FOOK LEE HOLDINGS LTD v. JOY FUTURE INTERNATIONAL LTD AND ANOTHER

HCA 321/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 321 OF 2010

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BETWEEN

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J U D G M E N T

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1.  The plaintiff claims against the defendants for repayment of a loan on the ground of breach of a supplemental agreement and total failure of consideration.

Undisputed or undisputable facts supported by documentary evidence

2.  The plaintiffwasand is controlled by the Ho family.  Mr Ho Sai Chu (eldest), Mr Ho Sai Kit and Mr Ho Sai Yiu are brothers.  They and Mr Wong Yiu Kai (“Mr Wong”) were and are common directors of the plaintiff and one Eastcorp Holding Limited (“Eastcorp”).

3.  Mr Ho Sai Yiu controls the 1^st defendant. Mr Ho Siu Ki (not a member of the Ho family) controls the 2^nd defendant.  Both of them were and are the common directors of the defendants.

4.  The plaintiff represents a group of investors comprising 7 persons: the plaintiff itself, Iu Kwong Properties Ltd, Mr Ho Sai Yiu, Mr Ho Sai Kit, Mr Wong, Mrs Wong and Mr Andy Ho (collectively “the Investors”).  Mr Andy Ho’s share had, by the time of commencement of this action, already been taken over by Mr Ho Sai Yiu.

5.  The China Youth Card Project (“the Project”) was to issue youth cards to the members of the Chinese Communist Youth League (中國共青團) (“the League”) aged between 14 and 35.  Those cards were multi-functional, including financial, telephone, business travel, youth hostel, and other personal services.

6.  The Project used to be run by a joint venture between共青團中央網絡影視中心 (“the Media Centre”) and 中青卡投資管理有限公司(“the outgoing company”).

7.  The 1^st defendant[1] had signed 2 agreements with Gold Track Group Co. Ltd. (“Gold Track”), one dated 21 September 2006 (the 1^st Gold Track Agreement) and the other 9 November 2006 (“the 2^nd Gold Track Agreement”).  Under the 1^st Gold Track Agreement, Gold Track could obtain 5% shares of the 1^st defendant if it could arrange for the share transfer agreement between the outgoing company and the defendants to be signed before the end of 2006.  Under the 2^nd Gold Track Agreement, the 1^st defendant agreed to pay RMB 20,000,000 to Gold Track to ensure that it would effectively promote the progress and efficiency of the project.

8.  By an Agreement of Intent (合作意向書) dated 9 November 2006, the Media Centre and the 1^st defendant agreed to set up a joint venture company (“the JV Company”) to invest in and operate the Project.  The registered capital would be RMB80,000,000 and the Media Centre would at all times be the majority shareholder.

9.  The Media Centre wanted to replace the outgoing company.  Through Mr Ho Sai Chu and Mr Ho Sai Yiu (who were trusted by the Communist party), the plaintiff was invited to invest in the Project in 2006.  Mr Wong was instructed by Mr Ho Sai Chu to follow up the suggested investment. 

10.  Because the plaintiff was providing the capital, the draft joint venture contract and cooperation agreement were given to Mr Wong for comment before the defendants committed to the same.

11.  Mr Wong prepared a spreadsheet of the projected income and expenses for the Project (“the Spreadsheet”) which anticipated that profits would be generated after 5 months. He sent the Spreadsheet together with a list of 11 questions (“the list of questions”) to Mr Ho Sai Yiu and Mr Ho Siu Ki for comment on 13 February 2007.

12.  In reply, Mr Ho Siu Ki declined to let the plaintiff approve the income and expenses of the JV Company but suggested that Mr Wong be appointed as its Chief Financial Officer (“CFO”).  Mr Ho Siu Ki agreed to ensure that the JV Company would allocate dividends and that dividends allocated to the defendants be paid first to the plaintiff.  He did not make any comments regarding the Spreadsheet notwithstanding that he had discussed the list of questions with the Media Centre.  The final joint venture contract and cooperation agreement had taken into account Mr Wong and Mr Ho Siu Ki’s comments.

13.  The plaintiff was concerned as to risk and resolved on 26 February 2007 to invest a maximum of HK$18 million. The remaining HK$17 million was contributed by the 6 other Investors.

14.  On about 6 April 2007, the defendants and the Media Centre entered into a 關於合資經營中國青年卡控股有限公司（暫定名）合同書 (“the JV Contract”)[2] and a 合作協議書 (“the Cooperation Agreement”)[3].  The JV Company was tentatively named as 中國青年卡控股有限公司 (“CYC Holdings”).  The Media Centre and the 1^st and 2^nd defendants would hold the shares in the ratio of 36%, 34% and 30% respectively.  The defendants had to contribute RMB51.2 million.  Out of the registered capital, RMB28,800,000 was earmarked for the take-over of the outgoing company (“the take-over”).

15.  On 13 April 2007, the plaintiff and the defendants entered into a supplemental agreement (“the Supplemental Agreement”)[4], which formed the subject matter of this action.  The plaintiff was to provide an interest-free loan of HK$35,000,000 (“the loan”) in return for 38.24% of the shares in the 1^st defendant (“the Shares”).  The relevant provisions were as follows:

‘[P]免息貸款HKD3500 萬給 [D1]以取得[D1] 38.24%的股權’ (SA clause 1)

‘[D1]以借款 HKD3500萬作為投入上述中青卡項目’ (SA clause 2)

‘[D1]與[D2]各股東收取股息後，首先要清還全部借款’ (SA clause 3)

‘基於以上第三項, [D1]用中青卡項目所分到的股息作為償還甲方的借款，於借款全部清還後，[D1] 股東才可分得股息’ (SA clause 4)

‘基於以上第三項，[D2]也一並用所分到的股息協助[D1]盡快清還HKD3500萬的借款，於[D1]的借款全部清還後，[D2] 股東才分股息’ (SA clause 5)

‘如果任何理由導致上述合作發展項目未能於貸款後落實而告吹，則[D1]與[D2]承諾盡快於二個月內償還此借款給 [P]……’ (SA clause 6)

16.  The loan was received by the 1^st defendant in the form of 2 sums paid on 25 May 2007 (HK$6,200,000) and 5 September 2007 (HK$28,800,000) respectively. 

17.  Eastcorp was the corporate vehicle for the plaintiff to hold the Shares.  Its members were the Investors.

18.  On 18 January 2008, Mr Andy Ho wrote to Eastcorp and all Investors asking about progress of Eastcorp’s investment in the 1^st defendant. 

19.  On 31 January and 11 February 2008, Mr Wong gave the bought and sold notes, instrument of transfer, the board resolution of the 1^st defendant and declaration of trust (“the transfer documents”) to Mr Ho Sai Yiu for the purpose of transferring the Shares to Mr Ho Sai Kit.  The transfer documents have been executed on plaintiff’s side.  They have never been returned to the plaintiff in executed form.

20.  On 5 February 2008, Messrs Gallant YT Ho & Co (“Gallant Ho”) purportedly representing Mr Tsoi Dick Man and Mr Chan Ching Yan (holders of 60% shares of the 2^nd defendant) wrote a letter to Mr Wong.  Gallant Ho asserted that the Fook Lee Group had not implemented the project in accordance with the JV Contract.  “中方表明，如該項目未能在短期内落實，將會告吹。”  Mr Tsoi and Mr Chan were said to have identified ideal partners and a decision had to be made within a short time.  Therefore, the Fook Lee Group was asked to reveal its stance and continue to support Mr Tsoi and Mr Chan.  Enclosed with Gallant Ho’s letter were 2 letters admittedly signed by Mr Ho Sai Yiu in 2006, one of which entrusted Mr Tsoi and Mr Chan to represent the Fook Lee Group to discuss the cooperation matter on youth cards with the League. 

21.  Mr Wong reported Gallant Ho’s letter to Mr Ho Sai Kit and Mr Ho Sai Chu.  Mr Ho Sai Chu passed the letter to Mr Ho Sai Yiu for follow up but Mr Ho Sai Yiu passed it to Mr Ho Siu Ki.  In the end, nothing was done about this letter.

22.  On 21 February 2008, as arranged by Mr Ho Sai Yiu, Mr Ho Sai Kit attended a meeting with Mr Andy Ho and Mr Huang of the Media Centre in Beijing. On that occasion there were some Canadian investors present with Mr Huang.  Mr Ho Siu Ki suddenly barged in and assaulted Mr Andy Ho, causing him injuries. 

23.  Subsequently, the plaintiff was informed that the Chinese party did not want Mr Andy Ho to continue in the Project.  His share was eventually taken over by Mr Ho Sai Yiu. 

24.  From time to time, the plaintiff expressed concerns as to progress of the Project.

25.  On 20 March 2009, Mr Wong resigned as CFO. 

26.  On 22 July 2009, at the plaintiff’s board meeting, Mr Ho Sai Chu suggested giving the Project one “final shot”.  Mr Ho Sai Yiu referred, for the first time, to 中青國聯青創投資(北京)有限公司 (“ZQGL”) as the JV Company.  In outlining the “final shot”, he said that ZGQL would secure a power of attorney from the Media Centre (“the power of attorney”) giving ZQGL the exclusive use of the name and logo of the Chinese Youth Card and conclude the talks with the Bank of Communications (“BOC”) for the issuance of the youth cards.  It was agreed that if the “final shot” was unsuccessful after 2 months, the plaintiff would withdraw from the Project. 

27.  On 12 November 2009, a group of the plaintiff’s directors including Mr Wong wrote a confidential letter (“the confidential letter”) to Mr Ho Sai Chu, questioning Mr Ho Sai Yiu’s integrity and criticizing his lack of transparency in handling the Project. They demanded the plaintiff to withdraw from its participation immediately and demanded for refund of the loan.

28.  On 25 November 2009, during the plaintiff’s board meeting, it was decided that legal action be taken against the defendants since the plaintiff had not received the Shares.

The plaintiff’s case

29.  The plaintiff was told by Mr Ho Siu Ki that the outgoing company had Taiwanese background and so the Project was halted.  The substitute joint venture partner had to be acceptable to the League. The Ho family (who had good relationship with the Communist party) fell into this category. 

30.  Mr Ho Sai Chu and Mr Ho Sai Yiu were the first persons who attended the meeting in Beijing concerning the Project.  They represented to the Investors that the outgoing company had already laid the basic foundation for the Project and had issued over 1 million youth cards through banks in the past few years.  Therefore, once the JV Contract was signed and money injected, the Project would begin to generate income within a few months’ time.  The primary source of income would be membership fees estimated to be RMB1.50 per member per month from about 80 million League members and commissions from banks at RMB80-100 per youth card and from service providers.  With such income, the investors would be fully repaid within 12 months after cash injection.  If the Project were successful, users of the youth cards could increase to all 450 million Chinese youth aged between 14 and 35.

31.  On 31 January 2007, Mr Ho Siu Ki told Mr Wong in a telephone conversation (unchallenged by the defendants) that (i) the State Council (國務院) had approved the name of CYC Holdings for the JV Company; (ii) that there would be income starting from August 2007 from in the form of membership fees for youth cards; and (iii) there would be income from banks starting from May to June 2007.

32.  The Spreadsheet was based on documents given by the Mainland side [5] and Mr Ho Sai Yiu and Mr Ho Siu Ki’s representations.

33.  At the end of 2007 or early 2008, Mr Andy Ho passed a Gold Track Agreement to Mr Wong.  There was a dispute as to which Gold Track Agreement Mr Wong confronted Mr Ho Sai Yiu with at a directors’ meeting on 5 January 2010.  I accept Mr Wong’s version that it was the 2^nd Gold Track Agreement.  I also accept his evidence that Mr Ho Sai Yiu had given him 2 inconsistent replies to this document – one in July 2008 that he thought that document had become invalid; the other that he had not signed it.  At the trial, Mr Ho Siu Ki admitted that Mr Ho Sai Yiu had signed the 2^nd Gold Track Agreement.

34.  On 21 February 2008, at a meeting in Beijing and as instructed by Mr Ho Sai Yiu, Mr Ho Sai Kit asked whether the Project was still to be carried out by the plaintiff; and if it was, why progress was so slow and whether it could be speeded up.  Mr Huang assured him that the plaintiff still carried the task of issuing youth cards.  He also felt that the progress was slow but the most important thing was that the plaintiff implemented its contractual promise. 

35.  After Mr Andy Ho’s withdrawal, Mr Ho Sai Kit and Mr Wong had still less chance to know about the progress. Whenever they asked Mr Ho Sai Yiu, he would say that the cards would be issued soon; but other matters were confidential. 

36.  On 8 August 2008, an informal directors’ meeting was held at the plaintiff’s office with, amongst others, Mr Ho Sai Chu, Mr Ho Sai Yiu, Mr Ho Sai Kit and Mr Wong.  Mr Ho Sai Yiu assured those present that the youth cards would be issued around April or May 2009, but definitely no later than October 2009, in time for the 60^th National Day Celebrations.

37.  Starting from 17 December 2008, Mr Wong and his wife had on several occasions told Mr Ho Sai Yiu that they wanted to resign from the Project and have their parts of the loan returned.  Time and again, Mr Ho Sai Yiu asked them to wait for 2 more months.

38.  At the meeting in early February 2009, the Agricultural Bank of China (“ABC”) which was responsible for issuing youth cards agreed to pay commission of RMB80 per card but Mr Ho Sai Yiu wanted to have RMB100.  Hence, no agreement was signed.  However representatives from the ABC were not familiar with the Project and questions could not be answered.  On that occasion, Mr Huang and one Mr Cao said that the plaintiff had not solved the question on provision of capital despite lapse of 2 years and wanted the plaintiff to comply with the contract.  Neither Mr Ho Sai Yiu nor Mr Ho Siu Ki could answer.  Mr Ho Siu Ki was to see Mr Huang on the following day to discuss the issue of capital but there was no feedback to the plaintiff.

39.  Even by 8 October 2009, Mr Ho Sai Yiu was unable to report on of the “final shot” at the board meeting.  Instead, he said that in order to bring about a quicker source of income, he had been working on a petrol discount card for League members over the past 2 months and held discussions with BOC for the right to issue this card.  He also said that a website 創業中國 (www.icychina.com) (“the Website”) had recently been set up.  It was planned to charge each League member RMB5 annual fee once the website was launched.  He said income would come in about March of the following year.

40.  On 5 January 2010, at the plaintiff’s board meeting, Mr Ho Sai Yiu could not explain why (i) Mr Huang denied the allegation that he had restricted the plaintiff’s access to financial information: and (ii) there was the 2^nd Gold Track Agreement which saddled the 1^st defendant with a liability for RMB20,000,000. 

41.  The writ was issued on 4 March 2010.  The plaintiff seeks repayment of the loan on the grounds that (i) the loan was repayable on demand; (ii) under SA clause 6, the Project has failed to materialize; (iii) there had been total failure of consideration for want of transfer of the Shares to the plaintiff. 

The defendants’ case

42.  The outgoing company had problems with the source of its capital and the channel through which the capital came, so the Chinese party wanted to replace it.  The Chinese party accepted Mr Ho Siu Ki because of his expertise in communications.

43.  Mr Andy Ho was removed because he disclosed confidential information about the Project and tried to introduce Canadian partners.  He was suspected of being connected to hackers from Canada and attempting to sell the database of the Project for RMB80,000,000. 

44.  As to the 2 Gold Track Agreements, Mr Ho Sai Yiu said that the 1^st defendant had never discussed or agreed to the contents, nor paid the RMB20,000,000 promised in the 2^nd Gold Track Agreement

45.  The defendants claimed that the loan was not repayable on demand but only upon occurrence of either one of 2 conditions, namely, (i) when the defendants were distributed dividends from the Project under SA clause 3; and (ii) when the Project was called off due to failure to implement under SA clause 6.  Neither condition was met. Further, they had procured the transfer of the Shares to Mr Ho Sai Kit to hold on behalf of Eastcorp after approval by some government authorities.

The Issues

46.  The following are the issues disclosed from the pleadings:

(A)  When was the loan due for repayment under the Supplemental Agreement? (para 55-75 below)

(B)  Was the loan due for repayment? (para 76-138 below)

(C)  Has there been total failure of consideration? (para 139-156 below)

Credibility of plaintiff’s witnesses – Mr Wong and Mr Ho Sai Kit

47.  Mr Wong is an honest witness.  At times he appeared to be hesitant under cross-examination, but it was due to the imprecise manner in which questions were put to him.  His evidence was supported by objective, contemporaneous documents.  He might have misunderstood the effect of some documents which existed prior to execution of the JV Contract and the Cooperation Agreement but that did not detract from his overall credibility.  Save where expressly stated otherwise, I accept his evidence.

48.  Mr Ho Sai Kit had not read all the documents before deciding to make the loan but relied on the representations of Mr Ho Sai Yiu and Mr Wong.  He did not know all the details. He did not have as good memory as Mr Wong but I find that his lack of memory was due to lapse of time and not lack of candour.  Save where expressly stated otherwise, I accept his evidence. 

Credibility of the defendants’ witnesses – Mr Ho Sai Yiu and Mr Ho Siu Ki

49.  As demonstrated by the analyses of the issues below, their evidence was fraught with inconsistencies, contradictions with documentary evidence, falsity and bare assertions.

50.  In the box, Mr Ho Sai Yiu and Mr Ho Siu Ki gave long answers to evade answering questions in a direct manner.  They often asserted state secrecy or that consent of various government authorities (部委) had to be obtained but there were instances where their acts contradicted the asserted secrecy.  The reason why Gold Track was engaged formed a good example.  Mr Ho Siu Ki did not know Gold Track’s background.  He said without signing the agreements, it was not possible to check on this entity!  Gold Track professed having a close relationship with the Media Centre.  Therefore Mr Ho Siu Ki set a “trap” for it, to see what ability it had and who controlled it.  He had no idea whether Gold Track would be able to achieve what it had contracted to do. 

51.  Mr Ho Siu Ki also made bare assertions without proof.  For example, he alleged that Mr Andy Ho attempted to sell the Project database without proof.  In his witness statement, he said that Mr Andy Ho withdrew because he held different opinions from Mr Ho Sai Yiu, Mr Ho Sai Kit and Mr Wong in a separate project on recycled coke cans, a much “milder” reason for his removal.  Why Mr Andy Ho was removed was irrelevant to the case but it just demonstrated how inconsistent Mr Ho Siu Ki was.

52.  Mr Ho Siu Ki initially agreed under cross-examination that a company could not do business beyond the approved scope of business but later retracted from it.  He qualified it by stating if no one had said it was forbidden, one could apply for approval whilst doing a business outside the approved scope.  Apparently, he wanted to evade the issue of why ZQGL did not mention anything about youth cards in its scope of business.

53.  Save for admissions and where I expressly accept the same, I reject the evidence of Mr Ho Sai Yiu and Mr Ho Siu Ki.

54.  I now proceed to analyze the issues.

A.  WHEN WAS THE LOAN DUE FOR REPAYMENT?

55.  Three scenarios have been suggested on the pleadings:

(i)  By the plaintiff: on demand;

(ii)  By the defendants: when they were distributed dividends under SA clause 3;

(iii)  According to the defendants: when the Project was called off due to inability to implement it under SA clause 6.

The answer turns on construction of the Supplemental Agreement.  There is no dispute that it has to be construed with the JV Contract and Cooperation Agreement.

The legal principles on construction of a document

56.  The meaning of the words in a written contract should be construed in their grammatical and ordinary sense, except to the extent that some modification is necessary in order to avoid absurdity, repugnancy or inconsistency with the rest of the instrument: Grey v Pearson (1857) 6 HL Cas 61at 106, per Lord Wensleydale.

57.  When construing a document, the court is entitled to take into account the factual matrix of the case. 

“The construction of a document is not a game with words. It is an attempt to discover what a reasonable person would have understood the parties to mean. And this involves having regard, not merely to the individual words they have used, but to the agreement as a whole, the factual and legal background against which it was concluded and the practical objects which it was intended to achieve. Quite often this exercise will lead to the conclusion that although there is no reasonable doubt about what the parties meant, they have not expressed themselves very well.” Jumbo King Ltd v Faithful Properties Ltd & Ors [1999] 4 HKC 707, Lord Hoffmann at 726E to F.

“The background was famously referred to by Lord Wilberforce as the ‘matrix of fact’, but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.” Investor Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, at 912-3.

58.  The factual matrix is the evidence of the factual background known to the parties at or before the date of the contract, including evidence of the “genesis” and objectively the “aim” of the transaction: Hunt v Fisher [1995] 3 HKC 417, at 421I-422B.

The factual matrix

59.  Judging from the documents relied on by Mr Wong[6], the Project was complex and of a large scale.  A database had to be set up to store the personal data of 80 million youths and probably to conduct commercial transactions.  See中國青年卡電子商務平台可研報告 (the “Feasibility Report”).  The Project had to go through trial-run in 2003 to 2005.  Initially, a million cards had been issued, although Mr Ho Sai Yiu described them as “dead cards” put inside a warehouse.  He wanted the youth cards to be “living cards” by engaging more service providers.  Agreements had to be entered into between the Media Centre with banks and service providers.  Various approvals and licenses had to be obtained.  The Media Centre had to apply to authorities at state level to link up the youth card system with the all-in-one card system in each city to form a centralized payment system.  The plaintiff was aware of the risk of investment in the Mainland as shown from the board minutes dated 26 February 2007. 

60.  The Project was costly.  Through cross-examination of Mr Wong, Mr Chong (counsel for the defendants) was able to show that the nation would invest billions of dollars in the Project (see Feasibility Report). The Project would enter a maturity period after 3 years of formal operation.  It would attract national and Asia Pacific investment.  Five years after operation, it would enter speedy development period. The Project was therefore unlikely to generate income in the first few years. 

61.  The Project was profit-making, notwithstanding Mr Chong’s submission that it was charitable.  The documents he referred to were produced in 2003-2005, a few years before the parties entered into the Supplemental Agreement and things changed with the elapse of time.  Those documents provided at best background information given to the plaintiff to help it decide whether or not to invest in the Project.  It may be that the nation did not want to gain profits from the youths themselves but certainly revenue was expected from institutions like banks and service providers. The plaintiff expected profits, rightly, from:

(i)  The letters of intent and cooperation agreements between the Media Centre and 4 banks (including the National Postal Office) which showed commissions paid by banks to the Media Centre for a specific period of time;

(ii)  The representations which Mr Ho Sai Yiu and Mr Ho Siu Ki made, before the making of the Supplemental Agreement, to the effect that there would be revenue within 5 months of the loan;

(iii)  The reply of Mr Ho Siu Ki’s to question 2 of the list of questions that there would be membership fees from the League members that would form the income of the JV Company;

(iv)  The agreement of Mr Ho Siu Ki to obtain an assurance from the Media Centre that the JV Company would distribute dividends to shareholders: answer to question 6 in the list of questions; it culminated in clause 7 of the JV Contract providing for “合資各方以各自認繳的出資額在公司註冊資本中的比例分享利潤承擔風險和虧損。每年核算損益作為股息派發的根據。”

(v)  The failure of Mr Ho Siu Ki to comment on the projected income in the Spreadsheet;

(vi)  Clause 16(6) of the JV Contract which stated that shareholders’ meeting could examine the profits and approve dividends;

62.  Mr Chong submits in his opening speech that if the court finds that the loan was an investment albeit it would be recoverable by payment of dividends in due course, it would also not be repayable on demand. He relies on recitals to resolve any difficulty: Orr v Mitchell [1893] AC 238.  He submits that the recital showed the intention of the parties to be such that whatever injected into the 1^st defendant would be the plaintiff’s investment in the Project through its purchase of Shares. As a shareholder, the plaintiff’s return would be the dividends to be distributed by 1^st defendant. 

63.  Despite the fact that at the negotiation stage, Mr Wong has used the word “investment” in his Spreadsheet and emails to Mr Ho Siu Ki, the Supplemental Agreement clearly distinguished between loan and investment.  The parties have carefully chosen the word “loan” to describe the HK$35,000,000, intended it to be so, and I find to be so.

64.  It is also pertinent to note that the parties had not talked about other sources of income or capital for the Project apart from membership fees, and commissions from banks and service providers.  The defendants were $10,000-companies and did not have the money to invest.  It should be known to the parties that the defendants would not have the means to repay except by way of dividends. 

Scenario (i): Repayment on demand

65.  Where money is lent without any stipulation as to the time of repayment, which the plaintiff submits is the case here, a present debt is created which is generally repayable at once without any previous demand: Atterbury v Jarvie (1857) 2 H & N 114, 120; Chitty on Contracts, 30 ed, Vol 1, para 38-247.

66.  Further, whether a loan is repayable on demand is determined at the time the contract was made, not at the time of demand.

67.  The facts known to the parties were such that the Project could not be implemented overnight whether on the plaintiff’s case or on the defendants’.  On the plaintiff’s case, it would take time at least to form a JV Company, to take over the outgoing company, to apply for licenses from government authorities and approval to use the name of Chinese Youth Card, and to continue the normal operation of the Project (JVC clause 33).  On the defendants’ case, there would be the additional steps of setting up a database, securing cooperation from banks, etc. 

68.  Therefore, if the plaintiff could withdraw the loan immediately after it was advanced, it would defeat the parties’ intention and upset the implementation of the Project.  Moreover, it would enable the plaintiff to get the Shares for free without meeting the need to fund the Project.  That would be absurd.

69.  Even on the plaintiff’s own case, the Project would only be revenue generating 5 months after making of the loan and the plaintiff would receive full repayment within 12 months of advancing the loan.  This is inconsistent with a plea of repayment on demand.

70.  Mr Chong is correct in pointing out that the plaintiff did not plead misrepresentation or an implied term as to repayment within 12 months except in the Reply.  On a careful reading of the Reply, I am of the view that the plaintiff was not making a new averment that the loan was repayable within 12 months.  In substance, it was just relying on a basket of factors to say that it was led to believe that the Project would be immediately operational after cash injection.  I find that it so believed.

71.  In summary, even if all other Supplemental Agreement clauses were ignored, I do not agree that the loan was repayable on demand, as opposed to after lapse of reasonable time, say, 5 months after making of the loan.  The plaintiff has pitched its case too high.

Scenario (ii): Repayment under SA clause 3

72.  Clause 3 was in very simple terms.  In its grammatical and ordinary sense, it governed how each defendant should use the dividends distributed to it.  It gave the plaintiff a first claim on the dividends to ensure early repayment.  It did not expressly state that applying the dividends was the only means to repay the loan. 

73.  However, when one considers the factual matrix, especially the fact that the defendants had no other income except through the Project, one can infer that the parties intended the funds for repayment to come from dividends allocated to the defendants.  That was why even though the loan was used as consideration to purchase only the 1^st defendant’s shares, the 2^nd defendant also had to apply its dividends received to repay the loan.

74.  I am satisfied that repayment should be due only when dividends were received.  This did not place the plaintiff into the position of an investor insofar as the HK$35,000,000 was concerned but merely gave it priority over the defendants with regards to dividends received.

Scenario (iii): Repayment under SA Clause 6 – when the Project was called off due to inability to implement

75.  This clause certainly provided a condition for repayment.  Mr Chong submits that the plaintiff must prove not only inability to implement but also an act to call off the Project.  I disagree.  Inability to implement (未能落實) is the cause and calling off (告吹) is the effect.  Things done substantially beyond what was agreed would not be implementing the Project but something else.  The Project must necessarily be treated as called off without a deliberate act.  However, slowness in progress or a dragging pace must not be equated with inability to implement.

B.  WAS THE LOAN DUE FOR REPAYMENT?

76.  No dividends have been allocated, so SA Clause 3 was not invoked.  For completeness’ sake, if my analysis that the loan was not repayable on demand is incorrect, various written demands for repayment had been made since April 2009 so that the loan was due and payable by the time the writ was issued.

77.  The remaining provision to consider is SA Clause 6.  The particulars in support of the averment of inability to implement the Project are in paragraph 32E of the Reply, which can be categorized as follows:

(i)  Failure to set up the JV Company;

(ii)  Failure to take over the outgoing company;

(iii)  Failure to issue the youth cards;

(iv)  Failure to produce financial accounts;

(v)  Failure of Mr Ho Sai Yiu to succeed on the “last shot”;

(vi)  Failure to transfer the Shares to the plaintiff or Eastcorp; 

(vii)  Provision of a false website.

78.  The defendants’ case is that there was no requirement under the Supplemental Agreement that the Project must materialize or generate profits immediately after the loan was made.  The Project is in progress. The plaintiff’s directors were involved in its operation and had full knowledge of the progress through Mr Ho Sai Yiu.   

(i)  Failure to set up the JV Company

79.  The defendants allege that ZQGL, incorporated in Beijing on 8 April 2008, was the JV Company.  It was described in the plaintiff’s board minutes dated 22 July 2009 as “我們有份間接參與的公司”.  At no time had the Investors queried the establishment of this JV Company.

80.  Why, since the State Council had approved the use of the name of CYC Holdings (as Mr Ho Siu Ki told Mr Wong), was the name of ZQGL adopted?  Why did Mr Ho Sai Yiu have to wait for 1 year and 3 months to disclose the existence of ZQGL to the plaintiff?  Why, when Mr Wong wanted to resign as CFO, did Mr Ho Sai Yiu tell him to write to CYC Holdings instead of ZQGL?  Without details like memorandum and articles of association, how could the Investors raise queries on it?  The defendants could have no answer to these questions.

81.  More importantly, the only things known about ZQGL were those in the one-page company search record produced by the plaintiff:

(a)  Its registered capital was RMB20 million – far less than the loan or the RMB80 million contemplated by the JV Contract.

(b)  Its scope of business was “investment management, property development (not including development of a whole piece of land), high class guest houses, villas, high class office and construction of international conference centres, construction and operation  of large scale theme parks), development of technology and technological service for smart cards”.  Only the last item of business might be related to youth cards. 

(c)  Its business period was 50 years whereas the JV Contract contemplated 30 (clause 8.1). 

82.  Under cross-examination, Mr Ho Sai Yiu agreed that just by looking at the company search record, unrelated persons would not know that ZQGL issued youth cards.  Nor would they know the shareholding of the joint venture partners. 

83.  I am not satisfied that ZQGL was the JV Company set up pursuant to the JV Contract.  This head of complaint is substantiated.

(ii)  Failure to take over the outgoing company

84.  It is not in dispute that there was no take-over and no refund of the RMB28,800,000 earmarked for that purpose.

85.  Mr Ho Siu Ki explained that he discovered that both the source of capital of the outgoing company and the channel through which it came were problematic.  Since all its shareholders had disappeared for fear of criminal liability, the Media Centre did not pursue the take-over. 

86.  Mr Ho Sai Yiu’ evidence in answer to the court’s questions was that from what he knew, the Media Centre thought there were other options to take-over.  It was still in the course of discussion and even at the trial he did not know the result.  Since the Media Centre did not mention anything, he did not ask how it dealt with the outgoing company.  He considered that the shareholders of the outgoing company might return and JVC clause 13.2 has to be performed. 

87.  I disbelieve both defence witnesses.  Their tell-tales were without supporting documents.  Mr Ho Siu Ki even avoided the issue of take-over in his witness statement. 

88.  Mr Chong submits that a supervening event that rendered the performance of a contractual obligation impossible would not necessarily release the contractual parties from their liability under the contract.  The supervening event must be so fundamental as to destroy the basis of the agreement and significantly changes the nature of the contractual rights and obligations of the parties: Chitty on Contract, 30^th ed, para 23-013 to -016. If it did not strike at the root of the agreement, it would not release the parties from their liability under the contract: Cricklewood Property and Investment Trust Ltd v Leighton’s Investment Trust Ltd [1945] AC 221, 228.  He submits that the take-over was only to facilitate the operation of the Project by the JV Company smoothly and efficiently.  The elimination of the obligation to take-over per se would not discharge the contractual obligation of the parties.

89.  Cricklewood’s case dealt with frustration, which is not an issue in the present case.  In any case, I disagree with Mr Chong.  The failure to take over the outgoing company struck at the very root of the parties’ bargain.  To borrow the analogy of Mr Samuel Wong (counsel for the plaintiff) in his opening submission, the parties’ agreement was to take over a taxi and do business from there.  There were built-in provisions to ensure normal operation of the taxi.  The defendants, instead, purported to construct a new taxi or did just anything but take over an existing taxi. This alternative move might involve more time, cost and risk which the plaintiff had never been told of or consented to.  The defendants could have been released from the JV Contract. So could the plaintiff and it should be refunded at least the RMB28,800,000, if not the full amount of the loan[7].

90.  Mr Chong then refers to CA clause 8:

“… … 如果由於任何的原因，收購原有的公司和註冊成立新公司不能成功，甲方(Media Centre) 承諾將乙方和丙方(defendants) 已支付的款項在乙、丙方支付後的二個月內全額退回。”

He argues that the take-over was not unsuccessful; it was just being unnecessary.

91.  With respect, even on Mr Ho Sai Yiu’s version, the Media Centre had not regarded the take-over as unnecessary.  It was waiting for resurface of shareholders of the outgoing company. For whatever reason, the take-over could not be achieved despite lapse of 3 years (up to the issue of the writ).   It was unsuccessful. 

92.  HK$28,800,000 had once been returned after the first remittance.  Mr Ho Sai Yiu said that it was because the Media Centre could not accept money directly from the plaintiff but it had to be routed through the defendants.  On the other hand, Mr Ho Sai Kit’s witness statement pointed out that it so happened that the money was returned to the plaintiff within 2 months of remittance, apparently  because the take-over was unsuccessful and in compliance with CA clause 8.

93.  The Media Centre only returned the money remitted by the plaintiff directly to it, but not the other sum of HK$6,200,000 remitted to the 1^st defendant.  I am unable to say that Mr Ho Sai Kit’s inference in the preceding paragraph was an irresistible one. 

94.  Mr Chong also relies on CA clause 6 which provides that:

“… … 收購中青卡投資管理有限公司股權資金的支付方式和時間，各方同意按合作進程中國青年卡控股有限公司董事會相關決議辦理。” (CA clause 6)

He submits that the time of acquisition and the time for payment were matters to be dealt with entirely by the new JV Company.

95.  I disagree.  CA clause 5 already provided for the take-over of 100% of the shareholding in the outgoing company (worth RMB80 million) after the incorporation of the JV Company.  The discretion of the JV Company under CA clause 6 lay only in the time and mode of payment, not whether or not to take over.  If I am wrong, there was nothing to show that the JV Company (ZQGL) had ever held a board meeting to resolve the question of when to take over.

96.  I find that there was no take-over, that the take-over of the outgoing company was unsuccessful within the meaning of CA clause 8, and that there was no valid explanation for the unsuccessful take-over. This head of complaint is substantiated.

(iii)  Failure to issue the youth cards

97.  The defendants point to the issue of transport cards in Anhui (“the Anhui cards”) as a try-out point for youth cards.  However, the evidence in support merely emerged 3 months before trial.  It took the form of a set of minutes of meeting of ZQGL held on 27 December 2011 (“the Minutes”), which referred to a printed report called中國青年卡項目.中國青年交通信息卡.可行性分析報告(“the Report”) purportedly published by ZQGL in November 2011.  The contents of the Report adopted in whole the report of 國務院發展研究中心經濟要參 and Beijing Jiaotong University.

98.  The authenticity of the Minutes and the Report were challenged by the plaintiff.

99.  With regard to the Minutes, the defendants produced at the trial what purported to be a handwritten draft of the minutes prepared by one Mr Fan (范磊).  The year and month of the draft minutes and the Minutes were different. The draft was dated later than the Minutes.  The contents of the Minutes were strange.  Two persons were notified of the meeting but 3 persons attended. Moreover, the proper person to instruct Mr Fan to attend should be Mr Huang (the legal representative of ZQGL) and not Mr Cao.  Mr Ho Sai Yiu said that it was difficult to understand this manner of instruction with “the Hong Kong way of thinking”. 

100.  The defendants have not satisfied me as to the authenticity of the draft minutes or the Minutes or that the meeting of ZQGL was held on any of the days described in those 2 documents.

101.  With regard to the Report, Mr Ho Sai Yiu claimed that many government departments were interested and thus joined in specified services under the umbrella of the Project.  The State Council had asked the defendants for information to do the Report for ZQGL.  He agreed that on paper, there was no disclosure of the State Council’s involvement to the plaintiff.

102.  The State Council’s report might not have been fabricated but it made no reference to youth cards.  The foreword (which was added by ZQGL) to it was out of tone with the contents of the Report. The plaintiff suggested that the State Council’s Report and the foreword were bound together, with Mr Ho Siu Ki’s skill in the printing business, for the purpose of contesting the present proceedings.  I consider that probable.  

103.  The subject customers of the Anhui cards were not the young members of the League but all youths including those in Greater China.  The Anhui cards were transportation cards with functions that differed from those of the youth cards, although there were some common features.  For example, youth aged 14-18 would have been served by the youth cards but not the Anhui cards for drivers.

104.  I am not satisfied that the issue of the Anhui cards was a try-out point for youth cards or was evidence that the Project was a going concern.

105.  Similarly, the petrol discount card which Mr Ho Sai Yiu referred to at the board meeting on 8 October 2009 was nothing close to a youth card.  In any case, the petrol discount card did not emerge in March 2010 as promised by Mr Ho Sai Yiu.

106.  This head of complaint is substantiated.

(iv)  Failure to produce financial accounts

107.  No accounts have been passed to Mr Wong for vetting.  Mr Ho Sai Yiu told him to be concerned only with the major figures (大數) but not the details.  Mr Wong discovered in correspondence with Mr Huang in January 2010 that the latter was not aware of his resignation, stating “你們不願讓我們知道,但我們也不想知道”.  No one replaced him as CFO.

108.  The defence to this head of complaint wavered greatly. In summary, the defendants claimed that:

(a)     There was no contractual obligation to provide financial information to the plaintiff;

(b)     The financial information was confidential and Mr Huang restricted its disclosure;

(c)      The accounts could not be personally disclosed by Mr Ho Sai Yiu but Mr Wong could have access to the same through other means.

(d)     The audit report of the 1^st defendant had been disclosed to Mr Ho Sai Chu.

109.  With regard to (a), it is true that there was no contractual obligation to disclose financial obligation.  In the course of pre-contract negotiation, Mr Ho Siu Ki had firmly rejected Mr Wong’s suggestion that all income and expenses of the JV Company had to be approved by the plaintiff.  However, when the defendants sought to justify its retention of the HK$35,000,000, they should provide sufficient evidence in support. 

110.  Mr Ho Sai Yiu reported at a board meeting on 23 February 2008 that $10,000,000 had been remitted to the Central Authority of the League.  He did not know whether and how it had used the money.  $10,000,000 was kept in Shanghai in relation to the setting up of the JV Company.  $10,000,000 was in Hong Kong and $5,000,000 was used. 

111.  I can see nothing to show that the loan had been applied towards the Project as required by SA clause 2. ZQGL was incorporated in Beijing so why would the money for setting it up be remitted to Shanghai?  If $10,000,000 was spent on setting up of ZQGL, how would the balance of the $25,000,000 be sufficient for the take-over if the shareholders of the outgoing company were to emerge as catered for by the Media Centre?  Why was money still in Hong Kong and how had it been used?   There were no explanations.

112.  With regard to (b), the Media Centre never confirmed that the financial information was confidential: see email of Mr Huang dated 6 May 2008 to Mr Ho Sai Kit.  To the contrary, by email dated 24 December 2009, Mr Huang denied that he had the authority to restrict the plaintiff’s access to financial information as alleged by Mr Ho Sai Yiu at the board meeting on 16 December 2009.  Mr Huang replied, stating:

“我要問，我方有何權利不讓你們過問你們的帳務事情？我黃子恒有何資格還能下什麼命令。不明白! 我們決不參與我們體制外的事情。我不想再過多的談論關於青年卡的相關事情。從簽訂合同到第二次修改合同你方從不按合同行事… ”

113.  According to Mr Wong’s evidence which I accept, on 5 January 2010, during the plaintiff’s board meeting, Mr Wong confronted Mr Ho Sai Yiu with the emails between himself and Mr Huang.  Mr Ho Sai Yiu was unable to explain Mr Huang’s denial in the preceding paragraph.

114.  With regard to (c), Mr Ho Sai Yiu explained that the accounts were confidential and so he assigned an employee of Fook Lee (Mr Ho Yui Man) to handle them.  Mr Ho Sai Yiu would not personally show the accounts to anyone for fear of breach of confidentiality, but if Mr Wong could obtain them from another source there would be no problem.  Mr Ho Yui Man would not deny Mr Wong access to those accounts, but the latter never asked for those accounts from the former. 

115.  If this explanation represented Mr Ho Sai Yiu’s view on how to treat confidential materials, it lacked integrity and was regrettable. This was evidence of his make-believe.  There was no evidence that Mr Ho Yui Man was cleared by the Mainland authorities.  Why should he be given access to the accounts instead of the CFO who was cleared?

116.  In the minutes of the plaintiff’s board meeting dated 22 July 2009 (by then Mr Wong had resigned as CFO), Mr Ho Sai Yiu was reported as promising that whether the Project was successful or not, the financial reports would be available through Mr Ho Yui Man.  It showed that Mr Ho Sai Yiu did not really regard the financial information as confidential. 

117.  Similarly, in the Rejoinder, the defendants averred that given the complexity and scale of the Project, it would take time to prepare audit reports.  The relevant audit reports of the 1^st defendant would be ready for the plaintiff’s perusal.  This also contradicted the defendants’ stance that the financial information was confidential. 

118.  With regard to (d), this directly contradicted the defendants’ assertions that the financial information was confidential.  Moreover, the audit report allegedly given to Mr Ho Sai Chu was never disclosed or referred to in any witness statement of the defendants.

119.  According to the company search record of ZQGL, annual audit (年檢) was required.  However, none has ever been done, despite setting up of ZQGL in 2008.  Mr Chong suggests that it was because the company search record stated clearly that the next phase for capital input was 26 March 2013 so the investment was not complete.  With respect, that the investment was not complete should not prevent auditing of the existing worth of the company with its current capital input.

120.  This head of complaint is substantiated.  I find that the lack of financial information was the direct cause of Mr Wong’s resignation.

(v)  Failure of Mr Ho Sai Yiu to succeed on the “last shot” as promised

121.  Over 2 months after the promise of a “last shot”, Mr Ho Sai Yiu had not reported on the power of attorney.  The defendants’ only evidence at trial was a reference in the foreword to the Report which stated that on 11 July 2009, the Media Centre authorized ZQGL to use the name of Chinese Youth Card in English and Chinese.  That was even before that date of the decision on the “last shot”.  No documentary evidence of the authorization has ever been produced.  I find that “the final shot” has failed.

(vi)  Failure to transfer the shares to the plaintiff or Eastcorp

122.  Failure to transfer the shares to the plaintiff might be a material breach of the Supplemental Agreement but it was not evidence of failure to implement the Project. 

(vii)  Provision of a false website

123.  At about the end of March 2010, Mr Wong discovered that the web pages of the Website were in fact cut and pasted from that of www.icycn.com, the official website of 創業中國. On some of the web pages of www.icychina.com, the bottom stated “Copyright © 2009-2010 www.icycn.com All Rights Reserved”.  The website of www.icycn.com was linked to the official website of the League’s website www.gqt.org.cn.  On 12 August 2010, the plaintiff discovered that the Website was offline.  There was no explanation from the defendants to refute Mr Ho Sai Yiu’s false representation about setting up of the Website.  This head of complaint is substantiated.

124.  The defendants have pointed to other matters to show that the Project was and is in progress and that the plaintiff was aware of it:

(i)      At the end of 2007, a detailed proposal of the Project was formulated including but not limited to a website, management system, supporting system, database and further development.  However, the plaintiff said this was never disclosed to it and there was no documentary proof.

(ii)     In February 2009, a meeting was held between the representatives of the ABC and the Ho family to discuss the cooperation in the Project.  However ABC was not familiar with the Project.

(iii)    In about March 2009, the plaintiff’s directors and the defendants had a joint meeting with the Chinese party to discuss the development of the Project.

(iv)    Since March 2009, the defendants have reported the progress of the Project to Mr Ho Sai Chu from time to time.  The plaintiff denied this but has not called Mr Ho Sai Chu as a witness.

125.  In my view, these matters, even if true, showed that apart from discussions, there was no evidence of what had actually been achieved under the Project.

Other signs of failures to implement

126.  The Chinese party was similarly concerned about compliance with agreement and progress of the Project. 

(a)     At the meeting in February 2008, Mr Huang told Mr Ho Sai Kit that the former also felt that the progress was slow but the most important thing was that the plaintiff kept its contractual promise.  By that date the plaintiff had already advanced the loan.

(b)     In April 2008, when Mr Ho Sai Kit asked Mr Huang what was hampering the establishment of the JV Company, Mr Huang did not give reasons but expressed concern at the slow progress of the Project.

(c)      In May 2008, Mr Huang stated that the Hong Kong side had failed to follow the terms of agreement.

(d)     On 22 February 2009, Mr Ho Sai Kit visited Mr Huang and Mr Cao in Beijing.  Mr Huang and Mr Cao expressed the wish that the defendants could implement the promise to inject capital as agreed since 2 years had elapsed.  At the scene neither Mr Ho Sai Yiu nor Mr Ho Siu Ki could give any explanation.  Nor could they thereafter.

(e)      On 24 December 2009, Mr Huang expressed that the Hong Kong side did not comply with the agreement: “從簽訂合同到第二次修改合同你方從不按合同行事”.

The plaintiff had certainly done its part of the obligations of making the loan.  The defendants never explained what other contractual obligation the plaintiff or defendants had breached.

127.  There were other matters which cried out for an answer from the defendants, e.g. Gallant Ho’s letter.  The letter asked Fook Lee group to support Mr Tsoi and Mr Chan.  Why would Mr Ho Sai Yiu pass it on to Mr Ho Siu Ki?  On the other hand, the letter threatened that the Project would fail.  Why would Mr Ho Siu Ki still regard it as a private letter issued by Mr Tsoi and Mr Chan and did not deal with it?  In the end, neither Mr Ho Sai Yiu nor Ho Siu Ki gave any explanation at all.

128.  The Gold Track Agreements form another example.  The defendants failed to disclose a potential liability of RMB20 million to the plaintiff.  This could not have been an oversight as the 2^nd Gold Track Agreement and the Cooperation Agreement were signed by Mr Ho Sai Yiu on the same day. 

129.  As to why the Gold Track Agreements were signed, Mr Ho Sai Yiu’s explanations were illogical.  He explained that the League had to find a Hong Kong company and someone whom the League trusted to deal with the outgoing company.  Notwithstanding that the defendants were Hong Kong companies, the Mainland authorities considered that it would be better for a trusted intermediary of the defendants to arrange for the take-over.  The defendants were in close relationship with the Mainland party.  It was not convenient to have them deal with commercial activities, so Gold Track was engaged.  Mr Ho Sai Yiu said that Gold Track had no role to play and was not involved.  The 1^st Gold Track agreement had become invalid as Gold Track had failed to arrange the formal signing of the share transfer agreement with the outgoing company before the end of October 2006. 

130.  Mr Ho Siu Ki’s explanation was even more astonishing. He said it was Mr Tsoi who sought out Gold Track.  He was not sure how Gold Track had the power or qualification to earn the 5% under the 1^st Gold Track Agreement. 

131.  It has been emphasized time and again in the defence evidence that the Project involved state secrecy.  Mr Ho Sai Yiu and Mr Ho Siu Ki’s explanations could not explain why a company with unknown background could be involved.  And if Gold Track’s involvement was at the suggestion of the League, why would the defendants not let Gold Track play the role stated in the Gold Track Agreements?  I have no hesitation in rejecting the stories of Mr Ho Sai Yiu and Mr Ho Siu Ki.  I find that they had deliberately failed to inform the plaintiff of the potential liability of the 1^st defendant under the Gold Track Agreements. 

Drawing of inferences

132.  To my mind, just the first 2 heads of failure – to set up the JV Company and to take over the outgoing company would have been sufficient to establish failure to implement the Project.  They went to the root of the parties’ agreement. 

133.  If those were not enough, I have considered the various head of failure together.  The plaintiff cannot prove the negative – that there was “inability” to implement the Project.  It invites the court to draw adverse inferences against the defendants. 

134.  The court can do so where the defendants fail to give evidence or, by the same token, gives evidence which was rejected by the court. 

“The failure to bring before the tribunal some circumstance, document, or witness, when either the party himself of his opponent claims that the facts would thereby be elucidated, serves to indicate, as the most natural inference, that the party fears to do so; and this fear is some evidence that the circumstance, document or witness, if brought, would have exposed facts unfavourable to the party. These inferences, to be sure, cannot fairly be made except upon certain conditions; and they are also open always to explanation by circumstances which make some other hypothesis a more natural one than the party’s fear of exposure. But the propriety of such an inference in general is not doubted.

The non-production of evidence that would naturally have been produced by an honest and therefore fearless claimant permits the inference that its tenor is unfavourable to the party’s cause.”

Wigmore on Evidence, cited in Hong Kong and Shanghai Banking Corporation v Chan Yiu Wah & anrs [1988] 1 HKLR 457 at 467 C-H;  Tullett & Tokyo International Securities Ltd v APC Securities Co Ltd [2001] 2 HKLRD 356 at 365 C-J.

135.  However:

(i)  absence of the defendant as a witness cannot be used to make up any deficiency of evidence;

(ii)  evidence which might have been contradicted by the defendant can be accepted the more readily if the defendant fails to give evidence;

(iii)  where an inference is open from facts proved by direct evidence and the question is whether it should be drawn, the circumstances that the defendant disputing it might have proved the contrary had he chosen to give evidence is properly to be taken into account as a circumstance in favour of drawing the inference.

Jones v. Dunkel 191 CLR 298,at 312, per Menzies J; Kao, Lee & Yip (a firm) v Donald Koo Hoi Yan, HCA 8847/1993, 2 April 2003,Mr Justice Ma (as he then was) at para 34.

136.  Although the agreement between the parties did not impose a positive obligation on the defendants to provide information to the plaintiff, the defendants should have honestly and fearlessly produced a lot more evidence to show signs of life of the Project, e.g. evidence of the existence of the database, sample youth cards, agreements with banks, which were not sensitive or personal data.  I am not satisfied that failure to do so was driven by an honest wish to keep any state secret but to be excused from honest accounting for the loan.  Instead, there were empty promises of setting up the JV Company, to issue the youth cards and to have income by certain dates; delaying tactics of arranging a petrol card; pulling wool over the plaintiff’s eyes by pointing to the Anhui cards; and falsity in referring to the Website.  When pressed, Mr Ho Sai Yiu arranged meetings in Beijing for discussion to give an impression that the Project was ongoing and yet nothing could be concluded.  The plaintiff’s evidence was credible whilst Mr Ho Sai Yiu and Mr Ho Siu Ki have not provided any satisfactory answer to the various heads of alleged failures.  I have no hesitation in drawing adverse inference against the defendants and hold that the Project has failed to be implemented and was called off.

137.  Mr Chong draws my attention to the confidential letter. Whilst it requested Mr Ho Sai Chu to call off the Project and recover the loan from Mr Ho Sai Yiu, it did not aver that the Project had failed to be implemented.  It did not complain that the Shares had not been transferred.  It did not refer to the letter from Gallant Ho.  None of the reasons mentioned in the confidential letter were mentioned in the subsequent demand letter of Mr Wong and Mr Ho Sai Kit but they relied on the financial turmoil instead to seek repayment.

138.  In my view, whether the Investors had raised various points in a complaint letter did not water down the credibility of their case. There was ample evidence to find that the Project had not been implemented or was called off. 

C.  WHETHER THERE HAD BEEN TOTAL FAILURE OF CONSIDERATION

The legal principles

139.  The failure has to be total because the consideration is whole and indivisible and the courts will not divide or apportion it unless the parties have done so: Chitty on Contract, 30 ed, para 29-054. 

140.  To rely on total failure of consideration, the innocent party must clearly and unequivocally communicate its acceptance of the repudiation to the other party:  Kwek Tek Chao v. British Traders and Shippers Ltd [1954] 2 QB 459, 475; Chao Keh Lung Bill v Don Xia [2003] 4 HKC 660, para 52, CA.  If the innocent party elects to treat the contract as continuing, then it remains in existence for the benefit or the wrong-doer as well as himself: Chitty on Contract, 30 ed, para 24-010 to 24-011.

Application of the legal principles to the facts

141.  Nowhere in its pleadings has the plaintiff pleaded acceptance of the defendants’ repudiation.  However, it has expressly pleaded the failure to transfer the Shares, a demand for immediate repayment and total failure of consideration.  Taken together, the pleas were sufficient to show that the plaintiff accepted the repudiation at the time of the writ.

142.  However, as admitted by Mr Ho Sai Kit, he had been given one share of the 1^st defendant on 18 May 2007.  Accordingly, the plea of total failure of consideration must fail.  It is nevertheless still useful to examine the circumstances under which it is said that the 1^st defendant had not transferred the Shares to see how the defendants ignored their contractual obligations.

143.  Clause 1 of the Supplemental Agreement expressly stated that the loan was made in consideration of the Shares.  The following questions are pertinent:

(i)  When should the Shares be transferred to the plaintiff/Eastcorp?

(ii)  Must the legal title be transferred?

(iii)  When did the 1^st defendant execute the transfer documents?

(iv)  Had the 1^st defendant transferred the equitable title in the Shares to the plaintiff/Eastcorp?

(i)    When should the Shares be transferred to the plaintiff/Eastcorp?

144.  No time frame was prescribed by the Supplemental Agreement.  The plaintiff suggested that the transfer should be contemporaneous with the making of the loan.  The defendants suggested that the transfer could only be done with the consent of the Chinese authorities pursuant to the following provisions in the JV Contract:

(a)  “除非得到另兩方的同意並經審批機關批准，合資任何一方都不得將其認繳的資本股份全部或部分轉讓給合資方以外的其他方。”(JVC clause 15.2);

(b)  “如遇股權變更，需提前一個月通知並徵求甲方 (Media Centre) 意見後執行。”  (JVC clauses 34(2) and 35(3)).

145.  Mr Ho Sai Yiu said there was a state policy re JVC clause 15.2 such that all transfer of shares had to be approved by the League  There was no evidence of the state policy and I reject Mr Ho Sai Yiu’s evidence. 

146.  In my view, on its true construction, clause 15.2 prohibited the transfer of shares beyond the Media Centre and the defendants. It did not govern the transfer of the 1^st defendant’s own shares to other people. 

147.  JVC Clauses 34 and 35 were different. There was a need to give one month’s notice of change of the shareholding to the Media Centre and to obtain its views.

(ii)  Must the legal title be transferred?

148.  The plaintiff pleaded that the 1^st defendant was obliged to transfer the legal title of the Shares to it.  However, the plaintiff’s own evidence was that Mr Ho Sai Kit agreed to hold the Shares on trust for Eastcorp at the request of Mr Ho Sai Yiu.  It was also not in dispute that Mr Wong has drafted the transfer documents.  The plaintiff has thus, by conduct, represented to the defendants that it would not insist on its strict legal right.  By so doing, it has waived a contractual term for its exclusive benefit: Handley, Estoppel by Conduct and Election (2006) para 2-018.  I hold that the 1^st defendant was not obliged to transfer the legal title in the Shares to the plaintiff or the individual Investors.

(iii)  When did the 1^st defendant execute the transfer documents?

149.  According to Mr Ho Sai Yiu, he executed the transfer documents on 31 December 2008. 

(iv)  Had the 1^st defendant transferred the equitable title in the Shares to the plaintiff/Eastcorp?

150.  Mr Chong submits that since the Supplemental Agreement imposed no time limit for the transfer of the Shares, it could be done at any time.  Before the plaintiff communicated its acceptance of the repudiation to the defendants unequivocally, the defendant would be entitled to complete the contract.

151.  Mr Chong submits that when Mr Ho Sai Yiu executed the transfer documents, the contract of transfer would have been completed and it was no longer open to him to revert to his legal position before such execution. Equity treats what is required to be done as done.  When an instrument of transfer was executed by the vendor in favour of the purchaser, the latter would become the owner of the shares in equity despite the non-compliance with the procedure for registration: Hawkes v McArthur [1951] 1 All ER 22, at 26H-27F; Ward v Henry’s case (1867) 2 Ch App 431, 438.  Failure to stamp the transfer documents only affected admissibility as evidence but not the beneficial interest of the purchaser in the shares: section 15 Stamp Duty Ordinance, Cap 117.

152.  Mr Ho Sai Yiu’s explanation for the delay was that the superior (上頭) had not decided whether or not the Shares should be held by Eastcorp or Mr Ho Sai Kit.  The executed transfer documents had to be sent around for approval of the government departments, which was given orally. 

153.  The transfer documents were given to Mr Ho Sai Yiu in February 2008.  It had taken him 10 months to allegedly execute them.  That was inexplicably long, even considering the need to comply with JVC clause 34 and 35.  The plaintiff/Eastcorp was comprised of people found acceptable to the Chinese side even before the Cooperation Agreement and JV Contract were entered into. 

154.  Moreover, whilst clause 34 could justify the 1^st defendant’s delay for one month in giving notice to the Media Centre, it could not justify the 1^st defendant’s asserted need to seek consent from an unspecified number of unspecified government departments.  I also find it incredible that if approval by the Mainland authorities was considered so important it would have been given orally.

155.  Further, the following factors show that the execution was incomplete and the 1^st defendant never intended it to take effect:

(i) The instrument of transfer was undated. Mr Ho Sai Yiu’s signatures in that instrument and the declaration of trust were not witnessed.  Eastcorp had not authorized Mr Ho Sai Yiu to sign the declaration of trust.

(ii) The fact of execution was never communicated to the plaintiff until discovery in this action. 

(iii) Despite the plaintiff’s board meeting on 25 November 2009 when Mr Ho Sai Chu asserted that the Shares had not been executed and that legal action should be taken against the defendants to recover the loan, Mr Ho Sai Yiu had never disclosed the execution.

(iv) The defendants have never purported to deliver the transfer documents to the plaintiff even by the time of the trial.

(v) The 1^st defendant has never filed annual returns to reflect the transfer with the Companies Registry.  Mr Ho Sai Yiu claimed that he has been negligent.

156.  In summary, I find that the defendants have not intended and failed to transfer the equitable title in the Shares to the plaintiff, such that there was a substantial failure of consideration for the loan. 

FINDINGS

157.  I accept the plaintiff’s version as the truth of what had happened.  I find that the parties’ intention was that the money put forth by the plaintiff was a loan and not an investment.  Given the factual matrix known to the parties, the loan was not repayable on demand.  Rather, it would be repayable under SA clause 3 when dividends were received.  No dividends had been received.  SA clause 6 was applicable as all heads of failure alleged by the plaintiff have been proved and the irresistible inference is that the Project has failed to be implemented and was called off.  The plaintiff is entitled to refund under SA clause 6.

158.  One share of the 1^st defendant was transferred to the plaintiff.  For the rest of the 3,823 shares, there was failure to transfer even the equitable title. Substantial failure of consideration was not enough to sustain a  plea of total failure of consideration.

ORDER

159.  I order as follows:

(1) That the defendants do refund the loan of HK$35,000,000 to the plaintiff.

I also order, on a nisi basis,

(2) That the defendants do pay interest on the aforesaid sum at judgment rate from 4 March 2010 (date of writ) to the date of payment;

(3) That the defendants do pay the plaintiff costs of this action, to be taxed if not agreed.

160.  Any application to vary the orders nisi shall be made by summons within 14 days of the handing down of this judgment, failing which the orders shall become absolute.

161.  I thank counsel for their able assistance.