TSANG WING WAI MICHAEL v. SUNLINK COMMERCIAL LTD

HCA 2407/2019

[2023] HKCFI 3368

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2407 OF 2019

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D E C I S I O N

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1.  This is the Defendant’s application to strike out and expunge certain parts of the Statement of Claim (“SOC”) and the Plaintiff’s witness statement of Tsang Wing Wai Michael (“Tsang’s Witness Statement”) made by summons under O 18 r 19; O 38 rule 2A of RHC, and inherent jurisdiction dated 17 April 2023 (“Strike Out Summons”).

2.  The Plaintiff by summons dated 29 June 2023 applied for leave to amend the SOC (“Amendment Summons”) and attached the draft amended Writ of Summons and draft amended SOC (“ASOC”).

3.  The Plaintiff served its skeleton submissions on 14 November 2023. Contained at §17 of the Plaintiff’s skeleton submissions were further amendments in respect of §§45(i),(p) and (q) of the SOC, which were different from those attached to the Amendment Summons.

4.  In the Plaintiff’s supplemental skeleton submissions served on 15 November 2023, the Plaintiff indicated further amendments to the SOC which were different from those attached to the Amendment Summons (“New Amendments”).

5.  In support of the Strike Out Summons, the Defendant filed the Affirmation of Chen Kam Tai William on 17 April 2023 and 2^nd Affirmation of Chen Kam Tai William on 5 September 2023. The Plaintiff filed the 2^nd Affirmation of Tsang Wing Wai Michael on 25 May 2023 in opposition to the Strike Out Summons.

BACKGROUND

6.  The Defendant is a private company engaged in the business of investment, management and enhancement of commercial properties in Hong Kong. Chen Kam Tai, also known as William Chen (“CKT”), is the sole director and sole shareholder of the Defendant. The Plaintiff was an employee of the Defendant from 8 September 2015 and 4 June 2019.

7.  After the Plaintiff joined the Defendant, he was mainly in charge of arranging and procuring the Defendant to acquire real properties, in particular, by refurbishing and renovating them for higher rental incomes and better tenant mix. The Plaintiff was also responsible for arranging the financing of the purchase of these properties (usually by revolving mortgaged loans for fixed terms) and the refinancing thereof.

8.  During the course of the Plaintiff’s employment with the Defendant, the parties entered into 3 incentive agreements (“2015 PISA”, “2016 PISA” and “2017 PISA”), under which the Plaintiff is entitled to receive:

a.  a “Sale Value Profit Bonus”, a bonus for profit from the sale of a property acquired; or

b.  a “LTIAMVE Bonus”, a bonus for long term investment and asset management value management when the relevant property has increased in value and reached a state where the increased rental income has achieved a steady return.

9.  Two of the properties that the Defendant (or its affiliate) had acquired during the material time were as follows:

a.  the whole building of Smart A (薈學坊), located at Nos 348- 352 Prince Edward Road West (“Smart A Project”), which was acquired for HK$285 million in January 2011 and was governed by the 2016 PISA; and

b.  the commercial and car park areas at Tin Wan Estate (田灣邨), located in Aberdeen (“Tin Wan Project”), which was acquired for around HK$486 million in October 2015 and governed by the 2015 PISA.

10.  It is the Plaintiff’s case in the ASOC that:

a.  in negotiating the amount of the LTIAMVE Bonus or Sale Value Profit Bonus for the Tin Wan Project that should be paid to him, the parties had agreed that such bonus should be calculated based on a notional sale of the property in which the valuation of the property accepted by the mortgagee bank for refinancing purpose shall be deemed to be the price of the property at such notional sale (and accordingly, that the comparison coefficient “b” shall be calculated based on the respective Monthly Private Retail Price Indices of the Rating and Valuation Department at the time of the bank valuation of the property for refinancing purpose and at the time of the acquisition): §45 of the ASOC.

b.  On 28 May 2019, by WhatsApp, upon CKT’s suggestion, P and CKT agreed that the bonus in respect of the Tin Wan Property shall be paid to the Plaintiff’s personal account from the personal account of either CKT or his father Chen Rui Cheng (“CRC”); and that there would be no need to book the bonus payment in the accounts of the Defendant or the relevant project company. Such an agreement was for the purpose of saving the Plaintiff’s potential liability to pay tax on the bonus received, the effect of which was to shift the tax liability to the Defendant. This was described in the ASOC as the “Tax Liability Agreement” : §45(i) of the ASOC.

c.  On 29 May 2019, at a luncheon meeting at Zentro East at Lee Garden Three, Causeway Bay, the Plaintiff and CKT orally agreed that, in calculating the bonus, the independent valuation accepted by Hang Seng Bank, i.e. the mortgagee bank for refinancing, namely HK$1,500,000,000 shall be used as representing the notional sale price: §45(j) of the ASOC.

d.  Hence the LTIAMVE Bonus and Sale Value Profit Bonus should be calculated as follows: (HK$1,500,000,000 – HK$486,268,899) x 8% x 200% = HK$162,196,976.10: §45(k) of the ASOC.

e.  After lunch, at about 15:21-15:23, by WhatsApp, CKT’s request for the Plaintiff’s personal bank account number, the Plaintiff provided the account number of his personal account with Standard Chartered Bank to CKT, and suggested that it would be preferable for the bonus to be paid from CKT’s father’s account. The Plaintiff also confirmed that the amount of the bonus shall be HK$162,196,976.16 but he was prepared to receive HK$2,000,000 less as a reserve for discretionary bonuses to be given to other staff members at the end of the year :§45(l) of the ASOC.

f.  The Plaintiff also proposed that they shall sign a gift voucher (intended to mean a deed of gift). The payment of the bonus as a gift from the personal account of CKT or his father to the Plaintiff’s personal account coupled with the execution of a deed of gift would ensure that such payment would not attract any tax liability on the part of the Plaintiff and that the source of the funds would come clean from CKT personally: §45(m) of the ASOC.

g.  CKT requested a 20% discount on the ground that the property had not actually been sold and that the increase in value of the property had not taken into account the cost of refurbishing and renovating the property. He offered to pay HK$162,196,796 x 80% = HK$129,757,581: §45(n) of the ASOC.

h.  The Plaintiff objected and counteroffered to accept a 15% discount and the following sum: HK$162,196,976 x 0.85 = HK$137,867,430:§45(o) of the ASOC.

i.  The Plaintiff made this concession solely in consideration of the Tax Liability Agreement: §45(p) of the ASOC.

j.  CKT accepted the Plaintiff’s counterproposal. In the circumstances the amount of the LTIAMVE Bonus or Sale Value Profit Bonus for the Tin Wan Project had been agreed at a reduced sum of HK$137,867,430: §45(q) and (r) of the ASOC.

k.  But for the Tax Liability Agreement, the Plaintiff would not have agreed to the concessions on the bonus payments for the Tin Wan Project from HK$162,196,976 to HK$137,867,430 and for the Smart A Project from HK$28,800,000 to HK$6,000,000 (the “Agreed Concessions”): §57 of the ASOC.

l.  In §§2.3 and 57.1 of the Amended Defence and Counterclaim, the Defendant contended that the Tax Liability Agreement was unenforceable as it was tainted by illegality. For the avoidance of doubt, P had no intention to “cheat the public revenue” as alleged. Rather, his understanding and intention were that either CKT or the Defendant would be responsible for the tax which would otherwise be payable by the Plaintiff. The Plaintiff admits for present purposes that the Tax Liability Agreement, in the terms agreed between the parties, would be tainted by illegality, and does not seek to enforce the same. However, given that no illegal purpose has been carried into effect, the Plaintiff is entitled to restitution of the consideration of the Tax Liability Agreement, namely the Agreed Concessions: §79 of the ASOC.

m.  Further or alternatively, for the reasons pleaded above, the Tax Liability Agreement could not amount to any valid consideration for the Agreed Concessions, and in the circumstances, there being no consideration for the Agreed Concessions, the same is not enforceable, and the Plaintiff is entitled to the full amount of the LTIAMVE Bonus or Sale Value Profit Bonus for the Tin Wan Project and the Smart A Project: §79A of the ASOC.

n.  Further or alternatively, if the Tax Liability Agreement did not exist (which is denied), there is no valid consideration for the Agreed Concessions. Accordingly, the Plaintiff is entitled to the full amount of the LTIAMVE Bonus or Sale Value Profit Bonus for the Tin Wan Project and the Smart A Project: §79B of the ASOC.

NEW AMENDMENTS

11.  On 15 November 2023, the Plaintiff introduced the New Amendments, among others, as follows:

a.  In §45(i) of the ASOC, by amending the Tax Liability Agreement to now state the “Tax Liability Proposal”, among others. Furthermore, the Plaintiff replied to CKT’s WhatsApp message of 28 May 2019 that he would need to consider CKT’s suggestion after checking with his tax accountant first because of his concern about money laundering. It was the understanding of CKT and the Plaintiff that CKT’s suggestion was for the purpose of saving the Plaintiff’s potential tax liability on the bonus received.

b.  In §45(j) of the ASOC, by amending that the Plaintiff and CKT confirmed their agreement to the Tax Liability Proposal at the lunch meeting on 29 May 2019 (the “Tax Liability Agreement”).

c.  In §57 of the ASOC, by adding that insofar as necessary, the Plaintiff invites the Court to infer that CKT would have been fully aware and understood this fact given that the Agreed Concessions formed part of continuing discussions on the subject of the Plaintiff’s bonus of which the luncheon meeting only several hours earlier (where the Tax Liability Agreement was discussed) also formed part.

d.  In §79 of the ASOC, by adding “and thus unenforceable” after “would be tainted by illegality.”

DISCUSSION

12.  The New Amendments changed the Plaintiff’s case to now rely on an oral agreement formed at a lunch meeting of 29 May 2019 as the basis of the Tax Liability Agreement.

13.  Mr Lam submitted that the Defendant should not be surprised about the New Amendments. He described these as technical amendments and not substantive as the Defendant knew of the facts.

14.  He drew my attention to §45(e) of the SOC:

“P and CKT also agreed to find a way to reduce the potential tax liability of P upon receipt of the bonus.”

15.  The Defendant had requested Further and Better Particulars of the SOC of §45(e) and the Plaintiff provided Answers to the Defendant’s Request for Further and Better Particulars of the SOC on 12 October 2020. This included the Answers to the Request for Further and Better Particulars of §45(e) of the SOC as follows:

“10. The agreement was made orally and evidenced in writing by the conversations between P and CKT in WhatsApp.

Further or alternatively, the agreement was made by conduct and evidenced in writing by the conversations between P and CKT in WhatsApp.

11.(a) The agreement was made sometime before 6.26 p.m. on 8 August 2018 and, among others, confirmed again on 28 May 2019 and during the lunch meeting at Zentro East (“Zentro East”), a restaurant situate in Lee Garden Three, Causeway Bay, Hong Kong on 29 May 2019.

(b) So far as the agreement was made orally, it was concluded at the Defendant’s office.

The agreement was confirmed, among others, via WhatsApp on 28 May 2019 and during the lunch meeting at Zentro East on 29 May 2019 and business meetings between P and CKT from time to time.”

16.  It was submitted that in giving particulars for §45(e), there was no attempt by the Defendant to strike out the Answers to the Further and Better Particulars.

17.  The lunch meeting on 29 May 2019 was a further confirmation of the Tax Liability Agreement.

18.  Mr Lam also drew my attention to the Plaintiff’s witness statement of 11 November 2022 (“P’s Witness Statement”), in particular §§126(13),(15), and (16) to illustrate there was nothing new in the New Amendments. In particular, §126(13) states at on 28 May 2019, the Plaintiff and CKT agreed through WhatsApp to directly transfer the performance bonus for the Tin Wan Project from CKT’s personal bank account (or from his father, CRC’s personal bank account) to the Plaintiff’s personal bank account. The bonus does not need to be recorded in the accounts of Sunlink or the project company. This arrangement was made to exempt the Plaintiff from potential tax liabilities arising from the receipt of the bonus (referred to as the “tax agreement”). §126(15) of P’s Witness Statement also referred to the 29 May 2019 lunch meeting between the Plaintiff and CKT, in which (a) the parties reached an agreement that the independent project valuation of HK$1,500,000,000 would serve as the “notional sale price” for calculating the performance bonus for the Tin Wan Project; and (b) the Plaintiff and CKT reaffirmed the earlier tax agreement.

19.  As for the WhatsApp messages exchanged between the Plaintiff and CKT on 28 May 2019, there was no mention of an agreement. It was alleged that the Tax Liability Agreement took place in the subsequent lunch meeting on 29 May 2019.

20.  It was submitted that the only difference in the New Amendments from the ASOC was whether the Tax Liability Agreement was formed on 28 May 2019 or 29 May 2019 at the lunch meeting.

21.  Accordingly, it was submitted that the New Amendments for §45(i) and (j) should be allowed.

22.  However, the Plaintiff’s Answers to the Requests for Further and Better Particulars were in respect of §45(e) and not §45(i) of the SOC where it is now alleged that the Tax Liability Agreement was made at the lunch meeting of 29 May 2019. Even based on the Plaintiff’s Answers to the Requests for Further and Better Particulars of §45(e), this is based on an agreement having been made sometime before 6.26 pm on 8 August 2018 and, among others, confirmed again on 28 May 2019 and during the lunch meeting on 29 May 2019. The Plaintiff’s case on the Tax Liability Agreement as contained in the New Amendments is now based solely on an oral agreement being made on 29 May 2019.

23.  The New Amendments proposed by the Plaintiff in §11 above were only fully set out in an ASOC handed to the court for the first time at the hearing.

24.  Before the New Amendments, the Plaintiff’s case on the Tax Liability Agreement was based on the WhatsApp communications of 28 May 2019, as indicated in the ASOC attached to the Amendment Summons:

“On 28 May 2019, by WhatsApp, upon CKT’s suggestion, P and CKT agreed that the bonus in respect of the Tin Wan Property shall be paid to P’s personal account from the personal account of either CKT or his father, CRC; and that there would be no need to book the bonus payment in the accounts of D or the relevant project company. Such an agreement was for the purpose of saving P’s potential liability to pay tax on the bonus received, the effect of which was to shift the said liability to D (the “Tax Liability Agreement”).” (amendments to SOC indicated in underline).

25.  It was clear from the Plaintiff’s supplemental skeleton submissions containing the New Amendments served one day before the hearing of the Strike Out Summons and Amendment Summons that the Plaintiff no longer sought to amend its SOC as per the ASOC as attached to the Amendment Summons.

26.  There was no proper application to the Court to amend the SOC based on the New Amendments. No summons and supporting affirmation had been filed.

27.  Under Order 32 r 3 of RHC, a summons asking only for the extension or abridgment of any period of time may be served on the day before the day specified in the summons for the hearing thereof but a summons must be served on every other party not less than 2 clear days before the day so specified.

28.  No abridgment of time was sought by the Plaintiff. Such orders are rare except by consent, and in practice almost limited to leave to serve short notice of certain urgent proceedings where no injustice would thereby be caused to the other party. Abridgement of time for the hearing of an originating summons will be refused where no very special or urgent reasons are shown (Talent Hope Ltd v Magnificent Estates Ltd [1995] 3 HKC 593): Hong Kong Civil Procedure 2023 at §3/5/4.

29.  Mr Man submitted that the New Amendments introduced a day before the hearing were in effect a de facto abridgment of time, and no special or urgent reasons were shown here.

30.  He submitted that the New Amendments were very different than those contained in the ASOC appended to the Amendment Summons. The time has not come to consider them.

31.  In Kayden Ltd. v Securities & Futures Commission (2010) 13 HKCFAR 696, Ribeiro PJ at §70 observed that:

“[i]t is the general practice of the court not to give leave to amend any originating process or pleadings without having sight of a formulated amendment. That is obviously as it should be since the court ought to be clear as to how precisely the applicant is seeking to modify its existing case and the other party ought to have a proper opportunity to object to the amendment.” (my emphasis).

32.  The Defendant submitted that, given the lateness of the proposed New Amendments and the way that the proposed New Amendments were made, they did not have an opportunity to properly consider them. If and when the Plaintiff makes a proper application to amend pursuant to the New Amendments, then the Defendant would then consider what stance to take and if the application is opposed, what evidence it would file in response.

33.  The Defendant submitted that if and when the Plaintiff made a proper application to amend based on the New Amendments, it would need to consider whether it would oppose an application to amend based on the New Amendments on the ground that it is unjustifiably late and would cause irreparable prejudice to the Defendant.

34.  There would be such prejudice, if, by reason of the lateness of the amendment, the other party suffers difficulty in gathering evidence: Asia-Pac Infrastructure Development Ltd v Shearman & Sterling (a firm) (unrep, HCA 806/2006, 19 November 2014) at §39; Johnson Controls Hong Kong Ltd v Associated Engineers Ltd (unrep, HCCT 47/2011, 28 February 2012) at §39.

35.  As the Tax Liability Agreement was allegedly formed during a lunch meeting in May 2019 (4.5 years ago) and the SOC was filed in May 2020, it was submitted by the Defendant that the New Amendments were late. Given the nature of the Plaintiff’s allegation regarding the Tax Liability Agreement being concluded orally on 29 May 2019 as opposed to by WhatsApp on 28 May 2019 (which was contained in the SOC) and the inevitable fading of memory, there was a respectable argument of prejudice. The Defendant submitted that it was entitled to time to consider what position to take regarding the proposed New Amendments.

36.  I am of the view that the differences in the amendments in the New Amendments compared to the ASOC are significant. The Answers to the Request for Further and Better Particulars do not assist the Plaintiff; they were for §45(e) of the SOC, and not §45(i). Even then, this is based on an agreement having been made sometime before 6.26 pm on 8 August 2018 and, among others, confirmed again on 28 May 2019 and during the lunch meeting on 29 May 2019.

37.  The Plaintiff’s Witness Statement also does not assist the Plaintiff. §126(13) refers to the agreement between the Plaintiff and CKT through WhatsApp on 28 May 2019. The arrangement made through WhatsApp to exempt the Plaintiff from potential tax liabilities arising from the receipt of the bonus was referred to as the “tax agreement.”

38.  The Plaintiff is not requesting this court to make an order in terms of the Amendment Summons due to the New Amendments. No summons has been filed in support of the New Amendments, which were only provided a day before the hearing. The court in any event only grants an abridgment of time if very special or urgent reasons are shown. None have been demonstrated here.

39.  I agree with Mr Man’s submissions that the forensic task to consider the New Amendments has not come and the Defendant should be given a proper opportunity to respond by considering the New Amendments and adducing affirmation evidence. Given the passage of time, it may be that the Defendant will want to object to the New Amendments (in particular the Tax Liability Agreement being concluded orally on 29 May 2019) on the ground of prejudice.

40.  It is only fair for the Defendant to have a proper opportunity to object to the New Amendments. The proper course is for the court to adjourn the Strike Out Summons so that the Plaintiff files a summons to amend the SOC based on the New Amendments.

DISPOSITION

41.  For all the reasons above, I formally make an order to adjourn the Defendant’s Strike Out Summons, with costs to be reserved. The Plaintiff’s Amendment Summons is dismissed with costs to be reserved.

42.  The costs of this hearing be reserved.

43.  Further directions can be given at a call over hearing after the Plaintiff has filed its summons attaching the proposed New Amendments.

44.  I thank leading counsel for their helpful submissions.