STARLIGHT ELECTRONICS COMPANY LIMITED v. THE OFFICIAL SOLICITOR appointed by the Order of Master Cheung dated the 2nd day of December 1993 to represent the estate of TAM CHUNG SHING (Deceased)

1993, Nos.A6501,

A6502 and A6503

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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1993, No.A6501

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J U D G M E N T

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1. The three consolidated actions arose out of the relationship between Mr Tam Chung Shing ("the deceased") and the companies in a group ("the Group") headed by Starlight International Holdings Limited which is a company listed in Hong Kong. The following companies are and were at all material times members of the Group:

(a) Acme Delight Limited ("ACDL");

(b) Acme Luck Limited ("ACLL");

(c) Surearn Industries Limited ("Surearn") which in April 1992 changed its name to Korrigan Industrial Holdings Limited ("KIHL");

(d) Korrigan Electronics Limited ("KEL"), a wholly owned subsidiary of KIHL; and

(e) Starlight Electronics Company Limited ("SECL").

2. ACDL and ACLL are the plaintiffs in Action No. A6501 of 1993, claiming mainly for the transfer of 7,500,000 shares in KIHL held in the name of the deceased. SECL is the plaintiff in Action No. A6502 of 1993, claiming for the repayment of a loan of $2,000,000 advanced to the deceased. KEL is the plaintiff in Action No. A6503 of 1993, claiming for the repayment of a loan or salary advanced to the deceased.

3. In early 1991, the deceased approached Mr Philip Lau, the chairman of the Group, with a view to setting up a joint venture to establish a television ("TV") factory. The deceased was known to be very experienced in the field. The negotiations with the deceased for the joint venture were conducted by Mr Philip Lau and Mr Yung Wai Tak, the Group general manager, on behalf of the Group. Eventually, agreement was reached for the purpose of carrying out the following objects:

(a) a company was to be formed or acquired for carrying out the joint venture;

(b) the deceased was to become a 30% shareholder of the new company;

(c) the deceased's contribution towards the purchase of the 30% shares would be lent by the Group to him;

(d) the deceased was to be the managing director of the new company; and

(e) if the deceased failed to continue to work for the new company, the Group would be able to acquire his 30% shares, the price of which would be set off by the loan.

4. The objects were carried out by two agreements, a Loan Agreement and a Service Agreement, both of which were signed on 26 May 1991.

5. The Loan Agreement was entered into between the deceased as the borrower and ACDL and ACLL as the lenders ("the lenders"). The parties thereto agreed to acquire Surearn for the purpose of carrying on the business of a manufacturer of TV sets. The ratio of holding in Surearn was to be 30% by the deceased and 70% by the lenders. The deceased agreed to serve Surearn as its managing director. The lenders agreed to lend the deceased a sum of $7,500,000 for the allotment to him of 7,500,000 shares in Surearn at $1 each, free of interest. The loan should be applied only by the deceased towards the payment by him for his allotment of shares in Surearn and the lenders should pay the amount of the loan to Surearn on his behalf.

6. There were other relevant terms of the Loan Agreement. Clause 3 entitled "REPAYMENT" provides as follows:

"(1) The Borrower shall repay the loan or outstanding balance thereof on or before the 31st December 1993 (hereinafter called 'the due date') and repayment in whole or in part may be made.

(2) The dividend of the Company (i.e., Surearn) attributable to the Borrower shall be withheld and be paid to the Lenders towards repayment of the loan or outstanding balance thereof PROVIDED that in the event that the dividend attributable to the Borrower be less than the Borrower's share of the net profit of the Company as hereinafter defined the Borrower shall be deemed to have repaid an amount equivalent to the Borrower's share of the net profit of the Company notwithstanding that the dividend shall be less than such amount.

(3) The Borrower's share of the net profit of the Company shall be the percentage of the Borrower's shares in the Company applied to the net profit of the Company after allowance for tax but not provisional tax. The net profit of the Company as provided for herein shall be determined by the auditor of the Company on a half-yearly basis on the 30th June and 31st December of each year.

(4) Save as provided for in this Agreement the Lenders shall not be entitled to apply any amount or money's worth due from the Company to the Borrower in repayment of the loan or the outstanding balance thereof or otherwise set-off any amount or money's worth held by him against the loan or the outstanding balance thereof."

7. Clause 4 entitled "SALE OF SHARES" provides as follows:

"(1) The Borrower shall be entitled to sell his entire shareholding in the Company (i.e., Surearn) to the Lenders by giving notice in writing of such desire to the Lenders whereupon the Lenders shall purchase the Borrower's entire shareholding in the Company free from incumbrance at a price to be valued by the auditor of the Company (acting as an expert and not an arbitrator) based on the net asset value of the Company less ten percent discount or at par value whichever is the higher. A certificate signed by the auditor as to the price based on net asset value shall be final.

(2) The Lenders shall be entitled to set-off thereof any amount due from the Borrower on the loan or the outstanding balance against the purchase price payable by the Lenders.

(3) The Lenders shall pay the par value of the shares or the balance thereof, if any, after set-off as provided above within 7 days after receipt of the notice and any excess of the purchase price, if any, upon the receipt of the auditor's certificate which shall be obtained within 30 days after receipt of the said notice.

(4) The transfer of the shares shall be completed (that is to say the duly executed transfer together with the share certificates shall be delivered to the Lenders) at the registered office of the Company upon receipt by the Borrower of the par value of the shares or the balance thereof.

(5) The Borrower shall be deemed to have given notice under this clause and the Lenders shall purchase the Borrower's entire shareholding in the Company as provided in this clause in the following events:

(a) ...

(b) the Borrower shall cease to be managing director of the Company; and

(c) ..."

8. On the other hand, the Service Agreement was entered into between Surearn and the deceased, whereby the deceased was employed as its managing director for the purpose of setting up the TV manufacturing operation and to manage the business. The term was fixed for three years commencing on 1 March 1991 until 28 February 1994, and thereafter determinable by either party giving the other six months' notice in writing.

9. Clauses 11(1) and 12(1)(f) are relevant. Clause 11(1) provides that

"If the director (i.e., the deceased) shall at any time be incapacitated or prevented by illness, injury, accident or any other circumstances beyond his control (such incapacity or prevention being hereinafter referred to as the incapacity) from discharging in full his duties hereunder for a total of thirty or more days in any twelve consecutive calendar months the company (i.e., Surearn) may by notice in writing to the director given at any time so long as the incapacity shall continue (a) discontinue payment in whole or part of the said salary on and from such date as may be specified in the notice until the incapacity shall cease or (b) (whether or not payment shall already have been discontinued as aforesaid) determine this agreement forthwith or on such date as may be specified in the notice. Subject as hereinafter provided the said salary shall notwithstanding the incapacity continue to be paid to the director in accordance with clause 8 hereof in respect of the period of incapacity prior to such discontinuance or determination."

10. Clause 12(1)(f) provides that the Service Agreement may be terminated forthwith by Surearn without prior notice if the deceased shall at any time

"become permanently incapacitated by accident or ill-health from performing his duties under this agreement and for the purposes of this sub-clause incapacity for three consecutive months or for an aggregate period of four months in any period of twelve months shall be deemed to be permanent incapacity."

11. Although the Loan Agreement and the Service Agreement were both dated 26 May 1991, in fact the joint venture was put into effect about two months earlier, for the Service Agreement provided for the commencement of the deceased's service as the managing director of Surearn on 1 March 1991. According to Mr Yung Wai Tak, who testified before me, the deceased was already working for Surearn in March 1991 and he was paid the salary as prescribed in the Service Agreement since March 1991. While the Loan Agreement made provisions for various dates of the allotment of various lots of shares in Surearn to the deceased, those dates were not followed by the parties and the deceased was allotted all his 7,500,000 shares on 31 July 1991. The price therefor, i.e., $7,500,000, was paid by the lenders as agreed.

12. Everything went on reasonably well, albeit Surearn did not make any profit for the year ended 31/3/92 because sizable sums had been expended for the purpose of setting up the operation and business.

13. The deceased did not make any repayment towards the loan of $7,500,000. On 26/7/92, the deceased was admitted into the Hong Kong Sanatorium for an operation; he was suffering from stomach cancer. Although there was no provision in the Service Agreement that KIHL should pay the deceased's medical expenses, it paid them. The underlying reasons for the generosity was explained by Mr Yung. The deceased was not only the moving force in KIHL, but most of the senior staff of KIHL were his own former employees or colleagues who had all been brought in by him to work for KIHL. Apart from the $25 million invested as share capital of KIHL, the Group had also spent at various times sums between $50 million and $100 million for establishing KIHL. The Group decided that the best medical treatment should be given to the deceased at its expense so that he would recover soon and return to work for KIHL. This move might also endear the senior management of KIHL who were brought in by the deceased to work there.

14. Mr Yung told me that the doctor who was in charge of the operation was renowned in the field of stomach cancer and Mr Yung learned that the operation was very successful. The deceased was discharged from the Sanatorium on 7/8/92 and he thereafter stayed home to convalesce.

15. Mr Yung paid a number of visits to the deceased at his home. Around the end of September 1992, the deceased raised the question of borrowing money with Mr Yung. He told Mr Yung that he should start enjoying life more. He was then living in rented accommodation, and even that was a very small flat. He asked the Group for a loan so that he could buy a larger flat and he could buy a house in the United Kingdom for his son and daughter. His son had just started working as a trainee after graduation from university. The deceased was quite persistent and gave Mr Yung the impression that he would be rather desperate without a loan.

16. After some negotiations, the Group agreed to lend him a sum of $6,000,000. Mr Yung expected that the deceased would recover and return to work in KIHL soon. The business of KIHL was picking up and the deceased's service as its managing director was virtually indispensable. After all, the Group had invested substantially in the venture and had already lent quite a considerable sum to the deceased, i.e., the $7,500,000 for the shares. The deceased was being paid $120,000 a month, and he would continue to enjoy that salary unless his services, which were virtually indispensable, were terminated. Termination was, at the time, not contemplated at all. The $6 million was lent to him in the following manner, and the advances made to the deceased or paid as directed by him were all evidenced by contemporaneous documents:

(a) $1 million paid by SECL on 27/10/92 as loan;

(b) $2 million paid by KEL on 28/10/92 as advanced salary;

(c) another $2 million paid by KEL on 7/11/92 as advanced salary; and

(d) $1 million paid by SECL on 12/12/92 as loan.

17. The two sums of $1 million totaling $2 million are the subject matter of the claim in Action No. A6502 of 1993, while the $2 million advanced on 28/10/92 by KEL forms the subject matter of the claim in Action No. A6503/93. The other $2 million paid by KEL on 7/11/92 as advanced salary was paid into the account of one Pausa Electronics (H.K.) Limited at he request of the deceased, and this sum is the subject matter of High Court Action No. A6500 of 1993, which is not before me, because another party other than the deceased, i.e., Pausa Electronics, is involved.

18. The deceased was, however, admitted into hospital again on 22 November 1992, and this time the Hong Kong Baptist Hospital. The Group or KIHL kept on paying his medical expenses and reimbursing his elder brother who had the medical bills settled first and produced them for reimbursement by the Group, until late December 1992. At that time, Mr Yung learned that the deceased's disease would not be cured, although he was still expected to be able to live for about three more years. The payment of the deceased's salary continued also till December 1992.

19. In late January 1993, Mr Yung learned that the deceased's condition had turned to the worst. He was not expected to be well enough to return to work. The prospect of the deceased repaying the loans, now totalling $13.5 million (i.e., $7.5 million for the shares plus the $6 million loan) looked extremely dim. The Group started to stall the reimbursement of the deceased's further medical expenses. KIHL also withheld his year-end double pay for 1992 and his salaries from January 1993 onwards which, together with some disbursements due to him, amounted to $486,115.55.

20. On knowing that the deceased was getting dangerously ill in early March 1993, KIHL used its powers under clauses 11(1) and 12(1)(f) of the Service Agreement to serve on the deceased a notice of termination of the Agreement. The notice, which was dated 8/3/93 to determine the Agreement with effect from that date, was given by Mr Yung personally to the deceased. The deceased was also asked to make plans for repayment of the $6 million loan, but he did not suggest anything save to say that he would think about it. The deceased was asked then or shortly after to transfer his 7,500,000 shares in KIHL to the lenders, but before the transfer forms therefor left by Mr Yung with the deceased were executed, the deceased died on 17/3/93.

21. It was not, and I think cannot be, disputed that the deceased had not repaid a cent in cash of the $7.5 million loan which was used for the allotment of 7,500,000 shares in KIHL to him. Clause 4(5) of the Loan Agreement clearly provides that he was deemed to have given a notice to sell the shares to the lenders if he ceased to be the managing director of KIHL. Upon such an event, the lenders were entitled to set off the loan or such part thereof as remaining unpaid against the purchase price for the shares.

22. A number of issues were raised by Mr Albert Yau for the deceased in respect of the price payable by the lenders, and whether the loan of $7.5 million had been repaid partially. He submitted that the lenders should not be entitled to the transfer of the shares as they had not paid the full price for the shares.

23. According to clause 4(1), the price of the shares was to be the higher of the par value (which was $1 per share) or the net asset value per share of KIHL less a 10% discount. Mr Victor Ng Chi Keung, the senior auditing manager of Deloitte Touche Tohmatsu which was the accountant and auditor of KIHL and the Group ("the auditor"), produced two documents (exhibits P1(A) and (B)) to show that the net asset value of a share in KIHL as at 8/3/93 and 31/3/93 was less than the share capital. Mr Ho submitted on behalf of the plaintiffs that the price was therefore at par which was higher than the net asset value. Mr Yau, on the other hand, argued that the net asset value of KIHL should be calculated by some other methods and not simply by that used by the auditor in compiling its certificates, which were mainly based on the audited accounts of KIHL as at 31/3/93. Mr Yau suggested that the items of raw materials and work in progress should not have been valued at cost but should have been assessed at the actual value at the relevant time. The argument was based on the financial statements forming part of the 31/3/93 accounts, in which the auditor stated:

"Stocks are stated at the lower of cost and net realisable value. Cost, which comprises direct materials and, where applicable, direct labour costs and those overheads that have been incurred in bringing the stocks to their present location and condition, is calculated using the weighted-average method. Net realisable value is determined by reference to the actual or anticipated selling price less the cost to complete production and costs of selling and distribution."

24. However, Mr Ng told me categorically that the accounting principles and policies adopted for the writing of the accounts were generally accepted as applicable in Hong Kong to a company like KIHL. Clause 4(1) of the Loan Agreement stated very clearly that the shares of the deceased were to be sold "at a price to be valued by the auditor of the Company (acting as an expert and not an arbitrator) based on the net asset value of the Company less ten percent discount or at par value which is the higher." It must have been within the contemplation of the parties to the Loan Agreement and therefore intended by them that the method of valuation adopted by the auditor of KIHL would be acceptable for the purpose. The auditor used the accounts audited by it to arrive at the net asset value of the company, and such accounts were drawn up in accordance with generally accepted accounting principles and policies. It was not to be an arbitrator between the parties. Although clause 4(1) provided that the auditor's certificate was to be final on the net asset value, I think it prudent not to rely on the sub-clause as binding on the parties because the time prescribed in clause 4(3) for obtaining it was not complied with. However, insofar as the auditor used its expertise in arriving at the net asset value, I must say that the court should not interfere where the parties had agreed. Nor do I see any abnormality or objectionable feature in the circumstances in the auditor using the audited accounts as the basis. I therefore find and rule that the price for the deceased's shares were and should be at par value, which is $1 per share.

25. Mr Yau further argued that there must have been a partial repayment of the loan. He relied on clause 3(2) and (3) of the Loan Agreement to say that the net profit of KIHL must mean the net profit for the year or a fixed period of the year. "Net profit" must be different from "accumulated profit" or "retained profit" or else those other terms would have been used in the Loan Agreement.

26. The balance sheet of KIHL as at 31/3/92 showed a loss of $164,670. There were no consolidated accounts for the same period. The consolidated accounts made up to 31/3/93 showed that KIHL had two wholly owned subsidiaries. There was a consolidated profit of $6,939,256 for the period between 1/4/92 and 31/3/93 whereas there was a consolidated loss of $6,316,967 for the period between 19/2/91 and 31/3/92. The retained or accumulated profit for the year ended 31/3/93 was therefore $622,289 ($6,939,256 - $6,316,967). Apart from recording the loss for the previous year at $164,670 for KIHL itself, the accounts also showed that it had sustained a further loss in the year ended 31/3/93 in the amount of $51,440.

27. Mr Yau submitted that the consolidated profit of $6,939,256, without taking into account the accumulated loss, should be taken as the net profit under clause 3(2) and (3). 31/3/93 was just a few weeks after 8/3/93 when the deemed sale of the shares took place. Using 31/3/93 as the applicable date, the net consolidated profit of $6,939,256 for the year ended on 31/3/93 should be taken into account as the basis for calculating the net profit attributable to the deceased which would by virtue of the proviso to clause 3(2) apply towards the repayment of the loan of $7.5 million. Thirty percent of the net profit attributable to the deceased's 30% shares in KIHL would mean that a sum of $2,081,777 should have been deducted from the loan. Alternatively, so Mr Yau argued, even if the net profit should be the accumulated net profit after taking into account all the losses, historical or otherwise, a sum of $622,289 (i.e., $6,939,256 - $6,316,967, the accumulated losses) should be used as the basis, reaching a sum of $186,687 of net profit attributable to the deceased. At least this sum should have been deducted from the loan. One way or another, the argument continued, the lenders had so far not paid either the sum of $2,081,777 or $186,967 to the deceased as the balance of the purchase price for the shares upon the notice of termination of the Service Agreement being given, which gave rise to the operation of the deemed notice given by the deceased to sell the shares under clause 4(5) of the Loan Agreement. The lenders therefore must fail because they were making a proprietary claim for the shares and insofar as they had not fulfilled their part of the bargain under clause 4(3) of the Loan Agreement to pay the balance of the purchase price due, they had no right to the shares.

28. The line of arguments raised by Mr Yau must be examined closely against the wording and scheme of various sub-clauses of clause 3. Sub-clause (1) allowed the deceased to make partial or full repayment by 31/12/93. As the loan was interest-free, the deceased was allowed to hold the shares without any obligation to repay the loan used for purchasing the shares up till 31/12/93. If during the interval, the TV manufacturing business was a success and KIHL made profits, then he would be able to reap the profits without any capital outlay. At the same time, while he was working as the managing director of KIHL, he was paid a reasonably handsome salary. That was the incentive offered by the Group and accepted by the deceased. As I see it, clause 3(1) was included by the deceased's solicitors who drafted both the Loan Agreement and the Service Agreement for his benefit. On the other hand, clause 3(2) proper (i.e., excluding the proviso), viewed with clause 3(4), was clearly for the benefit and protection of the lenders. Under sub-clause (2) proper, if any dividend was attributable to the deceased in KIHL, the dividend would be withheld for the purpose of off-setting the loan. That means, the deceased was not allowed to collect any profit earned by KIHL in the interim before 31/12/93 or before the loan was fully repaid.

29. The proviso to sub-clause (2), however, protected the deceased, for if the dividend attributable to him under sub-clause (2) proper was less than the net profit of KIHL, the deceased was entitled to have such net profit as was attributable to him applied to off-set the loan. This was to avoid the other shareholders and directors of KIHL who belonged to the Group (who formed the majority) declaring a very small dividend, or a dividend which only partially reflected the net profit. On this basis, Mr Yau argued that the meaning of the term "dividend attributable to the borrower" must include either dividend declared and dividend undeclared but capable of being declared. Insofar as there was net profit, then regardless whether a dividend was declared by KIHL, the proviso to sub-clause (2) came into operation, which also brought into operation sub-clause (3). Sub-clause (3) made provision for the auditor's determination as to what was the net profit for a half-yearly period ending on 30 June or 31 December. Even if there was no interim account showing the net profit as at 30/6 or 31/12, so Mr Yau argued, insofar as there was any account, yearly based or 6-monthly based, the reduction of the loan by the deceased's 30% share in the net profit shown on such account would be automatic.

30. KIHL, or Surearn as it was formerly called, adopted Table A of Schedule I of the Companies Ordinance, Cap. 32 for its articles of association. Articles 115, 116 and 117 deal with dividends. Under those articles and by virtue of Part IIA of the Companies Ordinance, dividends can only be payable out of accumulated, realised profits. If Mr Yau is right in the most ambitious of his arguments, namely, $6,939,256 should be the net profit of KIHL, then all the losses of KIHL would have to be ignored. The profit of $6,939,256 could not be the distributable profits of KIHL and its subsidiaries. The argument therefore flies in the face of the statutory provisions and KIHL's articles of association.

31. Both of the terms "dividend attributable" to the deceased and "the net profit" were used in clause 3(2). They appear together for the purpose of comparison as to the amount. They must therefore be read together so as to resolve any possible inconsistency or conflict in the context of the sub-clause. Net profit will come into play when it is more in amount than the dividend attributable, and the proviso was incorporated for this eventuality. If Mr Yau is right that net profit excludes losses being taken into account, then it would invariably be the case that the attributable dividend must be less than the net profit. The eventuality postulated in the proviso would therefore be futile, for it would be a certainty.

32. Looking at clause 3(2) and (3) from another angle, unless the attributable dividend is based on the profit of the same half-yearly period as the period by which the net profit is to be determined by the auditor, then there can be no comparison like with like. How is it possible, for example, to compare the attributable dividend based on a set of accounts for a half-yearly period written up to 31 March with the net profit for another half-yearly period based on accounts written up to 30 June? I do not know.

33. For the above reasons, I reject Mr Yau's submission that $6,939,256 was the net profit under clause 3(2) and (3) of the Loan Agreement.

34. Mr Yau's alternative submission that the net profit must mean the consolidated retained or accumulated profit, i.e., $622,289, accords better with sense in the circumstances of the facts. KIHL lent almost all if not all of its capital of $25 million to its subsidiaries. It was just a holding company whereas its two wholly owned subsidiaries were making and selling TV sets, from which the profits were derived. It sounds against good reason that the subsidiaries' profits should not be taken into account in arriving at the net profit of KIHL. I therefore hold that the net profit of KIHL should be $622,289 as at 31/3/93, to which date the consolidated accounts of KIHL were written up.

35. The matter does not end there. The question to be decided is whether the deceased was entitled to have 30% of this $622,289, namely, $186,687, treated as having reduced his loan by the same amount. I accept Mr Yung's evidence that at no time did the deceased ask for a valuation or a determination of the auditor in respect of the net profit of KIHL. The consolidated account of KIHL as at 31/3/93 was only available on 28/7/93. What Mr Yau suggested is to the effect that when this set of accounts became available, automatically the loan owed by the deceased would be reduced by the sum of $186,687. No where in the Loan Agreement was there any express provision to this effect. Clause 3(2) and (3) only provided that in case the dividend attributable to the deceased was less than the net profit, the deceased should be deemed to have repaid an amount equivalent to his share in the net profit, which should be determined by the auditor on a half-yearly basis on 30 June or 31 December of each year. As I said before, the withholding provision in sub-clause (2) proper was for protection of the lenders, and implying a term to give effect to Mr Yau's argument would be doing something exactly opposite. The damaging effect of the suggested course to the lenders can be appreciated from an example. The deceased was the person who was intended to run the business of KIHL as its managing director. The performance and details of the profit and loss position of KIHL would be properly or easily within his knowledge. If KIHL and its subsidiaries made a handsome profit during the period between 1 January and 30 June but suffered a huge loss in the second six months of the year, the deceased could, if Mr Yau's argument is right, say, shortly before the end of the year, call for an interim account (or an auditor's determination) up till 30 June. This interim account would show the profit, which would be used to off-set and reduce his loan owed to the lenders. The next day after the interim account was ready, he gave notice to sell his shares, which would under clause 4(1) be at par value despite any significant diminution of KIHL's net assets by the huge loss which he himself well appreciated but which would not appear until in a subsequent account. By this way, he obtained the profit from the lenders but without being liable for the huge loss. I cannot accept that clause 3(2) and (3) should be construed or a term should be implied in the way as suggested by Mr Yau.

36. Moreover, I am of the view that "dividend" attributable to the deceased under clause 3(2) should be interpreted consistently with the articles of association of KIHL and section 79B of the Companies Ordinance. Dividend must mean dividend as declared. You do not have a dividend capable of being declared so that even where no dividend was declared, the deceased would have the loan reduced by his share in the net profit of KIHL. The arguments of Mr Yau on this point are, on the other hand, quite interesting. First, he said that dividend attributable to the deceased was not limited to dividend as declared to which the deceased was entitled, for that would give too restrictive a meaning to the word "attributable". That word, according to him, should be interpreted as including something that should belong, not merely belonging, to the deceased. Secondly, Mr Yau submitted that the proviso to clause 3(2) would be deprived much of its use if "dividend" must mean dividend as declared and not the case of no dividend being declared. The lenders were the majority shareholders of KIHL and if they exercised their right of control and declared no dividend (which was a fact) then the protection given to the deceased by the proviso to sub-clause (2) and sub-clause (3) would be nullified.

37. It seems to me that the word "attributable" simply means the dividend that would be attributed to the deceased for his shareholding. It cannot have a wider meaning to include what should be dividend based upon net profit attributable to his shares. Giving the wider meaning as suggested by Mr Yau would do injustice to the language used. If Mr Yau is right, sub-clauses (2) and (3) could have been expressed very easily in a different way, e.g., "the loan shall be reduced by the dividend or the net profit of the company attributable to the borrower on a half-yearly basis on 30 June and 31 December each year, whichever is the higher sum", adopting the same formula as in clause 4(1) dealing with the price.

38. Moreover, "dividend" used by the parties in the Loan Agreement must bear the same meaning as the term used in the context of KIHL's articles of association and the Companies Ordinance, to which both parties' rights and obligations must be subject. Dividend must therefore mean that which is declared by KIHL in general meeting or paid by the directors. It cannot include anything which is neither so declared nor paid.

39. Mr Yau further argued that despite the example I gave above showing great detriment to the lenders, the parties might have intended to give a double benefit to the deceased, i.e., allowing him to have the loan reduced by the half-yearly net profit and then selling his shares at par value. He urged me to give effect to this intention, on the basis that that could have been the intention of the lenders in giving more incentive to the deceased. Although I am fully entitled to take into account the matrix of facts in arriving at the true construction of a term in a contractual document, on the basis of the interpretation I put to clause 3(2) and (3) above, taking into account the articles of association as well as the law governing companies and the surrounding circumstances as Mr Yung told me, I am not attracted by Mr Yau's argument, which would be too much of an unjustified attempt in conjecture at the intention of the parties.

40. My conclusion therefore is that as no dividend was declared, which I find as a fact, clause 3(2) including the proviso in it and clause 3(3) at no time came into operation. For the reasons I have given, I find that no part of the loan of $7.5 million had been repaid by the deceased, and ACDL and ACLL were entitled to the transfer of the deceased's 7,500,000 shares in KIHL as at 8/3/93 when his position as the managing director was terminated by the notice served on him by Mr Yung, upon which the deemed notice provision of clause 4(5) was invoked. The price for the shares was fully set off by the loan itself. The two plaintiffs in Action No. A6501 of 1993 should therefore succeed.

41. In Actions Nos.6502 and 6503 of 1993, the loans were proved with contemporaneous documentary evidence. I do not think that Mr Yau has been able to raise any substantial issue relating to them.

42. There was an admission made by KIHL by its solicitors' letter dated 1/12/95 that there was a sum of $486,115.55 due from it to the deceased being the aggregate of the 1992 year-end double pay, salaries for January and February 1993 as well as some items of disbursements. Mr Yung told me on oath that he had the requisite authority to accept this sum and also allow this sum to be set off against any judgment that the court might give against the deceased's estate in Action No. 6503 of 1993. Mr Yau was granted leave to amend the defence in that action even after the close of evidence, for it is just fair that such set-offs should be allowed.

43. In the result, I find for the plaintiffs in all three actions. There will be judgment for SECL in Action No. 6502 of 1993 for $2 million, with interest from the date of the writ at the rate of 4% per annum as suggested by Mr Ho. There will also be judgment for KEL in Action No. 6503 of 1993 for $1,513,883.45, being the loan of $2,000,000 as reduced by the sum of $486,115.55 admitted to be due to the deceased, similarly with interest from the date of the writ at 4% per annum.

44. Returning to Action No. A6501 of 1993, in my judgment, the deceased should have made transfer of his 7,500,000 shares in KIHL to the plaintiffs ACDL and ACLL on 8 March 1993 when he was served with notice of termination of his Service Agreement with KIHL, which brought into operation clause 4(5) of the Loan Agreement. He should have executed the transfer of those shares forthwith or very soon thereafter, as he was not entitled to any payment of the price which had been fully set off by the loan. The plaintiffs are clearly the beneficial owner of those shares as from 8 March 1993 and they should have been the legal owners since that date. Equity treats that as done which ought to have been done. But the deceased is dead and his estate is represented by the Official Solicitor. I think it right and proper that someone should execute a transfer on behalf of the estate of the deceased to transfer the legal title to the shares to the plaintiffs. As the Official Solicitor's stance is that he is not going to do anything other than representing the deceased's estate at the trial, and that stance was made clear to the plaintiffs when he agreed to participate in these proceedings, I do not think I should impose upon him the task of executing the transfer forms. I think in the circumstance, the Registrar of the Supreme Court is the best substitute. I therefore appoint the Registrar of the Supreme Court to execute a transfer form or transfer forms to vest the legal title to the 7,500,000 shares now in the name of the deceased free from incumbrance in the plaintiffs in this action to take effect as if the same had been executed by the deceased. It appears to me that the plaintiffs have in their possession the originals of the relevant share certificates, and no delivery of them is therefore necessary. The legal advisers of the plaintiffs should submit a form of order and necessary draft transfer forms for the court's endorsement.

45. Counsel had also addressed me on costs. There is an agreement that the Official Solicitor should have his costs in all the three actions on an indemnity basis against the plaintiffs. I make an order by consent accordingly. The plaintiffs, on the other hand, should have their costs, including the costs they are ordered to pay to the Official Solicitor, against the deceased's estate. I so order in each of the three cases.

46. It is left for me to thank counsel for their assistance. Mr Ho provided me with a very useful chronology, and he reduced what could be complicated arguments in simple terms. Mr Yau, on the other hand, was vigilant in putting a number of searching questions to the plaintiffs' two witnesses. He did not have instructions from the deceased's estate or personal representative, and all the documents that came to him relating to the actions emanated from the plaintiffs. Understandably, he did not have any material to rely on to challenge the plaintiffs' cases. He had a difficult task to perform and yet he applied considerable diligence and thought over every sort of possible gaps in the plaintiffs' cases. While he was not successful in his attempts, I must say that his presence before me had helped me identify the key issues and apply my mind to possible irregularities which albeit I have found none. This assistance is important because the court is dealing with an otherwise unrepresented estate of a deceased person, and without searching and probing cross-examination, the court may not be fully alerted to the risk of only listening to one side of the story.