KUNG SHIU CHEONG v. WONG SUET MAN AND OTHERS

CACV 406/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 406 OF 2007

(ON APPEAL FROM DCCJ NO. 5423 OF 2006)

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J U D G M E N T

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Hon Tang VP:

1.  The 1^st defendant is the wife of the 2^nd defendant.  The 1^st defendant and the 3^rd defendant are friends.  The 1^st defendant is registered as the sole proprietor of a noodle shop called “Noodle House”.

2.  The 2^nd and 3^rd defendants entered into the following Share Transfer Agreement with the plaintiff.

“Share Transfer Agreement

Buyer  :

Seller   :    Chau Chi Sum & Leung Wing Fai

Date    :    23 January 2006

1.      Seller transfer 33.33% Noodle House Share (include rental deposit) to Buyer at HK$ 240,000.00

2.      Buyer will not withdraw or sold out the share within two years.

3.      This agreement will effective from 1 Feb. 2006.”

3.  The plaintiff alleged in the Statement of Claim that he entered into the Share Transfer Agreement as a result of the representation by the 2^nd and 3^rd defendants that:

“2.     … the business of the Noodle House was being operated by a company with issued share capital (‘the Noodle House Company’) which were jointly held by the Defendants.”

4.  The plaintiff claimed that the representations:

“3.     … were false and untrue in that the Noodle House Company at all material times did not exist and the Defendants did not own any shares thereof and each of the Defendants, at the time when they made the representations, knew them to be false and untrue, or made them recklessly not caring whether they were true or false.”

5.  The plaintiff alleged that he had repudiated the Share Transfer Agreement as soon as he had discovered that the representations were untrue, and he claimed for the return of the HK$240,000.00, as well as damages.

6.  Final and Interlocutory Judgment was entered against the defendants on 27 December 2006.

7.  On 3 July 2007, the 3^rd defendant applied for leave to set aside the judgment.

8.  On 11 October 2007 HH Judge Lok set aside the judgment against the 3^rd defendant. 

9.  This is the plaintiff’s appeal.

10.  In the 3^rd defendant’s defence,

(i)      the 3^rd defendant claimed that he was acting as an agent for the 1^st defendant who was the wife of the 2^nd defendant, and that he had signed the agreement as an agent of the 1^st defendant.  (I note that the 2^nd defendant was an undischarged bankrupt at the time.)

(ii)      the 3^rd defendant also denied making any representation to the plaintiff about the Noodle House Company and that in any event, the plaintiff:

“… was well aware that the Noodle House Company was solely and/or beneficially owned by the 1^st Defendant”.

(iii)     the plaintiff had accepted the agreement by participating in the running or the management of the Noodle House Company, and therefore he had lost the right of repudiation.

11.  HH Judge Lok said in his judgment that the 3^rd defendant’s case that he was merely acting as an agent for the 1^st defendant was incredible.

12.  Indeed, he said he had great reservation about the credibility of the parties and doubted whether they had revealed the whole truth to the court.  I must say that I agree with the sentiment expressed by the learned judge.

13.  However, he was of the view that the 3^rd defendant’s case that the plaintiff had taken part in the management of the business after acquiring the shares was sufficient to justify a trial on whether the plaintiff had lost the right of repudiation and hence the right to the return of the HK$240,000.00 for total failure of consideration.  With  respect, I agree.

14.  I must add I have difficulty understanding the plaintiff’s claim and the alleged misrepresentation:

“2.     … that the business of the Noodle House was being operated by a company with issued share capital …”.

15.  Was he alleging that it was represented to him that the Noodle House was owned by a limited company and that he was acquiring shares in such limited company when he complained:

“3.     The said representations were false and untrue in that the Noodle House Company at all material times did not exist and the Defendants did not own any shares thereof …”

16.  The plaintiff’s allegation as I gathered from his affirmations appeared to be that the Noodle House was a sole proprietorship in the name of the 1^st defendant.

17.  According to the 3^rd defendant, that was known to the plaintiff.  In the 3^rd defendant’s 2^nd affirmation, affirmed on 9 October 2007, he said:

“13.   … In fact, after his injection of HK$240,000.00 into the Noodle House, the Plaintiff had attended the monthly management meeting in respect of the Noodle House.  It would be impossible for him to be unaware of the beneficial ownership of the Noodle House. …

……

15.    … All along the Plaintiff was aware that the Noodle House was a sole proprietorship beneficially owned by the 1^st Defendant.  The Plaintiff should be aware of this as he had visited the Noodle House on a numerous occasions and should have seen the business registration certificate displayed in the shop. …”

18.  It is to be noted that in the Share Transfer Agreement under the signature of the plaintiff and his HKID Card Number, the following appeared:

“Wise Forward Enterprises Ltd.,

  reg. no. 15417674-000-63-05-0”.

That was repeated in the Chinese memorandum referred to in the Statement of Claim where the Noodle Shop was described as “麵麵店”.  So it appeared the plaintiff probably knew what a limited company was.  There is no indication in either document that the Noodle Shop was or was owned by a limited company.  The language of the Share Transfer Agreement suggests that the plaintiff was not acquiring shares in a limited company.  For example, it does not refer to the number of shares to be sold but a percentage of “share”, which was supposed to include a rental deposit.  If the Noodle House was owned by a limited company, the rental deposit should belong to the limited company.  There is also the added curiosity that the 2^nd and 3^rd defendants were to sell shares jointly.  As I have said, the 2^nd defendant at the time was an undischarged bankrupt.

19.  Mr Lawrence Li for the plaintiff has submitted that the learned judge speculated, when after doubting whether the plaintiff and the 3^rd defendant had revealed the whole truth to the court, that the 3^rd defendant might have had a beneficial interest in the Noodle House.  But those observations were made after the learned judge had said:

“11.   … there is also a triable issue as to whether the Plaintiff has lost the right of repudiation and whether he is entitled to claim back the whole sum of $240,000 by reason of total failure of consideration.”

20.  Moreover, as I have said, I have difficulty understanding the representation relied on by the plaintiff.  What those representations were and whether they were made are critical to the plaintiff’s case.  So on the plaintiff’s pleaded case alone, the 3^rd defendant has reasonable prospects of persuading a judge that he has no liability to the plaintiff.

21.  As for the complaint that the 3^rd defendant has been guilty of unreasonable delay in allowing the judgment to have gone by default or to have remained a default judgment for very substantial period of time, the learned judge has exercised his discretion in favour of the 3^rd defendant, and there is really no basis upon which we can interfere.

22.  I am satisfied, as I have said, that the 3^rd defendant has reasonable prospect of success, so despite the persuasive submission of Mr Li, I would dismiss the appeal.

Hon Burrell J:

23.  I agree and have nothing to add.

Hon Tang VP:

24.  The appeal is dismissed with costs.