WORLD OCEAN LTD v. LAU HUNG TAT, TIMOTHY

HCA13805/1996

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 13805 OF 1996

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J U D G M E N T

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1. In this action, the plaintiff claims against the defendant the sum of $2,250,000 together with interest and an order for account.  The accounting relief is not pursued at the trial.  The basis of the claim is twofold.  Firstly, the plaintiff claims that the money was a loan to the defendant, having been paid to a third party at the defendant’s direction and for his benefit.  Alternatively, the plaintiff claims that the defendant had misappropriated the money for his use, in breach of his fiduciary duty to the plaintiff.

Background

2. The plaintiff is a company incorporated in Hong Kong on 4 June 1991.  Until 28 March 1995, its shareholders were Gao Yumen (“Gao”), Tan Bei Lan (“Tan”) and the defendant, holding 2,500 shares, 5,000 shares and 2,500 shares respectively.  Gao and Tan are husband and wife.  The defendant’s wife and Tan are sisters.  Gao, Tan and the defendant were also directors of the plaintiff in the following periods :

Gao	23-12-1991 to 28-9-1993
Tan	24-10-1991 to 28-9-1993
The defendant	24-10-1991 to 20-9-1993
	28-9-1993 to 12-1-1994

From 28 September 1993 to 12 January 1994, the defendant’s sister Lau Yee Lin Rosanna was also a director of the plaintiff.

3. On 28 March 1995, Gao, Tan and the defendant sold their shares in the plaintiff to Yip Wai Ki (“Yip”) and Ng Man (“Ng”), who are husband and wife.  Consequently, the shares of Gao were transferred to Ng whereas the shares of Tan and the defendant were transferred to Super Ford International Limited.  Before the transfer, Ng and Yip had been appointed as directors of the plaintiff on 12 January 1994.

4. In April 1995, Ng and Yip were alerted by the accountant of the plaintiff to irregularities in the account of the plaintiff.  Specifically they were informed that two pieces of land shown on the account to be owned by the plaintiff did not in fact belong to the plaintiff.  Consequently, some $20 million to $30 million had to be written off from the account.  Then on 18 May 1995, the plaintiff was sued by one Excellent Fine Consultants Limited (“Excellent Fine”) for repayment of a $3,600,000 loan.

5. In the light of these, an investigation of the plaintiff’s accounts was carried out.  The present claim is a direct outcome of the investigation.  It relates to two sums of money totalling $2,250,000 that were paid out of the plaintiff’s account in May 1993.

The evidence

6. As the current shareholders and directors only joined the plaintiff subsequent to 1993, much of the evidence surrounding the claim comes from the accounting records of the plaintiff and other documents.

7. The bank statement and accounting documents of the plaintiff show that :

(1) On 17 May 1993, the plaintiff withdrew from its bank account with First Pacific Bank a sum of $1 million to purchase a cashier order in the like amount.  The cashier order was made out in favour of Iu Lai & Li, solicitors and notaries (“ILL”).  The purpose of the withdrawal was described on a petty cash voucher of the plaintiff dated 17 May 1993 as “Temporary payment to Mr Lau”.  Mr Lau is a reference to the defendant.

(2) On 22 May 1993, the plaintiff withdrew a sum of $1,250,000 from the same account to purchase another cashier order in the same amount.  The cashier order was also made out to ILL.  A petty cash voucher of the plaintiff dated 22 May 1993 described the purpose of the payment as “Temporary payment to Mr Lau”.

8. ILL was the solicitor for the vendor, Dunfey Limited, and the confirmor, Soon Chip Chuan Wilbur, in the sale and purchase of various lots of land in D.D. No. 243 at Sai King, New Territories.  The purchaser in the transaction is Sun Fung Limited.  The defendant and a Mr Lau Chun Man Paul were the shareholders and directors of Sun Fung Limited.  The cashier orders were payment of the deposit for the purchase of the land.  The sub-sale and purchase agreement between Mr Soon and Sun Fung Limited was signed on 27 May 2003.  The assignment to Sun Fung Limited was dated 22 June 1993.  The plaintiff never has any interest in the land.

9. On 28 May 1993, the plaintiff entered into a loan agreement with Excellent Fine under which Excellent Fine agreed to lend $3,600,000 to the plaintiff at no interest and to be repaid no later than June 1994.  The defendant signed the loan agreement on behalf of the plaintiff.  Excellent Fine was a company incorporated on 1 May 1993.  Rosanna Lau was a 50% shareholder and one of the two directors of Excellent Fine.  As noted above, she is the defendant’s sister and was the plaintiff’s director from 28 September 1993 to 12 January 2004.

10. In the application for summary judgment against the present plaintiff in HCA4840/1995, the affidavit evidence filed by Excellent Fine shows that pursuant to the loan agreement, Excellent Fine caused its solicitors to pay a sum of $3,900,000 to a company called Saleswin Enterprises Limited.  On 28 May 1993, $3,650,000 was transferred from the bank account of Saleswin Enterprises Limited to the plaintiff’s bank account.

11. In the audited Financial Statement of the plaintiff for the year ending 31 August 1993, Saleswin Enterprises Limited was described as an affiliated company and was connected to the defendant.  The audited account also recorded that a sum of $6,716,396.66 was due from Saleswin Enterprises Limited to the plaintiff.  Other than this, no other evidence has been adduced to show the defendant’s precise involvement or connection with Saleswin Enterprises Limited.

12. In the accounts of the plaintiff, the transfer of $3,650,000 from Saleswin Enterprises Limited was recorded in a petty cash voucher dated 28 May 1993.  Out of the sum, $2,250,000 was credited as repayment from Lau (“刘還款”), $1,000,000 was described as loan from Lau (“向刘借入”) and the balance of $400,000 was recorded as repayment by Edward Chen (“陳還款”).

The plaintiff's case

13. The plaintiff’s case is that the two sums of $1,000,000 and $1,250,000 were loans advanced to the defendant.  Notwithstanding the entries on the petty cash voucher, the defendant had not made any repayment.  This is because the purported repayment was by means of money belonging to the plaintiff, being money obtained from the loan from Excellent Fine.

The defendant's pleaded case

14. The defendant’s case as appeared by the Defence and Counterclaim is that after early 1994, he had ceased to be involved in the plaintiff and had no access to the plaintiff’s books and accounts.  He therefore puts the plaintiff to strict proof of the two payments in May 1993 and the incurrence of the $3,600,000 loan from Excellent Fine.  He denies having appropriated any money of the plaintiff.  The defendant further avers that it was agreed between Ng and Yip, on the one hand, and Gao, Tan and him, on the other hand, that after the completion of the transfer of shares in 1995, the defendant, Gao and Tan would cease to be liable to the plaintiff and the plaintiff would have no claim against them.  On this basis, the defendant counterclaims for a declaration that he is relieved from all liabilities from the plaintiff.  This alleged oral agreement is denied by the plaintiff.

The trial

15. The defendant was initially legally represented.  On 10 January 2005, his solicitors obtained leave to cease acting for him.  The defendant was absent at the pre-trial review on 12 January 2006.  At the trial, he also did not appear.

16. The plaintiff called one witness, Miss Ng Man, at the trial.  Her evidence does not add much to the facts described above, which can readily be ascertained from the documents before the court.  The plaintiff had served hearsay notice of the documents and there is no counter-notice from the defendant.

Reasons for judgment

17. There is overwhelming documentary evidence that the plaintiff had paid out the two sums of $1,000,000 and $1,250,000 on 17 and 22 May 1993.  The evidence is also clear that the payments were not only for purposes unconnected with the plaintiff, but were also for the benefit of a company in which the defendant had an interest.  Further, the contemporaneous accounting records in the plaintiff show that the payments were advancements to the defendant.  It is not to be forgotten that the defendant was one of the three shareholders and directors when these accountings records were compiled.  There is thus no doubt that the plaintiff had advanced the two sums totalling $2,250,000 to the defendant by way of loan.

18. The documentary evidence also establishes that the plaintiff had incurred a $3,600,000 loan from Excellent Fine on about 28 May 1993.  The affidavit evidence filed by Excellent Fine in HCA4840/1995 shows that Excellent Fine caused the loan to be paid to Saleswin Enterprises Limited on 28 May 1993.  The banking documents further establish that on the same day, a sum of $3,650,000 was received by the plaintiff from Saleswin Enterprises Limited.

19. In the circumstances, although the petty cash voucher noting this $3,650,000 from Saleswin Enterprises Limited described part of the money (i.e. $2,250,000) as repayment by the defendant of the $2,250,000 advancement, there is in truth no repayment by the defendant.  This is because the defendant was using money obtained from a loan incurred by the plaintiff to repay his own indebtedness to the plaintiff.  In short, he is using the plaintiff’s fund to discharge his personal liability to the plaintiff.

20. Evidently, this is in breach of his fiduciary duty owed to the plaintiff in his capacity as a director.  He is misappropriating company's fund for his own use and benefit.

21. In the premises, the defendant must be liable to the plaintiff for the $2,250,000 claimed either by way of a loan or in breach of his fiduciary duty.

22. The defence of an oral agreement with the new shareholders that the plaintiff would have no claim against the defendant and the other former shareholders is simply not made on the evidence, the defendant having elected not to appear at the trial despite notice had been given.  Further, Miss Ng had gone on oath to deny such agreement.

23. Even if there were the alleged oral agreement, it would not be binding on the new shareholders or the plaintiff given that the true position was concealed by the petty cash voucher dated 28 May 1993 and the series of banking transactions involving Excellent Fine and its solicitors and Saleswin Enterprises Limited.  It is also Miss Ng’s evidence, which I accept, that she and Mr Yip did not receive the full set of accounts and books even after the completion of the transfer of shares.  They were only alerted to the irregularities in the plaintiff’s accounts after they appointed new accountant to investigate.

Conclusion

24. For the above reasons, I enter judgment for the plaintiff against the defendant for the sum of $2,250,000 together with interest thereon at judgment rate from the date of Writ to payment in full.  I further order that the defendant pays the plaintiff the costs of the action, together with all costs reserved, to be taxed if not agreed.