CHAN LUEN YAN AND OTHERS v. GOLDSFINE DEVELOPMENT LTD

HCA 3021/2016

[2018] HKCFI 1212

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3021 OF 2016

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D E C I S I O N

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1.  On 23 November 2017 Master Michelle Lam struck out the statement of claim with costs on the ground that it disclosed no reasonable cause of action. She gave the plaintiffs 14 days to apply to file a fresh statement of claim. She also dismissed the plaintiffs’ summons for summary judgment with costs. The plaintiffs now appeal. They seek to overturn Master Lam’s order and have summary judgment on their claims.

The statement of claim

2.  The statement of claim pleaded two alternative claims.  The first claim is for repayment of shareholders’ loans.  The alternative claim is for unjust enrichment.  

(1)  The first claim pleaded that the defendant was a Hong Kong company which acted as an investment vehicle holding the balance of the sale proceeds of two properties. 

(2)  The 1st, 2nd and 3rd plaintiffs had become shareholders of the defendant on 12 June 1998, 14 March 2011 and 8 December 1999 respectively.  All of them then ceased to be such shareholders on 2 June 2016. 

(3)  There was a shareholders’ loan agreement made between the 1st plaintiff, the defendant and some other persons providing that the proceeds of sale of the said properties, less two sums totaling HK$28.7 million, be injected into the defendant as shareholders’ loans and the loans be attributed to the shareholders in proportion to their shareholding in the defendant. 

(4)  The agreement further provided that upon transfer of the shares in the defendant, the shareholders’ loans or the balance thereof had to be transferred together with the shares. 

(5)  The amounts of shares in the defendant as held by the three plaintiffs were then pleaded.

(6)  There were also three confirmations of amount due dated 17 April 2012 and issued by a firm of accountants engaged by the defendant to audit its accounts.  The confirmations confirmed that the amounts of shareholders’ loans due to the 1st, 2nd and 3rd plaintiffs were HKD862,848.72, HKD647,136.55 and HKD2,148,493.30 respectively.

(7)  The defendant was and remains indebted to the plaintiffs in the said due sums as at the date of the statement of claim.

(8)  The alternative claim pleaded that the defendant was unjustly enriched as the defendant had received valuable benefits equivalent to the said loans which belonged to the plaintiffs.  There was a close casual connection between such benefits to the defendant and the plaintiffs’ loss of the said sums.  The defendant was thus unjustly enriched at the plaintiffs’ expense.

(9)  Finally, the plaintiffs pleaded that despite repeated demands by letters from their solicitors, the defendant has not repaid the due amounts to each of the plaintiffs.  The plaintiffs also claim interest on the said sums. 

The striking out decision

3.  Mr Leung, counsel for the defendant submitted before the Master that the first claim for repayment of loan was defective.  The reason being that it only stated the background facts, the making of shareholders’ loans by the plaintiffs and the plaintiffs having ceased to be shareholders of the defendant.  But it did not state the material facts showing the exact time when the defendant became liable to repay the loans and how such liability to make immediate repayment had arisen.  Master Lam agreed with him.

4.  Mr Lam, counsel for the plaintiffs referred to Chitty on Contracts §39-267 and submitted that when money lent without any stipulation on the date of repayment, a present debt is created which is generally repayable immediately without previous demand.  Hence, the statement of claim, which pleaded the shareholders’ loans and the defendant’s failure to repay the same, is sufficient for claiming a repayment of debt.

5.  Master Lam disagreed with Mr Lam and held that the absence of pleading to the effect that “the loan was without stipulation as to time of repayment and hence repayable without previous demand” had made the statement of claim incomplete on the factual basis.  Master Lam further said that it was only when Mr Lam had provided his written submissions that the defendant was aware of the plaintiffs’ case that “repayment was to be immediate because of the lack of stipulation of repayment date in the loan agreement”.

6.  Regarding the alternative claim of unjust enrichment, Master Lam also agreed with the defendant that there was no pleading of why the enrichment to the defendant was unjust. 

7.  For the above two reasons, Master Lam struck out the statement of claim and dismissed the plaintiffs’ summons for summary judgment but gave the plaintiffs 14 days to apply to file a fresh statement of claim.

8.  In fact, if Mr Leung was right that the claim for repayment of loans was defective for not having pleaded that “there was no agreed repayment date which made the loan immediately repayable”, such alleged omission could be made good by a simple amendment there and then instead of having this part of the statement of claim to be struck out.  If the amendment should indeed be necessary, the claim for summary judgment should of course be adjourned to a future date for the plaintiffs to verify the statement of claim as amended. 

9.  The same can also be done for the alternative claim of unjust enrichment which is indeed defective for want of any pleading on why the defendant’s enrichment was unjust. Amendment to this claim was indeed proposed by Mr Lam on the day of the appeal at my suggestion and Mr Leung also accepted that the amendment had supplied the unjust element for this claim which was thus made proper. 

The plaintiffs’ argument on appeal

10.  Mr Lam on appeal reiterated his submission that it was not necessary to plead that “there was no agreed repayment date which made the loan immediately repayable” and such omission did not render the statement of claim defective. 

11.  I note that the statement of claim in gist has pleaded the existence of the loans as confirmed by the three confirmations, that the defendant remained as at the date of the statement of claim indebted to the plaintiffs in the said due sums, and that despite repeated demands, the defendant still did not repay the due amounts to each of the plaintiffs.

12.  Mr Lam also drew support from the drafting precedents in form 14-E1 of Bullen & Leake & Jacobs (14 ed), form 72 of Vol. 1 and form 22 of Vol. 27 of Atkin’s Court Forms and form 49 of Atkins’ Court Forms Hong Kong Vol. 4. These precedents all plead the lending of money, the defendant remains indebted to the plaintiff and ends with a prayer for repayment.  There is in all these precedents no pleading on the agreed repayment date or that such date had not been agreed. 

The defendant’s arguments in opposition

13.  Mr Leung however submitted that this claim for repayment of loan is bad and it was right to have it struck out.  He submitted that this claim when read objectively is not a claim for immediate repayment of loans because it has pleaded to a number of facts which are unnecessary for a claim for repayment of loans. 

14.  Mr Leung submitted that the claim pleaded that a shareholder, upon assigning the shares, had the obligation to assign the loan together with the shares.  It also pleaded that the plaintiffs have ceased to be shareholders of the defendant on 2 June 2016. A reasonable reading of this claim therefore gave the understanding that the basis of the claim is the cessation of the identity of shareholder of the defendant.  The omission of pleading on the agreed repayment date or absence of such date is consistent with the possibility that the plaintiffs are not suing on the basis that the loans are per se repayable immediately.  Hence, Mr Leung maintained that this part of the statement of claim should be amended to plead that there was no agreed repayment date.

Analysis and decision on the striking out of the repayment claims

15.  I do not agree with Mr Leung.  The claim clearly says that the shareholders’ loans are due.  Hence, the plaintiffs ask for their repayment.  The pleading that the plaintiffs have ceased to be shareholders of the defendant cannot make the loans unrepayable or delay the repayment date.  Nowhere in the statement of claim does it suggest that the defendant should make repayment because the plaintiffs have ceased to be shareholders of the defendant.

16.  I am also of the view that the omission to plead “the agreed repayment date or that there is no such date” does not make the statement of claim defective.  Since the claim for repayment has pleaded the existence of the shareholders’ loans and that they are due, it is in order.  I do not think this part of the statement of claim should be struck out for disclosing no reasonable cause of action. 

17.  In the premises, I will allow the appeal in relation to the striking out of the claim for repayment of shareholders’ loans and restore this claim.  I now consider whether summary judgment should be given for this claim for repayment of loan. 

Summary judgment for the repayment of loan claim

18.  §17(1) of the defence admits that the three loans are “due” to the plaintiffs.  I think the use of the word “due” is a mistake and the word intended should be “owed”.  The reason being that the tenor of the defence is to refuse repayment.  I take §17(1) to mean that the three loans are owed to the plaintiffs but not due for repayment yet. 

19.  The gist of the defence is that there was an agreement made by the defendant’s shareholders.  A copy of it has been exhibited.  The defendant is not a party to it.  It provided that the loans could not be repaid on arbitrary demand save with the approval of the defendant’s board of directors and that there is no such approval from the defendant’s board.  Hence, the loans are not due to be repayable. 

20.  Mr Leung has tried to run an argument that the shareholders’ loans were equity of the defendant.  But he expressly abandoned such argument for the purpose of this appeal.  He instead relied on a Court of Appeal decision in Dawkins Ltd. v Source Holdings Ltd.  CACV 73/2000 (18 May 2000).  In that case, there was an alleged agreement between the shareholders providing that there would be no repayment of the shareholders’ loans without the consent of all the shareholders.  However, the shareholders’ loans were dealt with by loan agreements made between the lenders and the borrowing company.  Such agreement provided that repayment of the loan and interest thereon in whole or in part would be made in such manner as mutually agreed by the lender and borrower concerned.  The Court of Appeal said that it remained to be decided was whether there was a collateral agreement involving a collateral shareholders’ agreement and whether the collateral shareholders’ agreement involved all three shareholders and what the correct construction of that agreement.  Thus, the defendant company was given leave to defend the claim for repayment.

21.  Mr Lam on the other hand relied on the Court of Appeal’s decision in David Yuk Wah Ho v Gao Jiaren also known as Gao Kun also known as Karl Golden and Anor CACV 164/1999.  The court comprised of Both Rogers, JA (who also sit in Dawkins Ltd v Source Holdings Ltd) and Cheung JA.  Both learned judges referred to the English decision of Welton v Saffey [1897] A. C. 299 at 331.  That case held that a shareholders’ agreement only creates personal obligations against the shareholders themselves and not become a regulation of the company. 

22.  Rogers, JA said at p. 8:

“23. It is said that the Joint Venture Agreement to which Mr. Gao, Carnation and later Mr. Ho and Miracle were signatories, somehow affect the powers of Miracle. In my view, this is a misconception. The point was clearly and succinctly dealt with by Lord Davey, in his speech in the House of Lords in Welton v. Saffery [1897] A.C. 299 at p. 331 when he said: -

‘Of course, individual shareholders may deal with their own interests by contract in such way as they may think fit. But such contracts, whether made by all or some only of the shareholders, would create personal obligations, or an exceptio personalis against themselves only, and would not become a regulation of the company, or be binding on the transferees of the parties to it, or upon new or non-assenting shareholders.’” (Emphasis added.)

23.  Mr Leung asked me to follow the Court of Appeal’s decision in Dawkins Ltd v Source Holdings Ltd. But in that case, the facts are not the same as in the present case.  There was also a loan agreement made between each lender and the borrowing company which provided that the loan was only to be repaid by the mutual agreement of the lender and borrower.  The Court of Appeal in that case also did not discuss the law on shareholders’ agreement as it did in Dawkins Ltd v Source Holdings Ltd.  I therefore follow David Yuk Wah Ho v Gao Jiaren.  I also point out the doctrine of privity of contract is against the defendant.  The Contracts (Rights of third Parties) Ordinance has only come into operation on 1 January 2016 and cannot assist the defendant either. 

24.  Since the defendant cannot get the benefit of the shareholders’ agreement which provided that the loans could not be repaid on arbitrary demand save with the approval of the defendant’s board of directors, the defendant has no defence to this claim.

25.  Furthermore, there is no dispute that the plaintiffs’ shares in the defendant were in fact sold to the defendant by order of Barma J (as he then was) in HCCW 211/2007.  Mr Lam submitted that the plaintiffs’ demands for repayment of the loans are reasonable and not arbitrary.  Since the plaintiffs do not have any more interest in the defendant and the loans are interest free and without any fixed term of repayment (as stated in the defendant’s audited accounts), there is no reason why the defendant should be allowed to keep the loans for its own use and contrary to the will of the plaintiffs.  The demands for repayment are therefore reasonable and not arbitrary and no approval of the defendant’s board of directors would be required for repayment. 

26.  Mr Leung however argued that the provision on repayment only with approval of the defendant’s board should be interpreted to the effect that if the defendant’s board should approve of the repayment, then the demands would be reasonable.  If the approval should be withheld, then the demands are arbitrary. 

27.  I disagree with Mr Leung’s interpretation of the provision in the shareholder’s agreement.  I cannot see how the reasonableness or otherwise of a demand for repayment can be determined by the defendant’s board.  It is something to be decided objectively.  I agreement with Mr Lam.  Therefore, I would give summary judgment to the plaintiffs on this further ground that the demands are reasonable and not arbitrary and the approval from the defendant’s board is not required.

28.  Though the unjust enrichment claim is defective, it could have been made good by a simple amendment to the effect that it was unjust for the defendant to hold on to the loans which are interest free and without fixed term of repayment as the plaintiffs are no longer shareholders of the defendant and have no interest in it.  To allow the defendant to keep the loans at the plaintiffs’ expense is unjust to the plaintiffs and to enrich the defendant unjustly.  But even if the unjust enrichment claim is defective, it was not necessary to have it struck out as summary judgment should have been given under the claim for repayment. 

29.  In the premises, I allow the appeal and give summary judgment to the plaintiffs for the sums of HKD862,848.72, HKD647,136.55 and HKD2,148,493.30 respectively.  I also order that interest to accrue on the said sums at the rate of 1% over the Hong Kong Dollar prime rate from the date of the writ of summons to the date hereof.  I also make a costs order nisi that the defendant do pay the plaintiffs the costs of the action including the costs of the hearing below and on appeal.