tasa Nominees Ltd (“Tasa”). Wise Spencer was beneficially entitled to 800,000 shares in IAL. They were held by its nominee, China Ping An Insurance (HK) Ltd (“Ping An”). Together, Charmlink and Wise Spencer held about 5 percent of the shares in IAL. The directors and shareholders of Charmlink were the sisters of Terence. The directors and shareholders in Wise Spencer were the wife of Terence, and one of her friends.
Another shareholder the subject of discussion at this meeting was Major League Investments Ltd (“Major League”), which held 2,520,000 shares in IAL (about 5 percent). It was not associated with WNG, and was identified by Andrew as being a shareholder whose position on selling might be unclear. Samson was to find out how many shareholders would be involved in the proposed sale, and whether or not Major League was a friendly party. Samson asked Terence to approach the shareholders identified by Andrew and find out whether they were willing to sell.
Terence discovered that China Agricultural Bank, which once owned Major League, had gone into liquidation and its shareholding in Major League had been purchased by China Construction Bank. Terence had been unable to contact anyone at this Bank who would make a decision whether or not to sell the shares held by Major League in IAL. As a result it was not known what attitude would be adopted by Major League to the HCK proposal. All the other shareholders identified by Andrew as “friendly” whom Terence approached were willing to sell their shares at a reasonable price.
Whilst the precise timing is unclear (and not important in any event) the probabilities are that by about October/November 1997 there was general agreement to a proposal, negotiated by Andrew, that WNG and its friendly parties would sell about 89 percent of IAL to HCK at a price equivalent to the net tangible assets of the shares sold (expected to be about 90 cents per share) upon the basis that:
•HCK would pay a premium of 3 percent to WNG to cover its costs and expenses incurred in connection with the sale (the precise terms of this arrangement are controversial, and will be discussed later).
•The takeover by HCK of IAL would proceed in conjunction with a sale by IAL to WNG of its PRC infrastructure owning subsidiaries for about $45 million, and the purchase by IAL from HCK of its shares in Golden Glory for about the same price.
•Various reports would need to be obtained, and the approval of IAL shareholders to the proposal was required before it could be implemented.
•A general offer would be made to all shareholders.
The “friendly parties” whose shares comprised the 89 percent included Charmlink and Wise Spencer.
At about this time, Samson provided Andrew a list of the shareholders who were willing to sell. The list contained the following figures:
Shareholder Number of shares
Wah Nam Group 25,115,816
Wah Name Group (in trust for Wah
Nam Holdings) 7,861,391
Wah Name Holdings Ltd 482,500
Tascott Group Ltd 2,000,000
Rich Rewards International Ltd 2,000,000
Yen Sheng Associates Ltd 2,520,000
Enrich Management Ltd 1,692,068
Wah Hing Securities 152,500
Tasa Nominees Ltd 2,091,630
China Ping An Insurance (HK) Ltd 800,000
Charmlink International Ltd 50,000
TOTAL 44,765,905
and accounted for about 89 percent of the issued capital of IAL.
Andrew mistakenly believed, and was told by Samson, that all of the 2,091,630 shares registered in the name of Tasa were beneficially owned by Charmlink, giving it a total beneficial interest of 2,141,630 shares. In fact, only 1,658,000 of those shares were held for Charmlink, a difference of 433,630 shares. The significance of this difference will later emerge.
After agreement in principle was reached on these matters, Andrew told Samson that his clients wanted to buy the parcels of Charmlink and Ping An (ie Wise Spencer) shares under a separate contract. Why this was so, and what Samson was told in that regard, are the main factual issues for resolution in these proceedings. I will return to them later after completing this largely uncontroversial narrative of events.
The proposed purchaser of those parcels was identified as “a two dollar shell company called Eutopia. It’s got no assets” (Affidavit Samson, 12 March 1999 par 17). Samson asked Andrew whether his clients (HCK or the Khoo brothers) would be prepared to give Charmlink and Wise Spencer cheques as security for the purchase price. Andrew replied in the negative, but agreed to provide his own cheques as security.
Eutopia BVI Ltd (“Eutopia”) is a company incorporated in the British Virgin Islands (“BVI”). It was a dormant company owned by a mutual friend of Andrew and Phuan, who agreed to allow it to be used as a nominee company for the acquisition of the Charmlink and Wise Spencer shares.
Samson spoke to Terence about this proposal, who in turn reported to Samson that Charmlink and Wise Spencer would reluctantly agree to a sale of the shares to Eutopia, but only on condition that Andrew gives them his cheque for the purchase price prior to signing, as security for the completion of the agreement by Eutopia. This information was conveyed to Andrew.
The Heads of Agreement
On 5 December 1997 Heads of Agreement (Exhibit A p 4) were executed between Tascott Group Ltd and Yen Sheng Associates Ltd as vendors and Liam and Ping as purchasers. The vendors agreed to sell all or part of the 4,520,000 shares in IAL of which they were the beneficial owner, and to require their associates to sell a number of shares totalling no less than 50 percent, but not more than 85 percent in aggregate of the issued shares in IAL for $0.9158 per share. As part of the arrangement, the vendors were to acquire IAL’s subsidiaries in consideration of approximately $46 million to be paid as to 85 percent by cash and 15 percent by deferred terms to be agreed. IAL was to acquire the shares in Golden Glory for a consideration of about $46 million. The purchaser undertook to make a general offer in accordance with the Australian Code on takeover and merger and the rules of ASX.
According to Andrew (Affidavit 12 March 1999 par 24) the Heads of Agreement were drafted in this way because WNG was not then in a position to sign, as it would have to make an announcement which should not be done until all details are available. The block of shares owned by Charmlink and Wise Spencer should not be included in the Heads of Agreement as HCK would like these to be covered by a separate agreement.
On 5 December 1997 a Mandate Agreement (Exhibit A p 6a) was entered into between Liam and Ping and Aachen under which Aachen was to be paid a consulting fee of 10 percent of the net tangible assets (“NTA”) of IAL on completion, inclusive of all professional fees and other charges required to be paid by the Khoo brothers in the acquisition of IAL.
On 8 December 1997 (Exhibit A p 7) WNG, under the hand of Terence, wrote to Aachen as follows:
“Refer to the earlier discussion between you and our Samson Chen. This serve to confirm our understanding that the 3% premium payable over and above the consideration on the sale of IAL Holdings will be the maximum amount payable by you for the reimbursement of our expenses to be incurred in this transaction. On the other hand, we undertake to refund you any amount not expended.”
The period up to the sale agreements
On 11 December 1997 the IAL directors who were not also directors of WNG (Peter Lucas, Scott Smiles and Geoff Lucas) were advised of a potential bid for IAL (Exhibit A p 8). Trading in IAL shares was suspended by ASX.
In February or March 1998 Overseas Chinese Nominees Ltd purchased a block of about 1,300,000 shares in IAL from Promet Berhad. Overseas Chinese Nominees Ltd was a company belonging to Andrew. It was intended that Liam would pay for these shares. In the result, Liam paid for about 900,000 of the shares and Andrew paid for a maximum of 370,000. Overseas Chinese Nominees Ltd held its shares in IAL for Liam beneficially as to about 900,000 shares, and for Andrew beneficially as to a maximum of 370,000 shares. The price paid to acquire these shares was about 30-35 cents per share. When these shares were acquired the making of a general offer to shareholders was still in contemplation (T p 116/26).
Three parcels of shares came to be identified: the shares held by WNG, the “Many Vendors” parcel (other shares held by WNG and shares held by “friendly parties”) and the Eutopia parcel (the Charmlink and Wise Spencer shares). In early 1998 drafts of the share sale agreements for the WNG parcel and the Many Vendors shares were prepared by Baker & McKenzie. According to Samson’s evidence (T p 279), Baker & McKenzie were retained by IAL, but their fees were paid by WNG. The draft of the agreement for the Eutopia parcel was prepared by Andrew, using the Baker & McKenzie drafts as a precedent. Andrew claimed that he prepared the Eutopia Agreement himself, after discussion with Ping and Samson, in order to save some money (see Affidavit Andrew 12 March 1999 par 27; Affidavit Samson 12 March 1999 par 29). By the time of preparation of the drafts, the concept of a general offer had been abandoned, and was replaced by a proposed resolution under s 623 of the Corporations Law. When and why this change occurred does not emerge from the evidence.
On 15 April 1998 Andrew, Samson, Terence, Phuan and Ping met in Kuala Lumpur and negotiated the final amendments to the WNG Share Sale Agreement, the Many Vendors Share Sale Agreement and the Eutopia Agreement. Andrew handed Samson his own cheques in payment of the purchase price for the Charmlink and Wise Spencer shares. Those cheques were never presented for payment. They were to secure the performance by Eutopia of its obligations under the Eutopia Agreement. The Wise Spencer cheque was for AUD 776,000. The Charmlink cheque was for AUD 2,077,381.
The sale agreements
The Many Vendors Agreement was prepared by Baker & McKenzie (Exhibit A p 22). It provided for the sale of 16,864,888 shares from nine vendors to HCK for a consideration of AUD 16,358,941.36. It was subject to a condition precedent that a resolution approving the terms and conditions of the transfer and sale of shares in accordance with the agreement be passed at a meeting of IAL shareholders held in compliance with s 623 and Part 3.2A of the Corporations Law. Completion was conditional upon shareholder approval of the agreement for the sale of the WNG shares in IAL, and the agreement by which an exchange of assets was effected between IAL and HCK and WNG and upon contemporaneous completion of those transactions.
The WNG Agreement was prepared by Baker & McKenzie (Exhibit A p 45). It provided for the sale by WNG to HCK of 25,115,816 shares in IAL at the price of AUD 0.97 cents per share. This agreement was subject to a number of conditions including various shareholder approvals being given to the transaction. Completion was conditional on approval of the agreement by which an exchange of assets was effected between IAL, HCK and WNG, and upon contemporaneous completion of those transactions.
Agreements, also prepared by Baker & McKenzie, were executed providing for the sale by HCK of its shares in Golden Glory to IAL (Exhibit A p 68) for the sum of $45,000,000 and for the sale by IAL of its subsidiaries to WNG for the sum of $49,000,000 payable as to $41.65 million on completion (Exhibit A p 101a).
The Eutopia Agreement (Exhibit A p 102) was not prepared by Baker & McKenzie. It provided for the sale by Charmlink of 2,141,630 shares in IAL for AUD 2,077,381 to Eutopia and for the sale by Wise Spencer of 800,000 shares in IAL for AUD 776,000 to Eutopia. Completion was subject to completion of the share sale agreement entered into by WNG.
A meeting of directors of IAL was held in Singapore on 16 April 1998 (Minutes, Exhibit A p 19). Samson and Terence disclosed their interest in the proposed asset transactions as directors of WNG. They did not disclose the Eutopia Agreement or the involvement of Terence’s sister and wife in the companies which were the vendors under that agreement. Nor did they disclose that WNG was to receive a 3 percent premium in connection with the sale of its shares in IAL. At this meeting, it was resolved that the third respondent, Angela Wang, a solicitor practising in Singapore and Hong Kong, be retained to carry out due diligence on the proposed acquisition by IAL of Golden Glory.
The various agreements, including the Eutopia Agreement, were executed on 16 April 1998. On 17 April 1998 a preliminary announcement was made by IAL to ASX concerning the proposed transactions. The announcement did not disclose the Eutopia Agreement, or the arrangements in relation to the 3 percent premium (Exhibit A p 154). It disclosed the acquisition by HCK of 84 percent of the issued capital of IAL, rather than 89 percent.
A problem with the Charmlink shares
After the execution of the Eutopia Agreement, Terence’s sister noticed that the agreement referred to Charmlink holding 2,141,630 shares, whereas its actual holding was only 1,708,000 shares. The matter was raised with Andrew, who agreed to give Charmlink the balance of 433,630 shares to make up the difference on completion.
Terence’s wife and sisters requested that cheques drawn in Hong Kong dollars, rather than in Australian Dollars, should be provided by way of security, and this was done. The cheques were drawn by Mactra Ltd, a company controlled by Andrew (Exhibit A p 478).
The period up to completion of the sale agreements
A meeting of directors of IAL was held on 18 June 1998 (Exhibit A p 129). The material interests disclosed by the directors at the board meeting held on 16 April 1998 were noted, and approval was given for each of them to continue to act as a director of IAL in respect of the matters before the meeting. Time for completion of the asset sale agreements was extended (Exhibit A p 130).
By fax dated 23 June 1998 (Exhibit A p 129a), Terence advised the secretary of IAL of the material interests of WNG directors for inclusion in the information memorandum to be sent to IAL shareholders. The fax did not disclose the Eutopia Agreement, and the arrangement in relation to the 3 percent premium.
On 16 July 1998 time for completion of the Eutopia Agreement was extended so as to coincide with the completion date of the transactions announced by IAL (Exhibit A p 410a).
On 18 July 1998 Samson and Terence attended an IAL directors meeting which further considered the IAL takeover proposal. The directors authorised the dispatch to shareholders of a notice convening an extraordinary general meeting to approve the share sales and asset sales involved in the takeover, and an information memorandum explaining the proposal. The minutes of this meeting are Exhibit A p 139. There was no disclosure by Samson or Terence to the other directors of IAL of the Eutopia Agreement, or the arrangements with respect to the 3 percent premium, or of the terms of the letter of 8 December 1997 (see par 21 above).
The information memorandum (Exhibit A p 143) drew attention to the fact that an independent expert had reported that certain of the transactions involved in the proposal were unfair and unreasonable from the point of view of IAL shareholders, because of the respective values of the assets agreed to be purchased and sold. Whereas WNG, and the Many Vendors, were to receive 97 cents per share for the entirety of their shareholding, the only benefit which would accrue to the minority shareholders if the proposal was approved, was the opportunity of receiving 97 cents per share for a maximum of one in five of their shares pursuant to the proposed buy back offer for 20 percent of the shares (see par 43 below).
The information memorandum disclosed that it was only the minority of shareholders (those whose shares were not being sold as part of the proposal) who could vote on the proposed resolutions. If the shareholdings of WNG, and those of the Many Vendors were left out of account, only 8,250,928 shares, including the Eutopia parcel, remained. (The submissions for Solar Honest refer to 8,253,057 shares, but the difference is immaterial.)
On 10 August 1998 Charmlink signed a proxy in favour of Mr Sim Teow Geok, or failing him, the Chairman of the meeting, to vote as proxy for Charmlink in favour of all resolutions (Exhibit A p 425). On 14 August 1998 Tasa Nominees signed a proxy in favour of Mrs Carry Siu Wan Chan (Exhibit A p 432). This was an open proxy – it did not direct the proxy holder how to vote. There is no evidence of the lodgement of any proxy with respect to the Wise Spencer parcel.
Terence gave some rather unsatisfactory evidence (T p 244/25 – T p 246/20) as to whether or not he had any involvement in the procuring of the proxies for Charmlink and Tasa Nominees. He first denied that he had discussed with his sisters how Charmlink would vote, and claimed that he left the matter of voting the shares to which Charmlink was entitled entirely to them. He then admitted that “something did happen” about the Charmlink proxy, but professed an inability to recall what that was.
The extraordinary general meeting of IAL was held on 21 August 1998 (Minutes, Exhibit A p 444). The Chairman announced the number of proxies for and against each resolution. Each of the seven resolutions was then put to the meeting and carried on a show of hands. A poll was not taken, hence the proxy votes were not cast. A list of the proxies lodged with IAL appears at Exhibit A p 424. Major League did not lodge a proxy.
The following resolutions were passed at the meeting:
•Two resolutions under s 623 of the Corporations Law approving the acquisition by HCK of shares from WNG and the Many Vendors.
•A special resolution under s 260B of the Corporations Law approving the giving of financial assistance for the purpose of, or in connection with, the acquisition by HCK of shares in IAL from WNG and the Many Vendors.
•A resolution under s 243Q of the Corporations Law permitting the provision of financial benefits to HCK, WNG and the Many Vendors that might arise out of the completion of those acquisitions.
•A resolution under s 243Q of the Corporations Law permitting the provision of financial benefits to WNG arising out of the sale by IAL of its shares in the PRC infrastructure owning subsidiaries to WNG.
•A resolution under s 243Q of the Corporations Law permitting the provision of financial benefits to HCK arising out of the purchase by IAL from HCK of its shares in Golden Glory.
•A resolution under s 257C of the Corporations Law of an equal access buy back of 20 percent of the issued capital of IAL.
Each of the resolutions was subject to the passing of other resolutions.
Samson and Terence were at the meeting but did not disclose the Eutopia Agreement, or the arrangements with respect to the 3 percent premium, or that Charmlink and Wise Spencer were disqualified from voting.
Completion of the agreements
The agreements were due to be completed on 15 September 1998. In August 1998 the Malaysian Government introduced exchange control measures which had the effect that funds could not be taken out of Malaysia without the approval of the authorities. A few days prior to the date fixed for completion, Andrew told Samson that the Khoos were having a few problems getting the money out of Malaysia to complete, and the parties arranged to meet in Kuala Lumpur.
On 12 September 1998 Samson, Terence and Andrew met with Ping and Phuan in Kuala Lumpur. They were taken to visit a Mr Huang, an old friend of Liam’s and himself a person of financial substance. Huang gave the parties comfort that the monies for settlement would be available in a few days.
Andrew, Samson and Terence all agree that at this time, the possibility of Charmlink and Wise Spencer agreeing to an extension of time for completion of the Eutopia Agreement was discussed, and that Ping was a party to those discussions. They also agree that Ping was informed that Charmlink and Wise Spencer would agree to an extension, but that they wanted HCK to be the purchaser rather than Eutopia, because they were concerned about dealing with a two dollar company after the main agreements had been completed. The Khoo brothers have a somewhat different version, and as the resolution of these competing positions may bear upon the principal factual issue which I have to determine, I shall return to it later in these reasons when that issue is dealt with.
On 15 September 1998 the agreement for the purchase of the WNG shares, and the Many Vendors shares was completed by HCK, and HCK subsequently became registered as the holder of those shares. The Eutopia Agreement was not completed. The other transactions were completed.
Solar Honest Ltd
After completion there was discussion about the preparation of a document to cover the amount owing to Charmlink and Wise Spencer and the balance of the 3 percent costs reimbursement figure due to WNG. The amount due for costs reimbursement was $1,302,688 (Exhibit A p 492). Notes were made on a piece of paper (Exhibit A p 490) by Andrew and Ping as to the total amount owing, which was calculated to be $3,075,616. That amount was arrived at as follows:
1,302,688 3 percent of NTA of shares sold
2,853,381 Due to Charmlink and Wise Spencer
4,146,069
(1,080,453)
3,075,616
The $1,080,453 was the amount of a cheque drawn by Liam on behalf of HCK which he had handed over on settlement.
Angela Wang was instructed by Samson to draft an agreement to record the amount payable by HCK and to make it enforceable. She was told that the amount due was AUD 3,075,616, but that it was too complicated to describe the underlying transactions, and not necessary to describe the consideration if the document was drafted as a deed. There was discussion as to other terms which it is not necessary to record, except that 10 million shares in IAL were to be deposited by HCK as security for the payment. She asked for the name of the other party to the transaction. She was told that would be supplied to her later, and the company whose name she would be given "will act as a collection agent for those companies that HCK owes moneys to” (Affidavit Samson, 12 March 1999 par 63).
The next morning Terence told Angela Wang that Solar Honest was to be the other party to the document. It is a company incorporated in Hong Kong and was jointly owned by Samson and Terence.
On 16 September 1998 the First Solar Honest Document (Exhibit A p 500-502), which was dated the previous day was signed by all the natural persons whose signatures appear on the document, and their signatures were witnessed by Andrew. The document is expressed to be “Signed Sealed and Delivered” by the parties to it. Angela Wang thought that she was drafting a deed (Affidavit Angela Wang 12 March 1999 par 21). There is a dispute as to whether the document is operative as a deed. The resolution of that dispute, amongst other things, may involve issues as to whether, when and by what right the seal of HCK was placed on the document. I will defer consideration of those factual issues until the whole question of the validity of the document as a deed is addressed.
The parties to the First Solar Honest Document are HCK, Solar Honest and the persons carrying on business in Hong Kong under the name “Angela Wang & Co”. The document recited that HCK is indebted to Solar Honest in the sum of $3,075,616 as at 15 September 1998 (the “Debt”) and that HCK has deposited with Angela Wang & Co (“the Escrow Agent”) a transfer form for 10 million shares in IAL in blank as to the transferee.
Operative provisions of the document include:
•The blank transfer is to be held by the Escrow Agent as security for HCK’s repayment of the Debt and interest within 45 days of 16 September 1998 (Cl 2).
•The blank transfer is to be returned to HCK on receipt of a notification of payment of the Debt (Cl 3).
•If the Escrow Agent receives notification of non-payment of the Debt within the stipulated time, then the Escrow Agent is to deliver the blank transfer to Solar Honest, “who shall be entitled to register such blank Transfer Form in its name” and to exercise its power of sale in respect of the shares to satisfy the Debt. HCK continues to be liable for any shortfall in case the proceeds of sale of the shares are insufficient to satisfy the Debt (Cl 4).
•A stipulation that it is governed by and construed and enforced in accordance with the laws of the Hong Kong Special Administrative Region (Cl 8).
On 16 September 1998 Angela Wang was given a transfer of 10 million shares in IAL executed by HCK (Exhibit A p 496). According to Samson (Affidavit 12 March 1999 par 67), Andrew then raised the matter of share transfers from Charmlink and Wise Spencer and Terence said that he would ask them to send blank transfers to Angela Wang in Hong Kong. This is confirmed by Terence (Affidavit 12 March 1999 par 50).
On 21 September 1998 Solar Honest, under the hand of Terence sent to Angela Wang (Exhibit A p 507):
•Blank transfers for 800,000 IAL shares signed by Wise Spencer.
•A blank transfer for 1,708,000 IAL shares signed by Charmlink.
•An instruction to Solomon Fiduciary Pty Ltd to register 1,658,000 shares held in nominee account to Charmlink.
A blank transfer by Overseas Chinese Nominees Ltd for 433,630 shares in IAL (Exhibit F) was sent by Andrew to Charmlink under cover of a letter of 11 September 1998 (Exhibit A p 453a). These are the shortfall shares referred to in pars 13 and 32 above. The share transfer for this parcel was not submitted to Angela Wang.
The monies payable under the First Solar Honest Document were due to be paid on 31 October 1998, with time being of the essence. The monies were not paid, and on about 3 November 1998 (Exhibit A p 529) Angela Wang forwarded the form of transfer executed in blank by HCK for 10 million shares to Solar Honest.
On about 11 November 1998 Terence arranged for the completion of the transfer by inserting the name of Solar Honest as transferee and inserting a consideration of $1,500,000. He based that figure on the last closing price of 15 cents for the shares (Affidavit Terence 12 March 1999 par 54). On 12 November 1998 Solar Honest was registered as the holder of those shares.
On 21 November 1998 a Second Solar Honest Document was signed (Exhibit A p 556-559). It recited the First Solar Honest Document, the failure to pay the Debt within the time specified, and the subsequent registration of the IAL shares in the name of Solar Honest. The document stipulated for the payment of the sums outstanding by specified instalments, but if HCK fails to make the payments on the dates specified, then the agreement is deemed to be terminated, and shall cease to have any further effect, without prejudice “to the parties’ right to claim against the other for any antecedent breach”. HCK paid the sum of $100,000 on 21 November 1998 which was stated to be the consideration for the extension of the dates for payment effected by the Second Solar Honest Document. HCK otherwise failed to make the payments required by that document. The document was expressed to be Signed, Sealed and Delivered by the parties to it.
The issues pleaded – Solar Honest’s money claim
Solar Honest alleges by its cross claim, that as at 15 September 1998, Solar Honest held in trust for each of Charmlink, Wise Spencer and WNG the benefit of the obligations owed to each of them by HCK under the First Solar Honest Document, as follows:
for Charmlink $2,077,381.10
for Wise Spencer $ 776,000.00
for WNG $ 222,234.90
$3,075,616.00Credit is given for the sum of $331,352 received by Charmlink/Tasa in respect of the acceptance of the buy back offer in relation to the shares to which Charmlink was beneficially entitled, leaving an amount of $2,744,264 outstanding by HCK to Solar Honest under the First and Second Solar Honest Documents, the benefit of which was held by Solar Honest as follows:
for Charmlink $1,746,029.10
for Wise Spencer $ 776,000.00
for WNG $ 222,234.90
$2,744.264.00Solar Honest, by its cross claim, seeks judgment against HCK in the sum of $2,744,264 and interest thereon at the rate of 8 percent from 16 September 1998. It also seeks the sum of $10,000 pursuant to cl 3(d) of the Second Solar Honest Document, and interest on that sum from 7 January 1999.
No challenge was made in the course of submissions as to the calculation of the sums claimed in the cross claim. Nor was it submitted that it was inappropriate that the Charmlink buy back should be dealt with by means of a credit against sums otherwise due.
The defence to cross claim alleges that an agreement, called “The Takeover Agreement” was reached between October 1997 and 16 April 1998 between Samson, William, Terence, HCK, WNG, the Many Vendors, Charmlink, Wise Spencer and Eutopia. The Takeover Agreement consisted of the arrangements disclosed to IAL shareholders, and the following undisclosed additional terms:
•Eutopia would purchase the Charmlink and Wise Spencer shares for AUD 0.97 per share as trustee for HCK with monies to be provided, directly or indirectly, by HCK;
•HCK would have the beneficial ownership and control of the Charmlink and Wise Spencer shares;
•Andrew would pay out of monies to be provided by HCK, a premium equal to 3 percent of the net tangible asset value of the IAL shares to be sold by WNG;
•The purchase by HCK of the Charmlink and Wise Spencer shares through its nominee and trustee, Eutopia, and the agreement for the payment of the 3 percent premium, would not be disclosed to IAL shareholders, or ASX, contrary to the relevant provisions of the Corporations Law;
•Contrary to the provisions of the Corporations Law the Charmlink and Wise Spencer shares would be voted at the extraordinary general meeting of IAL to approve the transactions, thereby securing the passing of the resolutions in question.
The Takeover Agreement is claimed to be an express agreement between the parties to procure the takeover of IAL by HCK by means of acts which were expressly prohibited by the Corporations Law. The acts in question are non-disclosure of matters required to be disclosed, and voting of shares which the Corporations Law stipulated were not to be voted. The payment of the 3 percent premium is said to be part of the consideration payable by HCK for the performance of a contract prohibited by statute.
The First and Second Solar Honest Documents are merely variations to the Takeover Agreement. Those documents simply provide a mechanism for the payment to Charmlink, Wise Spencer and WNG of monies payable under the Takeover Agreement. The Takeover Agreement, the Eutopia Agreement, the agreement in respect of the 3 percent premium as well as the First and Second Solar Honest Documents are all said to be void and unenforceable on the ground of public policy or illegality.
In any event HCK asserts that the First and Second Solar Honest Documents are not effective as deeds, and that no consideration was given by Solar Honest for the promises on its part therein contained.
The issues pleaded – HCK’s claim to the 10 million IAL shares
Resulting Trust:
HCK claims that the 10 million IAL shares registered in the name of Solar Honest are held on resulting trust for HCK. Those shares were purchased and paid for by HCK; Solar Honest did not provide any monetary consideration for the transfer of the shares to it, and there is a presumption of a resulting trust in favour of HCK. Solar Honest cannot rely upon the Takeover Agreement, including the First and Second Solar Honest Documents, to rebut the presumption of a resulting trust, because Solar Honest cannot set up a contract prohibited by statute to rebut the presumption.
Rectification of the register
Alternatively it is put by HCK that the First Solar Honest Document was a mortgage under s 205 of the Duties Act 1997 (NSW), stampable at the rate provided for in s 210, on the amount secured by the mortgage, namely $3,075,616. The duty payable is said to be $12,243.48. The First Solar Honest Document was not stamped in any amount at all.
The only stamp duty paid in respect of the mortgage transaction is the duty paid on the transfer of the 10 million shares from HCK to Solar Honest at a stated consideration of $1,500,000. That consideration was wrongly stated, and duty of $4,500 only was paid.
Thus the mortgage created by the Solar Honest Documents was unenforceable at the time Solar Honest procured registration of the transfer to it of the 10 million IAL shares, and HCK is entitled to rectification of the register. The Office of State Revenue subsequently “stamped” the First Solar Honest Document with the notation: “No stamp duty is payable on this instrument”.
Conditions precedent to the performance of the Solar Honest Documents not satisfied
The Further Amended Defence to the Amended Statement of Claim (pars 57, 58) alleges that in September 1998 HCK agreed to purchase the Charmlink and Wise Spencer shares, and that one of the terms of the agreement was that Charmlink and Wise Spencer would deposit share transfers of the shares to be sold with Angela Wang. Angela Wang was to hold these transfers pending performance by HCK of its obligation under the First Solar Honest Document (57, 58(c)(viii) H).
HCK contends that this obligation was a condition precedent to HCK’s obligations, and to the First Solar Honest Document becoming operational.
Although a blank transfer of 1,708,000 shares, executed by Charmlink, was lodged with Miss Wang on 21 September 1998, this did not satisfy the condition precedent because:
•Until 11 February 1999 Charmlink was the holder of 50,000 shares only.
•2,141,630 shares were contracted to be sold and the transfer was for a smaller number of shares.
The discrepancy in number of 433,630 shares is not overcome by the share transfer executed by Miss Wang on behalf of Overseas Chinese Nominees Ltd (Exhibit F) because:
•She gave the transfer to Andrew, who gave it to Terence. Hence Miss Wang never held the blank transfer as escrow agent.
•Of the 433,630 shares, only a maximum of 370,000 were owned beneficially by Andrew, and the balance were held beneficially by HCK and interests associated with the Khoos. The net result of this is that Charmlink, through Andrew, was intending to sell to HCK shares in IAL which were already beneficially owned by HCK.
The result is that Charmlink/Solar Honest could not take advantage of HCK’s inability to perform its obligations under the First Solar Honest Document, when Charmlink/Solar Honest was unable to perform its concurrent obligation to transfer good title for the requisite number of shares. The completion of the blank transfer for 10 million shares and its registration were unlawful, and constituted repudiation by Solar Honest of its obligations under the First Solar Honest Document which HCK, by the commencement of these proceedings, has accepted.
Whether the Takeover Agreement is made out
The allegation that HCK secured control of IAL by means of an illegal takeover agreement was not an allegation contained in the original Statement of Claim. It was made for the first time when a Defence to Cross Claim was filed in Court when the matter came on for hearing on 19 April 1999; although informal notice of an intention to raise illegality as a defence to Solar Honest’s cross claim had been given by HCK’s counsel in the previous week. I was told that the Cross Claim, although filed on 16 March 1999, was not served until some time in April. No directions had been given for the filing of any defence to the cross claim.
The only importance of this aspect of the matter for present purposes, is that the principal affidavits of the parties were sworn before exposure of the illegality defence. When the matter came on for hearing, HCK mainly relied for proof of that defence on the evidence of Andrew, who was called to give evidence on behalf of Solar Honest. In many respects, the Takeover Agreement on which HCK now relies is inconsistent with the account of events given by Liam, and (but to a much lesser extent) with the account of those events given by Ping.
The Khoo brothers version
The general effect of the affidavit evidence given by Liam is that:
•In about March 1998 Andrew introduced what was described as an additional proposal whereby an extra 2-3 million IAL shares, which were not part of the then current deal, should be acquired by use of “an arms length name”. A nominee could vote the shares “in accordance with our (ie HCK’s) wishes in addition to the shares that would be held in HCK’s name” (Affidavit Liam 17 December 1998, par 16).
•Liam did not have the funds available to acquire the additional parcel, and would only acquire those shares if a promissory note to be given by WNG on completion of the transactions, could be discounted in the market.
•Thereafter, whilst Andrew from time to time recommended or urged the acquisition of this additional parcel, it was Liam’s view that they were not needed. He was only prepared to make a decision in relation to the acquisition of the parcel if Andrew could find someone who was prepared to lend HCK the money to buy the shares.
•Liam was unaware, at the time, that Andrew had arranged to purchase the 2-3 million shares in the name of a nominee company, Eutopia (Affidavit, Liam 17 December 1998, par 34, but cf Affidavit Liam, 6 April 1999 par 20).
•When in Australia in September 1998, Liam was present at a meeting when Ping was informed that WNG would not complete the main transaction (ie, the disclosed agreements) unless HCK agreed to buy the additional 2-3 million shares. Ping was then told that Andrew had already arranged for a nominee, Eutopia, to acquire the shares.
•It was at this meeting that HCK accepted responsibility, for the first time, for the payment for these shares, and agreed to buy the parcel provided the main transaction was completed that day (Affidavit Liam 17 December 1998, par 39).
Ping’s affidavit evidence is to the effect that in a conversation with Andrew in March/April 1998 he learnt of arrangements made by Andrew, which Andrew claimed to have previously discussed with Liam, whereby 2-3 million shares in IAL, which were not part of the main transaction, would be purchased on HCK’s behalf by Eutopia, a nominee company under the control of a friend of Andrew. “HCK can acquire the remaining 2 or 3 million shares in IAL in the name of a nominee company which will keep the shares out of HCK’s name”. Ping was told by Andrew that the shares were owned by Charmlink and Wise Spencer – companies associated with WNG (Affidavit Ping 18 December 1998, par 9).
Ping also asserted (par 13) a conversation in Sydney in September 1998 to the effect that WNG would not complete the main transactions, unless HCK assumed Eutopia’s obligations under the Eutopia Agreement.
The internal inconsistencies between these accounts, and the inconsistency between those accounts (particularly that of Liam) and the case now put on behalf of HCK were not pursued in cross examination, except that Liam confirmed (T p 104/18) that it was not until about February or March 1998 that he became aware of a plan by Andrew for two parcels of shares to be purchased in the name of a company other than HCK. He claimed (T p 109/15) not to be aware that the Eutopia Agreement had been signed, but accepted (T p 120/5) that a parcel of shares in Eutopia would be a convenient source to sell down shares without there being any change in HCK’s shareholding in IAL. Liam was ill between March and October 1998.
In response to a question as to the absence of any reference in the information memorandum to the IAL shareholders to the Eutopia Agreement, Ping stated (T p 156/24):
“There was not supposed to be a purchase by HCK.”
Andrew’s version
Andrew’s affidavit of 12 March 1999 joins issue with the Khoo brothers’ claim that the acquisition of the Charmlink and Wise Spencer parcels was first raised in March or April 1998. He says that the acquisition of these shares was raised by him in 1997, almost from the commencement of the transaction. He says that he explained to Phuan, Ping and Liam well before the Heads of Agreement were signed, that the purpose of using Eutopia as a purchaser, instead of HCK, was to separate the Charmlink and Wise Spencer parcels from the main transaction (par 35).
In pars 13 and 20 of his affidavit, Andrew deposes as to conversations with Phuan and Ping in September/October 1997 and with Phuan and Liam or Ping in November 1997, in which:
•Andrew suggested that the 2.9 million shares of Tasa and Ping An should be purchased separately so as to ensure that they can be voted in favour of the transaction; in case the 2.5 million Major League (China Construction Bank) shares are used to vote against the transaction (13).
•Andrew was asked to acquire the Tasa and Ping An shares under a separate contract with the nominee company. If this is done, the block can be dealt with freely in the market, and voted independently (20).
In pars 19 and 21, Andrew deposes as to conversations with Samson, apparently about October/November 1997. The general effect of that evidence is that Samson is told by Andrew that “we” (ie Andrew and/or HCK) want the Charmlink and Wise Spencer parcels to be purchased by a nominee company under a separate contract. In response to a request for security to ensure that the separate contract is completed at the same time as the main contract, Andrew declines to provide a cheque from Liam by way of security, but agrees to provide his own cheques, although asserting that he does not have the money to back them up (Andrew, to the knowledge of Samson, was an undischarged bankrupt.) Andrew asserted an understanding on his part, that the Khoo brothers had the monies to complete the transaction.
The effect of the affidavit evidence so far is that Andrew, in his discussions with the Khoo brothers, puts forward the ability to vote the Charmlink and Wise Spencer parcels as a reason for acquiring them in the name of a nominee company under a separate contract, but there is no mention in his discussions with Samson, or with anyone else on behalf of WNG, that the purpose of buying these parcels through a nominee company is to enable the Charmlink and Wise Spencer shares to be voted at a general meeting of IAL.
In his cross-examination by counsel for HCK, Andrew said that early in his discussions with Samson, the fact that there would need to be shareholders meetings by IAL to approve all the necessary transactions was discussed (T p 171/10). He gave the following evidence:
“And in discussions that you were having then with Mr Samson Chen and yourself in September/October 1997 it was recognised between the two of you that if all the vendors of the shares, Wah Nam vendors and associates were disqualified from voting that took care of 89 percent of the shareholding, correct? --- Yes.
The remaining shareholding and the votes for the minorities could be very much influenced by the vote of Major League, correct? --- That’s correct.
And if Major League voted against any one of the resolutions that were necessary then it was highly probable that the resolutions would fail, correct? --- Correct.
And therefore the takeover would be thwarted, you discussed that with Mr Samson, didn’t you? --- Yes.
And it was in the course of those discussions that an idea was developed that rather than all of the 89 percent of the shareholding of Wah Nam and its associates being contained in one agreement or two agreements for sale there should be another agreement with a company apparently not associated with the Khoos, correct? --- Correct.
And the shares to be sold under that separate agreement would be shares held by Ping An Insurance Company and Charmlink and its nominee, Tasa Securities or TA Securities, correct? --- Yes.
They happened to be two parcels of shares that were held in company names not immediately associated with the Wah Nam name or group, correct, on their face? --- Correct.”
At T p 172 Andrew gave the following evidence:
“You discussed with Mr Samson Chen that the shares to be acquired from Ping An and Charmlink would be acquired through a separate agreement, correct? --- Yes.
The money to purchase those shares would be coming from the Khoos, correct, indirectly? --- Yes.
The way in which that would be done would be worked out but the money was eventually going to be coming from the Khoos, correct? --- At that stage probably we did not discuss exactly where the money coming from but ultimately.
Ultimately it would come from the Khoos, correct? --- Yes.
At the end of the day they would be responsible for finding the money? --- Yes.
And you discussed with Mr Samson that the agreement for the purchase of those Ping An and Charmlink shares would not be disclosed publicly, correct? --- Yes.
And those shares would be voted in favour of the relevant resolutions at the IAL shareholders meeting, correct? --- Correct.”
The following evidence was given by Andrew at T p 173:
“Have you any doubt in your mind that you did discuss with Mr Samson Chen the fact that the Charmlink shares and the Ping An shares would be bought in a separate agreement, no doubt about that? --- No doubt.
No doubt about the fact that you told him that that agreement would not be disclosed publicly? --- That’s correct.
No doubt about the fact that you told him that those shares would be voted in favour of the resolutions at the meeting? --- Yes.
Of IAL? --- Yes.
No doubt about the fact that you discussed with him the reason for that being done as being to overcome the danger that Major League would vote against the resolutions? --- Correct.”
At T p 174 Andrew gave the following evidence:
“He [Samson] said that Wah Nam wanted to sell all of its 89 percent interest in Wah Nam IAL, didn’t he? --- Yes.
You appreciated, did you not, after the Major League problem had become evident, that is the difficulty in getting resolutions passed if it opposed, you appreciated that obtaining voting control of the relevant IAL shareholders meeting was absolutely essential to the whole transaction going ahead, correct? --- Yes, otherwise there’s a danger that after spending all the time and then the last moment the deal couldn't conclude.
You said that to Mr Samson Chen too, didn’t you? --- Yes.
That the deal really just could not go ahead at all unless steps were taken to ensure voting control of the shareholders meeting, correct? --- Yes.”
At T p 176 Andrew gave the following evidence:
“When I made the suggestion I meant that we find a party that was willing to buy the shares and we proceed, and Mr Khoo, in fact, proceed to look for this party enthusiastically. While this pursuit was going on we had to proceed with the signing of the agreement and we hadn’t got that party to buy these shares and thereupon we say we make some arrangement to find a party to buy this share first while the other pursuit is going on.
Well, the situation came about then that by April 1998 all the terms of the transaction which were going to be disclosed anyway to the public had been settled upon and had been incorporated in draft agreements, correct? --- Correct.
You discussed with Mr Samson Chen that the separate agreement for the purchase of the two separate parcels would be signed at the same time as the main agreements for the purchase of shares, correct? --- Correct.
He was insisting that that be done, wasn’t he? All agreements proceed together, both signing and completion? --- Yes.
So are you saying that you were starting to run out of time in April 1998 in finding a suitable nominee party to purchase the Charmlink and Wise Spencer shares? --- Not nominee, actual buyer.
Well, the money as you said for the purchase would at the end of the day be the responsibility of the Khoo brothers? --- Only if we can’t find buyer. If we find an investor who was willing to go along with Mr Khoo then Mr Khoo doesn’t have to come up with the money.”
Counsel for HCK had conferred with Andrew prior to his giving evidence. Counsel for Solar Honest knew this. There is no property in a witness, or impropriety in speaking to a witness to be called by the other side. No direction was sought by counsel for Solar Honest that leading questions should not be put to Andrew in cross-examination (cf Evidence Act 1995, s 42), nor did he seek leave to cross-examine Andrew notwithstanding that it was Solar Honest who called him as a witness (cf Evidence Act 1995, s 38).
Andrew’s affidavit evidence (par 45) is that the issue of whether Charmlink and Wise Spencer would agree to an extension of time for completion of the Eutopia Agreement was raised at the meetings in Kuala Lumpur held prior to completion of the transaction in Sydney on 15 September 1998.
Samson’s version
In par 17 of his affidavit, Samson deposes as to a conversation with Andrew which apparently occurred in October/November 1997. The material part of that conversation is as follows:
“Andrew:‘My clients have requested that they want the share purchase to proceed under two separate contracts. Two of the selling companies have to come out of the agreement and contract with another company’.
Myself: ‘Why?’
Andrew:‘It’s for strategic reasons. My clients want to maintain a price level which is above the NTA value so they can sell shares at a price above that which they buy the shares for. That would be better achieved by having a nominee company to buy and sell shares in the market. The Khoos have friends who will also be buying some shares. For various reasons it would be better to have some of the shares bought by this nominee company. The companies whose shares are to be purchased under the separate agreement are Charmlink and Wise Spencer. Can you approach those parties to inform them and see if they will agree?’”
In his oral evidence (T p 257/17) Samson accepted that he told Andrew during the course of negotiations, that the shares which could be delivered if the price was right was something in the order of 89 percent.
Samson denied any discussion with Andrew concerning the disqualification of WNG and its associates from voting at the EGM of IAL to approve the transaction. He claimed that the fact of disqualification was obvious to him, and, in his view, to Andrew (T p 261).
He denied that there was discussion with Andrew about the IAL shares being sold by Charmlink and Ping An through a separate agreement to overcome the possibility that Major League might vote against the resolutions at the EGM (T p 262). He gave the following evidence:
“The risks involved for Wah Nam in the takeover proposal being defeated at the last minute by an adverse vote from Major League never entered your mind when this proposal was being discussed with Mr Andrew Chen in late 1997? --- Never.” (T p 265/33, 266/3.)
At T p 271 Samson gave the following evidence:
“The money would be coming either from the Khoos themselves or people that they found to buy the shares? --- No, it was presented as friendly parties.
Friendly parties you understood to be people that the Khoos would find? --- Friendly to them.
Yes, obviously that they would have to find themselves, wouldn’t they? --- I thought they would have it otherwise they won’t be making the request.
Exactly? --- Yes.
So the money was to be coming from people that the Khoos found? --- It was friendly parties. He did not say to me, sir, that it was found by the Khoos or what. It could well have been found by Andrew.
And you understood that at the end of the day if the Khoos weren’t able to find people or Andrew wasn’t able to find people to buy those shares, those shares would have to be paid for by the Khoos? --- No, they have found the people already, didn’t they?
Just a moment. Were you told that people had already been found? --- Yes.
When were you told that? --- Well, when they made the request for the two companies to be coming out, right, they said that because they were friendly parties to the Khoo brothers who want to buy those shares.”
At T p 280 Samson denied that the Eutopia Agreement was not prepared by solicitors because he had previously agreed with Andrew Chen that it would be kept secret. He did not disclose the existence of the Eutopia Agreement to Peter Lucas, the chairman of IAL, but he claimed to have had discussions with Peter Lucas concerning the disclosure requirement. He did agree that he recognised in April 1998 that it would have been prudent and responsible, as a director of IAL, to seek advice from a qualified person as to whether the Eutopia Agreement had to be disclosed. He claimed to have sought advice from Peter Lucas, but without disclosing the existence of the Eutopia Agreement to him (T p 283).
In the submission earlier referred to, Solar Honest’s solicitors discussed the competing contentions as to the duty payable. On one view the duty payable on the First and Second Solar Honest Documents and the share transfer was $25. On the other view there would be an outstanding amount of duty of $7,765.00 calculated as follows:
-Duty on First Solar Honest Document on
the assumption that s 210(1)(b) applies $12,245.00
- Duty on share transfer $ 10.00
- Duty on Second Solar Honest Document $ 10.00$12,265.00
- Less duty paid on share transfer $ 4,500.00
$7,765.00
Solar Honest, in effect, invited the Commissioner to determine the duty payable on the documents and enclosed a cheque for $7,765.00 in case the Commissioner’s decision was that the amount payable exceeds $25.
HCK contends that the duty payable is $12,245.00. Section 211 of the Duties Act provides that a mortgage on which duty is required to be paid is, whilst any duty remains unpaid on it, enforceable only to the extent of the amount secured by the mortgage on which duty has been paid under the Act.
HCK contends that the mortgage created by the Solar Honest Documents was thus unenforceable at the time Solar Honest procured registration of the transfer to it of the 10 million IAL shares. HCK had an entitlement in equity to restrain any exercise by Solar Honest of any right under the mortgage security, and an equitable right to restrain IAL from giving effect to that security by registering the transfer to Solar Honest. HCK is entitled to rectification of IAL’s share register by restoring HCK as the holder of the 10 million shares in lieu of Solar Honest if it can show that it has some equity which the Court will protect: Kathleen Investments (Aust) Ltd v The Australian Atomic Energy Commission (1977) 139 CLR 117 at 151. In Whitehouse v Carlton Hotel (1982) 7 ACLR 329 at 331 Thomas J referred to the discretionary nature of the remedy, the discretion being exercised “on a broad basis of justice”.
The person liable to pay the mortgage duty was HCK as mortgagor: s 207. HCK’s case must therefore be that it has an “equity” to rectification of the register by reason of the fact that its failure to pay the duty which it ought to have paid has the result that Solar Honest was not entitled to complete the blank transfer and lodge it for registration. Section 211 does not contain a provision equivalent to s 304(2).
HCK cannot put itself in a better position by its own wrongful act, than it would have been in had it performed the duty which the law imposes upon it. There is no equity to restrain Solar Honest from completing the transfer and securing its registration where unenforceability, if it arises at all, only arises because HCK failed to pay the duty which it should have paid. Even if HCK’s contention as to the duty payable, and the operation of s 211 were correct, it would not be entitled to the relief which it claims.
In Westpac v Mousellis (1985) 17 ATR 49, Nader J expressed the view that “enforceable” meant enforceable by any means, including by exercise of the power of sale, or by action to enforce the personal covenant. His Honour also referred to authorities which indicate that an instrument will become retrospectively efficacious upon payment of the requisite duty. With respect, I am not sure that even if this is so, it would operate so as to preclude Solar Honest from completing the blank transfer and obtaining its registration without the necessity for curial action.
The First Solar Honest Document acknowledged a debt to Solar Honest, but even within the extended terms of s 206 there was no advance, HCK voluntarily assumed a responsibility to pay Solar Honest monies theretofore payable to other parties. There was no loan, and only nominal duty payable.
I have examined this issue on the assumption that the First Solar Honest Document is operative because the parties, in their submissions, approached the matter in this way. The result is essentially the same if it is the Second Solar Honest Document which is operative, although there might be a slight difference in the figures. My conclusion is that neither document is operative, hence the duty issue does not arise. I have dealt with it for the sake of completeness.
Accordingly, HCK cannot succeed in its rectification claim. I should record that had I formed the view that duty in excess of that already paid was payable, I would have thought it proper, in all the circumstances, to announce my decision to that effect, and to have adjourned the proceedings for a short period to enable Solar Honest to pay the shortfall.
Resulting trust and unjust enrichment
HCK seeks a determination that the 10 million IAL shares registered in the name of Solar Honest on 12 November 1998 are held in trust for HCK. The facts pleaded in support of that claim are as follows:
“29.Solar Honest did not provide any or any valuable consideration as transferee for the 10 million IAL Shares.
30.In the premises, Solar Honest holds the 10 million IAL Shares as a bare trustee and/or on a constructive trust and/or on a resulting trust for the benefit of HCK.
31.Alternatively, in the premises, the transfer of the 10 million IAL Shares to Solar Honest constitutes an unjust enrichment of Solar Honest to the detriment of HCK, in respect of which HCK is entitled to restitution.”
It is clear that the 10 million shares were transferred into the name of Solar Honest with the intention that they should be held by Solar Honest by way of mortgage. If the intended mortgage was effectively created by the transfer of the shares in question, it would not matter that Solar Honest did not provide consideration for the mortgage: Sykes and Walker, The Law of Securities (5th ed), p 44; Waldock, The Law of Mortgages (2nd ed), p 133. In such cases, there would be no question of a resulting trust because the intention is that Solar Honest should become the absolute owner of the shares, albeit subject to a proviso for redemption. That intention would be sufficient to rebut any presumption of a resulting trust flowing from the absence of consideration.
In the view which I have formed neither the First nor the Second Solar Honest Document was effective to create any liability in HCK to Solar Honest. In Handevel Pty Ltd v Comptroller of Stamps (Victoria) (1985) 157 CLR 177, 192 the High Court held:
“The classic definition of a mortgage is that given by Lindley MR in Santley v Wilde [1899] 2 Ch 474 at 474: ‘ … a mortgage is a conveyance of land or an assignment of chattels as a security for the payment of a debt or the discharge of some other obligation for which it is given’.”
As neither document was effective to create any debt or other obligation in HCK to Solar Honest, the transaction cannot take effect by way of mortgage.
The proposition that a mortgage cannot exist in the absence of a debt or some other obligation is not novel. In Jacobson v Williams (1919) 48 DLR 51 a purported mortgage was executed to secure repayment of a loan which was never advanced. Walsh J stated (at 57):
“If the question is asked ‘How much is owing on this mortgage?’ the answer undoubtedly would be ‘nothing’ …’.
For this reason his Honour held that the mortgage was null and void and directed that it be removed from the alleged mortgagor’s certificate of title.
G M Industries Pty Ltd (in liq) and the Companies Act (1980) ACLC ¶40-665 is a somewhat similar case. In that case a company attempted to grant a charge over its assets to secure a loan which was never made. Needham J held (at 34, 424):
“The purported creation of a charge over property to secure a debt where there is no debt and no contractual liability to raise one is, in my opinion, an act without legal effect. The very nature of a charge is a security for a debt or other legal or equitable obligation. One cannot have a charge in vacuo.”
In that case the charge was simply annihilated. Here, as title has passed, some basis needs to be found for a conclusion that the legal title which Solar Honest has is held for HCK.
Although the transfer of the shares to Solar Honest was apparently absolute in nature, recourse may be had to the surrounding circumstances in order to determine the true nature of the transaction: Lincoln v Wright (1859) 4 De G & J 16 [45 ER 6, 9].
Is there a resulting trust?
Inre Vandervell’s Trusts (No 2) [1974] 1 Ch 269 at 294 establishes two categories of resulting trust:
1.where the settlor transfers the legal estate in property to another otherwise than for valuable consideration. If, by construing the document transferring the legal estate, it is possible to discern whether the settlor intended for the transferee to take the beneficial estate, then such intention is conclusive. However, if the document is silent as to the settlor’s intentions, a presumption of resulting trust in favour of the settlor arises.
This presumption may be rebutted by evidence of the settlor’s intentions from all the relevant facts and circumstances: Vandervell v IRC [1967] 2 AC 291 at 312; the “relevant” facts and circumstances will, generally, consist of what was said and done at the time of transfer: Charles Marshall Pty Ltd v Grimsley (1956) 95 CLR 353 at 364 quoting Sidmouth v Sidmouth (1840) 2 Beav 447 [48 ER 1254]; acts or declarations before the time of transfer are admissible but subsequent acts or declarations are admissible only as evidence against the acting or declaring party: Shephard v Cartwright [1955] AC 431; evidence rebutting a presumption of resulting trust may be direct or circumstantial: House v Caffyn [1922] VLR 67.
2.Where the settlor intends to transfer his beneficial interest in property and believes he has done so, but fails (by reason of a mistake or accident or failure to comply with the requirements of law). A resulting trust in favour of the settlor exists by operation of law in respect of the beneficial interest of which he failed to dispose.
See also Westdeutsche Bank v Islington LBC [1996] AC 669 at 708; Corin v Patton (1989-1990) 169 CLR 540 at 578.
Here we are concerned with category 1 because legal title to the shares has passed to Solar Honest (and perhaps, at least by way of analogy, with category 2, but nothing turns on this). Therefore the share transfer must be examined for evidence of HCK’s intentions. Nothing can be deduced from this document. The fact that it nominates consideration paid for the shares is of no moment – this was a fictitious entry made by Solar Honest: cf House v Caffyn at 80. Accordingly, a presumption of resulting trust arises. However, this may be rebutted by evidence of HCK’s intentions.
The surrounding circumstances indicate that HCK did not intend to make a gift of the IAL shares to Solar Honest. Its intention was to assume an obligation to Solar Honest, and to provide the 10 million IAL shares as security for performance of that obligation. If the intended assumption of the obligation fails, then, it seems to me to follow that the intended provision of security also fails, and that there is a resulting trust in favour of HCK.
In a superficial sense this may seem like an odd outcome: HCK owes money, it put forward security, it failed to pay, the purported creditor obtained title to the security, yet such title is held on trust for HCK. However, this analysis is flawed. Assuming the agreements under which HCK is said to owe money to Wise Spencer, Charmlink and Wah Nam could be proved, HCK owes money to Wise Spencer, Charmlink and Wah Nam. Those creditors could sue HCK for breach of their respective agreements. Instead, for whatever reason, it was decided that Solar Honest should be interposed as the single creditor to which all the outstanding sums were due. That enterprise failed. The result is that Solar Honest cannot sue on a debt it is not owed and has no absolute entitlement to the property which was intended to secure a debt to be assumed by HCK, but which was not effectively assumed.
Again, Solar Honest neither pleaded nor submitted that there was any conventional estoppel which would preclude HCK from denying the efficacy of the intended mortgage transaction. I do not mean to imply that such a case would have succeeded; I simply record that as a case to that effect was not made, it has not been necessary for me to deal with it.
HCK paid the sum of $100,000 to Solar Honest pursuant to cl 3(a) of the Second Solar Honest Document. The sum was expressed to be paid in consideration of Solar Honest extending the due date for payment of the debt which HCK assumed pursuant to the First Solar Honest Document. On my findings, HCK did not incur a liability to Solar Honest by virtue of the First Solar Honest Document, hence the expressed consideration is illusory. If it were otherwise, and Solar Honest gave consideration for the Second Solar Honest Document, then it would bind the parties as an agreement.
HCK seeks to recover the sum of $100,000 on the ground that Solar Honest gave no consideration to HCK for the payment (Amended Statement of Claim par 36) or alternatively the payment of $100,000 by HCK to Solar Honest constitutes a debt payable by Solar Honest, and/or an unjust enrichment of Solar Honest to the detriment of HCK.
Although this relief is sought in the Amended Statement of Claim, ultimately no submissions were put in support of the claim to recover $100,000. It may be that this was due to oversight, or because of an acceptance that whatever the result in relation to the 10 million IAL shares would flow through and determine the claim to recover $100,000.
In my view, on the findings which I have made, there is a total failure of consideration in relation to the $100,000 and HCK is entitled to recover that sum.
Conclusion
In the result:
-HCK is entitled to a declaration that the 10 million shares in IAL registered in the name of Solar Honest are held upon trust for HCK.
-HCK is also entitled to recover the sum of $100,000 paid pursuant to the Second Solar Honest Document.
-Solar Honest’s cross claim should be dismissed.
-Whilst I have not heard argument on the question of costs my prima facie view is that Solar Honest should pay HCK’s costs of the proceedings.
HCK should bring in short minutes of order to give effect to these conclusions.
I certify that the preceding two hundred and sixty-nine (269) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Hely. Associate:
Dated: 23 August 1999
Counsel for the Applicant: G A Palmer QC and R E Dubler Solicitor for the Applicant: Deacons Graham & James Counsel for the Respondent: M B Oakes SC and D E Perrignon Solicitor for the Respondent: McMahons Date of Hearing: 19, 20, 21, 22, 23, 29, 30 April 1999
4, 5, 26, 31 May 1999Date of Judgment: 23 August 1999
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