TREEWELL DEVELOPMENT LTD v. TSANG CHUN WAH

CACV 431/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 431 OF 2002

(ON APPEAL FROM HCA 5530 OF 2001)

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REASONS FOR DECISION

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Hon Ma JA:

The Appeal

1. By a notice of appeal dated 21 November 2002, the Plaintiff appealed against the order of Deputy Judge Saunders dated 22 October 2002 in which unconditional leave to defend was given to the Defendant on the Plaintiff's claim in this action. The learned judge had in turn allowed an appeal by the Defendant from an order of Master Ho giving leave to defend but only on condition that the Defendant paid into court $1.5 million.

2. Before this court, the Plaintiff sought an order that summary judgment be given to it on its claims; alternatively that the order for conditional leave be reinstated.

3. At the hearing of the appeal, the Plaintiff was represented by Mr Neil Thomson, the Defendant by Mr Andy Hung. At the conclusion of argument (we did not call on Mr Hung), we made an order dismissing the appeal with costs. We also dismissed with costs a summons dated 30 April 2003 in which the Plaintiff applied for leave to refer to a further affirmation on appeal. I will presently explain the relevance of this evidence.

4. In dismissing the appeal and the summons, we indicated that we would hand down the Reasons for Decision at a later date.

The Plaintiff's claim

5. The Plaintiff's claim is based on an alleged breach by the Defendant of a Deed entered into by the parties on 6 July 1993 ("the Deed"). The other party to the Deed was a company called CF & Associates Company Limited ("CF & Associates").

6. The Plaintiff's claim is essentially as follows:-

(1) In 1993, prior to entering into the Deed, both the Plaintiff and the Defendant were shareholders in CF & Associates, a company that had been established in 1984 carrying on a real estate business.

(2) By the Deed, the Plaintiff agreed to sell to the Defendant its entire holding of 270,000 shares in CF & Associates for the sum of $5.4 million.

(3) Payment of the purchase price was to be made in the following way:-

(a) $1 million was to be paid upon execution of the Deed.

(b) The balance $4.4 million was to be paid in 44 monthly instalments of $100,000.00 each on the first day of each month beginning 1 August 1993, and for this purpose, the Defendant was to deposit with the Plaintiff 44 cheques for $100,000.00 each post-dated to the 1st of each month for 44 months, with the first cheque to be dated 1 August 1993.

(4) In the event of default, including the failure on the Defendant's part to honour any of the post-dated cheques, the whole of any outstanding balance would become immediately due and payable.

(5) Clause 7 of the Deed also stated as follows:

"This Deed sets forth the entire agreement and understanding between the parties hereto and shall supersede all and any previous agreement or arrangements (if any) between the parties hereto or any of them and all or any such previous agreements (if any) shall cease and determine with effect from the date hereof."

(6) The $1 million down-payment was made by means of the Defendant's personal cheque dated 6 July 1993 made out not to the Plaintiff, but to one Chan Mow Fat, a director of the Plaintiff ("Mr Chan").

(7) 44 post-dated cheques were also provided to the Plaintiff, again with Mr Chan as the drawee, but this time with the drawer being a company called CF & Associates (China) Property Consultants Company Limited ("CF China"). The Plaintiff appears to have accepted these cheques without objection despite their not having been drawn by the Defendant but by a person, like Mr Chan, who was not a party to the Deed.

(8) The first 11 of the post-dated cheques were honoured, therefore fulfilling the payment obligations for 11 of the monthly instalments. However, the rest of the 33 cheques were dishonoured upon presentation and accordingly, none of the balance 33 instalments was paid.

(9) The Plaintiff claims against the Defendant for the sum of $1.5 million. In the original Statement of Claim, one can see that the reason for the Plaintiff not claiming the full balance of $3.3 million was that it thought the Limitation Ordinance operated as a bar to a claim in respect of any cheque dated prior to 28 December 1996 (28 December 2001 was the date of the Writ in the present action). However, the Plaintiff was not suing on a simple contract, but on a deed. This part of the Statement of Claim has now been deleted by amendment but the claim remains at $1.5 million. This is the sum for which the Plaintiff sought summary judgment; alternatively, it was also the sum that the Plaintiff wanted paid into court as the condition for the granting of leave to defend.

The proceedings below

7. The Plaintiff's summons for summary judgment was taken out on 21 March 2002, amended on 2 May 2002 to take into account the Amended Statement of Claim. At that time, the learned Master had 7 affidavits and affirmations before him.

8. Master Ho granted conditional leave to defend on 23 September 2002. On the Defendant's appeal before Deputy Judge Saunders on 22 October 2002, the learned judge substituted an order for unconditional leave to defend with an order that there be costs in the cause. The learned judge had an additional affidavit and two additional affirmations before him.

9. Before us, together with the additional affirmation sought to be introduced by the Plaintiff in this appeal, there was another affirmation which the Defendant intended to use in opposition to the summons to introduce further evidence on appeal. This affirmation contained as an exhibit an additional affidavit of the Defendant. Altogether, therefore, there were some 13 affidavits and affirmations in relation to the present appeal.

Ought the order granting unconditional leave be upheld?

10. Where a judge has made an order giving unconditional leave to defend on the basis there are triable issues of fact, it will be an exceptional case before an appellate court (meaning the Court of Appeal) will disturb this order:- see the decisions of this court in Strong Base Services Limited v Geroma Electronic Limited [1996] 2 HKLR 124; Ng Lung Sang Anita v Lam Yuk Lan [1999] 4 HKC 106; both cases referring to the well-known dicta of Robert Goff LJ in European Asian Bank AG v Punjab and Sind Bank (No. 2) [1983] 1 WLR 642.

11. The approach is different when questions of law are concerned since the views of the court below are either correct or not correct , whereas his views on facts are by their nature capable of a wider spectrum of correctness or reasonableness. Where a judge has arrived at a reasonable view of the facts, the Court of Appeal will rarely disturb the result.

12. In the present case, I am of the view not only should the learned judge's views on the facts be respected, he was correct as well.

13. In his judgment, he points to two aspects of the defence that in his view ought to be determined at trial:-

(1) The Defendant was not himself the actual purchaser of the 270,000 shares. The real purchaser according to him was CF & Associates. The Deed therefore represented a transaction that was tainted by illegality since under section 58(1A) of the Companies Ordinance Cap. 32, a company cannot purchase its own shares.

(2) Alternatively, by the Plaintiff accepting the post-dated cheques drawn by CF China (as well as other matters), there was a novation in which the parties to the Deed became or were Mr Chan, CF & Associates and CF China.

14. It is unnecessary to deal with the novation argument and the validity of that argument can be left for determination at trial. In my view, the appeal can be disposed of by reference to the illegality point alone.

15. It has to be accepted (and Mr Thomson relies heavily on this) that the Deed identifies only as the vendor and purchaser of the shares, respectively the Plaintiff and the Defendant. Although CF & Associates was a party to the Deed, on its face, this was not in the capacity of the purchaser of the shares.

16. However, the Defendant's contention is that the common understanding and agreement between the parties was that the true purchaser was CF & Associates. The Defendant expressly says so in his affidavit evidence. He alleges that in June 1993, Mr Joseph Ng (who together with the Defendant established CF & Associates in1984) informed him that he wished to retire and that if the Defendant did not purchase the shares, he would sell them to another buyer. The Defendant proposed to Mr Ng that CF & Associates itself would buy the shares. The Defendant also alleges that Mr Ng expressly agreed that the 44 post-dated cheques for the balance of the purchase price could be provided by CF China, who in turn would be funded for this purpose by CF & Associates. At the time the Deed was signed on 6 July 1993 (in the offices of Messrs Tai, Tang & Chong who acted for all parties in the Deed), the Defendant informed Mr Chan as well that the purchase price for the shares would be provided by CF & Associates.

17. The Defendant's allegations are supported in an affirmation made by one Mr Lam Wai Hung, the former accountant of CF China. He says that in July 1993, another accountant at CF China (as well as the accountant of CF & Associates), one Miss Naturie Fung, had given 48 post-dated cheques of $100,000.00 each to Mr Chan. She informed Mr Lam that these cheques represented monies for the purchase by CF & Associates of its shares. Mr Lam also says that in fact CF & Associates did deposit monies each month in CF China to enable the post-dated cheques to be honoured. When eventually CF & Associates did not do this, the cheques could no longer be honoured.

18. The Plaintiff of course denies these allegations and has done so in his affidavit evidence. Mr Thomson makes the point that the type of assertions made by the Defendant (of oral agreements or understandings) is all too easy to do and this should not be permitted to thwart what he says are his client's entitlements. I have already referred to one of his main arguments which was that the terms of the Deed are directly contrary to the Defendant's case. He also refers to the fact that the Defendant did not even respond to a letter of demand dated 6 December 1994 made by the Plaintiff's solicitors, much less put forward the type of defence now run. In addition, when the Defendant did eventually respond to another letter of demand dated 16 November 2001 from the Plaintiff's solicitors at that time (Messrs Tai, Tang & Chong), he (in his letter dated 20 November 2001) did not mention the illegality (or any other) defence.

19. However, I am of the view that Mr Thomson's arguments, whether taken individually or as a whole, are simply not sufficiently compelling, given the other circumstances in the case, for a court to grant summary judgment or even conditional leave to defend.

20. The approach of the courts in Order 14 applications is well known and I do not need to set out the relevant principles again.

21. In reaching my view that the learned judge has not erred in giving unconditional leave to defend, I would in particular highlight the following matters:-

(1) The factual disputes between the parties as to what was or was not said (and these disputes relate to crucial aspects in the case) as shown in the various affidavits and affirmations, will have to be determined at trial where the relevant deponents will be cross-examined.

(2) Although much emphasis is placed by the Plaintiff on the terms of the Deed, it is clear that the Plaintiff, as part of its case too, like the Defendant, has to rely on agreements or understandings made outside the terms of the Deed. For example, it will be recalled that the cheques for the $1 million initial payment and the 44 post-dated cheques were made out not to the Plaintiff but to Mr Chan as the payee. At some stage, the parties must have agreed on this. Further, at some stage, the Plaintiff must have agreed to accept post-dated cheques from CF China rather than the Defendant himself. All these matters could have been expressly dealt with in the Deed (especially as it was prepared by solicitors), but for some reason were not.

(3) I accept that the payment arrangements alleged by the Defendant (involving the Defendant himself, CF & Associates and CF China) involve somewhat elaborate relationships between these three persons. I mentioned to Mr Thomson at the hearing that the audited (or indeed any) accounts or other documents of CF China might have thrown some light on how CF China treated its relationship with CF & Associates and the Defendant. No such documents were, however, produced on appeal, despite the number of affidavits and affirmations served, even though both parties were in a position to do so (as far as the Defendant was concerned, both Mr Chan and the Plaintiff were shareholders of CF China at the material time). I assume this type of documentation exists and will be produced at trial.

(4) I also accept that the Defendant's response (or lack of it) in relation to the solicitors' letters referred to in paragraph 18 above, is a point the Plaintiff can fairly make against him. However, I do not regard this aspect as being so overwhelming, in view of the other evidence, so as to justify the Defendant being shut out at this stage from going to trial.

(5) Similarly, the inconsistencies in the Defendant's version of certain events (such as the background as to why post-dated cheques were provided by CF China in the first place) are again matters which should be ventilated at trial. They call for an explanation but do not themselves alone justify an order for summary judgment.

(6) Mr Thomson had also submitted that the whole illegality defence made no sense, meaning that there appeared to be no commercial reason why CF & Associates would want to purchase its own shares. Again, this is something which can be dealt with at trial. For the moment, all I can say is that there may be a variety of reasons why CF & Associates or the Defendant might have wanted the company to purchase its own shares. Some may be plausible, some may not be, but these are matters that should properly be determined by the judge at trial after hearing the relevant evidence.

(7) The Plaintiff sought to introduce for the purposes of the appeal an affirmation of its solicitor exhibiting a letter dated 28 April 2003 from Messrs Tai, Tang & Chong (who, it will be recalled, were the plaintiff's former solicitors as well as the solicitors who acted for all parties in relation to the Deed). This letter set out those solicitor's understanding of their instructions at the time the Deed was made. Quite apart from the contents of the letter not being on oath and the question whether privileged matters have properly been disclosed, it does not in my view advance the Plaintiff's case to the extent necessary to disturb the learned judge's decision. For example, as Stock JA remarked during counsel's submissions, if an illegality was involved, one would hardly expect the parties to have informed their solicitor of this. Any solicitor upon hearing such instructions would immediately have refused to act. Therefore, the fact that the solicitor did not know of any illegality, is not to deny the possibility that this may have been the actual arrangement between the parties to the Deed.

(8) I have earlier referred to the entire agreement clause contained in the Deed (see paragraph 6(5) above). While such clauses may usually have the effect of preventing any collateral contract allegations to be made (see Chitty on Contracts (28th Ed.) Vol. 1 at paragraph 12-102), it is doubtful whether such a clause has the effect of preventing evidence to be given of the true nature of the agreement, particularly when illegality is involved.

22. For the above reasons, the learned judge cannot be faulted for ordering that unconditional leave to defend be given to the Defendant. In an application for summary judgment where 13 affidavits and affirmations had been produced to the court, this is perhaps an indication of the correctness of the decision.

Hon Stock JA:

23. I agree with the reasons provided by Ma JA.