SPIN PARTS LTD v. TSANG KING MAN

DCCJ 6386/2004

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 6386 OF 2004

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JUDGMENT

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Introduction

1.  In this action, the Plaintiff is suing for the outstanding balance of a loan which was evidenced by what was referred to by the parties as a promissory note dated 15 February 2000 (“the Note”).

2.  The defence is essentially that this was not a genuine loan.  There has allegedly been settlement(s) between the parties so that the Defendant's liability to the Plaintiff has been discharged.

Background

3.  In about 1989 to 1990, Wu Ka Sum (“WKS”) and the Defendant, together with 4 other persons, became the beneficial owners of one Craftech Engineering Limited (“Craftech”).  The understanding was that, among them, WKS and the Defendant would each be entitled to 20% beneficial interest in Craftech.  At the time, the Defendant was a structural engineer under the employ of the Buildings Department of the Hong Kong Government.  His 20% shareholdings in Craftech were held on trust by WKS.

4.  In about 1992 to 1993, Craftech purchased 95% shareholdings in one Chuen Hing Construction and Engineering Limited (“Chuen Hing”).  Through his interest in Craftech, the Defendant became effectively entitled to 19% beneficial interest in Chuen Hing.

5.  Craftech and Chuen Hing carried on construction business.

6.  The Plaintiff is a textile company.  Wu Ka King  (“WKK”) was and still is the majority shareholder and director of the Plaintiff.  WKK has been carrying on textile business since the 1970's.  He is the elder brother of WKS.

7.  In about 1993, one of the beneficial shareholders of Craftech (and Chuen Hing) transferred for value effectively 5% beneficial interest in Chuen Hing to WKK.

8.  In about 1999, the Government required all the registered contractors to employ a “Qualified Person” to take up the duties as, among others, the Technical Director.  The Defendant possesses the necessary qualifications to become such a director.

9.  In about January 2000, the Defendant left the Government and joined Chuen Hing as a director and became the Technical Director.

10.  The Note was dated 15 February 2000.  It consists of a handwritten part in Chinese.  It says that the Defendant borrowed from the Plaintiff a sum of HK$200,000 at the interest rate of 10% per annum.  The loan together with the interest was repayable from 1 March 2000 by 18 monthly instalments as stipulated in 2 repayment schedules appended to the Note.  Each monthly instalment was HK$12,011.  The Note was signed by the Defendant as the borrower.  On the same day, the Defendant received the sum of HK$200,000 from the Plaintiff.

11.  During the period between March and August 2000, the Defendant paid to the Plaintiff 6 such monthly instalments of HK$12,011.

12.  During the period between November 2001 and June 2002, the Defendant made 4 other separate payments in the total amount of HK$15,000.

13.  Chuen Hing was wound up in September 2003.

14.  The above background is not in dispute.

The Plaintiff's case

15.  WKK gave evidence.

16.  According to WKK, on 14 February 2000, he received a telephone call from the Defendant asking to meet with him on the following day.  On 15 February 2000, the Defendant visited the Plaintiff's office in Tsuen Wan.  The Defendant explained that he had obtained a loan from the Government for the purchase of an apartment in Shatin.  Now that he had left the Government, he had to repay the outstanding loan.  He had insufficient cash and asked for a loan from WKK.  WKK did not know the exact amount of the outstanding housing loan owed by the Defendant.  However the Defendant asked him to lend an amount of HK$200,000.  He offered to pay interest at 10% per annum.  He also showed WKK the 2 schedules of proposed repayment which were subsequently appended to the Note.  WKK agreed.  Since WKK had insufficient cash, he drew the cheque on the Plaintiff's behalf for the sum in favour of the Defendant.

17.  WKK prepared the Note on the same day.  The original of the Note was produced in court.  He made a photocopy of the Plaintiff's cheque.  He handed the cheque to his staff, Mr. Tsui, to deposit into the Defendant's bank account with the HSBC.  He managed to recall the branch of the bank which Mr. Tsui went to.  Mr. Tsui returned with the deposit slip which WKK attached to the photocopy just below the image of the cheque.  He then wrote out the bottom part of the Note in Chinese, copied the Defendant's identity card number onto it and dated it.  The Defendant signed it on the same day.

18.  After 6 monthly instalments, the Defendant stopped payment after August 2000.  WKK said he has requested the Defendant for repayment.  In particular, he has asked Wong Wai Yeung (“Wong”), who was also a beneficial shareholder and director of Chuen Hing, to help request the Defendant to repay.

19.  According to WKK, the Defendant replied that he had cash problem.  At WKK's request, the Defendant agreed and repaid the interest part.  These were the total sum of HK$15,000 which the Defendant paid on 4 occasions during the period between November 2001 and June 2002.

20.  In September 2004, the Plaintiff finally demanded the Defendant for repayment through his solicitors.

The Defendant's case

21.  The Defendant gave evidence.  He called Wong as his witness.

22.  The Defendant contends that the HK$200,000 was not a loan by the Plaintiff to the Defendant.  Instead, this was part of an amount of HK$400,000, which WKK and WKS agreed to pay through the Plaintiff, as part of the remuneration package for the Defendant to resign from the Government and to work full time at Chuen Hing.  The sum was what the Defendant needed to discharge the outstanding Government housing loan when he resigned.

23.  According to the Defendant, to make up the required HK$400,000, he would borrow HK$200,000 from the HSBC.  WKK and WKS would pay the other HK$200,000 through the Plaintiff.  Chuen Hing would pay an additional allowance of HK$24,000 per month to the Defendant to enable him to cover the monthly repayment to the bank and the Plaintiff.  Therefore, it was the liability of Chuen Hing to repay the Plaintiff, though through the Defendant.

24.  The Defendant explained that he signed the Note acknowledging the debt only at the request of WKK and WKS to facilitate the accounting procedure of the Plaintiff.  He signed the Note at Chuen Hing's office.  He denied what WKK said to have happened at the office of the Plaintiff on 15 February 2000.

25.  According to the Defendant, Chuen Hing stopped paying his salary and monthly allowance in September 2000.  He also stopped repaying the Plaintiff.  In 2001, he ceased to work for Chuen Hing.  After negotiation in 2001, the Defendant agreed with WKK and WKS to settle this way: the Defendant would not pursue Chuen Hing for the unpaid remuneration and in consideration of which the Defendant would only be required to pay a further nominal amount of HK$15,000 to the Plaintiff by instalments within 2 years.  This explains the HK$15,000 which he paid to the Plaintiff during the period between November 2001 and June 2002.

26.  In January 2002, the Defendant filed a claim against Chuen Hing in the Labour Tribunal and subsequently obtained judgment (Claim No. LBTC304/2002).  His case is that after further negotiation in mid-June 2002, the parties agreed that the Defendant would not enforce the judgment in consideration of the Plaintiff agreeing not to pursue against the Defendant for the balance of the amount of HK$200,000.

27.  By reason of the settlement(s), it is averred that the Defendant's liability to the Plaintiff has been discharged.

DISCUSSION

28.  In summary, the Plaintiff and the Defendant differ mainly in the following areas:

(1) whether the HK$200,000 from the Plaintiff was part of the Defendant's remuneration for joining Chuen Hing;

(2) how the Note came to exist; and

(3) whether there were the alleged settlements.

WKK and Chuen Hing

29.  When WKS was the director of Craftech and Chuen Hing, he was very much in charge of their management.  Wong confirmed this.

30.  On the contrary, WKK was never a director of Craftech or Chuen Hing.  He was a minority beneficial shareholder of these companies.  According to WKK, he knew very little about the construction industry.  He did not take part in the operation of the companies but would attend the monthly meetings of the beneficial shareholders of Craftech.  This is evidenced by the few sets of minutes of those meetings during the period between 1993 and 1995.  Wong also confirmed this.  The minutes of the meeting on 1 April 1994 recorded the restructured management level of Craftech.  WKK was not a member of the management level nor was he assigned any duty.  Wong added that the directors of Chuen Hing seldom had meeting but if they happened to meet, they would discuss matters.

31.  The Defendant gave evidence that WKK participated in a couple of important operations in late 1999 and 2000.  However, this was neither put to WKK nor specifically corroborated by Wong.

32.  I find that WKK's involvement in the management of these companies was minimal.

WKK and the Defendant's employment

33.  WKK denied having taken part in urging or discussing with the Defendant the terms of the Defendant's employment by Chuen Hing.

34.  The Defendant maintained the contrary in his evidence.  However, in his statement which was adopted as his evidence, the Defendant repeated that it was only WKS who discussed with and offered to him the terms of his employment.  When asked about this, he sought to explain that he might have simplified the reference to the 2 Wu's and that he treated WKS and WKK as one since they are brothers.

35.  Wong gave evidence to the effect WKK was present in a meeting where the employment terms of the Defendant were discussed.  However, in his statement which was also adopted as his evidence, he named all the persons present at the meeting but not WKK.  When asked about this, Wong seemed to suggest that he did not realise the importance of the missing reference to WKK.  I also find it strange for Wong to be so equivocal in saying in his statement that he only supposed WKK (and other shareholders) knew the terms of the Defendant's employment if WKK was really privy to such discussion as alleged.

36.  In the circumstances, as to whether WKK took part in discussing with the Defendant about his terms of employment, I would treat the evidence of the Defendant and Wong with caution.

Proof of the Defendant's remuneration package

37.  According to the Defendant's pleading, the remuneration package offered to him consisted of:

(1) salary of HK$100,000;

(2) directorship and shareholdings of Chuen Hing; and

(3) a sum of HK$400,000 to be paid to the Defendant for the discharge of his outstanding housing loan owed to the Government.

38.  The fact that the Defendant was appointed as a director and his salary of HK$100,000 are not in dispute.

39.  The shareholdings referred to by the Defendant were 19% shareholdings in Chuen Hing.  As mentioned above, it was always the understanding of the beneficial shareholders that such interest in Chuen Hing arose out of the Defendant's 20% beneficial interest in Craftech.  Therefore, the Defendant's entitlement to the transfer of such shares in Chuen Hing into his name was nothing new and would not have depended on his agreement to join Chuen Hing or not.

40.  The Defendant should be aware of this.  In the shareholders' meeting on 7 June 1998, the beneficial shareholders resolved to perfect soon the transfer of the shares in Chuen Hing to the beneficial shareholders including the Defendant.  The minutes of that meeting recorded that the resolution accorded with the agenda drafted by the Defendant.  This was before the Defendant considered joining Chuen Hing in 1999.

41.  The major dispute lies in the alleged sum of HK$400,000 and the alleged associated arrangement.

42.  At about the time when the Defendant resigned from the Government and joined Chuen Hing, he might have had to repay the then balance of the Government housing loan.  I see no serious dispute about that.  According to WKK, that was also the reason given to him when the Defendant requested for the loan.

43.  The Defendant's case is that HK$200,000 of the $400,000 required was borrowed from the HSBC.  He was required to repay $11,595.90 per month to the bank.  He relies on a bank account statement from the bank for the month of November 2000.  It contains an entry of a loan repayment in the amount of HK$11,595.90 but the other entries on the document have been concealed.  The document evidences only this much.  There is no other document relating to the alleged bank loan.

44.  The Defendant's case is also that Chuen Hing would pay an additional monthly allowance of HK$24,000 to him to enable him to repay the bank and the Plaintiff every month.  This was more than what he needed to repay to HSBC (HK$11,595.50) and the Plaintiff (HK$12,011).  According to him, HK$24,000 was a rounded up figure.  In fact, the originally pleaded amount was HK$25,000 which was subsequently amended to HK$24,000.  The Defendant attributed his failure to recall the exact amount to poor book keeping.  However, according to him, he had received 6 such payments during the period between March and August 2000 and these payments by cheque were deposited into his bank account either by himself or the staff of Chuen Hing.  In that case, I would have expected documentary evidence such as bank record of such deposits into the Defendant's bank account.  Such documentary evidence was lacking.

45.  Instead, the Defendant sought to rely on 2 payment vouchers issued by Chuen Hing which the Defendant apparently managed to uncover by chance at a later stage.  The vouchers indeed recorded 2 cheque payments of HK$24,000 each to the Defendant.  However, the voucher dated 3 April 2000 only recorded the amount as a payment whereas the voucher dated 5 June 2000 recorded the amount as an advance to director.  The Defendant's explanation was that the vouchers were prepared by the staff of Chuen Hing and the entries were never treated as important.  In that case, I wonder why the staff even bothered to enter different descriptions of the payments in these vouchers.  The Defendant could offer no explanation for that.  If the information contained in the vouchers cannot be accepted as true even according to the Defendant, I wonder how far these 2 vouchers serve to substantiate the alleged monthly allowance of HK$24,000.

46.  Further, in the Defendant's claim against Chuen Hing in the Labour Tribunal in 2002, there was the claim for unpaid salary but none for the alleged unpaid monthly allowance of HK$24,000.  The Defendant explained that he was after the undisputed salary in arrears whereas the monthly allowance of HK$24,000 might need other proof.  This is difficult to understand.  First, it is his evidence that notwithstanding the settlement in 2001, he decided to file the claim in the Labour Tribunal in order to obtain legal proof of what Chuen Hing owed him.  The exclusion of the alleged HK$24,000 monthly allowance from the claim does not tally with such intention of the Defendant.  Second, as mentioned above, the Defendant has not really demonstrated any difficulty in proving the alleged monthly allowance.

47.  Wong's evidence also does not corroborate the Defendant in this respect.  According to Wong, he came to know about this amount of HK$400,000 allegedly payable to the Defendant about 2 to 3 weeks after the Defendant had joined Chuen Hing.  He was not even sure whether the other shareholders knew about this.  He did not know whether and, if yes, how the amount was paid to the Defendant.  When he commented on this HK$400,000, he apparently associated this with the profits which Chuen Hing was supposed to distribute to some beneficial shareholders.  He also did not claim any knowledge about the alleged $24,000 monthly allowance.

The Plaintiff's cheque

48.  In his statement, the Defendant said that WKS gave him the cheque for HK$200,000.  He actually went further and developed from the alleged receipt of the cheque.  He stated that discovering that the cheque was drawn by the Plaintiff and was signed by WKK, he asked WKS to explain why the cheque was not from Chuen Hing.  WKS allegedly explained that Chuen Hing had cash flow problem and therefore he asked WKK to help by drawing the cheque.  The Defendant reckoned that it would take 3 days for the Plaintiff to pay Chuen Hing first and then from Chuen Hing to him.  He could not wait and therefore accepted the cheque and signed the Note.  He then deposited the cheque with the bank that day.

49.  The Defendant's evidence cannot be true.  The deposit slip for the Plaintiff's cheque has always been in the possession of the Plaintiff.  The cheque must have been deposited with the Defendant's bank without reaching the Defendant.  The Defendant had to concede that at trial.

The Note

50.  The Defendant's pleaded case is that WKK and WKS asked him to sign the Note.  This again differs from his statement and evidence in court that it was only WKS who told him to sign it.

51.  More importantly, the Defendant said he asked WKS why he had to sign the Note with the apparent effect that he borrowed from the Plaintiff whereas the Plaintiff was in fact just paying for Chuen Hing.  WKS allegedly explained that as the Defendant was not an employee or debtor of the Plaintiff, it would be difficult for the Plaintiff and WKK to “do the account” if the Plaintiff gave him the cheque for no reason or with no documentary support.

52.  The problem of the Defendant's case is this:  If this was not intended to be a loan by the Plaintiff to the Defendant, WKK did not have to cause the cheque to be issued in favour of the Defendant at all.  To help Chuen Hing solve the alleged cash flow problem, WKK could have put Chuen Hing in funds to deal with the Defendant.  Loans by WKK to Chuen Hing also happened on several subsequent occasions during the period between April and September 2001 (see the financial agreement between WKK and Chuen Hing dated 18 March 2002).  There is no evidence why this was not, or could not, be done on this occasion if WKK was simply assisting Chuen Hing.  Instead, according to the Defendant, the parties chose to arrange an effectively false loan from the Plaintiff to the Defendant which entailed the preparation of artificial documentary support and the subsequent indirect repayment by Chuen Hing to the Plaintiff through (and at the mercy of) the Defendant.  This was simply unnecessarily convoluted and, I find, hardly credible in the circumstances.

Challenge by the Defendant

53.  It was submitted on behalf of the Defendant that it is not probable that the Defendant would choose to ask WKK instead of Chuen Hing or its other shareholders for the loan.  It was also submitted that it is unbelievable that WKK decided to lend to the Defendant without discussing with WKS.  In my judgment, such challenge is neither here nor there.

54.  The Defendant also submitted that it is most unusual for the Defendant to go to WKK equipped with the printed repayment schedules when he had no idea whether and, if yes, on what terms WKK would agree to lend to him.  This, on its face, is a reasonable argument.  However, I note that on one of the repayment schedules, there was written the number of the Defendant's bank account.  This was the account into which the Plaintiff's cheque for HK$200,000 was deposited on 15 February 2000.  Besides, another document appended to the Note was actually a photocopy of the Defendant's identity card which was also dated 15 February 2000 and signed by the Defendant.  These materials must be provided by the Defendant and to WKK and, in my judgment, on 15 February 2000 as WKK said.  Further, WKK agreed that the Defendant probably did not expect, when he requested for the loan, that WKK would agree to his request right away.  He understood that the Defendant only needed the loan in that month and the schedule provided that the first repayment instalment would be due in March 2000.  Therefore he was indeed supposed to consider the proposed repayment terms and schedules first.  However, considering their fellow-shareholders relationship and the Defendant's ability to repay, WKK said he was willing to extend the loan on the proposed terms then and there and indeed drew the Plaintiff's cheque right away.  I find WKK's answer a credible one.

Whether there were the alleged settlement(s)

55.  To begin with, the alleged settlement(s), and therefore the alleged discharge from liability, was not pleaded as an alternative defence (in the event that the Defendant was liable to the Plaintiff on the loan as evidenced by the Note).

56.  WKK denied the alleged settlement in 2001.  He also denied any knowledge about the Defendant's claim at the Labour Tribunal and the alleged settlement in 2002.

57.  The Defendant's case is that by the alleged settlement in 2001, the Defendant agreed not to pursue against Chuen Hing for the unpaid salary and allowance in consideration of the Plaintiff's agreement to require the Defendant to pay a further nominal amount of HK$15,000 by instalments in 2 years.

58.  If there was no genuine loan and no liability on the part of the Defendant to the Plaintiff (as the Defendant contends), the question is what consideration supported the Defendant's agreement to waive his right to claim against Chuen Hing and to pay even a further sum of HK$15,000 to the Plaintiff.  As to this, Mr. Lai for the Defendant submitted that the Plaintiff has threatened to pursue against the Defendant for repayment.  Even though the Defendant should not be liable, the Defendant settled to avoid dispute.  However, the Defendant's case is that the parties knew that this was not a genuine loan.  No authority was cited by the Defendant to illustrate that forgoing an invalid claim known by the Plaintiff amounts to valuable consideration to support the Defendant's agreement under the alleged settlement.

59.  Even assuming that the alleged 2001 settlement was somehow valid and binding, the Defendant's case is still problematic.  The Defendant's claim against Chuen Hing in the Labour Tribunal in 2002 would amount to breach of the alleged 2001 settlement.  As to this, the Defendant explained that he filed the claim because he still needed to have a judgment as some proof of his entitlement against Chuen Hing.  I find this explanation per se difficult to understand and difficult to accept.

60.  Mr. Lai for the Defendant also suggested that the settlement in 2001 was not finalised until the settlement in 2002.  This argument simply fails in the light of the facts.  There is no dispute that the Defendant paid a total amount of HK$15,000 to the Plaintiff on 22 November 2001, 15 January 2002, 3 April 2002 and 12 June 2002.  The Defendant said that these were the payments pursuant to the 2001 settlement.  Therefore, on his own case, by the time of the Labour Tribunal award dated 22 April 2002, the Defendant had effectively been performing his side of the alleged 2001 settlement agreement.  This can hardly be explained if the Defendant considered that the alleged 2001 settlement was not a concluded agreement.

61.  It was also submitted on behalf of the Defendant that there was good reason for the Plaintiff or WKK to settle.  It was suggested that the enforcement of the Labour Tribunal judgment might lead to winding up of Chuen Hing and thus prejudicing the prospect of WKK's recovery of the debt owed by Chuen Hing, an amount of HK$1,200,000 by then.  It was suggested that WKK would settle with the Defendant so as to preserve Chuen Hing.  First, WKK in his statement explained that in about January 2002, Chuen Hing already received a statutory demand from a creditor which was soon followed by a petition for winding up.  The petition was first heard in April 2002.  The Defendant never challenged WKK's evidence regarding these events.  Therefore, the prospect of the winding up of Chuen Hing existed before and quite independently of whether the Defendant would enforce the Labour Tribunal award.  Second, by the written financial agreement dated 18 March 2002, Chuen Hing agreed to transfer to WKK its real property in Dongguan as security for the HK$1,200,000 debt owed to WKK.  It was also agreed that unless and until that was done, the shareholders personally guaranteed the debt.

62.  Mr. Lai for the Defendant also submitted that the lack of demand by the Plaintiff for the Defendant's repayment was due to the alleged settlements.  As mentioned above, the Plaintiff said that he had in fact requested the Defendant to repay.  In particular, he also asked Wong to help him do so in 2001.  Wong actually confirmed that this happened in 2001.  In any event, considering my reservation about the Defendant's case as well as his evidence so far, I am not prepared to draw the adverse inference, which Mr. Lai invited me to draw, against the Plaintiff on the basis of apparently lack of frequent demands for repayment since 2002.

CONCLUSION

63.  Considering all the circumstances, I prefer the evidence of WKK to that of the Defendant.

64.  I am satisfied that the events leading to the loan and the Note happened the way WKK described.

65.  I do not accept that there were the alleged settlement(s).  I find that the reason for the Defendant's payment of HK$15,000 during the period between November 2001 and June 2002 was as explained by the Plaintiff in his evidence mentioned above.

Order

66.  The Plaintiff has adjusted the original amount of claim downwards due to an amount received from the Defendant but not accounted for.  The amount outstanding as at 1 September 2004 was HK$184,621.54.

67.  I order that the Defendant do pay to the Plaintiff the sum of HK$184,621.54 with interest thereon at the contractual rate of 10% per annum from 1 September 2004 until judgment and thereafter interest on the sum so accrued shall run at the judgment rate until payment.

68.  I see no circumstances justifying an order of costs other than to follow the event and so I order with certificate for counsel.  The costs should be taxed if not agreed.  The costs order is nisi.