Commercial Law — The holder’s lack of explanation for holding promissory notes is a relevant factor in establishing a trust in favour of third party
In Charm Master Enterprises Ltd v Grand T G Gold Holdings Ltd and J. Thomson Asset Investment Ltd [2024] HKCFI 2847, Cheng J held that the Plaintiff, as the legal holder of two promissory notes (“PN D” and “PN E”), in the sums of $7.5m and $5m respectively, held them on trust for the 2nd Defendant, a non-party to the PNs.
The facts
Pursuant to a Sale and Purchase Agreement (“SPA”), the 1st Defendant, listed on the GEM Board of the Hong Kong Stock Exchange, acquired from SSC Mandarin Holdings (“SSC Holdings”) all the shares of its wholly owned subsidiary SSC Mandarin Mining Investment Ltd (“SSC Mining”) at a consideration of $1,212m, $60m of which was to be paid by PN A totalling $60m.
The draft of the proposed PN A stated that SSC Holdings was to be the holder. However, on the completion date of the SPA on 30 April 2008, PN A was issued to the Plaintiff pursuant to a payment instruction issued on the same day in which no trust was mentioned.
PN A was partially redeemed and PN D and PN E were eventually issued in substitution. Upon the 1st Defendant’s default in 2011, the Plaintiff commenced this action. In 2017, the 2nd Defendant joined this action and produced a minutes of SSC Holdings dated 30 April 2008, stating that the Plaintiff held PN A on trust for (1) SSC Holdings to the extent of $48m and (2) the 2nd Defendant to the extent of $12m (“the trust”). In 2019, the 2nd Defendant further produced a Disputed Trust Confirmation dated 2 May 2008, which contained the signature of a representative of the Plaintiff confirming the trust.
The judgment
At trial, the 2nd Defendant did not dispute the validity of PN A on the ground of lack of consideration. Nor did it plead that the Plaintiff’s case involved any illegality. The 2nd Defendant’s case was that PN A was issued to the Plaintiff to be held on trust rather than in its own right.
In upholding the 2nd Defendant’s claim for trust, the Court made two important findings. First, it was held that, when considering whether PN A was held on trust, the Court could take into account the Plaintiff’s lack of explanation as to why it held PN A beneficially when it did not pay any of the consideration under the SPA, notwithstanding the presumption that the Plaintiff became the holder of PN A for value under the Bills of Exchange Ordinance, Cap 19.
Second, insofar as there may be a reason why the Plaintiff might have been beneficially entitled to PN A, this would involve the inherently unlikely implication that the person who was ultimately behind Plaintiff at the time was taking an illegal kickback under the SPA since he was then the Chairman of the 1st Defendant; and it was held that there was no need for the 2nd Defendant to plead any case of illegality because it was not advancing a positive case that the Plaintiff was not entitled to claim under the PNs by reason of illegality.
The judgement also provides useful guidance on the drawing of adverse inferences. Having reviewed the authorities, the Court rejected the 2nd defendant’s argument that adverse inferences should be drawn against the Plaintiff’s failure to call (1) the director of the Plaintiff at the relevant time ; (2) personnel of its former solicitors, on the grounds that the adverse inferences were not specified, and the persons could not have given relevant evidence.
Anthony P.W. Cheung (with Lee Siu Him), instructed by Chan, Lau & Wai acted for the Plaintiff.
Lee Siu Him
Called to the Bar in 2007, Lee Siu Him predominantly engages in general civil practice as both sole counsel and led junior. His areas of expertise include commercial disputes, banking, land, employment, trust, intellectual property and probate.
Siu Him has a track record of appearances in trials and appeals involving complex questions of law such as “contractual estoppel” in mis-selling claims (DBS Bank (HK) Ltd v Sit Pan Jit HCA 382/2009 (CFI); CACV 91/2015 (CA); FAMV 45/2016 (AC)), adverse possession of common parts of multi-storey building (The IO of Po Hang Building v Sam Woo Marine Works Ltd FAMV 21/2016 (AC)), and effect of severance notice on joint tenancy (Ho Kwok Wing v Chan Mei Mui [2018] HKCFI 1135 (CFI); [2020] 3 HKLRD 548 (CA)).
Siu Him holds particular exposure in cases raising public law issues of great general or public importance, e.g. the first final appeal involving National Security Law (see HKSAR v Lai Chee Ying (2021) 24 HKCFAR 33) and the judicial review challenging constitutionality of “anti-mask” law (Leung Kwok Hung v Secretary for Justice [2020] 1 HKLRD 80 (CFI); [2020] 2 HKLRD 771 (CA); (2020) 23 HKCFAR 518 (CFA)).
Siu Him has extensive experience as both trial and appellate advocate in courts and tribunals, including magistrates’ courts, the Lands Tribunal, the District Court, the Court of First Instance, the Court of Appeal and the Court of Final Appeal. He also has a wealth of experience in providing opinions on legal issues arising from listing applications to the SEHK.
Find out more from Siu Him’s profile.
This article was first published on 7 November 2024.
Disclaimer: This article does not constitute legal advice and seeks to set out the general principles of the law. Detailed advice should therefore be sought from a legal professional relating to the individual merits and facts of a particular case. The photographs which appear in this article are included for decorative purposes only and should not be taken as a depiction of any matter to which the case is related. The views and opinions expressed in this article/material are solely those of the members authoring it and do not necessarily reflect the official policy or position of Denis Chang’s Chambers, or of any other member or members of Denis Chang’s Chambers.