FOK HING INTERNATIONAL CO LTD v. LIU HSIAO CHENG

HCA 97/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 97 OF 2013

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DECISION

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1.  This is an appeal by the defendant in the original action and the plaintiff in the counterclaim, Mr Liu Hsiao Cheng (“Mr Liu”), against the order of Master S Lo dated 18 February 2014, granting summary judgment in favour of the plaintiff in the original action, Fok Hing International Company Limited (“Fok Hing”), against him in the sum of HK$1,000,000 and interest. Execution of the said judgment has been stayed upon Mr Liu’s payment into court in the sum of HK$1,500,000.

Background

2.  Fok Hing’s claim in the original action is a simple one: a claim for the repayment of a loan in the sum of HK$1,000,000 advanced on 11 August 2008 (“the Loan”).  According to Fok Hing, the Loan was evidenced by: (i) a cheque in the same amount dated 11 August 2008 drawn by Fok Hing in favour of Mr Liu (“the Cheque”); and (ii) a receipt signed by Mr Liu on 11 August 2008 (“the Receipt”).

3.  Mr Liu does not dispute that he had received a sum of HK$1,000,000 by way of the Cheque issued by Fok Hing.  However, this was only a prepayment of the cumulated profits due to Mr Liu under a joint-venture business.

4.  According to Mr Liu, the present case is, in substance, about a dispute between him and the 2^nd defendant in the counterclaim, Mr Wong Shu Wai (“Mr Wong”).  In around 2000, Mr Liu and Mr Wong entered into a trading joint-venture agreement (“the JV Agreement”).  Under the JV Agreement, each of them would own 50% of the joint-venture business (“the JV Business”).  The JV Business would be operated through Fok Hing and each of them would be entitled to 50% of the profits of the JV Business captured under Fok Hing.

5.  It is common ground that, apart from the JV Business, Fok Hing carried on other businesses on its own.

6.  According to Mr Liu, in or around late 2002 and early 2003, he and Mr Wong entered into a trust agreement whereby Mr Wong agreed to hold 5,000 shares in Fok Hing on trust for him.  However for the purpose of the present application, Mr Liu is not relying on his beneficial interests in the shares of Fok Hing in maintaining the counterclaim against Fok Hing, rather he relies on the terms of the JV Agreement that he is entitled to receive half of the profits of the JV Business.

7.  At all material times, Mr Wong and his brother were equal shareholders and the only directors of Fok Hing.  According to Mr Liu, his brother was a mere nominee of Mr Wong.  He had no involvement in Fok Hing’s affairs and Fok Hing was and still is under the sole control of Mr Wong.

8.  In around August 2008, Mr Liu requested Mr Wong to account and to distribute to him 50% of the cumulated profits of the JV Business captured under Fok Hing.  In reply, Mr Wong claimed that the audited accounts of Fok Hing ended 31 August 2008 were yet to be finalised and the cumulated profits of the JV Business could not be worked out.  Mr Wong suggested to pay Mr Liu a sum of HK$1,000,000, which was the amount under the Cheque, as a prepayment of his profit share and undertook to pay Mr Liu the balance of his share once the audited accounts were available.  But despite repeated requests, neither Mr Wong nor Fok Hing has accounted to him for his share of the cumulated profits of the JV Business, the amount of which Mr Liu calculates is at least US$955,826.

9.  According to Mr Liu, he has a bona fide claim against Fok Hing to account for his share of the profits of the JV Business on the ground of unjust enrichment or that Fok Hing is holding his share of the profits as constructive trustee.  It is also Mr Liu’s defence that Fok Hing does not have the locus to sue him for the Loan.  It has been stated many times in Mr Wong’s affirmations that the Loan was a personal loan by him to Mr Liu.  In such circumstances, Fok Hing does not have the locus to sue for the repayment of such personal Loan.

The factual disputes

10.  In his affirmations, Mr Wong denies the existence of the JV Agreement.  For the business carried on under Fok Hing, Mr Wong claims that Mr Liu and his wife, Madam Shen Luan (“Madam Shen”), only agreed to introduce their customers in Taiwan to Mr Wong and Fok Hing in return for the financial assistance and remuneration provided by Mr Wong.  Pursuant to such arrangement, Mr Wong had advanced various loans to Mr Liu throughout the years to ease his financial pressure.

11.  In attacking Mr Liu’s case about the JV Agreement and the prepayment of profit share, Mr Lam SC, counsel for Fok Hing, submits that: (i) Mr Liu cannot produce any documentary proof to support the existence of the JV Agreement; (ii) Mr Liu had not mentioned the existence of the JV Agreement in the reply to the pre-action letter issued on behalf of Fok Hing[1]; (iii) Mr Liu cannot produce any documentary proof to support his contention that he had repeatedly asked Mr Wong and Fok Hing to account to him for his share of the profits of the JV Business; (iv) Mr Liu admitted in his email to Mr Wong dated 31 July 2012[2] that he was neither a director nor shareholder of Fok Hing, and hence he was not liable to shoulder the liability or entitled to share the profits of Fok Hing, nor was he able to examine its financial accounts; (v) Mr Liu’s allegation about the sum of HK$1,000,000 being prepayment of his profit share is unbelievable, since he expressly acknowledged in the Receipt that the said sum was a loan to him; and (vi) it was stated in Fok Hing’s accounting documents that the sum of HK$1,000,000 was a loan to Mr Liu and not a prepayment of the profits of the JV Business.

12.  Despite the able submission of Mr Lam, I cannot simply dismiss Mr Liu’s factual allegations at this stage.  According to the evidence of the present case, it is clear that there had been considerable business dealings between Mr Liu and Mr Wong throughout the years.  They had set up a joint-venture tobacco business (“the Tobacco Business”) which was operated under a company known as Gold Driven Investments Ltd (“GDIL”).  The dispute between the parties relating to the Tobacco Business is the subject matter of the other litigation in HCA 1278 of 2013 and another proceedings in Zimbabwe.

13.  If Mr Wong’s evidence is the truth, Fok Hing had nothing to do with the Tobacco Business.  But surprisingly, the accountant of Fok Hing, Ms Amy Lit (“Ms Lit”), had provided Mr Liu with the sales and payment records for the trade conducted by Fok Hing between 2000 and 2008 (“the Sales and Payment Records”)[3]. If the Mr Liu was only entitled to receive remuneration and financial assistance for the businesses introduced by him, why would he be entitled to receive these financial records of Fok Hing?  In this regard, Fok Hing has not provided any credible explanation.

14.  Furthermore, by an email dated 25 May 2012, Ms Lit had provided Mr Liu with a financial summary of all the joint venture companies including GDIL and Fok Hing suggesting that Fok Hing suffered a cumulative loss of about HK$32.7 million as at 31 March 2012[4].   Later on 31 July 2012, Mr Wong produced the financial summary to Mr Liu suggesting that Fok Hing’s cumulative loss was reduced to about HK$17.2 million as at 30 June 2012 over a period of 3 months[5]. If Mr Wong’s evidence is the truth and there was no JV Business involving Fok Hing, why would Ms Lit or Mr Wong have provided Mr Liu with such sensitive financial records of Fok Hing?  Again no explanation has been given.

15.  The contents of these financial records may also support Mr Liu’s case.  In these records, the liabilities of all the joint-venture companies were combined and reported as one, and the records also show that the 2 joint-ventures owed Mr Liu a sum of HK$4,503,115.44 as at 31 March 2012 and HK$4,531,975.54 as at 30 June 2012.  These are certainly consistent with Mr Liu’s allegation that the JV Business was run side-by-side with the Tobacco Business.  Although the evidence is not conclusive at this stage, Mr Liu’s allegations deserve serious investigation at the trial.

16.  As mentioned above, Mr Wong claims that Mr Liu was not involved in the business of Fok Hing.  In return for the business opportunities introduced by Mr Liu and Madam Shen to Fok Hing, Mr Wong only agreed to advance various loans to Mr Liu in order to ease his financial pressure. However, the Sales and Payment Records show that Mr Liu was able to generate over US$1 million in income for Fok Hing.  On the other hand, the amounts of the loans allegedly advanced by Mr Wong were relatively insignificant.  In such circumstances, I have serious doubt as to why Mr Liu would have agreed to forego such a promising business for some insignificant loans.  It seems to me that the arrangement between the parties for the business carried on under Fok Hing was more complicated than that depicted by Mr Wong, and the details of such business arrangement should be fully investigated at the trial.

17.  I also have some queries about Mr Wong’s evidence relating to the advancement of the loans.  According to Mr Wong’s own ledger[6], some of these alleged advances were related to dealings with an entity known as “Universal Taikang” and not Mr Liu.  These loans were booked under “sundry debtors” rather than as “loans”.  Further, the financial statements of GDIL for the year ended 31 August 2008[7] show that the Tobacco Business was generating some handsome profits for the partners.  With a net profit of about HK$6 million, I doubt whether Mr Liu was experiencing financial difficulties as alleged by Mr Wong.  In such circumstances, although Mr Liu signed the Receipt acknowledging that the advancement was a loan, such document may not reflect the true position between the parties and all above queries should be properly investigated at the trial.

18.  I also do not accept that the contents of Mr Liu’s email dated 31 July 2012 are necessarily inconsistent with his case.  Although Mr Liu apparently admitted that he was neither a director nor shareholder of Fok Hing, one must bear in mind that, based on Mr Liu’s version, he left the actual operation of the JV Business to Mr Wong and Fok Hing.  Technically, he was right in saying that he was neither a director nor shareholder of Fok Hing, but he was still a partner of the JV Business which, according to him, was operated under the name of Fok Hing.  As Fok Hing carried on other businesses on its own, it was also right that Mr Liu had nothing to do with those other businesses. Furthermore, by a subsequent email dated 23 May 2013[8], Mr Liu wrote to Ms Lit to enquire about his shareholding status in the various joint-venture companies he operated with Mr Wong.  That was certainly consistent with Mr Liu’s case that he left the actual operation of the JV Business to Mr Wong, and he was not clear about the details of the actual operation of the JV Business.

19.  Finally, I do not find that the contents of the reply letter from Mr Liu’s then solicitors dated 3 October 2012, reading as a whole, are inconsistent with Mr Liu’s case.  His allegation about his beneficial interest in the shares of Fok Hing in the reply letter is actually consistent with his case about the existence of the JV Agreement.

20.  Although there is no document evidencing the existence of the JV Agreement and Mr Liu signed the Receipt acknowledging that the advancement of HK$1,000,000 was a loan, there are also other documents (as mentioned above) which support that, contrary to Fok Hing’s evidence, the JV Business was operated side-by-side with the Tobacco Business.  As I see it, both parties are able to put up some arguments in support of their respective case, but ultimately the business relationship between Mr Liu and Mr Wong deserves further investigation by the court.

21.  In fact, the learned Master agreed that there are various triable issues of facts between Mr Liu and Mr Wong.  In his oral reasons, the learned Master said:[9]

“As I found that [Fok Hing] is not a party to [the alleged JV Agreement], although I tend to agree that there are a lot of triable issues as between [Mr Liu] and Mr Wong, but that has nothing to do with [Fok Hing]. [Fok Hing’s] case [is] based on the loan, which was made orally and evidenced by the written receipt signed by [Mr Liu], and in the written receipt it is clearly said that it is a loan, I think [Mr Liu has] not [established] any triable issue as to why the loan shall not be repaid. Even there is a term in [the JV Agreement] between Mr Wong and [Mr Liu] that such loan is, in fact a prepayment of certain profit from [the JV Agreement]. This term can be enforceable against Mr Wong, but [it is] not enforceable against [Fok Hing].”

22.  For the reasons given earlier in this Decision, the learned Master was right in saying that there are various triable issues of fact between Mr Liu and Mr Wong.  However if that are so many factual issues between them, it would virtually mean that Mr Liu’s evidence is capable of being believed.  As Mr Liu claims that the sum of HK$1,000,000 was a prepayment of his profit share, this factual dispute alone should entitle Mr Liu to have unconditional leave to defend Fok Hing’s claim.  Hence, the learned Master’s order should be set aside.

Mr Liu’s claim for his share of profits of the JV Business against Fok Hing

23.  For the sake of completeness, I will also address the issue as to whether Mr Liu has a bona fide claim against Fok Hing to account for his share of the profits of the JV Business allegedly captured under Fok Hing.

24.  On the basis that Mr Liu’s evidence about the JV Agreement and the JV Business is the truth, then Fok Hing had operated the JV Business on behalf of the joint-venture involving Mr Liu and Mr Wong (“the Joint-Venture”).  Because Fok Hing was entrusted by the Joint-Venture to operate the JV Business, it is quite arguable that Fok Hing had to hold the money received from such business on trust for the Joint-Venture.  Apparently, Fok Hing was entitled to deduct its own expenses for the operation of the JV Business, but it had to hold the net surplus, ie. the profits of the JV Business, on behalf of the Joint-Venture.  It is a simple application of agency and trust principles.  Although Mr Liu does not know the details of the operation of the JV Business, it is certainly open to him to argue that Fok Hing was holding his share of profits on trust for him.

25.  Mr Lam submits that since Mr Liu is relying on the JV Agreement to sue for his share of the profits, he only has a contractual right to sue for the profits which is enforceable against Mr Wong and not Fok Hing.  Further, in asking Fok Hing to account for his profit share on the ground of constructive trust, Mr Liu has to establish that he has an equitable interest in the profits earned by Fok Hing.  Since the profits earned by Fok Hing could only belong to Fok Hing and no one else, Mr Liu had no equitable interest over the profits and so he is not entitled to maintain an action based on constructive trust against Fok Hing.  Finally, it is not permissible in law for Mr Liu to pierce the corporate veil by saying that Mr Wong was the alter-ego of Fok Hing.

26.  Obviously, whether Fok Hing was holding the money or profits relating to the JV Business on behalf of the Joint Venture is a fact-sensitive issue which depends very much on the actual arrangement between the relevant parties.  It was possible for the Joint-Venture and Fok Hing to make an arrangement to the effect that Fok Hing was to carry on all the businesses, including the JV Business, on its own, and Fok Hing was only liable to pay a certain sum to the Joint-Venture under the contractual arrangement.  However, if Fok Hing was a corporate vehicle on behalf of the Joint-Venture in operating the JV Business, then it is also very arguable that Fok Hing was the Joint-Venture’s agent, and the money received by Fok Hing on behalf of the Joint-Venture, subject to the deduction of the expenses, actually belonged to the Joint-Venture itself.  If what Mr Liu tells the court is the truth, he knew very little about the actual operation of the JV Business, and the court therefore needs to investigate further into such matter in order to ascertain whether Fok Hing was holding the profits of the JV Business on behalf of the Joint-Venture.

27.  According to Mr Liu, Mr Wong was the person who actually controlled Fok Hing, and so Fok Hing, through Mr Wong, should have known about the JV Agreement and that it was operating the JV Business as a corporate vehicle for the Joint-Venture.  This has nothing to do with piercing the corporate veil.

28.  Based on the aforesaid, I find that Mr Liu has managed to establish a triable issue as to whether he has a valid claim for his profit share against Fok Hing.  As Fok Hing’s claim for the Loan and Mr Liu’s claim for the profit share are somewhat related, in the sense that both are related to the business dealings between Mr Liu and Mr Wong relating to Fok Hing, Mr Liu’s cross-claim may amount to a defence of equitable set-off to Fok Hing’s claim for the Loan.  Hence, this offers an additional reason as to why unconditional leave should be given to Mr Liu to defend the claim.

Fok Hing’s locus to sue

29.  Based on the aforesaid reasons, it is quite unnecessary for me to consider whether Fok Hing has the locus to sue for the personal loan advanced by Mr Wong.  However, there is no dispute that the money advanced to Mr Liu actually came from Fok Hing, and so even if the alleged Loan was personal in nature, it is arguable that Fok Hing can maintain the cause of action against Mr Liu.  In any event, how Mr Wong had arranged the advancement to Mr Liu is a fact-sensitive issue.  If Mr Liu seeks to run this defence for the purpose of resisting the summary judgment application, he should have raised such issue in the pleading or the affirmations in opposition so that Fok Hing would have the opportunity to reply to such query.  Mr Liu has failed to do so.  In any event, since Mr Liu has managed to raise an arguable defence on some other grounds, it is not necessary for him to rely on such argument.

Conclusion

30.  For the above reasons, I allow the appeal and set aside the order of Master S Lo.  I also grant Mr Liu unconditional leave to defend Fok Hing’s claim in the original action.

31.  I also make the following order nisi:

(i) the costs of the O 14 summons before the Master be costs in the cause;

(ii) the costs of the appeal be paid by plaintiff;

(iii) the sum of HK$1,500,000 paid by Mr Liu into court, together with any interest, be paid out to Mr Liu.

32.  The order nisi shall be made absolute 14 days after the date of the handing down of this Decision.