LAU TUNG PUI PATRICK V. TSE KIT CHING

DCCJ 5542/2006

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 5542 OF 2006

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JUDGMENT

1.  In this action, the Plaintiff claimed against the Defendant for repayment of a loan in the sum of $180,000.00 (“the loan”).  The Defendant (“Miss Tse”) denied she is liable to the repayment of the sum claiming that payment of the loan was conditional upon the continuation of the business venture between the Plaintiff and the Defendant in the operation of an internet café (“the business”).  As she had ceased to participate in the business, and since the internet café had ceased operation, she claimed she is not liable to repay the said loan.

Background

2.  The Plaintiff (“Mr. Lau”) was a friend of the Defendant Miss Tse’s boyfriend Mr. Ho Chun Sang, John.  They met when they were working at a Hong Kong trading company between 1978 to 1980, and had become good friends and maintained regular contacts since then.  Mr. Lau came to know Miss Tse as Mr. Ho’s girl-friend since the early 1990’s and Miss Tse regarded Mr. Lau as a good-friend.  In January 2006, Mr. Lau was assigned back to Hong Kong from Shanghai by his then employer, Steris.  Knowing that his contract with Steris was going to end soon, he began to look for business opportunities in Hong Kong.  Mr. Lau and Mr. Ho together with Miss Tse then began looking for business opportunities, eventually, they settled on the setting up of an internet café business.

3.  In early September, the parties incorporated a limited company named “Meganet International Limited” through which the parties would operate the internet café.  They agreed that Mr. Lau would hold one share in Meganet while Miss Tse and Mr. Ho would hold one share in Miss Tse’s name.  The estimated initial capital of the business was $700,000.00.

4.  On 27 August 2006, Mr. Lau and Mr. Ho jointly signed a provisional tenancy agreement with the landlord for a shop premises located in Jaffe Road, Causeway Bay (“the said shop unit”) for a term of 4 years at a monthly rental of $18,000 commencing on 1^st October 2006.  The formal tenancy agreement was signed on 2^nd October 2006 by Mr. Lau and Miss Tse representing the tenants.  As a guarantee under the tenancy agreement, Mr. Lau and Miss Tse each issued 12 post-dated cheques in the sum of $18,000.00 for the benefit of the landlord.

5.  The Defendant, Miss Tse, did not dispute that a sum of $180,000 was paid by Mr. Lau to her; that in return, Miss Tse had issued 18 cheques of $10,800 each.  The 1^st cheque was post-dated to 15 October 2006 and the 2^nd to the 18^th cheques were post-dated to the 15 day of each subsequent month.  It is not disputed that Miss Tse had applied the $180,000 in the refurbishment of the said shop unit in Jaffe Road.  It is further not disputed that she spent a further $28,714 for the same purpose.

The Plaintiff’s case

6.  It was Mr. Lau’s evidence that originally the parties had agreed to set up Meganet on an equal shareholding basis, that was why the issue of the shares at Meganet was 1 share for each shareholder, namely Mr. Lau and Miss Tse.  However, on or about 1 September 2006, Miss Tse informed Mr. Lau that she did not have sufficient cash to pay the required $350,000 capital injection into Meganet and that she can only raise $100,000 cash from her savings.  Mr. Lau claimed that Miss Tse and Mr. Ho then invited Mr. Lau to acquire a larger shareholding in Meganet.  Consequently, the parties reached an oral agreement that the shareholding in Meganet shall be 60:40 with Mr. Lau holding 60% of the shares and Miss Tse 40%.  As Miss Tse only had $100,000 in cash, she asked Mr. Lau for a loan of $180,000.  Mr. Lau claimed that he agreed to lend her the loan on the basis that he would charge 8% per annum on the $180,000 and that Miss Tse would guarantee the loan by issuing 18 post-dated cheques of $10,800 each representing the 18 monthly instalments for repayment of the $180,000 loan.  Mr. Lau also claimed that should any of the post-dated cheques be dishonoured he would be entitled to demand the return of the outstanding balance immediately.  Mr. Lau further claimed that was why he issued to Miss Tse a personal cheque from his account at the Hong Kong Bank on 4 September 2006 for payment of the loan of $180,000 (see page 92 of the bundle).  Mr. Lau also produced a handwritten note recording the discussion and agreement between himself, Miss Tse and Mr. Ho (see page 93 of the bundle).  None of the 18 post-dated cheques (at pages 94 to 99 of the bundle) were honoured.

The Defence case

7.  It is the defence case that the parties entered into an oral agreement in early September 2006 regarding the running and the operation of the business of the internet café.  Miss Tse admitted and agreed that a company would be incorporated to operate the business and Mr. Lau and herself would each hold 1 share in the company.  Furthermore, she claimed Mr. Lau would finance the initial operation and that he would pay $180,000 on behalf of herself and a further $420,000 on his own behalf.  Miss Tse claimed she agreed to reimburse Mr. Lau the $180,000 with interests by 18 monthly instalments of $10,800 each on condition that she would only be liable to pay the monthly instalment so long as Mr. Lau and herself shall continue to participate in the business and that the business shall continue to operate.  She claimed that it was on those basis she had issued 18 post-dated cheques of $10,800 and gave them to Mr. Lau.

8.  Miss Tse claimed that it was the result of the unreasonable conduct of Mr. Lau in relation to the setting up and the operation of the business that the mutual trust and confidence between the parties evaporated.  By 5 October 2006, she no longer wished to continue to participate in the business and asked Mr. Lau to buy her share in Meganet.  She claimed Mr. Lau had agreed to consider her proposal.

9.  She admitted the internet café business nevertheless commenced operation on 7 October 2006.  She further claimed that on 9 October 2006, Mr. Lau and herself entered into another oral agreement involving the share transfer to Mr. Lau.  She claimed Mr. Lau had agreed to her ceasing to participate in the business and that her liability would also cease.  In return, she would resign as a director of Meganet and she would sell her share in Meganet to Mr. Lau and the parties would sign the necessary documents to effect the share transfer.  She claimed Mr. Lau also agreed to return the 18 post-dated cheques to her without presenting them for payment.  Furthermore, she claimed Mr. Lau had also agreed to pay to her the sum of $208,714 in cash as reimbursement for the sum she paid on the refurbishment.  She claimed Mr. Lau had further agreed to issue 12 post-dated cheques to replace the 12 cheques Miss Tse gave to the landlord as guarantee and Mr. Lau would also informed the landlord that Miss Tse would no longer be liable under the lease.  However, on 11 October 2006, Mr. Lau refused to sign the documents for share transfer including the instrument of transfer, the bought and sold notes and the draft minutes of board meeting.  On 16 October 2006, she requested Mr. Lau to sign the transfer documents again but Mr. Lau refused to do so, however, he agreed to refund to Miss Tse the sum of $208,714, the expenses on the refurbishment of the internet café.  She relied on a note signed by Mr. Lau dated 16 October 2006 (see page 101 of the bundle).

10.  Miss Tse claimed that on 20 October 2006, Mr. Lau reneged on his earlier promise and informed her he would not purchase her share in Meganet or return the 18 cheques to her or pay to her the $208,714.  She claimed that since the business ceased operation on 31 October 2006, according to the agreement between Mr. Lau and herself regarding the $180,000 loan, she is no longer liable to honour those 18 post-dated cheques and she was further entitled to the refund of $208,714 which she spent on the business.

The Issues

11.  The issues according to Counsel for the Plaintiff, are :

(1)  Whether the terms of repayment in respect of the loan included the stipulation that repayment was conditional on the Defendant continuing to participate in the business and that the business shall continue to run?

(2)  Whether the Share Purchase Agreement and 16 October Agreement existed?  If so, what were the valid terms to give effect to the Defendant’s Counterclaim?

Findings

1.    Whether the terms of repayment in respect of the loan included the stipulation that repayment was conditional on the Defendant continuing to participate in the business and that the business shall continue to run?

12.  It is the Defence pleaded case that the 18 cheques were delivered in escrow which never came into effect because the Defendant had already ceased to participate in the business and the business had also ceased operation on or before the Plaintiff presented the 1^st cheque of 15 October 2006 for payment on 31 October 2006.

13.  It is the Plaintiff’s case that $180,000 was a loan to Miss Tse for payment of her share of injection of share capital in the operation of the business.  Mr. Lau denied there were any conditions attached to the loan or that it was subject to Miss Tse’s continue participation in the business or that the business shall continue to operate.

14.  It is not disputed that the $180,000 was a loan from Mr. Lau to Miss Tse.  It is further not in dispute that in early September 2006, the parties had amended the parties’ earlier intention of each holding an equal share in the business, and it was mutually agreed Mr. Lau would hold 60% share while Miss Tse would hold 40% share in the business.  This agreement was subsequent to the incorporation of Meganet International Limited (“Meganet”) when parties were allotted 1 share each.  The intention of an equal shareholding is evidenced by the fact that each party submitted 12 post-dated cheques to the landlord on 2 September 2006 when both parties signed on behalf of the tenant on the tenancy agreement for the said shop unit.  The submission of equal number of cheques as a guarantee and both parties signed on behalf of the tenant indicated they have an equal shareholding status.

15.  Miss Tse admitted she had informed Mr. Lau in early September that she only had $100,000 in cash and she had asked Mr. Lau to take a larger share in the business.  She also admitted to have agreed to take a 40% shareholding in the business.  On the one hand, she admitted as she had only $100,000 in cash she could not pay the balance of $180,000 as her share of capital in the business.  On the other hand, she claimed Mr. Lau was leaving Hong Kong at the time and had entrusted with her the refurbishment of the shop unit which was scheduled to open in October, she therefore asked Mr. Lau to leave some money with her so that the refurbishment and purchasing of the necessary equipments can be done while he was away.  On that basis, she claimed the $180,000 was not a loan to her personally but an advancement to the business in preparation of the internet café’s opening in October.

16.  Miss Tse’s argument is credible but for the fact that she had handed over to Mr. Lau 18 post-dated cheques payable on the 15^th day of each month upon Mr. Lau giving her the sum of $180,000.  If the amount of $180,000 was an advancement from Meganet to her for payment of refurbishment of the said shop unit, why was it necessary for her to issue 18 cheques to Mr. Lau for the monthly repayments of the said sum with interests?

17.  It is not logical for Miss Tse to issue the 18 post-dated cheques if the payment of the $180,000 to Miss Tse was only an advancement for the renovation, refurbishment and opening expenses of the business.  Furthermore, no business partnership after incorporation can be run on a conditional basis such as what Miss Tse suggested that the payment of the 18 cheques would be terminated should the business ceased to operate or should Miss Tse stopped participating in the business.  I find Miss Tse’s argument that the $180,000 was not a loan but an advancement from the business to her for refurbishment and renovation of the said shop unit unsustainable.

18.  It is clear that Miss Tse was having second thoughts in early September as to whether she and Mr. Ho could work in partnership with Mr. Lau in any business whatsoever.  Miss Tse referred to a few things that she was unhappy with such as:  (1)  Mr. Lau insisted on using an accountant firm of his choice ‘Alpha Services’ for the incorporation of Meganet which charged a fee that Miss Tse considered to be higher than the average;  (2)  Mr. Lau suggested appointing his then girl friend from Shanghai (who later married Mr. Lau) be appointed as a director of Meganet to provide her  easy access to Hong Kong;  (3)  Mr. Lau expressed his wish to charge his travelling expenses to company expenditure.

19.  Those may well be requests Miss Tse considered to be unreasonable, however, she could have or should have resolved these differences with Mr. Lau before the internet café’s opening.

20.  I am not satisfied there was any possible cause for Miss Tse to claim that the payment of $180,000 by 18 post-dated cheques were attached with the conditions she now claimed existed.  I have no doubt that the two parties have agreed to set up a business operating an internet café under Meganet with Mr. Lau and Miss Tse each holding one share.  Even though the parties subsequently reached an agreement that Miss Tse was going to hold a smaller share of 40% while Mr. Lau agreed to have a larger shareholding of 60%; the party clearly remained co-owners of Meganet.  Unless and until the company is dissolved or that Miss Tse succeeded in selling her share to Mr. Lau or some other party, Miss Tse remained a shareholder of the company.  It is also clear that the parties had agreed to inject a joint capital of $700,000 into the company for its initial operation and because Miss Tse had declared to Mr. Lau she only had $100,000 in cash, Mr. Lau agreed to lend to her the sum of $180,000 to make up her share of $280,000 to Mr. Lau’s $420,000, making a total of $700,000.  On this basis, I find the $180,000 was a loan from Mr. Lau to Miss Tse.  The sum was given to her by Mr. Lau for which he demanded a guarantee repayment by 18 monthly instalments with interests, hence, the 18 post-dated cheques were issued by Miss Tse to Mr. Lau.

21.  On the aforesaid basis, Mr. Lau and Miss Tse had a business to run under an incorporated company.  Before any shareholder can retire from the business, he or she would have to either ask the other party to purchase his or her share or wind up the company.  No shareholder can hold the other shareholder to ransom and say to him/her that unless she/he remained in the business, otherwise the injection of capital will be returned without any deduction of expenses utilized by the company before the retirement.  Neither is the shareholder entitled to impose a condition to have the capital he/she injected into the company returned to him/her should the company cease business.  Based on the aforesaid reasons, it is unlikely Mr. Lau would accept the conditions Miss Tse claimed she imposed on the payment $180,000 loan to her by Mr. Lau.  Further, Miss Tse’s claimed conditions were completely and totally unilateral, there was no evidence that Mr. Lau had consented to them; consequently, those conditions could not be part of the agreement for the payment of $180,000.  I reject Miss Tse’s evidence on the conditions attached to the loan.

2.   Whether the Share Purchase Agreement and the 16 October 2006 Agreement existed?  If so, what were the valid terms of the Agreement?

22.  It is Miss Tse’s evidence that she formally informed Mr. Lau on 5October 2006 that she wanted to withdraw from the business.  She claimed that on 9 October 2006, Mr. Lau and she had reached an agreement that he would purchase her share in Meganet.  Unfortunately, on 11 October 2006 when Mr. Lau handed over to her a share transfer document, Miss Tse refused to sign it.  She gave the reason that it was because Mr. Lau had refused to give her back the 18 post-dated cheques and the balance of $208,714 she had paid on the renovation of the said shop unit; consequently, no share transfer document or bought and sold notes were signed.  Miss Tse, on the other hand, continued to work at the internet café daily until 26 October 2006.  Meanwhile, Mr. Lau decided on 31 October 2006 that the internet café would cease business.  Subsequently, the lease of the said shop unit was terminated and the computers and other equipments were sold.  Miss Tse referred to a document dated 16 October 2006 where Mr. Lau acknowledged the receipts for the expenditures amounting to a total sum of $208,714 on the refurbishment and renovation of the said shop unit from Miss Tse.  He further recorded on the note the following: “which will be refunded to her at a proper manner and agreed date”.

23.  Miss Tse claimed that this document is evidence that there was an oral agreement reached that Mr. Lau would refund to her the sum of $208,714.  Mr. Lau claimed this note was merely an acknowledgement on behalf of the company that Miss Tse had submitted all the receipts on the expenditures on renovation and refurbishment of the said shop unit on behalf of the company.

24.  On the basis that the internet café business was run and operated by means of an incorporated company, the receipts of any expenditures would form part of the company’s expenditures, the expenditures would have to come from the company’s capital from the shareholders.  As explained above, the company’s incorporated capital was $700,000 which would be used on refurbishment, equipment and operation expenses.  The sum of $208,000 Miss Tse claimed to have used on renovation clearly was part of the company’s expenses.  Consequently, her demand for return of the money should be made to the company, not from Mr. Lau personally.  Furthermore, $180,000 of the $208,714 was paid to Miss Tse as an advancement by the company.  The sum did not have anything to do with the loan guaranteed by 18 post-dated cheques issued by Miss Tse.  On that basis, I find there was no agreement from Mr. Lau that he would personally reimburse Miss Tse the $208,714 as the expenditure was part of the company’s expenditure; Miss Tse should seek for the repayment of the balance of $28,714 from Meganet.

Conclusion

25.  I am satisfied Mr. Lau had successfully proved the $180,000 was a loan to Miss Tse, it was guarantee by the 18 post-dated cheques given to Mr. Lau by Miss Tse.  Miss Tse is liable to repay Mr. Lau the sum claimed.  I further dismiss Miss Tse’s counterclaim for reasons set out above.

Interests

26.  The Plaintiff is entitled to interests on the sum of $180,000 from the date of writ to the date of judgment at half judgment rate and thereafter at judgment rate until full payment.

Costs

27.  Costs follow the event.  I grant a costs nisi order against the Defendant, to be taxed if not agreed with certificate for Counsel.