CHOW LUEN FATv. WONG YAT KONG

DCCJ 6688/2020

[2022] HKDC 453

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 6688 OF 2020

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BETWEEN

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JUDGMENT

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Introduction

1.  This is the defendant’s appeal against the summary judgment given by Master Jacqueline Lee on 17 September 2021 in favour of the plaintiff for the sum of HK$500,000 with interest and costs.

The Facts

2.  The plaintiff’s case against the defendant is that pursuant to an alleged oral agreement made in July 2014, he advanced a loan of HK$1.5 million to the defendant to assist him in purchasing some property. The loan is said to be repayable by 31 December 2014 by the terms of the oral agreement. According to the plaintiff, the defendant only made a partial repayment of HK$1 million on 1 December 2014 and failed to repay the remainder of the sum, which has remained outstanding as at the time when this action was commenced in December 2020, shortly before the expiry of the limitation period, i.e. on the plaintiff’s case.

3.  It is common ground that a sum of HK$1.5 million was indeed transferred to the defendant on 15 July 2014, but it was transferred from the bank account of a company called Tak Lee Machinery Company Limited (“the Company”), of which the plaintiff was at the material time a director and shareholder. The partial repayment made by the defendant on 1 December 2014 was also made by transferring a sum of HK$1 million to the account of the Company.

4.  At the hearing of the appeal, Mr Law for the defendant submitted that the defence is simple – that there was no personal loan agreement made orally between the plaintiff and the defendant in July 2014 as alleged. It was rather a loan extended from the Company to the defendant for him to utilise as a working capital of his construction business. There being no valid assignment of the debt from the Company to the plaintiff, the plaintiff cannot sue the defendant for the remaining outstanding sum of HK$500,000.

5.  Mr Law pointed out that the Annual Returns of the Company for the years ended 5 March 2014 and 5 March 2015 show that the plaintiff was only one of the directors and a 50% shareholder of the Company, the other shareholder and director being a person named Cheng Ju Wen whose relationship with the plaintiff has not been identified by the parties in the evidence. As such, according to Mr Law, the defence is a substantive, rather than a technical one: that the Company is a separate legal entity. There is a substantive factual dispute in this case as to who was the one that extended the loan to the defendant. In other words, it would be jumping the gun to conclude that the alleged oral agreement existed based on the evidence so far adduced by way of affirmations, without a proper trial.

6.  It was further pointed out that when this action was commenced, the plaintiff was no longer even a shareholder of the Company, which was then wholly owned by a BVI company called TLMC Company Limited. The significance of this will be further dealt with below, suffice for me to say at the outset that it is the plaintiff’s case that he had instructed the Company to advance the loan of HK$1.5 million to the defendant by transferring the sum to his order, in reduction of an alleged director’s loan in the amount of about HK$92 million that was owed by the Company to the plaintiff at the time. Apart from a payment instruction given by the plaintiff to the Company as referred to below, there is no evidence adduced to prove and demonstrate the treatment of the director’s loan in the accounts of the Company concerning the sum, or whether any amount is currently still due or owing.

7.  The plaintiff, on the other hand, says that his case is supported by documentary evidence, namely:-

(i) A transfer record of HK$1.5 million from the Company to the defendant as mentioned above;

(ii) A payment instruction letter dated 15 July 2014 said to have been signed and delivered by the plaintiff to the Company providing instruction to the Company to pay into an account of the defendant held with the Bank of China the sum of HK$1.5 million (“the Payment Instruction Letter”);

(iii) The Annual Returns of the Company of the relevant years showing that “the plaintiff owned and controlled the Company”;

(iv) The transfer record dated 1 December 2014 mentioned above evidencing the partial repayment of HK$1 million made to the account of the Company by the defendant.

8.  It is also pertinent to note that subsequent to the present disputed loan, the plaintiff had extended another loan of HK$1.4 million to the defendant on 22 September 2016, as evidenced by a written agreement dated 13 October 2016 signed between the plaintiff and the defendant in their personal capacities, by which the defendant promised to repay the loan by the end of January 2017. This loan was soon repaid in full by the defendant on 27 October 2016. There was no mention of the loan forming the subject of this dispute in the 2016 written agreement.

The Legal Principles

9.  The applicable legal principles are well established.

10.  First of all, an appeal from the decision of a master is in the nature of a re-hearing, as though the matter has come before the judge hearing the appeal for the first time. Although the judge hearing the appeal may adopt the reasons of the master, his decision is in no way fettered by the previous exercise of the master’s discretion – see Hong Kong Civil Procedure 2022, Vol 1, at paragraph 58/1/2.

11.  As for an application for summary judgment, it is a process by which a plaintiff may apply for judgment expeditiously in a case where there is no defence, in order to avoid unnecessary delay. Where a plaintiff has established a prima facie sustainable case, it is for the defendant to show cause why summary judgment should not be granted by reason of the existence of a triable issue or an arguable defence or that there ought to be a trial for some other reason – see Hong Kong Civil Procedure 2022, Vol 1, at paragraphs 14/4/1 and 14/4/3. See also the commentary in paragraph 14/4/9 where it is stated:-

“He has to satisfy the court that he has a “real or bona fide defence” (see Mass International Ltd v Hillis Industries Ltd [1996] 1 H.K.C. 434 at 439, per P Chan J.) or a “fair probability or reasonable grounds that a bona fide defence exists” (see Toy Major Trading Co Ltd v Plastic Toys Ltd [2007] 3 H.K.L.R.D. 345 at [12], per Ma C.J.H.C.). If he makes an allegation, it must be credible or believable in the light of the evidence placed before the court. As Bokhary J.A. said in Re Safe Rich Industries Ltd (unrep, CACV 81/1994, November 3, 1994, [1994] H.K.L.Y. 183): “The test at the summary stage is indeed as simple as whether the defendant’s assertions are believable. But it must be recognized – because failure to recognize it would create a debt-dodger’s charter – that whether the defendant’s assertions are believable is a question to be answered not by taking those assertions in isolation but rather by taking them in the context of so much of the background as [is] either undisputed or beyond reasonable dispute……Unless it is obvious that the defence put forward by the defendant is “frivolous and practically moonshine, O.14 ought not to be applied”: Codd v Delap (1905) 92 L.T. 510 at 511, per Lord Lindley…”

12.  The primary duty, however, rests on the plaintiff to demonstrate that the defendant has no defence. In this regard, the court will examine not only the defence raised, but also the basic premise of the plaintiff’s claim and its inherent strengths and weaknesses. As Cheung JA said in Ju Yan Di Emperory Genesisy v Yau Wai Han [2015] 1 HKLRD 822 at paragraph 14:-

“14. It is well established that the burden on the defendant in a summary judgment application is to show that he has a credible defence and he must condescend to give particulars of his defence. However, this does not mean that once the plaintiff invokes the application and irrespective of the strength of his case, the defendant bears all the burden of showing that there are triable issues in the case. This is because the starting point in a summary judgment application is that it should only be invoked when there is no defence to a claim. This means that the plaintiff must in the first place demonstrate that the defendant has indeed no defence. This requirement is further recognised in the procedural rules which mandate the plaintiff to state his belief in the verifying affidavit that there is no defence to the claim. This requirement must be kept in proper perspective when assessment is made of the strength of the application, otherwise there is a danger that the attention will be focused solely on what the defendant has said without consideration at the same time of the basic premise of the plaintiff’s claim or its inherent strength and weakness…” [underline added]

Analysis

13.  The facts of this case as presented by the plaintiff are simple – that the defendant has failed to repay the outstanding balance of a loan extended to him by the plaintiff in his personal capacity pursuant to an oral agreement made with the defendant. On the other hand, the defendant says the loan was extended by the Company to him. The plaintiff has no capacity to sue absent a proper assignment of the loan by the Company to him.

14.  First of all, there is no dispute that the funds representing the loan extended to the defendant was transferred to the defendant on 15 July 2014 from the bank account held by the Company. The transfer record of the Company produced by the plaintiff, which appears to be an internet print-out showing the initial extension of the loan of HK$1.5 million to the defendant was in fact endorsed with a note signifying that the transfer was for “LENDING MONEY TO MR. WONG YAT KONG”. According to the plaintiff, the abbreviation “LFCHOW” appearing on the record shows that the transfer was handled and authorised by him.

15.  There is however no indication on the transfer record whether the money was advanced to the defendant on behalf of the plaintiff. In this regard, the plaintiff’s case is that he had indeed procured and arranged for the Company to advance the loan on his behalf, since the Company owed him a director’s loan. He relies on the Payment Instruction Letter signed by him addressed to the Company, requesting the Company to advance the HK$1.5 million on his behalf to the defendant as partial repayment of the director’s loan owed to him by the Company. The outstanding amount of the director’s loan is said to be HK$92,135,001.98 as at 30 June 2014.

16.  As Mr Law has put it, no other evidence confirming this substantial debt owed by the Company to the plaintiff has been adduced. The Company was at the material times a private company with a paid-up capital of HK$3 million. Given the significant amount of the director’s loan the plaintiff had allegedly extended to the Company, one would have expected some documentary evidence supporting such a contention as, after all, this forms the basis on which the plaintiff explains the advance of the loan amount from the Company on his behalf. There is no loan agreement between the Company and the plaintiff, or any other supporting documents, e.g. a statement of account between the plaintiff and the Company, or even the pertinent parts of the audited financial statements of the Company for the relevant years, produced to verify the director’s loan.

17.  At the material times the Company had another director who was also a shareholder holding 50% of its issued share capital. On the evidence adduced, the assertion that “the plaintiff owned and controlled the Company” is a far cry. There is no evidence that the advance of HK$1.5 million on behalf of the plaintiff, in reduction of the director’s loan allegedly owed to him, had been approved by the board.

18.  It is also somewhat intriguing, in the light of what the plaintiff claims in his evidence, that the partial repayment by the defendant of HK$1 million on 1 December 2014, as evidenced by the relevant transfer record, was made in favour the Company instead of the plaintiff. According to the plaintiff, the defendant called him prior to making the partial repayment and indicated to him that he would be repaying HK$1 million to him by transferring the sum to the account of the Company. Had the Company already reduced its outstanding amount of the director’s loan from the plaintiff by HK$1.5 million, it is difficult to understand why the plaintiff had not requested the defendant to transfer the repayment amount directly to him.

19.  The defendant in his evidence stated that he has been running his business in the construction industry for some years in the business name of Kwan Lik Construction Company (“Kwan Lik”), working as a contractor in the demolition field. He first had business dealings with the Company in around 2009, purchasing and sometimes renting heavy machinery and parts from the Company. A statement of account between the Company and Kwan Lik which appears to be a running account, and some receipts issued by the Company to Kwan Lik were produced showing records going back to 2015. In this regard, the plaintiff originally stated in his first affirmation in support of his application that “at all material times, the Company had no dealings with the defendant” and the defendant knew full well that he advanced the loan to the defendant through the account of the Company. However, in his evidence filed in reply to the defendant’s affirmation, he shifted his stance and did not dispute that the Company has had previous dealings with the defendant but in so far as he recalls their business dealings only started to build up since around 2011.

20.  The statement of account produced by the defendant containing entries between July 2015 and September 2016 also shows that the Company had given credit to the defendant’s business in the past for previous transactions, even up to HK$700,000 for around a year. Given this backdrop, Mr Law argues that a loan of HK$1.5 million extended by the Company to the defendant in July 2014 was “inherently probable”.

21.  On the other hand, it is argued by Mr Chen for the plaintiff that if the loan was one extended by the Company, it would have appeared in the statement of account produced in the evidence, which ran from 31 July 2015 to 29 September 2016. However, it seems to me that the statement of account is only a running account related to the sale or rental transactions in machinery or parts. It cannot be said to be a conclusive document with regard to the existence of the loan in question.

22.  In relation to the loan extended by the plaintiff to the defendant in 2016, there was no mention of the 2014 loan or the outstanding balance of HK$500,000 in the 2016 written agreement. As to the reason why the 2016 loan was reduced into writing, the plaintiff explained that he became aware of the need to keep good records when he was engaged in the listing process of another company, when he started to keep records even for personal transactions. Further, he explained that the defendant and his company had become less trustworthy since 2016 due to poor repayment record. In my view, whilst it is not mandatory for a loan agreement of this sort to be in writing, the circumstances do make one wonder as to the reason why, if that was the view of the plaintiff about the defendant at the time, the outstanding balance of HK$500,000 of the 2014 loan was not recorded down or otherwise mentioned in the 2016 loan agreement.

23.  The plaintiff also submitted the fact that the loan was advanced by the Company to his order does not detract from him the proper locus to sue, relying on the decision of Deputy District Judge Rebecca Lee in Cheung Hau Chun v Leung Paik Kan Rory [2021] HKDC 605, DCCJ 3263 of 2019, 2 June 2021. In that case, the plaintiff claimed on an oral agreement reached with the defendant, when the parties were negotiating a deal for the defendant to sell shares in a company to the plaintiff at a consideration of HK$8 million, that the plaintiff was to pay a deposit or “good faith payment” of HK$800,000 to the defendant. For that purpose, the plaintiff procured a company of which he was a director and shareholder to issue a cheque in that amount to the defendant. In short, the negotiations subsequently failed to crystallise into a completed share-sale transaction, and the defendant did not return the deposit of HK$800,000 to the plaintiff, but claimed that the amount should be returned to the company instead. Shortly before the hearing of the plaintiff’s application for summary judgment, the defendant returned the deposit to the company, and argued that his liability has already been discharged. Summary judgment was nevertheless granted in favour of the plaintiff but the plaintiff undertook not to enforce the judgment to avoid the defendant having to pay twice. On appeal, the learned Deputy Judge noted that the money was paid for the specific purpose of acquiring shares by the plaintiff. The plaintiff’s company which issued the cheque to the defendant was never a party to the negotiations nor a party to the concluded agreement. As such, court found there was no debt owed to the plaintiff’s company, and the appeal was dismissed.

24.  In my view, the appropriate decision should rest upon the facts of each case. In Cheung Hau Chun, there was no dispute as to the relevant parties to the alleged agreement or the negotiations with a view to forming a final contract, whereas in the present case, the very parties to the loan agreement are in issue. In any event, it is not the defendant’s position that there can never be circumstances under which a court is entitled to look to the person behind the issuer of a cheque for contractual liability. Such a proposition would not be correct in any event.

25.  In the present case, the documentary evidence so far adduced appears to me to be at least consistent with the defendant’s allegation that the loan arrangement was a matter between him and the Company, save for the Payment Instruction Letter which is a document signed and issued by the plaintiff himself. As I have already mentioned, the plaintiff has not produced any audited accounts of the Company for the relevant years, or the pertinent parts, or any loan or other documents evidencing the loan from him to the Company in an amount over HK$92 million that was said to be outstanding at the material time. There is also no evidence of any board resolution authorising the advance of the loan of HK$1.5 million to the defendant on behalf of the plaintiff in reduction of the director’s loan. As I commented at the hearing, there is the possibility of seeking discovery from the Company as a non-party but I say no more than that.

26.  The Annual Return of the Company filed in the year 2021 shows that the entire shareholding of the Company has already been taken over by a BVI company named “TLMC Company Limited”, with the plaintiff and Cheng Ju Wen remaining as directors nevertheless. There is no evidence as to the corporate constitution of the new sole shareholder of the Company, or whether in the current books of the Company, including the details of any management accounts kept by the Company, the director’s loan owed to the plaintiff remains due and owing.

27.  The plaintiff made a further point concerning the credibility of the defendant. It is submitted by Mr Chen that at the hearing before Master Lee, the defendant through his former counsel had indicated to the court that he had instructions the defendant had already repaid the outstanding balance of the loan in the sum of HK$500,000 to the Company some time in 2017. However, this was not pleaded, or raised in the defendant’s affirmation, where he simply stated that the outstanding sum would be accounted for “in our future course of business”. At the hearing of the appeal, the defendant has not maintained the assertion that the outstanding sum had been repaid to the Company. As such, Mr Chen submitted that the defendant’s change of stance is incredible, and this is reason sufficient for rejection of the defence and for summary judgment to be entered.

28.  Whilst the plaintiff seeks to cast a dim light on the defendant for his previous conflicting indications to the court, such consideration does not take away the importance of an assessment of the overall quality of the rest of the evidence presented before the court. I notice from the transcripts that at the hearing below, an application was initially made for the inclusion into the evidence of some further correspondence, but the application was withdrawn amidst criticism of the lateness of the application. However, there was subsequently a suggestion that the correspondence was somewhat related to the amount of HK$500,000, although the same had not be produced. It is not for me to make any conjectures about the contents of those correspondence, but such is the situation the I am given to understand.

Conclusion

29.  In the round, having considered all the evidence and the submissions, I am of the view that there is potential doubt about the plaintiff’s case for the reasons stated above, in particular with regard to the payment instruction given by the plaintiff to the Company, and the state of the outstanding director’s loan at the material time. At the same time, whilst I do not think that the defendant’s case should be rejected outright as being frivolous and practically moonshine, there is also a certain amount of doubt about his case especially in light of the conflicting indications given to the court below, as well as the lack of a positively pleaded case in the Defence filed on 16 March 2021 relating to the creation of the loan with the Company as described by the Defendant in his affirmation filed in opposition to the application for summary judgment.

30.  On the evidence presented to the court, it appears that the perceived simplicity of the case may be more apparent than real. There are underlying facts that may require further examination before one can reach a fair decision. This is especially so as the case involves the possible interest of a third party, i.e. the Company, subject to the question of time-bar. As I have also mentioned, there is an amount of doubt over the defence put forward. Conditional leave may be ordered where there is something suspicious in the mode of presenting the defence case, or the court is left with a real doubt about the defendant’s good faith (see Hong Kong Civil Procedure 2022, Vol 1, at paragraphs 14/4/16, referring to Fieldrank Ltd v E Stein [1961] 1 WLR 1287 (CA)).

31.  In the round, I am of the view this is a case suitable for conditional leave to defend to be granted, subject to the payment into court by the defendant of the amount claimed.

Orders

32.  I therefore allow the appeal and set aside the Judgment below, and make an order that the defendant be granted leave to defend, conditional upon the payment into court by him of HK$500,000.

33.  Mr Law has indicated at the end of the hearing that in the event conditional leave is granted requiring payment into court of a sum, he would need to take instructions on the time needed by his client to arrange for the payment, as his client is currently in the mainland. On reflection, rather than inviting further submissions on this aspect, I am prepared to allow for an extent of flexibility in the time to be given for effecting payment into court.

34.  I order that leave to defend be granted conditional upon the payment into court by the defendant of HK$500,000 within 42 days from the date of this Judgment, failing which the plaintiff shall have leave to enter judgment for the amount claimed with interest (calculated at the conventional rate of prime + 1% from the date of the commencement of this action to the date of the judgment entered) and costs of the action, to be taxed if not agreed, with certificate for counsel. In fixing the date from which pre-judgment interest is to accrue, I have taken into account the fact that this action was not commenced until, on the plaintiff’s case, the limitation period was about to expire. There is no explanation by the plaintiff for that long lapse.

35.  As for costs consequential on my ruling on the appeal itself, I make an order nisi that, on the condition of payment into court being fulfilled:-

(i) the costs of this appeal be paid by the plaintiff to the defendant, to be summarily assessed by way of paper disposal if not agreed, with certificate for counsel;

(ii) the costs of the application below be in the cause, with certificate for counsel.

36.  Lastly, I am grateful to counsel for their assistance.