CHEUNG AH MEI AND ANOTHER v. WONG SHIU LING

HCA 2025/2014

[2020] HKCFI 449

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2025 OF 2014

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J U D G M E N T

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Background

1.  This action was brought by two shareholders of a company known as Sun Tung Lok Nursing Home Company Limited (“Company”) against the third shareholder, for payment of $10.4 million (calculated up to 31 December 2019) representing income from a nursing home for the elderly known as Sun Tung Lok Nursing Home (“Home”) formerly operated by the Company.  The Plaintiffs claim that the sum is due to them from the Defendant under what they allege to be an oral agreement (“Agreement”) made between the Plaintiffs, the Defendant and one Mr Shie Wai Nin acting on behalf of Sino Care Enterprise Management Limited (“SC”).  The Defendant denies that she had made any such agreement. 

2.  The Plaintiffs and the Defendant were all in the business of operating residential care homes for the elderly.  Apart from the Home, the Plaintiffs, together with the 1^st Plaintiff’s son (“Benjamin”), on the one part and the Defendant on the other part had operated other nursing homes in Hong Kong and Kowloon.  Phoenix Olympic Nursing Home (“Phoenix Home”) was the nursing home operated by the Defendant, through a company Phoenix Olympic Nursing Home Limited (“Phoenix”) of which the Defendant was the shareholder and director, together with her family.

3.  The shares in the Company which operated the Home were owned by the 1^st Plaintiff as to 37.5%, the 2^nd Plaintiff as to 25%, and the Defendant as to 37.5%.  The Plaintiffs were not involved in the actual management of the Home.  They were assisted by Benjamin since 2010, who represented the Plaintiffs in most matters concerning the Company.  It is not disputed that the Defendant was the person in charge of the management of the Home.

4.  The Company at the material time held a licence issued by the Government to operate an elderly home which can accommodate up to 109 residents.  Under the Government’s Enhanced Bought Place Scheme (“Scheme”), the Company received subsidies from the Social Welfare Department for Government funded places within the Home, in exchange for its compliance with specific staffing and space requirements which are more stringent than those required by statute.  At the relevant time in 2007, the Home was allocated 43 Government funded places under the Scheme, which meant that it received a fixed fee from the Government each month.  The Phoenix Home was allocated 40 Government funded places.  These Government funded places generate considerable and steady income for elderly homes, and the number of Government funded places correlate with the profit margin of the home.

The listing plan

5.  Sometime in early 2009, 13 parties with interests in elderly homes decided to group their assets and to form a company, for the ultimate purpose of procuring a listing for the holding company.  The Defendant and Benjamin became shareholders of a company known as Yu Fat Hong (Hong Kong) Limited (“YFH”).  There were 13 shareholders altogether in YFH, each of which had interests in the operation of elderly homes, and the plan was to incorporate a new group of companies collectively known as the Sino Care Group (“Group”) and to inject into the Group YFH and other companies owned by the shareholders and which operated elderly homes, so that the Group could be listed on the Stock Exchange of Hong Kong in 3 years (“Listing Plan”).

6.  At a meeting held on 29 March 2010, which was attended by both the Defendant and Benjamin, the shareholders of YFH discussed the Listing Plan, and agreement was reached for the Company to be injected into the Group.  As a result, a sale and purchase agreement dated 29 March 2010 (“SPA”) was signed amongst the shareholders of YFH and other participants, including the Plaintiffs, whereby companies and elderly homes which were owned by the companies were agreed to be injected into the Group for listing purposes, following a restructuring exercise undertaken by all the participants in respect of their individual holding of the elderly homes.

The SPA

7.  In essence, under the SPA, each of the named vendors agreed to sell, and Sino Care Enterprise (BVI) Limited (“Purchaser”) agreed to purchase, the shares in target companies, each of which target companies is a holder of a licence or permit issued by the Director of Social Welfare to operate residential care homes for the elderly under the relevant Residential Care Homes (Elderly Persons) Ordinance (“Licence”).  Clause 3.2 of the SPA provides that the purchase price for the shares to be sold is to be satisfied by the Purchaser directing Sino Accomplish Limited (“Holdco”, which was to be listed) to allot and issue such number of Consideration Shares in Holdco, as set out in the Schedule to the SPA (“Holdco Consideration Shares”). 

8.  The vendors under the SPA include Lufu Limited (“Lufu”), whose shares in Rapid Win Investments Limited (“Rapid Win”) as the target company were to be sold under the SPA.  The Plaintiffs and the Defendant were 3 of the named shareholders of Lufu.  Rapid Win as the target company owned by Lufu was stated in the SPA as the holder of a Licence to operate the Home and the Phoenix Home.  The Defendant was named as one of the directors of Rapid Win.  The total number of Holdco Consideration Shares to be issued to Lufu was 13.2 million.

9.  The shares sold under the SPA carried with them all rights, dividends or distributions which may be paid, declared or made in respect thereof at any time on or after the reference date and date of completion, of 31 March 2010.  Clause 2.1 of the SPA provides however that each vendor would be entitled to all the dividends and distributions in respect of the “distributable profits” of the target company.  These “distributable profits” in relation to each target company were defined in the SPA as its accumulated and realized profits earned during any period prior to the reference date of 31 March 2010, less any accumulated and realized losses incurred prior to the reference date. 

10.  The SPA provides for various post-completion matters.  Under clause 6.4, the parties agreed that each target company would, within one month after the date of the issue of the audited financial statements for 2010, declare in favor of the relevant vendors a dividend out of the “distributable profits” of each target company, which dividend is to be calculated in accordance with a specified formula.

11.  Clause 7.1 of the SPA provides that the Holdco Consideration Shares to be issued on completion to the relevant vendor is determined by reference to the projected earnings before interest, tax, depreciation and amortization of the target company as certified by the auditors based on the audited financial statements (“Earnings”), divided by the combined projected earnings of all the target companies for the year ending 31 March 2011.  The parties to the SPA agree that the number of Holdco Consideration Shares to which each vendor would be entitled in each relevant financial year after completion would be adjusted upon the expiry of each relevant financial year after the audited financial statements are available for the target companies. 

12.  The operation of the elderly homes covered by the SPA and the earnings and profits from such operation are therefore relevant to each vendor’s right to the distributable profits from the target company, and also material to the ultimate entitlement of each vendor and the eventual shares to be held by each vendor in the listed company. 

13.  Completion under the SPA took place on 31 March 2010.  Upon completion, the entire shareholding of Lufu was transferred to the Purchaser.  On the same day, a Licence Agreement was signed between the Company and SC, whereby the latter licensed the Company to use the “Sino Care System” in the Company’s operation of the Home.  The Company agreed to operate the Home in accordance with the standards and under the service marks of SC, and further, to pay a licence fee to SC.

14.  On the evidence of the parties, under the overall Listing Plan as agreed, the Company (and other participants including Phoenix) had to contribute a part of its profits to the Group to support the operational expenses arising from the Listing Plan. It is not disputed that the Company agreed, as from April 2011 at least, to pay 30% of 57% of its Earnings to the Group.

15.  Despite its elaborate terms, and the fact that the numerous parties involved had undertaken some restructuring of the manner in which the assets of the companies were held, the SPA made no provision for any adjustments in the restructuring in the event that the contemplated listing should fall through or not proceed.  The witnesses explained that at the time of the SPA, the parties were so confident of the listing that they did not contemplate what would happen if the listing should not materialize. 

16.  The first unforeseen event which took place shortly after completion of the SPA was the termination of the lease for the premises in which the Home was operated, at Prince Edward Road West (“Premises”).

17.  In late 2010, the Company was informed by the landlord of the Premises that the lease would not be renewed.  It was only extended for a short period up to 6 September 2011.  The Company was not able to find suitable alternative premises for the operation of the Home.  The termination of the operation of the Home would have serious impact on the Earnings of the Company and on the entitlement of the shareholders of Lufu (namely the Plaintiffs and the Defendant) to an interest in the successful listing of the Group. 

18.  The parties differ in their evidence as to their stance on whether to withdraw or to proceed with their participation in the Listing Plan.  Benjamin claims that he and the Plaintiffs wished to withdraw but the Defendant wanted to proceed and to keep the assets of the Company within the Group.  The Defendant pleads in her Defence that in order not to complicate the Listing Plan, the Company and SC proposed that the Company should be removed from the Group, and the Company should take care of its own residents, but it was Benjamin and the Plaintiffs who were persistent in continuing with the listing and for the Company to remain within the Group.

19.  What is not disputed is that a meeting took place in July or August 2011 (“Meeting”) at which the Plaintiffs, Benjamin and the Defendant were present, together with Mr Shie Wai Nin (“Shie”) representing SC.  Matters relating to the operation of the Home after the expiry of the lease and how it could be resolved in the context of the Listing Plan were discussed.  The Plaintiffs claim that the oral Agreement was made at the Meeting.  The Defendant claims that a decision was made by the directors of the Group and was notified to her, and that an agreement was made between the shareholders of the Company and SC, on matters pending the listing of Holdco/the Group (“Agreement Pending Listing”).  She denies that there was any agreement which involved her personally assuming any obligations. 

The oral Agreement

20.  On the Plaintiff’s pleaded case, the Agreement made between the Plaintiffs and the Defendant contained the following express terms:

1)  The existing customers of the Company shall be relocated to the elderly homes operated by the Defendant and other elderly homes operated by SC;

2)  The 43 Government funded spaces allocated to the Home shall be transferred to elderly homes operated by the Defendant;

3)  The Defendant shall, whether through SC or otherwise, make monthly payments to the shareholders of the Company as follows:

(a)  $120,000 for the 43 Government funded spaces;

(b)  $2,000 for each customer who pays monthly service charge equal to or exceeding $6000; and

(c)  $1,500 for each fee paying customer who pays monthly service charge not exceeding $6000.

4)  Such payments shall be shared by the Plaintiffs and the Defendant in proportion to their respective shareholding in the Company.

21.  In his evidence, Benjamin claimed that what was agreed at the Meeting which took place on about 10 August 2011 was that the customers of the Company and the Government funded places in the Home would be transferred to the Phoenix Home.  7 of the private paying customers of the Company were to be relocated to the Phoenix Home operated by the Defendant, and 20 other customers were to be relocated to 4 other homes owned by other members of the Group.  As evidence of the existence of the Agreement, the Plaintiffs rely on a letter (“Letter”) written and signed by Shie on behalf of 中國安老集團有限公司(which according to the certified English translation of the Letter is Sino Care Enterprise Limited (“SCE”)), and addressed to the Plaintiffs and the Defendant, who were stated to be the current shareholders of SCE and former shareholders of the Company (“Shareholders”).

22.  The Letter refers to the prior discussion and oral confirmation of agreement by the parties on the arrangements which, at the request of the parties, were set out in the Letter (“Arrangements”).  The Letter defines SCE as the “Group”.  The Arrangements include, inter alia:

(1)  the continuation of payment by the Company to the “Group” of 30% of the 57% of its Earnings, for the period prior to 6 September 2011 (para 1 of the Arrangements);

(2)  the relocation of the Company’s customers to the homes operated by the “Group” from 7 September 2011;

(3)  payment being made to the Shareholders of: (a) $120,000 per month for the 43 Government funded places; (b) $2,000 for each private fee paying customer who was paying monthly service charge equal to or exceeding $6,000; and (c) $1,500 for each private fee paying customer who was paying monthly service charge below $6000 (“Substitute Payment”);

(4)  the Substitute Payment was to replace the Shareholders’ entitlement to 70% of the respective 43% and 57% of the Earnings from the Company (“70%”), and would last until the “Group” was listed, when the Shareholders would only receive distribution of profits or dividends on the basis of their shareholding in the “Group” (para 2 of the Arrangements);

(5)  all fees paid to the Company before 6 September 2011 would belong to the Shareholders in full, and the “Group” would continue to levy 30% of 57% of the Earnings of the Company (“30%”) for the operations of the Group (para 7 of the Arrangements);

(6)  as from 7 September 2011, all fees of the Company would be paid over to the “Group”, and the “Group” would arrange for their distribution or apportionment to the homes to which the residents are relocated (para 7 of the Arrangements).

23.  The key dispute between the parties is whether the Letter provides for payment of the monthly sums to be made by SCE/SC/the Group, or by the Defendant. 

24.  It is unfortunate that no clear distinction was made by either Counsel or the parties between the different companies involved: SCE, SC and the Group/Sino Care Group.  The Statement of Claim refers to Shie attending the Meeting for SC, and pleads that the sums under the Agreement were agreed to be paid by the Defendant “via SC or otherwise”.  The Defence, in adopting the nomenclature of the Statement of Claim, refers to the Agreement Pending Listing as having been made between SC and the Company, and refers to the Letter evidencing or containing the Agreement Pending Listing as having been signed by Shie on behalf of SC (and not SCE as the Letter itself states).  Benjamin in his witness statement referred roughly to the Listing Plan as the intention to form and list “a new group of companies collectively known as the Sino Care Group”, whereas the Defence refers (in para 3) to the “Sino Care Group” as a group under SC specifically.  In her witness statement, the Defendant referred (from para 13 on) to SC itself (中國安老集團管理有限公司) as the Sino Care Group. Likewise, Leading Counsel for the Plaintiffs referred in his closing submission to the “Sino Care Group” as SC, and in para 33 to the Listing Plan involving the listing of the Sino Care Group - which is not strictly correct.  The SPA was entered into by SCE as Purchaser, for listing of the shares of Sino Accomplish Limited, and not SC. 

The Agreement Pending Listing

25.  The Defendant claims that the Letter which sets out the Arrangements record the decision made by the directors of SC as to how the customers and residents of the Home, operated by the Company prior to the expiry of the lease for the Premises, would be dealt with in order for the Listing Plan to continue.  She claims that at the request of the Plaintiffs, the Company and SC agreed that notwithstanding the fact that the Company no longer had premises for the Home to continue, the Company was permitted to remain within the group or name of SC for the listing, and its customers were relocated to other companies within the Sino Care Group, Phonenix being one of the companies to take in the Company’s residents.  The Defendant claims that this was all part of the arrangement agreed pending the listing of SCE or Holdco as contemplated under the SPA.  The Agreement Pending Listing was contained in and evidenced by the Letter, which was signed by Shie on behalf of SC and addressed to the Shareholders, as the former shareholders of the Company.

26.  The Defendant’s case was that although she had known of some terms being proposed by Benjamin and the Plaintiffs for the transfer of the residents of the Home, she was only informed of the details for the first time when she was shown the Letter. For the Defendant, matters relating to the Company, the Home and its residents, and whether the Company would be allowed to stay within the Listing Plan and the SPA, were not for her to decide, but by the Group and SCE which owned Rapid Win, the Company and Phoenix after the completion of the SPA. The decision on withdrawing the Company from the Listing Plan had been made and confirmed by SCE/the Group at its meeting on 21 April 2011. Subsequent to that, Shie had attended the Meeting on behalf of the Group and eventually decided on the Arrangements for the transfer of the residents from the Home, to the Phoenix Home and other homes operated by the other companies owned by SCE. The Defendant had no objection to the Arrangements affecting the Phoenix Home, but according to her, she had never been a party to any agreement for her payment under the Arrangements, although Phoenix had made payment of its share of the Substitute Payment to the Shareholders of the Company, in accordance with SC's decision and as reflected in the Letter.

27.  The Defendant claims that under the Agreement Pending Listing, SC would make the monthly payments specified in the Letter to the Company, which payments would continue until the listing of the Sino Care Group, after which time the interests of the Shareholders would be reflected in their respective shareholding in the Sino Care Group.  On the Defendant’s case, therefore, she was not a party to any oral Agreement as alleged by the Plaintiffs nor to the Agreement Pending Listing, and does not have any obligation to make the payments sought by the Plaintiffs.

Construction of the Letter

28.  According to the Plaintiffs, the Letter evidences the Agreement which was orally made with the Defendant but it did not record the terms of the Agreement.  Benjamin claims that paras 3-5 and 8-11 of the Letter had not been agreed at the Meeting, but he did not dispute paras 1, 2, 6 and 7 of the Arrangements - which are the material terms relied upon by the Defendant.  The Plaintiffs have not shown any difference between the terms of the Agreement they allege, and those set out in the undisputed paragraphs of the Letter which on their case also evidences the Agreement.

29.  The common ground amongst the parties is that the customers and residents of the Home were transferred to Phoenix and other companies within the Group.  The Plaintiffs’ case is that the Government funded places and the private paying customers were all valuable assets of the Company, and that the Defendant had, through Phoenix controlled by her and her family, taken up these valuable assets and derived benefit from the operation of the Phoenix Home to which the Company’s customers had been transferred.  The transfer of the Government funded places had been possible only because the Defendant was a director of both the transferor and of transferee companies of the funded places, which could not be transferred without the consent of the Director of Social Welfare.  Since the Defendant obtained benefit through the use of the assets of the Company transferred, she had the personal obligation to make the payments set out in the Letter.  According to the Plaintiffs, even though the Listing Plan fell through, the Defendant remained personally liable to make the payments since the Phoenix Home operated by the Defendant continued to receive profits derived from the customers of the Company. 

30.  According to the evidence of the Plaintiffs, the Group (for which Shie had signed the Letter) was only acting as the middleman, to resolve the dispute between the shareholders of the Company as to whether and how the Company should remain in the Listing Plan.  Although the Letter refers to the Group “distributing” (派發) the monthly payments to the Shareholders, Benjamin and the Plaintiffs understood the Letter to mean that the Group would simply collect the money from the companies operating the homes which took in the Company’s residents, and then forward the payments to the Shareholders.  The Group did not assume any obligation under the Letter to make the monthly payments specified in the Arrangements agreed.  It was purely out of administrative convenience that the Group assumed the role of distribution, since the Group was involved in the collection and receipt of fees from the companies in the Group which had taken in the residents from the Home.  The evidence of Benjamin is corroborated by that of Shie in this respect, who maintained that the Group was acting as the Defendant’s agent in the payment.

31.  Whilst the evidence of the parties as to their subjective intention in entering into an oral agreement may be admissible, ultimately, in determining whether an agreement has been made, what its terms are and whether it is intended to be binding, an objective test is applied (Blue v Ashley (Rev 1) [2017] EWHC 1928 (Comm), relied upon by the Plaintiffs).  To quote Lord Clarke in RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH and Co KG [2010] UKSC 14: “As with all questions of meaning in the law of contract, the touchstone is how the words used, in the context, would be understood by a reasonable person.”

32.  The material context in which the oral Agreement, the Letter and the Agreement Pending Listing were made, and are to be construed and objectively understood, is the Listing Plan and the SPA made between the parties, the termination of the lease for the Premises and the agreed and actual transfer in September 2011 of the residents of the Home to the Phoenix Home and other homes operated by companies in the Group. 

33.  Under the SPA, the Holdco Consideration Shares which the vendors as parties to the SPA were to obtain, upon the successful listing of Holdco, depended on and were to be adjusted in accordance with the Earnings of the target companies injected into the Group.  The Plaintiffs and the Defendant were all shareholders of Lufu, one of the vendors under the SPA. Lufu held the shares in Rapid Win, one of the target companies, and the Company and Phoenix were both held by Rapid Win.  The Plaintiffs as shareholders of the Company had an interest in the Earnings to be made by the Company from the operation of the Home.  The loss of the lease for the Premises of course adversely affected the operation of the Company, and consequently, the shares to which the Shareholders would indirectly be entitled under the SPA.  This was what Benjamin sought to explain. It was inevitably in the interests of all the Shareholders that the Earnings of the Home be allowed to continue (and to reflect the Plaintiffs’ interests in the Company).  On the totality of the evidence, it is clear that the transfer of the residents of the Home to the other homes operated by companies within the Group was intended and agreed to preserve the interests of all the parties involved, and in particular those of the Shareholders of the Company, including the Plaintiffs.  The retention of the customers of the Company and the residents of the Home within the Group meant that (1) the Earnings from the Home could be retained; (2) the Earnings of Rapid Win which held the Earnings from the Home and the Phoenix Home would not be reduced; (3) the overall earnings and profits of SCE which purchased the shares in Rapid Win would be increased with better prospects of listing the Group; and (4) the Plaintiffs and the Defendant as shareholders of the vendor under the SPA would be in a position indirectly through Lufu to obtain more shares in Holdco if the listing should succeed.

34.  This is recognized by SCE in the Letter, when it referred in the preambles to the cooperation of the Shareholders of the Company which secured “valuable assets” for SCE, in the form of the Government funded and private residents and the staff of the Home - despite the expiry of the lease for the Premises - and the transfer of these assets to other homes of SCE. There was obvious benefit to the entire Group of companies in the overall context of the Listing Plan. 

35.  Read and understood in its proper context, the Letter sets out an overall arrangement whereby the Shareholders of the Company and SCE/the Group were to continue to receive benefits to which they were entitled under the Listing Plan and the SPA, as if the Home operated by the Company continued to operate (despite the transfer of its customers to other homes, including the Phoenix Home operated by the Defendant), such that the Shareholders could continue to receive their benefits in anticipation of and in the interim of the listing of Holdco.  If the operation of the Home ceased, and the residents were transferred to other homes within the Group, the Company would cease to have any Earnings, and the Shareholders should have no right to any payment of the 70% reflected in the Arrangements. Under the Arrangements, the Shareholders nevertheless received their share of the 70%, and SCE continued to receive the 30%.  Benjamin accepted that the payment to the Shareholders under the Arrangement would be apportioned amongst them according to their respective shareholding in the Company.  The only difference was that after the transfer in September 2011, the fees received from the transferred customers would be paid to SCE in the entirety (under para 7 of the Arrangements), for SCE to allocate the relevant share or percentage to the companies in the Group which received the customers. 

36.  But for the agreement on the Arrangements, Phoenix and the companies within the Group which received the transferred customers would have been entitled to retain the income as their Earnings, and to receive their due share of such Earnings after paying over 30% to SC, as listing expenses as Benjamin labelled them, or as management fees, in accordance with the Listing Plan and the SPA.  As shareholders of the Company, the Plaintiffs would have no right to share in these Earnings at all, when the Home had ceased operation upon the expiry of the lease.

37.  As Shie accepted in cross-examination, the Arrangements in the Letter he prepared set out the agreed mechanism to calculate the income of the Home, for the purpose of allocation to the Company and the Shareholders who were unable to agree on how the transfer should be resolved and paid for.

38.  On its plain reading, the Arrangements refer to SCE’s payment, by distribution to the Shareholders, of the Substitute Payment after 7 September 2011.  It requires clear wording in the Letter, or otherwise clear evidence from the Plaintiffs, to justify the Court holding that the payment referred to is to be made by the Defendant. 

39.  The Plaintiffs argued that the Defendant herself had received benefit under the Arrangements for the transfer of the customers. The short answer is that the direct benefit from the transfer was received by Phoenix, and not the Defendant personally. 

40.  Even in his testimony, Benjamin recognized and claimed that in the calculation of the Substitute Payment, the intention was to calculate the profit element of the fees and charges received from the residents of the Home, and then to divide the profit element between the Company and Phoenix, as the recipient of the customers from the Company. This is obviously correct, as the residents were transferred from the Home, operated by the Company, to the Phoenix Home, operated by Phoenix. 

41.  The Plaintiffs had also received their share of the Substitute Payment, which was expressly stated in the Letter to replace the Company’s share of 70% of 43% and 57% of the Earnings from the transferred customers.  The Earnings made from the Phoenix Home (as one of the recipients of the transferred customers) operated by Rapid Win (as one of the target companies under the SPA) were to be reflected in the shares to be allotted to Lufu as vendor, of which the Plaintiffs themselves were shareholders at the material time.  The “benefit” from the income received from the customers and places transferred, and which had formerly belonged to the Company, had been received by the Shareholders, and shared with SC and Phoenix.

42.  The Plaintiffs sought to rely on the fact that the conduct of the parties support their contention, of the Defendant being the party who had the obligation under the Agreement to make the Substitute Payment to them. In early 2012, the Company issued an invoice for the monthly Substitute Payment due, for the sum of $186,000 covering the months of November and December 2011 (“Invoice”). On 4 October 2012 and 28 December 2012, two cheques were issued by Phoenix in favour of the Company, for the respective sums of $798,600 and $258,000. The Plaintiffs claim that the 1^st cheque was for the monthly payment due from the Defendant for April to September 2012, and the 2^nd cheque covered the payment from October to November 2012. The cheques were issued by Phoenix, but the Plaintiffs claim that such payment was made by the Defendant through Phoenix, in discharge of her obligation under the Agreement, which was for her to make payment “via SC or otherwise”.  In his testimony, Benjamin accepted that after September 2011, and at least before the listing was abandoned in around April 2012, payment of the $120,000 for the Government funded places had been made by Phoenix (and not the Defendant personally) to SC, and then by SC to the Shareholders.

43.  I do not accept that the conduct of the parties unequivocally supports the Plaintiffs’ case, that the Defendant assumed personal liability under the Agreement.

44.  Leading Counsel for the Plaintiffs relies on the judgment in Chan Chung Yee v Chan Wah Cho, Joe & Anor [2018] HKCFI 611, at para 73, where the Court observed:

“Where the subsequent conduct of the parties cannot be explained except on the basis that they were performing the terms of the contract alleged, then the inference may be drawn that they had in fact entered into the contract on those terms as alleged.”

45.  The passage referred to by Counsel makes it clear that what is required is that the conduct of the parties cannot be explained except on the basis that they were performing the contract on the terms as alleged: ie that the obligation for payment in this case was assumed by the Defendant personally.

46.  First, the cheques relied upon to show the Defendant’s payment of the agreed amounts were issued not by the Defendant personally, but by Phoenix. The Plaintiffs’ claim, that the Defendant had personally agreed to make payment “through SC or otherwise”, is denied by her. The issue of the cheques can be explained either on the basis that the obligation to make payment was imposed on and assumed by Phoenix, and not the Defendant, or on the basis asserted by the Plaintiffs, that the Defendant agreed to make payment by herself, through SC or otherwise. The cheques which were issued by Phoenix can equally be explained on the Defendant’s assertion, and cannot unequivocally establish the Plaintiffs’ case.

47.  Secondly, the Invoice which was issued by the Company, for the sums relating to November and December 2011, was in fact addressed to the chairman of SCE. It expressly referred to the calculations of the distribution of profits, “based on the agreement between the shareholders of the Company and SCE”. There is also reference in the Invoice to the monthly Substitute Payment by the Phoenix Home (which took in the Government funded places from the Company) to the Home. There is no reference at all to the Defendant, or to any agreement with or payment by the Defendant personally.

48.  On her part, the Defendant claims that the cheques were issued as a result of the Plaintiffs’ persistent requests and demands for the Substitute Payment referred to in the Letter setting out the Agreement Pending Listing. On her case, she had made the payments on the Plaintiffs’ promise that upon receipt of these payments from her on behalf of SC/the Group, the Plaintiffs would negotiate with SC/the Group to resolve their dispute with SC/the Group as to their entitlement under the Listing Plan, when the listing fell through. The Defendant claims that there had been negotiations with and agreement by other vendors under the SPA to reinstate ownership of the elderly homes from the Group to the vendors, but that the Plaintiffs had withheld their agreement and had instead made claims against SC/the Group in respect of the failed listing, with which course of action she did not agree.  She was also keen to have the Plaintiffs’ resolution of the matter such that they can withdraw from their shareholding in Lufu.

49.  It is also pertinent that, apart from the issue of the Invoice to SCE, the Plaintiffs had throughout, until December 2013, sought the Substitute Payment from the Group. In the letter dated 29 May 2012 from the Company to the chairman of SCE, which was signed by the 1^st Plaintiff and the Defendant, reference was made to the agreement between the Company and SCE, and to the payment due from SCE to the Shareholders, when demand for payment was made. The Company also resolved, at a meeting of its shareholders on 23 September 2013, to commence legal proceedings against “Sino Care” （中安）, for payment of the same fees said to be outstanding and payable. The letter of demand issued by the solicitors acting for the Plaintiffs on 12 July 2013 was issued to SC. It referred to the Shareholders’ entitlement to about $157,000 per month (as the Substitute Payment) from the Group, and to the agreed payment by SC to the Company, for distribution to the Plaintiffs. The Plaintiffs did emphasize in the letter that legal proceedings would be commenced against the Group “and the other parties concerned”, including the Defendant, Shie and the chairman of SCE. 

50.  Pursuant to the letter of demand of 12 July 2013, solicitors acting for SC claimed in their letter of 8 November 2013 to the solicitors for the Plaintiffs that SC had only agreed, as a matter of administrative convenience, to act as the agent of the Defendant, in collecting the monthly payments from her and to forward or pay such amount collected from her to the Plaintiffs. SC claimed that when the Defendant stopped payment of the monthly amounts, SC did not forward any payment to the Plaintiffs, and denied that they owed any obligation to the Plaintiffs. Only as a result of this letter, did the Plaintiffs commence to demand from the Defendant personally payment of what they claim to be their entitlement to the Substitute Payment. It was argued on behalf of the Plaintiffs that it was only upon their discovery, from the solicitors acting for SC, that the Defendant had failed to make payment to SC, that they decided to pursue their claim against the Defendant.

51.  On my reading and construction of the Arrangements set out in the Letter, and in the light of the evidence from the parties, including in particular the contemporaneous documents (which I find more reliable than the self-serving statements made in the parties’ witness statements and testimony) such as the correspondence exchanged between the parties at the relevant time, the demand letters issued in the name of the Company to SC, the Invoice, the cheques issued by Phoenix, and the record of the meeting of the Company held on 23 September 2013, I find Benjamin’s evidence on the personal agreement made with the Defendant, and her personal obligations to make payment, to be improbable and unreliable. The contemporaneous documents in particular are inconsistent with the Plaintiffs’ assertions as to the Defendant’s personal liability.

52.  In relation to Shie’s testimony, although he supports the Plaintiffs’ assertion that it was the Defendant who had personally agreed to make the Substitute Payments, that must be considered in the light of the clear interest of SCE to avoid responsibility under the Agreement alleged by the Plaintiffs and the Agreement Pending Listing, both evidenced by the Letter.  However, even in his testimony, when Shie was asked who was obliged to pay the amounts specified in the Letter, his answer was that it was “those which received the clients of the Company”, and that these included the companies or homes which were owned by his family. For the Government funded places and the 7 private paying clients that were transferred from the Home, the recipient of these clients was Phoenix owning the Phoenix Home, and not the Defendant.  It is also pertinent that on Shie’s evidence, if the Group could not be listed, it would be the homes, and the companies owning the homes taking in the customers of the Company, which should be making payment of the amounts to the Shareholders.

53.  Whatever may be the subjective intention and understanding of Benjamin, Shie and the Defendant, and whatever their wishful thinking as to the effect of the Letter and the Arrangements, the Letter in writing has to be construed in the context of the case, which includes the Listing Plan and the SPA. It is not for the Court to rewrite the parties’ agreement after the event, and on whatever terms as the parties may retrospectively consider to be fair or reasonable. It must also be borne in mind that the onus is always on the Plaintiffs in this case to establish, on a balance of probabilities, that the Agreement they allege was made with the Defendant personally, and that she had personally agreed to make the Substitute Payment to the Plaintiffs. On the available evidence, I reject the Plaintiffs’ case that, objectively understood and construed, the Letter evidences an agreement by the Defendant to personally pay the amounts set out in the Letter.

Implied term

54.  In any event, the Arrangements clearly recognize that the Substitute Payment was only for the duration of the time prior to the listing of Holdco/the Group.  Paragraph 2 of the Arrangements expressly states that upon such listing, the Shareholders would only get their share of profits from the shares they hold in the Group.  According to the Defence, as the sole purpose of the Agreement Pending Listing was to provide for arrangements pending the listing of Holdco, the Agreement Pending Listing contained an implied term that any payment obligations would cease upon the failure of the proposed listing.  The Plaintiffs’ claims for the payment due relate to the period commencing from December 2012, after the listing was abandoned in April 2012.

55.  The legal principles applicable to implied terms are not seriously disputed. They are as set out in Kensland Realty Ltd v Whale View Investment Ltd and BP Refinery v Shire of Hastings (1978) 52 ALJR 20, and affirmed in Lo Yuk Sui v Fubon Bank (Hong Kong) Ltd [2019] HKCA 261.

56.  Paragraph 2 of the Arrangements states expressly that the Substitute Payment was to be maintained until the listing of the Group. Thereafter, the Shareholders would only be entitled to distribution of profits on the basis of their shareholding in the Group. The listing did not materialize, and on its express wording, paragraph 2 would mean that the Shareholders would continue, indefinitely, to receive the Substitute Payments, at least until the residents choose to move away from the homes operated by the Group, or upon their demise (as expressly stated in relation to the payments of $2,000 and $1,500 for the fee paying customers). For the Government-funded places, the monthly fee of $120,000 would continue to be payable by the Defendant or SC to the Shareholders. On behalf of the Defendant, it was argued by Counsel that this cannot make business sense. The Phoenix Home to which the Company’s customers were transferred had to incur expenses to provide its services, but the Substitute Payment which was calculated on the basis of the 70% share of the relevant Earnings of the home was to be paid to the Shareholders under the Arrangements, with 30% being paid over to the Group.  Since the listing fell through, there would be no further compensation in the form of any shares in Holdco being issued on the basis of the Earnings of Rapid Win, through Phoenix. Benjamin accepted, in his evidence, that with the transfer of the Government funded places to Phoenix, a new agreement for 12 months only was signed between Phoenix and the Director of Social Welfare, and there was no guarantee that Phoenix would be allocated any Government funded places for the Phoenix Home.

57.  By virtue of the express wording used at the end of paragraph 2 of the Arrangements, I accept the submissions of Counsel for the Defendant, that in the context of the Letter and the circumstances in which the Agreement/Agreement Pending Listing was made, the common intention of the parties when they entered into the agreement evidenced by the Letter must be that the Substitute Payment set out in paragraph 2 of the Letter was only to be payable in the interim up to the contemplated listing of the Holdco, and would cease in the event that the listing was not approved, and could not proceed as envisaged under the SPA. The term to be implied as to the duration of the payments was in my view obvious at the time of the making of the Agreement/Agreement Pending Listing, and goes without saying, and is also necessary to give business efficacy to the agreement evidenced by the Letter.

58.  Since I accept the Defence on implied terms, it is not necessary to decide whether the agreement evidenced by the Letter was frustrated by virtue of the listing falling through.

Disposition

59.  The Plaintiffs’ claims made against the Defendant in this action are accordingly dismissed, with costs to the Defendant.