MAN SUM GARMENT TEXTILES (GROUP) MFG. CO., LTD v. CHOW MING CHEUNG

HCA 2014/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2014 OF 2008

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J U D G M E N T

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1.  The Plaintiffs in these two actions sued the Defendant for repayment in respect of two loans advanced by them respectively in May 2007 to the Defendant. The loan amount was $500,000 for each loan. There were two loan agreements signed by the Defendant, one for each loan. In respect of the loan from the plaintiff in HCA 2014 of 2008, Man Sum Garment Textiles (Group) Mfg. Company Limited [“MS”], the loan was interest free and secured by the Defendant’s interest in the plaintiff in HCA 2015 of 2008, Man Fung Textiles & Dyeing Limited [“MF”] and a factory in mainland China called Zhongshan Fung Hua Dyeing Factory [“FH”]. The other loan was advanced by MF charging an interest of 0.5% above prime charged by the Hong Kong & Shanghai Banking Corporation.

2.  According to the terms of the loan agreements, the loans were repayable within 2 years and in any event, repayable on 30 days’ notice by the lenders.  As evidenced by bank deposit forms, the two sums of $500,000 were advanced by MS and MF respectively to the Defendant on 10 May 2007.

3.  By two letters dated 27 May 2008, MS and MF demanded repayment of the loans within 30 days.  The Defendant did not make the repayment and the Plaintiffs commenced these actions on 22 July 2008 in the District Court.  By reason of the defence and counterclaim raised by the Defendant, the case was transferred to the High Court.

The relationship between the parties

4.  More need to be said about the relationship between the Defendant and these companies and Mr Li Lap [“Li”], the ultimate shareholder of MS in order to understand the defence case.  Li is the 100% shareholder of a BVI company also called Man Sum.  That BVI company holds 99% of the shareholding in MS with the remaining 1% held by Li.  The BVI company also holds 80% of MF, the Defendant holds 10% with a Mr Yeung Kwok Ching [“Yeung”] holds the remaining 10%.

5.  There is a dispute as to whether the Defendant is also beneficial owner of 10% shareholding of FH.  As a matter of official record, FH is 100% owned by MS.  However, MS and Li said in respect of that 100%, 10% is held on trust for the Defendant and another 10% is held on trust for Yeung.  On the other hand, the Defendant denies he has any interest in FH.

6.  Li was a businessman who had invested in different businesses, some of them were in the garment industry.  MS was his alter ego.  One of the businesses he acquired was the factory of FH.  That was acquired by MS in 2001 at the price of RMB 16 million.  In addition, he acquired some equipment and machinery and installed them at FH.  Altogether, the investment by MS into FH was about $28 million.  Li needed a person to run the business of FH for him.  Through Yeung, Li came to know the Defendant. The Defendant had been running a dyeing factory in Mexico since 1997 and he had been in the same trade since 1974.

7.  After discussion in 2002, the Defendant agreed to manage the FH factory for Li.  MF became the trading arm in respect of the products of FH in terms of sales outside the mainland though a small portion of MF’s sales was in respect of some other products.  The Defendant did not work solely as an employee.  It is accepted by him that he was a shareholder and director of MF.  But he said he was only an employee in FH.

The defence and the counterclaim

8.  The role of the Defendant in these businesses is relevant because the defence case is that he had advanced money to MF and he seeks to set-off MF’s indebtedness to him against his loan liabilities towards MF and MS.  He said he had advanced $600,000 to MF in 2003 ($300,000 on 10 May and $300,000 on 28 August).  Further, $30,000 a month was deducted out of his salary from January 2003 to December 2004 as financial assistance to MF.  Thus, the total amount due from MF to him, according to his reckoning, was $1,320,000.  And as far as the books of MF show, even though the Defendant has 10% shareholding in MF, given the authorized and paid up capital of MF is only $10,000 in total, he said his 10% contribution was therefore only $1,000. Thus, the rest had to be loan by him to MF.  The Defendant counterclaims $1,320,000 in both actions though it is difficult to see any legal basis for such counterclaim against MS.

9.  The plaintiffs said this total sum of $1,320,000 was actually capital contribution by the Defendant for acquiring his 10% interest in MF as well as FH.  Li said it was agreed that the Defendant would pay $2,800,000 for his said interest but the Defendant had not paid the same in full because of his lack of means.  Thus, instead of MF owing him $1,320,000, he still owed MS $1,480,000 in terms of his capital contribution.  However, MS did not sue for that sum in these actions.

10.  Though the Defendant had previously disputed about the true nature of the two sums paid to him by the two Plaintiffs, at the trial Mr Siu accepted the validity of the two loan agreements and the focus of the defence is on set-off.  As far as the claim of MS is concerned, Mr Siu contended that due to the circumstances under which the loan of MS was advanced, there could be equitable set-off with the liabilities of MF towards the Defendant.  Alternatively, counsel asked the court to consider staying the execution of the judgment in favour of MS pending the repayment by MF to the Defendant.

11.  When the Defendant gave evidence, he said he initially asked for repayment of his loan to MF.  But when Li told him it was not possible, he agreed to accept the two loans from the Plaintiffs instead. Thus, even on his evidence, there is no ground for challenging the validity of the two loan agreements.  The only arguable defence is set-off and it turns on the factual dispute as to the nature of the payments in terms of the two sums paid by the Defendant to MF and those deducted from his monthly salary.  As mentioned, the Defendant said these were his loans to MF whilst the Plaintiffs said these were his capital contribution for the 10% interest in MF and FH.

Nature of the Defendant’s two payments and monthly deductions of salaries

12.  There is no contemporaneous document recording the nature of the two payments of $300,000 in 2003 and the monthly deductions of the salary of the Defendant.  Though there are some documentary evidence relevant to this issue, they are documents prepared from information and cannot be accorded as much weight as contemporaneous primary documents.  I shall come back to the documentary evidence later.  It would however be more logical for me to start the analysis with the genesis of the relationship between the parties given the relevance of the Defendant’s role in FH.

13.  It is common ground that at about the end of 2002 there were discussions amongst Li, Yeung and the Defendant regarding the business of FH.  It is also not disputed that the Defendant had inspected the factory of FH and he was invited to manage the factory for Li.  Even though he had not examined the books of the factory, he was told that Li (in the context that MS was Li’s alter ego) had invested $28 million into it.

14.  The Defendant testified in his evidence that there were discussions leading to an agreement for him to invest and acquire a 10% interest in a business with Li, Yeung and another person called Poon.  But he said that the business he agreed to invest in was the trading arm for handling sales of FH’s products outside the mainland, viz. MF.  His role in FH was only a general manager, not a shareholder.  The Defendant said at the end of 2002, he was told over the phone that the total investment was $1 million and therefore his 10% share would be $100,000.  He paid the first sum of $300,000 in May 2003 after MF became operational.  (Actually, MF had been incorporated before but there was a change of name when the Defendant (and other business partners) joined the company.)  A few months later, since there was insufficient fund to support the operation of MF, he paid another sum of $300,000 in August.  At that stage, Poon withdrew from the business because he said he did not want to contribute further.  The Defendant agreed that further injection of fund was necessary.  But he regarded any contribution in excess of the $100,000 as loans to MF.  However, after he learnt (after legal proceedings had been commenced) that the authorized and paid up capital of MF was only $10,000, he said his capital contribution should only be $1,000.

15.  As regards FH, the Defendant started to work at the factory in January 2003.  But he did not receive any salary for the first three months.  He only received a lump sum payment of $90,000 in March representing his three months’ salary working at FH.  After MF came into operation, his agreed salary structure was $30,000 plus $30,000 allowance.  But in terms of actual amount received by him, a monthly sum of $30,000 was deducted up to December 2004.  The Defendant said these deductions were the financial assistance provided by him to MF.

16.  It should be noted that according to the Defendant’s own case, the deduction started from January 2003 even before MF came into operation.  The Defendant had not explained why it was necessary to make the deduction during those three months if it was meant to be financial assistance to MF (and to be treated as his loans to the company).

17.  On the other hand, Li said that the agreement between the parties at the end of 2002 was about investment by the Defendant (together with Yeung and Poon) into the business of FH.  It was agreed between all of them and Li that the total investment would be valued at $28 million and the Defendant would contribute $2.8 million for 10% interest in the business.  As for MF, Li said it was treated as part of the business of FH as it acted primarily as the trading arm for the sale of FH’s products outside the mainland.  Thus, even though MF was a separate legal entity, in the eyes of the partners no distinction had been drawn between the two.  Because the minority partners did not have sufficient cash to pay for their respective interest in the business, Li simply let them pay as much as they could and when they felt able to do so.  In the case of the Defendant, Li was more interested in securing his service as manager of the FH factory.  Thus, it was agreed that he could contribute by a $30,000 deduction out of his monthly salary plus whatever payment he could make later on.

18.  Mr Siu asked the court to take into account of how Li’s case as to the agreement to invest and the beneficial ownership of FH had been varied in the past.  Counsel referred to the Plaintiffs’ stance as “equivocal” as manifested in the pleadings and affirmations.  With respect, all these boil down to the confusion as to whether it was Li or MS who acted as the trustee for holding the 10% interest in FH and was as such party to the agreement.  I do not regard this as significant being in mind the fact that MS was actually the alter ego of Li.  In any event, the crucial point is the substance of the agreement, viz. whether it was only an investment by the Defendant into MF or an investment into FH as well.  In this respect, I do not find anything equivocal in the Plaintiffs’ pleadings or evidence.

19.  Li’s account as to the agreement between the parties was supported by the evidence of Yeung.  Yeung also took up 10% interest in the business.  Like the case of the Defendant, whilst he held 10% of the shares of MF, his interest in FH was not formally recorded.  He had only paid $500,000 in 2004 as his contribution and he acknowledged that he still owed Li (or his alter ego MS) $2.3 million.

20.  As for the lack of formal transfer of 10% interest in FH into the name of the Defendant, Li explained that it was cumbersome to do so and the parties agreed to leave it as a matter of trust just like the payment of the contribution by the minority partners.  Yeung also supported Li in this regard in his evidence.  Though Yeung could be regarded as having an interest in the litigation as he is a shareholder of MF and he supplied dyeing material to Li, having heard his evidence and taking into account of Mr Siu’s cross-examination and submissions, I find him to be an honest and reliable witness.  I do not think his evidence was tainted by his association with Li as suggested by Mr Siu.

21.  Mr Siu criticized Li’s explanation.  He submitted that since Li and the Defendant only came to know each other not that long ago, there was no reason why the matter could be left as a matter of trust.  Counsel also submitted it was incredible that the Defendant simply accepted from Li that $28 million had been invested into FH without examining the books.  Further, there was actually ample time for the formal transfer to be registered officially no matter how cumbersome it was.  Counsel asked the court to reject Li’s version.

22.  Though I acknowledge there is some force in counsel’s criticism, the matter has to be examined against the commercial reality facing the parties at that time.  First, the Defendant was experienced in the trade and he had inspected the factory.  He could therefore form his own view as to whether Li’s assertion that $28 million had been invested was a reasonable figure.  Further, Li was keen to enlist the service of the Defendant in running the factory.  Once the Defendant was in the factory, he would have more information about its financial position.  In this connection, though the Defendant said he did not handle the accounts of FH and MF, I do not believe he did not even have some understanding of the financial position of the two companies after he became the general manager of the factory.  Since the Defendant did not need to make full payment of his contribution by a definite date, and the agreement was not recorded formally, coupled with the unlikelihood of Li pressing him for payment of the balance of his contribution given Li’s need for his service, the Defendant did not have much to lose by agreeing to take on the 10% interest on that basis.

23.  For the same reason, I do not attach much significance to Li’s inaction in terms of pressing for further payment by the Defendant as to his outstanding capital contribution, a point also relied upon by Mr Siu.

24.  Because Li’s main concern was the service of the Defendant as manager of the factory, the 10% interest was merely a kind of incentive to promote the Defendant’s loyalty and diligence in running the factory, I consider it was believable that Li did not require the Defendant to make full payment for his share of contribution and was contented to leave it that way for quite a long time.

25.  I accept Li’s evidence that the monthly deductions from the Defendant’s salary was on account of capital contribution by the Defendant for the acquisition of his 10% interest.  It is incredible that the deductions were loans to MF.  As observed, the deductions started before MF came into operation.  Given the scale of the financial support for MF by MS or Li in terms of bank facilities and other financial assistance (which the Defendant agreed), I agree with Mr Li (counsel for the Plaintiff) that a monthly sum of $30,000 is insignificant.  Since the Defendant was working for FH as well, there was no reason why he should not be paid in full of his salary simply because MF had financial difficulty.  I reject the Defendant’s evidence that the $30,000 deductions were loans to MF.  I find the proposition that the deductions formed part of his capital contributions to be in line with the rationale behind Li’s offer to the Defendant the 10% interest as an incentive for his loyalty and diligence.  Such an arrangement could foster the Defendant’s commitment to FH and MF whilst at the same time he did not need to fork out that much money in one go by way of capital contribution.  In a sense, the arrangement was to make him earn his own stake in the business by working as the general manager.

26.  Given the amount of the deductions in total, they had to be contribution to 10% interest in both FH and MF as the value of MF (a new trading company without substantial assets) could not justify so much contribution.

27.  Thus, in my judgment, notwithstanding Mr Siu’s criticism, it is not inherently improbable that the parties agreed to handle the 10% interest as a matter of trust, both in terms of the transfer of the shareholding in FH to the Defendant and the timing for the full payment of the contribution by him.

28.  There is other evidence showing that the Defendant had a beneficial interest in FH.  In the MS loan agreement, one of the terms was that the loan was to be secured by the Defendant’s interest in FH and his shares in MF.  Under cross-examination, the Defendant explained that the reference to FH’s interest was actually a reference to his interest in a company called Wan Fung Washing Factory.  He said he had invested RMB 90,000 into that factory which carried out its operation at FH’s premises.

29.  Though the Defendant had mistakenly referred to that investment as a $90,000 loan to MF in 2005 in his Answer to Request for Further and Better particulars filed on 24 March 2009, the ledgers of MF recorded that on 4 June 2005 the Defendant injected a sum of $90,000 through MF to Wan Fung Washing Factory as share capital.  In his oral evidence, the Defendant explained that though he injected the $90,000 as investment, he thought he could ask for its return when he left the company.  But he accepted that there was a difference between share capital and loan.  He retracted what he said in his Answer as regards Li having promised to repay him the $90,000. When further questioned on this by the court, he accepted that he could only retrieve the investment if there was someone buying his interest in this business from him.  I would add that even if there were a purchaser, there is no guarantee that the price would be $90,000.

30.  On the evidence, I am prepared to accept that the Defendant had made a $90,000 investment into this Wan Fung Washing Factory.  However, it does not mean I have to accept his explanation that the reference to his interest in FH in the MS loan agreement was a reference to his interest in Wan Fung Washing Factory.  If the parties intended to refer to the Defendant’s interest in Wan Fung in the MS loan agreement, I do not see why they could not specify so and instead referred to his interest in FH.  I do not accept the Defendant’s explanation that this was because of the fact that Wan Fung did not have its own registration.  MF had no problem with recording the $90,000 as investment in Wan Fung as opposed to FH in its ledgers.  I prefer the evidence of Li that the reference in the MS loan agreement was not to the Defendant’s interest in Wan Fung.  Rather, it was a reference to the Defendant’s interest in FH.

31.  Since the Defendant had signed the MS loan agreement and he testified that he understood its contents before signing the same, it is a compelling piece of evidence that the Defendant had interest in FH.

32.  There are other documents showing that the Defendant was a shareholder in FH.  There is an unsigned minutes of a shareholder meeting of FH held on 13 September 2006.  This document was prepared by Fok Chi Keung [“Fok”] the then financial controller of MS (who was also responsible for the financial matters of MF and FH).  Fok gave evidence that the minutes was an accurate record of the meeting and he had sent it to the three shareholders of FH for their signatures though they had not done so. The three shareholders, as stated on the minutes, were Li, Yeung and the Defendant.  Li and Yeung confirmed the meeting and the accuracy of the minutes in their evidence.  On the other hand, the Defendant denied that he had seen this document.  He also denied there was such a meeting though he agreed there was a discussion about his tax position (the main subject of the minutes) around that time.  He said he had separate discussions with Li and Yeung.

33.  Fok left MS in November 2009 and his current employer has no connection with Li.  There is no reason why he would fabricate a story to support the Plaintiffs.  I find him to be an impressive and truthful witness.  As between him and the Defendant, I find Fok to be a more reliable and credible witness.  I believe he was telling the truth when he relayed to this court what happened at various meetings and how the various documents, including the minutes, were prepared.

34.  Though the minutes of 13 September 2006 was not signed, in addition to being vouched for by these witnesses, the veracity of its contents is partly supported by a letter written by MF to the Commissioner of Inland Revenue on 25 September 2006 pursuant to the instruction given to Fok at that meeting.  The subject matter of the discussion at the meeting, as recorded on the minutes, was the remuneration package of the Defendant and the reporting of such package to the Inland Revenue.  The background was that on 18 April 2006, MF filed an employer’s return reporting the Defendant’s remuneration to be $780,000.  The Defendant’s tax liability was assessed by the Inland Revenue accordingly and an assessment was issued on 5 September 2006. The Defendant considered that to be incorrect as that sum of $780,000 included the monthly sums of RMB 30,000 he received from FH in the mainland.  This was confirmed at the meeting and, according to the minutes, Fok was instructed to correct the employer’s return with the Inland Revenue.

35.  In his closing submissions, Mr Siu cast doubt on the minutes on the basis that what was stated in paragraph 2 of the minutes had not been implemented.  But counsel had chosen not to cross-examine the Plaintiffs’ witnesses on this.  The court is therefore in no position to assess whether the Plaintiffs had a good explanation for not implementing the resolution.  In such circumstances, I do not think much weight can be placed on this criticism.

36.  I find that the meeting of 13 September 2006 did take place and the minutes recorded what had happened at the meeting.  For present purposes, the minutes showed,

(a)     The Defendant was regarded as one of the three shareholders of FH;

(b)    The $30,000 monthly deductions from his salary up to 31 December 2004 were treated as his contribution to the capital of the company;

(c)     The parties dealt with the affairs of MF and FH together at this meeting;

(d)    Up to 31 December 2004, the Defendant still owed a capital contribution in the sum of $1,480,000.

37.  I reject the Defendant’s evidence that the agreement to invest was confined to investment into MF and his capital contribution was confined to $100,000.  I prefer the evidence of Li and Yeung, as corroborated by the other evidence alluded to in the above, that the agreement to invest was in respect of FH and MF.  The parties had all along treated FH and MF as one business.  The Defendant’s 10% interest includes 10% shareholding of MF as well as 10% interest in FH.  Given the amount already invested into FH when the Defendant was invited by Li to join, it is incredible that Li would agree to give the Defendant 10% in FH and MF at the price of $100,000.  I find that the agreement was that the Defendant would contribute $2.8 million by way of capital investment.

38.  There is an internal audit report to FH shareholders regarding the financial position of FH up to the end of May 2008. This document was prepared by the financial controller of FH in the mainland as Li wanted to ascertain the accurate financial position of FH after the employment of the Defendant had been terminated.  The Defendant agreed that he was given such document at a meeting on 24 July 2008.  He said he had raised objection to its contents at the meeting whilst Fok said he did not.

39.  According to that internal audit report, up to 31 May 2008, the actual capital contributions made to FH by various shareholders included a sum of RMB 1,415,400 contributed by the Defendant.  Up to 31 May 2008, total capital contribution received by FH was RMB 22.6 million odd whilst it suffered an accumulated loss of RMB 35 million odd.

40.  Mr Siu asked this court not to attach weight to the documents tabled at the meeting of 24 July 2008 and the minutes for that meeting as well as some other documents issued by MF after dispute arose between the Plaintiffs and the Defendant.  Counsel suggested that these documents were prepared with a view to advance the Plaintiffs’ interest in the litigation.

41.  The Defendant was given one month’s notice of the termination of his employment on 5 May 2008.  On 27 May 2008, MS and MF issued letters to the Defendant demanding the repayment of the two loans within 30 days.  On 18 June 2008, the Defendant replied by a letter to MF and MS stating that he “had personal loan and invest” a total sum of $1,410,000^[1] to MF.  He asked that the $1 million (viz. the two loans from MS and MF) to be set-off against the $1,410,000.

42.  On 20 June 2008, MF wrote to the Defendant stating that his obligation in capital contribution was for the sum of $2.8 million and he had only paid $1.32 million, thus leaving a balance of $1.48 million.  It also stated that the $500,000 loan to the Defendant was a separate matter from his investment in MF.  The demand for repayment was reiterated.  MS also issued a letter on the same date stating that the loan was a separate matter from the Defendant’s investment in MF.

43.  On 27 June 2008, MF and MS wrote letters to the Defendant demanding repayment and stating that if the Defendant did not pay within 7 days legal proceedings would be commenced.

44.  On 10 July 2008, the Defendant wrote to MF and MS asserting that since the total investment in MF was $1 million and he agreed to take up 10%, his share of investment was only $100,000.  Thus out of his personal loan of $1.4 million, $1.3 million could be “redeemed” by him.  He also said the two $500,000 loans should be settled at the same time.

45.  The writs in the two actions were issued on behalf of MS and MF on 22 July 2008.

46.  The meeting of 24 July 2008 was originally scheduled to be held on 18 July.  The Defendant did not attend and it was re-scheduled to 22 July.  On 21 July, the Defendant told Fanny Chan, the company secretary of MF and the wife of Li, that he was not available.  The meeting was subsequently changed to 24 July.

47.  The events leading to the meeting show that by July 2008 the parties were engaging in the dispute about the MS and MF loans and the nature of the Defendant’s $1,320,000 loan or investment was an issue. I must take this into account in assessing the weight to be attached to the documents generated for and at the meeting of 24 July.  On the other hand, these events also demonstrate that the Defendant was quite capable of refuting what he did not agree and set out his response in correspondence.  The Defendant was also aware of the possibility of litigation.  Hence, it is unlikely that the Defendant would subscribe to anything that might prejudice his interest in the event of litigation.

48.  According to Fok, the agenda of the meeting of 24 July 2008 was emailed to the Defendant on 22 or 23 July.  The Defendant said he only received it at the meeting.  In this respect, I prefer the evidence of Fok to that of the Defendant.

49.  One of the items set out in the agenda was the loan of $1.4 million the Defendant raised in his letters in response to the Plaintiffs’ demands for repayment.  The Defendant was invited to produce documentary evidence of the $1.4 million loan.  The other item which is relevant for our purposes is items 9 and 10 of the agenda.  After setting out the existing and outstanding contributions by the shareholders (including the $1.32 million contributed by the Defendant with a balance of $1.48 million), another matter to be discussed was how to cover for the accumulated loss FH had suffered.  This was to be considered together with the internal audit report mentioned above.

50.  It is consistent with the Plaintiffs’ case that these items had to be discussed after the termination of the employment of the Defendant.  On the other hand, if the Defendant was a mere employee in FH and had no documentary evidence to prove his alleged loan of $1.4 million to MF, there was not much point for him to attend the meeting.

51.  There is no dispute that the Defendant did attend the meeting on 24 July 2008.  Fok produced a minutes of the meeting and it was signed by Li and Yeung.  The Defendant refused to sign and he disputed the contents of the minutes.  According to the minutes, the Defendant said he borrowed the money from MF and MS to finance his purchase of property.  Li and Yeung indicated that the MS and MF loans should not be mixed up with the Defendant’s $1.4 million capital investment.  Li also referred to the Defendant’s outstanding capital contribution in the sum of RMB 1.48 million.  Li, Yeung and Fok confirmed the accuracy of the minutes.

52.  The Defendant agreed that these matters were discussed at the meeting but he raised objections and he felt a lot of things said at the meeting were unreasonable.  He said he had not been a shareholder of FH.  He accused Li of pressurizing him to sign the minutes at the meeting despite his refusal.  He got so excited that he fainted and he was sent to a hospital.

53.  Li denied that he had tried to force the Defendant to sign the minutes.

54.  Fok said he prepared the minutes at the meeting and he had read its draft to the parties and no-one objected.  At that stage, the Defendant had not yet fainted.  Fok handed a copy of the minutes to the Defendant at a later date when he attended a Labour Department conciliation meeting.  The Defendant said he had to consult his lawyers.  Then two days later, the Defendant said he would not sign it.

55.  The minutes did not contain any admissions by the Defendant regarding the nature of the $1.4 million coming from him.  It recorded other matters discussed with the Defendant about the business of FH and his comments on other transactions.  I do not accept Mr Siu’s submission that this document was drafted in a manner calculated to facilitate the Plaintiffs’ claims.  I believe the evidence of the Plaintiffs’ witnesses that the minutes faithfully recorded what actually happened at that meeting.

56.  I now turn to the Defendant’s own evidence.  In one respect, I find his story inherently incredible.  If (as he testified) he had lent $1.4 million to MF, when he needed money for his purchase of property, he would ask for repayment instead of borrowing $1 million from MS and MF.  He said he initially asked for repayment but Li refused to accede to his request. I cannot understand why the Defendant would find it helpless when Li refused. It is incredible that instead of treating at least the $500,000 from MF as partial repayment of the $1.4 million, the Defendant turned himself into a debtor of MF for this sum if he verily believed he was the creditor of MF at that time.

57.  From the Defendant’s evidence, it is clear to me that he did not quite appreciate the distinction between capital contribution and loans to the company.  As in the case in respect of the $90,000 investment in Wan Fung Washing Factory, he thought mistakenly that he could get a refund of his investment when he left the company.  But that could not be so unless the remaining shareholders agreed to take up his share and the value of the shares had not been diminished by loss sustained by the business in the meantime.

58.  Likewise, he probably thought his investment into FH and MF could be recovered by him when his employment was terminated. Thus in his letter of 18 June 2008, he referred to the $1,410,000 as his personal loan and investment in MF.  It was only after MF had written back on 20 June 2008 pointing out his obligation to make capital contribution of $2,800,000 of which $1,480,000 remained unpaid that he wrote back to assert that his investment was only $100,000.  As I said, I reject that suggestion of the Defendant.  I find that to be his invention when he realized that his belief as to his entitlement to a refund of his capital contribution when he left the businesses of FH and MF was misconceived.

59.  This also explains why the Defendant agreed to take up the loans from MF and MS in 2007 when his request for refund of his capital was unsuccessful.  Since his contribution was by way of capital, even on his misconceived belief he had no right to the return of the same when he was still a shareholder.

60.  Mr Siu also relied on the accounts of MF in advancing the defence case that the money paid by the Defendant to MF was a loan.  In the audited accounts of MF for the year of 2003, the current liabilities of the company included a sum of $599,000 recorded as “amount due to a director”.  Reading that with the ledgers of MF, in the current account of the Defendant, the two cheques of $300,000 each were booked in as fund from the Defendant, of which $1,000 was deducted as capital (10% of the authorized and issued capital of MF), leaving a balance of $599,000.

61.  However, in the same set of ledgers, regarding the $30,000 monthly deductions from his salaries (from Jan 2003 to Feb 2004), a lump sum of $420,000 was booked on 28 February 2004 as investment into FH. This seems to support the Plaintiffs’ case as to the Defendant’s investment in FH.

62.  No-one suggests before me that the nature of the two $300,000 payments should be different from the monthly deductions from the Defendant’s salary.  Thus, the accounts of MF are ambivalent.

63.  Further, Fok explained that the entries in respect of the two sums of $300,000 were mistaken and steps had been taken in November 2008 making adjustments to rectify the situation.  Mr Siu made a submission based on Li’s failure to rectify the mistake when he signed the audited account for 2003.  Having regard to the fact that the accounts were left by Li to his account staff and he obviously was not a man who pay much attention to details, I do not think such failure on Li’s part has any great impact on my overall assessment of the evidence.

64.  In my judgment, the ledgers and the accounts have to be considered together with the other evidence before the court.

65.  Considering all the evidence, having regard to what I said above regarding the Defendant’s interest in MF and FH and the nature of his contribution, I accept Fok’s explanation.

66.  To sum up, I find that the Defendant had agreed to invest and acquire 10% interest in FH and MF at the price of $2.8 million. Out of that agreed price, he had only paid $1,320,000 (including the monthly deductions of his salaries).  As these were invested as capital, the Defendant cannot get a refund unless someone agreed to purchase his interest.  There is no suggestion that anyone had agreed with him to acquire his interest.  He therefore cannot set-off the Plaintiffs claims against the $1,320,000.

Conclusions

67.  In view of my findings as to the nature of the $1,320,000, the Defendant does not have any valid set-off against the Plaintiffs.

68.  I therefore enter judgment in favour of the Plaintiffs in the sums as claimed respectively in each action together with interest at 5% from date of writ to judgment and thereafter at judgment rate.

69.  The counterclaims of the Defendant in both actions are dismissed.

70.  There shall also be a costs order nisi that the Defendant shall pay the costs of the Plaintiffs in these actions, such costs to be taxed if not agreed.