TUNG SHING INDUSTRIAL (HONG KONG) LTD v. AU YEUNG FAN

DCCJ 415/2010

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 415 OF 2010

(Transferred from High Court Action No. 1487 of 2005)

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BETWEEN

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JUDGMENT

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Introduction

1.  The Plaintiff claimed repayment of a loan of $1m together with interest and costs. The Defendant contested the proceedings.

Background

2.  On 30 July 2005, the Plaintiff commenced HCA 1487/2005 against the Defendant.  It said that, by an oral agreement between the parties, the Plaintiff on 30 November 2004 issued a cheque to Champion Essence International Limited (“Champion”) which the Defendant was the majority shareholder.  Requests and demands were made for repayment, but the Defendant failed to do so.

3.  The Defendant filed his Defence.  Briefly, he said that he himself, Mr. Leung of the Plaintiff, and one Mr. Wong were shareholders of Fansway International Limited (“Fansway”).  At about the end of 2004, Mr. Leung told him that he was entitled to a profit share of $1m from Fansway.  He asked the money to be paid to the account of Champion.  The $1m was not a loan.  Further, there were then disputes among the shareholders of Fansway.  Mr. Leung had commenced winding up petition in HCCW 504/2005 and the Plaintiff only instituted the present proceedings to extend such dispute.

4.  The Plaintiff thereafter applied for summary judgment against the Defendant.  Mr. Leung deposed, inter alia, that Fansway did not engage in business and had no profits to be shared at all.  A number of profit tax returns were exhibited to support the Plaintiff’s case.

5.  The Defendant did not agree to it.  He deposed that Fansway in fact wholly owned Bao Feng Flocking Factory Shude Co. Ltd. (“Bao Feng”) in PRC, and Bao Feng had all along been making substantial profits.  However, unknown to the Defendant, Mr. Leung set up the Plaintiff and transferred Bao Feng’s customers to it, making secret profits.  Mr. Leung even went further to prepare 2 sets of financial statements for Bao Feng.  By the judgment of the Immediate Level of People’s Court of Foshan City of Guangdong Province dated 6 June 2006, Mr. Leung was held liable to Bao Feng for about RMB 6.5m.

6.  Later, the Defendant was granted unconditional leave to defend the proceedings and the substantive costs of the application were made costs in the cause.  Parties were further directed to prepare discovery and exchange of witness statements.

7.  The directions were complied with.  The Plaintiff intended to call 2 witnesses, Mr. Leung and a PRC accountant, Mr. Lai.  The Defendant also sought to call 2 witnesses, the Defendant himself and the accountant or accounting officer of Bao Feng, Madam He.

8.  On 29 January 2010, the High Court proceedings were transferred to the District Court to become the present action.  Later, directions were also made to set down the case for 3 days with a pre-trial review (“PTR”), to be held 8 weeks before the commencement of the trial.

9.  Until that time, including when parties were fixing the dates for the PTR and trial, the Defendant was legally represented.  However, on 17 January 2011, the Defendant’s solicitors applied for ceasing to act.  The application was allowed on 24 January 2011 and the relevant certificate was also filed on 26 January 2011.

10.  The PTR was held on 28 January 2011.  Mr. Chan of Counsel represented the Plaintiff.  The Defendant was absent.  Upon discussing the further conduct of the trial with Mr. Chan, I made a number of directions thereof.

11.  Application was subsequently made by the Plaintiff regarding expert evidence and substituted service.  I dealt with it on 1 March 2011.  I allowed the latter one and adjourned the former one to be dealt with at the commencement of the trial.

12.  The trial commenced as scheduled on 29 March 2011.  Mr. Chan continued to represent the Plaintiff and the Defendant, still absent.  Upon being satisfied that the Defendant had been duly informed of the hearing date, and served with all relevant documents, I proceeded to hear the Plaintiff’s case.

Preliminary matters

13.  Apart from the expert directions, the Plaintiff also took out a summons to amend the name of the Defendant by adding his alias “also known as Fan Ao Ieong”.  Upon consideration, I am satisfied that both applications are to be allowed in the circumstances:

(a)   The Defendant will suffer no prejudice by allowing expert evidence to be relied upon.  As a matter of facts, both parties already had their own “expert”, Mr. Lai for the Plaintiff and Madam He for the Defendant.  In their witness statements having been exchanged, both of them did provide opinion regarding accounting practices in PRC, and these opinions will have some bearing on the parties’ disputes.

(b)   The adding of the Defendant’s alias aims at identifying him clearly for the purpose of execution, if applicable, in future.  There is clear evidence before this Court that the Defendant bears such alias.  I see no reason not allowing the same.

The Ruling

14.  Coming back to the substance of the parties’ disputes, namely, whether the $1m is a loan or a distribution of profit?  Two live witnesses from the Plaintiff stepped into the witness box, namely, Mr. Leung and Mr.  Lai.  The case of the Defendant is set out in his Defence and further elaborated by the witness statements of the Defendant himself and Madam He.  Some details can of course be found in the affirmations filed to defend for the O.14 application.  However, the Defendant was absent at the trial.  His witnesses did not take the oath and were not made available for the purpose of cross-examination or clarification.

15.  With the above, and in further consideration of them in light of the submissions from Mr. Chan, I have decided to accept the Plaintiff’s case on balance although I do not go as far as accepting that the documents produced by the Defendant are forged.  It is indeed not necessary and easy for me to do so in light of the relatively higher burden of proof, regarding such proposition.

16.  To start with, the evidence of Mr. Lai is preferred to those of Madam He.

(a)   Mr. Lai did go to inspect the documents of the Defendant at the office of his then solicitors.  He suspected that some documents were fabricated, including that one particular page (page 43).  It was because that document bore only 1 perforated hole when all other papers in the same booklet had 2, overlapping with each other.  And, indeed, page 43 contained particulars trying to show that the subject $1m is a distribution of profit.  Madam He dealt with it in her supplemental statement.  She said that the description was true but all the papers were strung by the same string.  I do not consider that a satisfactory answer has been provided to the complaint.

(b)   Mr. Lai further said that 2 other pages (pages 44 and 45) appeared to be fabricated.  He took such view because he was able to locate 2 other pages 44 and 45 within the documents, and they contained different items as from the other pages 44 and 45.  Again, they purported to contain reference of the $1m distribution of profit.  Madam He explained in her supplemental statement that they were done so in order not to mix up calculation of interest for the loan. I doubt such bare assertion very much.

(c)   Mr. Lai had reservation over 3 further pages of document, pages 37, 38 and 39.  In short, he said that, by Chinese accounting convention and practice, transaction proof needed contemporaneous supporting documents to be attached.  Madam He agreed, but went on to say that there were exceptions.  She tried to justify by explaining that documents of proof could be located elsewhere, paper adjustment required no proof, and so forth.  Without any disrespect to Madam He, Mr. Lai’s opinion is more convincing to me.  One certainly needs supporting documents to verify the correctness or incorrectness of an accounting entry, and it is particularly important when the authenticity of those entries are in dispute. Regrettably, Madam He was not available before this Court to justify the preparation of the accounts.

17.  Second, my attention was drawn to the result of HCCW 504/2005.  On 30 May 2007, by a judgment of Mr. Recorder Ambrose Ho, SC, Mr. Leung’s petition to wind up Fansway was successful in that the learned Recorder agreed to order the Defendant and Mr. Wong to purchase his shares.  The Judge accepted that parties had legitimate expectation to participate in the management of Fansway, Bao Feng and a factory in PRC.  The argument that the Plaintiff had been making secret profit and agreed voluntarily to resign from management was rejected. While the issues at that action were different from those of the present one, one can understand how the matter has been developing.  One important and relevant point to remember is that the Plaintiff’s version of pages 41 and 42 was deployed in HCCW 504/2005 and they were accepted and unchallenged by all the parties therein.

18.  Finally, I agree that the case of the Plaintiff is relatively straight forward when that of the Defendant is inherently less probable.  As pointed out by Mr. Chan in his paragraph 19(1) of Closing Submission:

“(1) He has changed his story from one of Profits Share of Fansway’s profits, to the New Story of Advance Payment of Baofeng’s Dividents, not by Baofeng, but by Mr. Leung on Baofeng’s behalf, in effect eulogizing Mr. Leung’s Generosity with dividends, when in the previous Petition Proceedings, he criticized Mr. Leung’s Secrecy with Baofeng’s dividends;”

Conclusion

19.  To conclude, I will make the following orders.

(a)   Regarding the summons for expert directions:

(i)   Paragraphs 1 and 2 of my order of 28 January 2011 herein are set aside;

(ii)   The Plaintiff’s Witness Statement of Lai Tung Fong do take effect as a witness statement containing expert opinion, and the Plaintiff do have leave to call Lai Tung Fong as an expert on the accounting practices in Mainland China and as a professional accountant qualified to practice in Mainland China, pursuant to O.38 r.37 RDC;

(iii)   The Defendant’s Supplemental Witness Statements He Weiqing filed on 10 February 2009 and 28 October 2009 do take effect as witness statements containing expert opinion, and the Defendant do have leave to call Madam He Weiqing as an expert on the accounting practices in Mainland China, pursuant to O.38 r.37 RDC;

(iv)   Costs of the application are in the cause.

(b)   As to the summons for amendment:

(i)   The Plaintiff do have leave to amend the name of the Defendant on the Writ of Summons dated 30 July 2005 by adding to it, “also known as Fan Ao Ieong”, pursuant to O.20 r.5(2) and (3) RDC;

(ii)   Costs are in the cause.

(iii)   Filing and service of the Amended Writ are dispensed with and all other documents having filed with the Court so far are deemed to have been duly amended accordingly.

(c)   The proceedings herein:

(i)   The Defendant do pay the Plaintiff the sum of $1m together with interest at 8.245% per annum from 30 July 2005 until judgment, and thereafter at judgment rate until payment.

(ii)   The Defendant also pay the Plaintiff costs of the proceedings, including Certificate for Counsel for hearings on 29 and 30 March 2011, on District Court scale, party-and-party basis, summarily assessed at $581,740.