Following a 10-day trial, the High Court in Sung Chung Kwun & Ors v Addchance Holdings Ltd & Ors [2025] HKCFI 5216 dismissed the entirety of the Plaintiffs’ claims, putting an end to their longstanding attempt to derail D2 (“CFGL”)’s enforcement of a Second Mortgage granted over “Sung’s Tower”, a HK$300 million flagship building which used to be owned by the Plaintiffs’ camp helmed by Sung Senior, one of Hong Kong’s first-generation textile entrepreneurs.
This case is a reminder that the court will not lightly find fiduciary duties in a commercial context, even if one party claims to have reposed trust and confidence in the other party and rendered himself vulnerable to breach of contract.
Background
The dispute arose out of a failed listed company “shell sale” transaction some ten years ago.
The Plaintiffs claimed that in 2014, Sung Senior, the founder and controller of the listed company then named Addchance Holdings Limited (AHL), entered into an agreement to sell his controlling stake to Mr. Poon, with the assets and liabilities of the textile businesses to be subsequently re-transferred to Sung Senior.
Before parties could complete the transfer of the shares, the listed company had encountered such severe financial difficulties that Sung Senior had to cause his property-holding vehicle to execute a Second Mortgage over Sung’s Tower in favour of various banks.
In the meantime, Mr. Poon refused to complete the “shell sale” transaction, and later became the controlling shareholder by way of a share subscription and whitewash waiver instead. He then carried out a debt restructuring exercise by incorporating CFGL to purchase the company’s debt and the Second Mortgage at a discount, which was in part funded by the 7th and 8th Defendants, vehicles of a third-party investment fund.
As CFGL, the 7th and 8th Defendants sought to enforce the Second Mortgage against Sung’s Tower, the Plaintiffs resisted by invoking the oral “shell sale” agreement between Sung Senior and Mr. Poon.
It was alleged that while parties would progressively transact the shares, Mr. Poon would immediately gain control over the listed company, leaving the Plaintiffs vulnerable to his abuse of power, and giving rise to fiduciary and contractual duties on the part of Mr. Poon to, inter alia, maintain the viable existence of Sung Senior’s heavily indebted textile businesses pending the re-transfer, and to raise funds to discharge the liabilities owed by the AHL group to the banks.
On this basis, it was said that CFGL, which was substantially owned by Poon at the time, was rendered a “knowing recipient” of the rights held under the Second Mortgage when it acquired the same, which in turn affected the third-party investment fund’s rights to enforce the Second Mortgage via CFGL.
The trial judge rejected the Plaintiffs’ claims; it agreed with CFGL and the 7th and 8th Defendants and allowed their counterclaim for enforcement of the Second Mortgage. It was found that the Plaintiffs had failed to prove the existence of the alleged oral agreements, such that all of the Plaintiffs’ claims, parasitic upon proof of such “agreements”, also fell away.
Key Takeaways
- Alleged oral agreements: the Court will not accept assertions of “oral agreements” at face value, and will consider factors such as the availability of contemporaneous documentary evidence and the commercial sense of the agreement alleged. The Court reaffirmed the rarity of an alleged oral agreement which is not corroborated by contemporaneous documentary record of any kind. As the value of a written record is understood by anyone with business experience, the absence of records tends to suggest that no contract was concluded. Such oral agreements are notoriously difficult to prove and should not be raised without proper factual foundation (§§178, 238, 323-324).
- Implication of fiduciary duties in commercial context: even if the alleged agreements did exist (which they did not), this alone was insufficient to give rise to a fiduciary relationship between Sung Senior and Poon, which “does not arise simply because trust and confidence are reposed by one person in another”. What is required is trust and confidence in the loyalty of the decision-maker to put aside his or her own interests and act solely in the interests of the principal (§315).
- Illegality: the Court was also highly critical of the illegal means by which Sung Senior and Mr. Poon had sought to implement the “shell sale” transaction, by way of three sham share purchase agreements providing for acquisition by seemingly unconnected parties, which would help Mr. Poon conceal the true extent of his substantial interest in AHL and to evade the obligation to make a mandatory general offer to all shareholders of AHL under the Code on Takeovers and Mergers. The Court found that the Plaintiffs would have in any event have been disentitled from any relief due to illegality, and even directed a copy of the judgment be sent to the Securities and Futures Commission for further consideration and action (§§329 and 337).
- Mortgagor’s duty to account for rent: given the Plaintiffs’ failure to resist CFGL’s legitimate attempt to enforce the Second Mortgage, the Plaintiffs are liable to account for the rents they received to CFGL as a constructive trustee from the time they received notice of CFGL’s intention to re-enter, and for so long as they continue their (wrongful) possession of Sung’s Tower (§334).
Conclusion
The decision favours commercial certainty and serves as a useful reminder that oral agreements and fiduciary relationships are not to be asserted lightly, especially in a commercial context; financial institutions and investment funds may also find comfort in the unlikelihood of their being bound by latent oral agreements involving former owners of commercial assets.
Read the judgment here: https://legalref.judiciary.hk/lrs/common/ju/ju_frame.jsp?DIS=174680&currpage=T
Christopher Chain SC, Tinny Chan, and Clara Wong acted for CFGL and the 7th and 8th Defendants
