XCHRX WONG YUK LUNG v. YAU KOON NAM and Another

1994, A9608 and A11977
1995, A1670

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. The plaintiff is the payee of the following cheques drawn in his favour by the defendants -

2. These cheques were dishonoured upon presentation.

3. The plaintiff commenced three sets of proceedings claiming payment of the sums due under the cheques. In respect of cheques dated 25 May to 25 August 1994, the plaintiff obtained default judgment. A summons by the defendants to set aside this judgment was dismissed. In respect of the other cheques, the plaintiff obtained summary judgment. The defendants now appeal against the dismissal and the entry of the default judgment.

4. In only one of the sets of proceedings have the defendants filed a defence. In this, the defendants say that they issued three cheques, including cheque numbered 502881 - the other two are not identified - to pay to the plaintiff his share of the profits in Hamtron Transportation Limited (Hamtron). The defendants say that these cheques was issued on the condition that Hamtron had made a profit. It is alleged that, because the first defendant made a mistake, his calculations were not accurate, that, in fact, Hamtron had made no profits, and that the plaintiff was aware of this. There is no allegation that these cheques were given in return for the plaintiff withdrawing from Hamtron.

5. The defence goes on to allege that, in or about May 1994, the parties entered into an oral agreement in terms of which the plaintiff would resign as director of Hamtron and transfer his share to the first defendant. In return, the first defendant agreed to reimburse the plaintiff for his contributions to Hamtron. Accordingly, the first defendant issued seven post-dated cheques to the plaintiff, including cheques numbered 502874 and 502875 - the others being unidentified. It is alleged that these cheques were given conditionally upon the plaintiff's resignation and transfer of his share, but he did not do so. It is alleged that the condition failed and the consideration has wholly failed.

6. In his affirmation filed in support of the application to set aside the default judgment, the first defendant says that the plaintiff lent to him the sum of $325,000 to enable him to make his contribution to Hamtron so that the company could pay under a agreement with Yiu Shan Trading (HK) Company Limited (Yiu Shan) relating to a transportation business. He says that on 23 April 1993, he made two payments, one of $90,000 and one of $50,000, and on 6 October 1993, another payment of $50,000. These cheques were honoured. This left a balance of $135,000 due to the plaintiff. On 25 May, 25 June, 29 June and 30 June 1994, he says, he issued cheques in the sums of $36,000, $40,000, $80,000 and $36,950 to the plaintiff. These were to pay the balance of the loan, plus interest. These cheques were not honoured. The first defendant says that he agreed with the plaintiff that the plaintiff would quit Hamtron and the first defendant would repay his contributions. Accordingly, he issued three cheques to the plaintiff in the sums of $60,000, $36,950 and $60,000 dated 25 July, 30 July and 25 August 1994. These cheques were also not honoured. The plaintiff failed to quit Hamtron, so the consideration for giving these cheques failed. The first defendant says that the default judgment was given for more than was due to the plaintiff.

7. So, at this stage of the matter, the first defendant is saying that he does owe the money in respect of the cheques given for the repayment of the loan, with interest, but not the money in respect of the cheques given in repayment of the plaintiff's contributions.

8. In response to this affirmation, the plaintiff says that the payment of $190,000 was made by Hamtron, not the first defendant, and was in partial repayment of his capital contribution to Hamtron by way of a director's loan. He produces copies of the cheques to show this. Late in April 1994, he spoke to the defendants. He was told that Hamtron needed $100,000, but the first defendant could raise only $20,000. They asked for his assistance. He asked if Hamtron was running at a profit. The first defendant said he could not give an approximate figure, but he was sure Hamtron was making a profit, but he had converted Hamtron's money to his own use. The plaintiff told the defendants that he would not help unless they made solid proposals for repayment of the money due to him and that of Hamtron misappropriated by the first defendant. The defendants proposed giving him post-dated cheques, which he agreed to accept if the first defendant stood down from the management of Hamtron. The first defendant agreed to do this. The first defendant then gave him cheques numbered 502872, 502873, 502877 and 502878, totalling $325,000 in repayment of the loan and $36,000 in respect of interest. A cheque numbered 502888 for $80,000 post-dated to 29 June 1994 was also given in repayment of an advance then made by the plaintiff to make up the balance of $100,000 needed by Hamtron. The plaintiff was also given cheques numbered 502879 and 502880, each in the sum of $36,950, as part of the plaintiff's share of interim profits from Hamtron. The parties entered into a written agreement in terms of which the first defendant agreed to step down from the management of Hamtron. In this documents, the first defendant also acknowledged that he has misappropriated funds from Hamtron.

9. In another affirmation dated 28 March 1995, the first defendant responds to what the plaintiff had to say. The first defendant says that, because of the number of the cheques and because the plaintiff sued on them in three separate actions, he was confused. He explains the reason for issuing each of the 12 cheques as follows -

10. The first defendant does not say here why it was legitimate to repay the loan he owed to the plaintiff from Hamtron.

11. The first defendant says that what he had to pay the plaintiff for leaving Hamtron was $460,000, that is, the plaintiff's contribution of $325,000 and the balance of $135,000 owing by the first defendant.

12. At this stage, the first defendant is saying that the first four cheques were not exclusively for repaying the loan and interest, but were, partly, to repay the plaintiff's contributions to Hamtron, although he does not, at this stage, seem to be saying that there is nothing due to the plaintiff.

13. In his third affirmation dated 5 June 1995, the first defendant explains why the sum of $190,000 was paid out of Hamtron's account. He also points out that the cheques drawn on this account bore the plaintiff's signature. He says that he had incurred roughly $190,000 in expenses on behalf of Hamtron, and the plaintiff agreed he could use Hamtron's money to repay the plaintiff.

14. The first defendant says that he agreed with the plaintiff that money due to Hamtron could be paid into the defendants' account, but the money had to be transferred to Hamtron "later on".

15. On 26 April 1994, the first defendant signed a document that records that Hamtron had appointed the first defendant to manage its business, that the first defendant had embezzled Hamtron's money and that the first defendant would be responsible for that money.

16. The first defendant explains how he came to sign this document. He says that the plaintiff questioned him about the operation of Hamtron and asked details of Hamtron's financial status. The first defendant told him that he could not give exact details because he only kept a rough record. He also told the plaintiff that he sometimes used Hamtron's money for his own purposes, that sometimes he would pay Hamtron's expenses from the firm's account, and that his personal spending was very much mixed up with that of the firm. The plaintiff was angry, and said the first defendant was misappropriating Hamtron's money. The first defendant told him that Hamtron's accounts were not complicated because its income and expenditure was simple and straightforward. The plaintiff insisted he sign a document accepting responsibility, which he did. The first defendant stepped down from the management of Hamtron, and the plaintiff took over from 26 April 1994. But only a short time later, on about 10 May 1995, the plaintiff told him that he was fed up with Hamtron's business and wanted to get out of it. They agreed that the first defendant would take over and repay the plaintiff his contributions. The first defendant gave the plaintiff the cheques as already described. The plaintiff wrote down the details of the payments. This records the sum of $110,850 as "monthly fee income June to March 1994" payable by cheques dated 30 June 1994, 30 July 1994 and 31 August 1994. It also records as "capital returned" the sum of $650,000, with $190,000 "already received", leaving $460,000 payable by cheques dated 25 June 1994, 25 July 1994, 25 August 1994, 25 September 1994, 25 October 1994, 25 November 1994 and 25 December 1994. Finally, it mentions "interest from Oct 93 to March 94" of $36,000, payable by a cheque dated 25 May 1994. The document is not dated.

17. The first defendant says that the document signed by him and dated 26 April 1994 has been amended by the plaintiff after his signature. It is not necessary to come to a conclusion regarding this. The additions by the plaintiff, if they were such, do not change the substance of the agreement; that is, that the first defendant acknowledged that he had misappropriated Hamtron's money, that he would be responsible for this money, and that he agreed to step down as director and manager.

18. On 27 April 1994, the plaintiff and the first defendant, on behalf of Hamtron, entered into an agreement with Yiu Shan. This was designed to give Hamtron some breathing space. This agreement records that Hamtron would be run "hereafter" by the plaintiff, that the first defendant resigned as manager, and that the plaintiff gave a guarantee for money due by Hamtron.

19. The first defendant eventually arrives at the position of saying that all the cheques were issued consequent upon the agreement with the plaintiff to withdraw from Hamtron.

20. In his defence filed, the first defendant seems to rely upon a defence that the cheques were given on a condition. Mr Yuk told me that the first defendant no longer relies upon this defence. He does, however, rely, in respect of all the cheques, upon the defence of failure of consideration. He also suggests that the first defendant has another defence not raised in the written defence; one of fraud and misrepresentation. There is no evidence whatsoever of any fraud in this matter; not by the plaintiff, in any event. As I understand Mr Yuk, he suggests that, because the plaintiff promised to withdrawn from Hamtron and did not do so, that is fraud. I reject this. Even if what the first defendant says is true, there is no evidence that there was any misrepresentation. Accordingly, the only defence worthy of consideration is that of failure of consideration.

21. The parties differ as to the underlying reason for giving the cheques. The plaintiff says they were given by the defendants because the first defendant had used the money of Hamtron for his own purposes. The purpose was to pay the plaintiff his share of the profits of Hamtron, to repay the balance of the loans to Hamtron and the first defendant, with interest, and to repay the sum of $80,000 advanced by the plaintiff. On this basis, the cheques were given to settle a dispute between the parties, and no question of failure of consideration arises.

22. The defendants, on the other hand, say that the cheques were given on the basis that the plaintiff would resign his directorship of Hamtron and transfer his share. He has not done this. Consequently, there has been, it is alleged, a failure of consideration.

23. The first defendant says that he met the plaintiff "in about early May 1994" to discuss the way in which the first defendant should pay the plaintiff in return for his leaving Hamtron. He says that "in or about 10th May 1994, the Plaintiff said to me that he found those vehicle owners very difficult to deal with and intended to withdraw from Hamtron. He told me he was fed up with Hamtron's business and wanted to get out of it. He asked me to take over Hamtron. He also stated that if it wasn't convenient to pay him back in one go I could pay him back by instalments. I accepted."

24. So, the first defendant's case is that, the plaintiff having secured the first defendant's resignation as director and manager of Hamtron on 26 April 1994, together with an acceptance of responsibility for the money taken by the first defendant, and having guaranteed Hamtron's indebtedness to Yiu Shan on 27 April, within a matter of days, because he is having difficulties with the business, reverses the position, and sells out to the first defendant, giving control of the company in respect of which the plaintiff had given a guarantee to a man who was, in the plaintiff's book at any rate, plainly dishonest.

25. This, in my judgment is, to a high degree, unlikely. It is much more likely that the cheques were given, as the plaintiff says, following the first defendant's exposure as a man who had misappropriated funds from Hamtron, to settle the matter.

26. On 6 February 1995, the plaintiff's solicitors wrote to the Registrar of Companies saying that the first defendant had resigned as a director on 26 April 1994, but he had refused to sign a letter of resignation. A copy of this letter was sent to the first defendant. The first defendant's solicitors responded to this letter by letter dated 23 May 1995. This letter denied that the first defendant had resigned, raising, firstly, a technical point, and, secondly, an allegation that the document of 26 April 1994 was disputed. It is said that the first defendant remains one of the two directors, that he is entitled to access to the books of account, and that "both our respective clients" were responsible for preparing a balance sheet and other documents required by the Companies Ordinance. There is not the slightest hint in this letter that the first defendant bought out the plaintiff from Hamtron. The letter is totally inconsistent with such a situation. The first defendant's solicitors wrote letters of 31 May 1995 and 24 June 1995. These letters are also inconsistent with the allegation that the plaintiff had sold out his interest in Hamtron.

27. The first defendant also produces a bundle of nine cheques dated from 30 April 1994 to 31 January 1995, signed by both the plaintiff and the first defendant. The first defendant says that the plaintiff sent to him these cheques for signature after the plaintiff took over the management of Hamtron on 1 May 1994. He produces them to support his allegation that he did not resign as a director of Hamtron, but he does not explain why, if he had bought out the plaintiff, he continued to co-operate with the plaintiff in running the company.

28. When the inherent improbability of the first defendant's story is taken together with the inconsistencies in the first defendant's own evidence, its inconsistency with the defence filed, and the inconsistent letters written by his own solicitors, his case is not capable of belief.

29. Accordingly, the appeals must be dismissed. The defendants must pay the plaintiff's costs. A certificate for counsel is granted.