TREEWELL DEVELOPMENT LTD. v. TSANG CHUN WAH

HCA5530/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 5530 OF 2001

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J U D G M E N T

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1. This is an appeal from the order of the Master, granting conditional leave to defend. The action is on a deed to enforce payment of a sum of $1.5 million being part of the contract price for the sale and purchase of shares in C F & Associates Company Limited, which I will call "C F & Associates". Also involved in the proceedings is an associated company, C F & Associates (China) Property Consultant Company Limited, which I will call "C F China".

2. The plaintiff company was formed by three men who were former shareholders of C F & Associates. The purpose of the formation of the plaintiff company was simply to hold the shares in C F & Associates, apparently it has no other business. In July or June 1993, the plaintiff wanted to dispose of its shares in C F & Associates. On 6 July 1993, it entered into a deed with the defendant to sell its shares to the defendant for the sum of $5.4 million. The contract provided for a deposit of $1 million and the balance to be paid by 44 post-dated cheques of $100,000 each.

3. On its face, the deed is a straightforward contract for the sale and purchase of shares for $5.4 million with payment provision being made and a usual provision for default of the whole amount falling due upon any of the post-dated cheques not being met.

4. But the surrounding facts established on the affidavit evidence provide a basis upon which the defendant argues that, in fact, he personally was not the purchaser of the shares but that he was merely acting as an agent for C F & Associates. His evidence was that he personally could not afford to purchase the shares but C F & Associates could make the purchase. An agreement by C F & Associates to purchase the shares in itself would potentially be a breach of section 58 of the Companies Ordinance and so, he said, a scheme was devised whereby the defendant appeared to be the purchaser of the shares.

5. As evidence to support these contentions, he has shown an arguable case that the source of the deposit of $1 million, although coming immediately from his bank account by way of a cheque he drew, in fact came from C F & Associates. The evidence establishes that at about the same time as the deposit was paid, funds from C F & Associates and C F China, were paid into the defendant's bank account to meet the cheque.

6. Further, instead of giving to the plaintiff 44 post-dated cheques drawn on his own account, 44 cheques were drawn on C F China's account. To further complicate matters, all cheques in payment of the obligations under the deed were made payable to Chan Mou-fat, a minority shareholder in the plaintiff company. The explanation given for this was that the plaintiff company, although holding shares for three different men and instructing solicitors on the transaction, did not have a bank account.

7. The first 11 of the post-dated cheques were duly presented and paid. Three cheques drawn on 1 July 1994, 1 August 1994 and 1 September 1994 were dishonoured. No action was taken by either Mr Chan or the plaintiff company until 6 December 1994 when a solicitor's letter was written to the defendant insisting on payment of the balance due of 3.3 million. The letter suggested that if payment was not made within five days, proceedings would be commenced. In fact, no proceedings were then commenced. On 10 December 1994, instead, three further cheques due on 1 October 1994, 1 November 1994 and 1 December 1994 were presented and dishonoured. Again no further steps were taken either by the plaintiff company or by Mr Chan.

8. In August 2001, seven years later, steps were taken by the plaintiff company to have itself de-registered and dissolved. This procedure was gazetted on 5 October 2001 but the procedure was aborted on 27 December 2001, before it became final. No explanation has been offered in relation to any of these steps. Shortly thereafter, these proceedings were commenced by the plaintiff company. C F & Associates was closed in December 1994. There is no evidence as to whether it is still in legal existence. C F China was struck off the Register of Companies in March 1998.

9. The defendant's contention that C F & Associates was using C F China to purchase its own shares is supported by an affidavit from a Mr Lam Wai-hung who was an accountant for C F China. He gives evidence of an explanation being given to him by another accountant for C F & Associates and C F China that 44 cheque vouchers for cheques for the sum of $100,000 each, payable to Mr Chan Mou-fat were moneys to be paid by C F & Associates to buy back shares from Mr Chan. On the face of Mr Lam's evidence, there is no present connection between himself and the defendant.

10. On these facts I am satisfied, as was the Master, that a defence of agency is available to the defendant. The exchange of cheques payable by C F China instead of the defendant personally is, in my view, sufficient to raise an argument that cannot be said to be either frivolous or practically moonshine. Supported as it is by the cheques in the evidence of Mr Lam, I find the contentions raised by the defendant to be facts that are believable, as that expression is used in Ng Shau Chung v Hung Chun San [1994] 1 HKC 155.

11. A second argument is available to the defendant. He says that there has been a novation and that his obligations have been taken over by C F China upon the acceptance of the cheques by Mr Chan. The explanation offered by Mr Chan for the plaintiff as to why he accepted cheques from C F China instead of the defendant was that the cheques were "security for the defendant's payments". He never received any apparent payment directly from the defendant and he simply deposited the cheques. The deed does not provide for cheques by way of security from a third party, but as a means of payment by the defendant. Where such cheques come from a third party, in the absence of consideration, they may well not have been enforceable by reason of section 27 of the Bills of Exchange Ordinance and, accordingly, no security at all. If, however, the intention of the parties was that pleaded in paragraph 10(d) of the amended statement of defence, and I am satisfied on the evidence that such a scenario is arguable, there was an arguable case for a novation, and that the proper parties to the contract are Mr Chan Mou-fat and C F & Associates and C F China, and that there is, accordingly, good consideration for the cheques.

12. In all of the circumstances, I am satisfied that the Master was right to grant leave to defend. Conditional leave was granted by the Master, the defendant being required to pay into court the sum of $1.5 million. $1.5 million is not the full amount that was due under the deed. The original statement of claim contained an averment abandoning the difference between that sum of $1.5 million and the total amount due of $3.3 million, on the basis that the difference was statute-barred. The action being on a deed and the limitation period being 12 years, it is plainly not statute-barred.

13. An amended statement of claim was filed in which the averment containing the abandonment has been deleted but the amount claimed has not been increased, and while counsel for the plaintiff made some indirect suggestion that there might be another action for the balance, there has been no proper explanation from Mr Chan as to why he is not now proceeding, after such a very long delay, albeit within the limitation period, for the whole of the sum.

14. The usual rule is that if there are doubts and suspicions as to the plaintiff's case, there should be unconditional leave (see Billion Silver v All Wide Investment Ltd [2002] HKC 262). Conditional leave will be granted where the plaintiff has a strong case but the defendant only a shadowy defence.

15. The evidence before me is sufficient to raise the argument that the defendant was acting as an agent for C F & Associates in the purchase of its own shares. If that argument is successful, there is a strong argument that the transaction is in breach of section 58 of the Companies Ordinance. Such a transaction would not be enforced by the court. That is sufficient, in my view, having regard to the evidence in this case, for there to be doubts as to the plaintiff's case.

16. In these circumstances, there will be an order granting the defendant unconditional leave to defend. The appeal will be allowed to the extent that the order of the Master requiring a payment into court is set aside. In all other respects, the Master's order including the order as to costs is confirmed. Costs on the appeal are to be costs in the cause.

Remarks: