MR ROH SHANG SOO AND ANOTHER v. MR. CHEUNG YUEN FAI

DCCJ 5706/2006

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 5706 OF 2006

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JUDGMENT

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1. This trial concerns the agreement amongst the 1st Plaintiff Mr. Roh, the Defendant Mr. Cheung and one Mr. Ko Shiu-Ming Stanley (“Mr. Ko”) to set up a company called Golden Glory Hong Kong Ltd (“Golden Glory”) to carry on the business of garment trading. 

2. It is the plaintiffs’ case that the agreement provided for Mr. Roh to finance the operation of Golden Glory for 6 months up to a limit of $300,000 by loans paid through the 2nd Plaintiff First International Supplies Limited (“First International”) to Mr. Cheung and Mr. Ko respectively, against their promise to repay the loan after 6 months.  Pursuant to the agreement, a total sum of $119,334 was lent to Mr. Cheung and a total sum of $89,200 was lent to Mr. Ko.  By this action, the plaintiffs claim against Mr. Cheung for the repayment of the $119,334 loan.  At the trial, the plaintiffs agree that half of the $10,000 paid on 26th November 2004 (i.e. $5,000) should be regarded as money lent to Mr. Ko.  Hence, the claim against Mr. Cheung is reduced to $114,334.

3. Other than the aforesaid sum of $5,000 allegedly paid for his use on 26th November 2004, Mr. Cheung does not dispute having received the remainder of $109,334.  He, however, denies that the money he received was a loan.  According to him, the agreement provided for a salary of $20,000 per month plus reimbursement of all his out-of-pocket expenses in return for his work for Golden Glory. 

4. The issues in this case are therefore:

(1)	What were the terms of the tripartite agreement?  In particular, whether the agreement provided for a loan by Mr. Roh to Mr. Cheung or the employment of Mr. Cheung?
(2)	Whether Mr. Cheung has received the use of the $5,000 paid on 26th November 2004?
(3)	Whether the money received by Mr. Cheung was a loan or was salary plus reimbursements?

DCCJ 3458/2005

5. This is not the first time Mr. Roh, First International and Mr. Cheung attend court for the trial of their dispute.

6. In DCCJ 3458/2005, Mr. Roh and First International claimed against Mr. Ko for the repayment of the $89,200 loan.  The basis of their claim against Mr. Ko in that action is the same as their claim against Mr. Cheung here [see paragraphs 5-7 of that judgment].  Mr. Ko’s defence was that he had received the $89,200 in pursuance of the agreement that Mr. Roh would pay all the set-up and operating costs of Golden Glory and that he, as an employee of Golden Glory, would receive a monthly salary of $20,000 and reimbursement of his expenses incurred whilst working in Mainland China [see paragraphs 8-9 of the judgment].  Thus, Mr. Ko’s defence in that action is the same as Mr. Cheung’s defence here.

7. DCCJ 3458/2005 came on for trial in August last year and went on for 5 days.  Although Mr. Cheung was not a party to that action, he was called by Mr. Ko to testify for the defence. 

8. In a judgment handed down on 31st October 2006, Her Honour Judge Ng rejected Mr. Ko’s defence and the testimony of Mr. Cheung.  Judgment was entered in favour of Mr. Roh against Mr. Ko for the sum of $89,200.

9. Mr. Ko’s subsequent applications to the learned Judge and to the Court of Appeal respectively for leave to appeal against the judgment were dismissed (see the judgment dated 19th January 2007 of Her Honour Judge Ng in DCCJ 3458/2005, and the judgment dated 25th May 2007 of the Court of Appeal in HCMP 229/2007).

10. Since both actions involve the same parties, the same background and the same agreement, it is imperative that the issues in this action must be discussed in the light of what has been decided in DCCJ 3458/2005.

Discussion

11. At paragraph 30 of her judgment, Her Honour Judge Ng made the following findings of facts on the background leading to the proposal for establishing Golden Glory:

(a)	Mr. Ko knew Mr. Roh from his previous employment at Sweetmart Garment Works Limited (“Sweetmart”).  Following the failure of Sweetmart to pay First International’s fabric cost, Mr. Ko and Mr. Roh ceased contact with each other from mid-2003 to February 2004.
(b)	In the meantime, Mr. Ko and Mr. Cheung suggested to Mr. Zhe of a garment factory in Ma Ahn Shan in the Anhui Province in Mainland China (“MAS Factory”) to open a Hong Kong branch and offered themselves to be branch managers.  Mr. Zhe declined the suggestion in late 2003.  Mr. Ko and Mr. Cheung were still looking for an opportunity to set up a new garment business with third party financial support.
(c)	Even though the suggestion to Mr. Zhe did not bear fruit, Mr. Ko decided to leave Sweetmart at/about the end of 2003 and eventually joined AMW HK Co Ltd in February 2004.
(d)	Mr. Ko still looked for opportunity to set up a new garment business. He took the initiative to renew his acquaintance with Mr. Roh and to place purchase orders for fabrics with First International for which Mr. Roh was grateful.
(e)	In March 2004, Mr. Ko introduced Mr. Cheung to Mr Roh. The three gentlemen consolidated their relationship by going on a trip to Dongguan together and by meeting further over restaurant meals.
(f)	In April 2004, Mr. Ko told Mr. Roh that he and Mr. Cheung wanted to set up a garment company with production support from the MAS Factory, but they wished to look to Mr. Roh for the start up funds to finance the enterprise. Mr. Ko said he needed HK$20,000 per month because he had to support his mother, pay rent, pay his personal bank loan and pay his own expenses, but he assured Mr. Roh he could achieve sales within a year.  Mr. Roh did not give any affirmative reply.

12. On the crucial issue of whether the tripartite agreement provided for a loan by Mr. Roh to Mr. Ko and Mr. Cheung or the employment of Mr. Ko and Mr. Cheung, Her Honour Judge Ng made the following findings:

“	53.	I find on balance Mr. Roh never agreed to employ Mr. Ko and Mr. Cheung or give them salaries and out-of-pocket expenses on an outright basis. I further find [the parties] entered into the new garment business venture as co-principals or co-venturers with each making their own contributions and receiving their own benefits. Mr. Ko and Mr. Cheung had the benefit of being able to start a new garment business without putting up any initial capital and they could each earn 30% profits (if any) by generating sales and looking after production. Mr. Roh would be able to expand his business into garment trading by putting up financial convenience for the new business during the first six months and by arranging the supply of fabrics, thereby earning 40% profits (if any).”
“	129.	I further accept that at Mr. Ko’s/Mr. Cheung’s requests Mr. Roh through First International made various payments of various amounts under [the agreement] within the monetary limit of HK$300,000 to Mr. Ko and Mr. Cheung … by (a) cash, (b) cheque, (c) remittance to Mainland China or (d) purchase of air-tickets for their business trips to Mainland China. Mr. Roh deposited such sums into First International’s bank account to pay for Mr. Ko’s and Mr. Cheung’s drawings and business expenses at their requests.”

13. At the trial of this action, Mr. Roh (both for himself and on behalf of First International) agrees with the findings of the learned Judge.  He clarifies that the proposal put to him in April 2004 was in fact made jointly by Mr. Cheung and Mr. Ko.  He says that Mr. Cheung also told him that Mr. Cheung needed $20,000 per month in order to care for his 2 children and his then pregnant wife as well as to repay his personal bank loans.

14. In my view, Mr. Roh’s clarification is consistent with the findings of Her Honour Judge Ng.  In fact, the learned Judge has also said in her judgment that:

“

38.

I find the defence evidence unreliable and reject the same. In my view, since Mr. Ko and Mr. Cheung made the proposal to start a new garment business, they were the ones who were keen to set the shareholding and profit-sharing ratio of 50%:25%:25% for Mr. Roh, Mr. Ko and Mr. Cheung respectively…”

15. Mr. Cheung, on the other hand, disputes the findings of the learned Judge.  He still maintains that it was Mr. Roh who proposed to set up Golden Glory and that Mr. Roh offered shareholding of Golden Glory and a salary of $20,000 per month plus reimbursement of all out-of-pocket expenses in order to entice him and Mr. Ko to work for Golden Glory. 

16. Mr. Cheung disputes the findings of the learned Judge on the following grounds:

(a)	there is no written agreement for the alleged loan;
(b)	it would have been unreasonable for him to request a loan from Mr. Roh to set up the new company given his then stable employment with Eagle Speed Global Manufacturing Limited (“Eagle Speed”) earning $20,000 a month and the fact that he had to provide for his pregnant wife and 2 children;
(c)	it would have been unreasonable for Mr. Roh to accept that he and Mr. Ko could repay the $300,000 loan in 6 months time;
(d)	Mr. Roh as shareholder of 40% of the shares of Golden Glory should bear 40% of the claim now made against him as such money represents the operating loss of Golden Glory; and
(e)	given the difference between him and Mr. Ko in terms of family background, financial circumstances and the timing in knowing Mr. Roh, the findings of the learned Judge should not apply to him.

17. In my view, there is no substance in Mr. Cheung’s 1st challenge.  It is common ground that the tripartite agreement for the setting up of Golden Glory was not in writing.  Indeed, it is also Mr. Cheung’s own case that the agreement to employ him (and Mr. Ko) was made verbally.  Mr. Roh explains at trial that he then trusted Mr. Ko and Mr. Cheung and so did not consider a written agreement necessary.  I find Mr. Roh’s explanation reasonable given the fact that the parties had consolidated their relationship through the Dongguan trip and the restaurant meals and were contemplating entering into business together.

18. The learned Judge has in fact dealt with Mr. Cheung’s 2nd challenge in her judgment where she said:

“	43.	It was also suggested that Mr. Ko and Mr. Cheung would not have exchanged the security of their salaried employments for the responsibility of repaying [the loan]. But such argument ignores the background reality as well as Mr. Ko’s and Mr. Cheung’s mentality at the time. In my view, Mr. Ko and Mr. Cheung were contemplating leaving their existing employments to “搏一搏” (i.e. take a risk) and needed financial support without which they could not do so. Having failed to secure financial support from Mr. Zhe, I find on balance they were prepared to accept [the loan]. Further, [the loan] was not unreasonable from Mr. Roh’s perspective. He had limited capital, so he only offered a financial convenience of six months to Mr. Ko and Mr. Cheung for which he would receive 40% shareholding in the new company and 40% profit-sharing.”
“	55.	Mr. Cheung claimed he had a steady job with Eagle Speed and his financial commitments were not small with several children and a pregnant non-working wife. It was only after due consideration and discussion with his wife that he decided to quit Eagle Speed to join the new garment business.”
“	56.	I find on balance Mr. Cheung was not too reluctant to leave Eagle Speed. After all he was prepared to become a branch manager of the Hong Kong branch of the MAS Factory with Mr Ko had Mr. Zhe agreed to set up such branch. I accept Mr. Cheung told Mr. Roh his personal situation, but prefer Mr. Roh’s evidence that Mr. Ko persuaded Mr. Cheung (and Mr. Cheung agreed) to join the new garment business as they anticipated the new business to be quite busy.”

I respectfully agree with the learned Judge’s analysis.

19. The learned Judge has also dealt with Mr. Cheung’s 3rd challenge as follows:

“

54.

In my view, it is not unreasonable for Mr. Ko and Mr. Cheung to agree to (a) repay [the loan] and (b) raise funds to finance the new business after the initial six months. According to the defence case, Mr. Ko anticipated there would be purchase orders from customers within three months of commencement of business and receipt of income within the following three months. In short, he thought money would be coming in within half a year (i.e. before the expiry of [the loan] period) to maintain the new garment business.”

20. Mr. Roh further explains at trial that he had been told by Mr. Ko that Mr. Ko had a property which could be mortgaged to provide further finance for Golden Glory after the first 6 months.  Likewise, he had been told by Mr. Cheung that Mr. Chueng’s mother had a property in Sheung Shui which could be mortgaged to provide additional funding.  Mr. Cheung does not dispute that his mother does own a property in Sheung Shui.  Mr. Roh would have no means of knowing this fact unless Mr. Cheung has volunteered it.  In the premises, I do not consider Mr. Cheung’s challenge justified.

21. Mr. Cheung’s 4th challenge is premised upon the fact that the claim against him can be regarded as operating loss of Golden Glory.  He has apparently ignored the basis upon which the plaintiffs are now claiming against him.  If I accept the plaintiffs’ case that the money Mr. Cheung received was part of a loan extended by Mr. Roh to him and Mr. Ko, there can be no basis for Mr. Roh bearing any part of such money.

22. There is also no substance in Mr. Cheung’s last point.  As the Court of Appeal has observed from the comprehensive and carefully written judgment of Her Honour Judge Ng, the learned Judge made her findings after considering the background leading to the agreement, the business experience of the parties and the evidence of the agreement itself.  The learned Judge also considered the objective evidence which included, among other things, that Mr. Roh, Mr. Ko and Mr. Cheung were shareholders and directors of Golden Glory; Mr. Ko and Mr. Cheung also had signing rights of cheques of Golden Glory; Golden Glory had not filed any tax return for employees; there was no contribution by Golden Glory to any mandatory provident fund for and on behalf of Mr. Ko and Mr. Cheung, and also Mr. Roh was not a ‘boss’ of the operation.  The learned Judge also considered the agreement on repayment and Mr. Roh’s decision to extend the repayment date.  Mr. Cheung’s personal circumstances, insofar as they are relevant to the issues in dispute, have been carefully considered by the learned Judge.  With respect to the learned Judge, I would have reached the same conclusion and for the same reasons based on the evidence in this action.

23. In fact, there are other reasons that lead me to reject Mr. Cheung’s defence.

24. First, Mr. Cheung alleges at the trial of this action that he was paid a total of $60,000 by cheques as salary as follows:

Date	Amount
2nd October 2004	$20,000
11th November 2004	$20,000
15th December 2004	$10,000
3rd January 2005	$10,000
	$60,000

25. This is apparently different from what he alleged in DCCJ 3458/2005.  The learned Judge has recorded the following evidence of Mr. Cheung in that action:

“	118.	Mr. Cheung claimed he received his first salary payment of HK$20,000.00 on/about 2nd October 2004. He said in his witness statement that “…… the amount of salaries Mr. Roh had given to [Mr. Cheung], with cheques of [First International]” were as follows :
		Date of cheque	Amount (HK$)
		2nd October 2004	20,000.00
		15th December 2004	10,000.00
		1st February 2005	3,000.00
	119.	Although Mr. Cheung’s witness statement stated his monthly salary should be paid on the first day of each month, he gave evidence that such salary was payable in arrears either at the end of the month or beginning of the following month. He claimed (a) he was entitled to salary payments in the total sum of HK$100,000.00 at HK$20,000.00 per month from September 2004 to January 2005 (which suggested he worked for Golden Glory for the full month of January 2005), and (b) Mr. Roh/First International still owed him HK$10,000.00 in outstanding salary payment.
	120.	Although Mr. Cheung’s witness statement only stated he received total salary of HK$33,000.00 … he insisted he was owed HK$10,000.00 and not HK$67,000.00 in outstanding salary payments. He even blamed Mr. Ko’s solicitors for supplying him the figure of HK$33,000.00 and possibly missing other cheque payments he received. I reject Mr. Cheung’s strained explanation.”

26. When he is asked about the discrepancy at trial, Mr. Cheung again blames it on Mr. Ko’s solicitors and the fact that he did not have all the records.  Like the learned Judge, I find his strained explanation incredible.

27. Secondly, Mr. Cheung has apparently accepted at trial that it was indeed part of the tripartite agreement that he would be given 30% of the shareholding of Golden Glory.  This is very different from his stance in DCCJ 3458/2005.  The learned Judge has this to say about the evidence on the respective shareholding of Mr. Roh, Mr. Cheung and Mr. Ko in Golden Glory:

“	68.	Even on the defence case, Mr. Ko knew he would be given [the] shares in the new company, so his attempt to distance himself from the letter he signed was perplexing. I am persuaded he and Mr. Cheung adopted such stance because they had to explain why each of their shareholding was increased by 5% in their favour from 25% to 30%. They claimed they only found out about the change in the shareholding ratio when they signed the relevant corporate documents, but no plausible reason was given for Mr. Roh’s unsolicited generosity when, according to Mr. Ko and Mr. Cheung, [the parties] had already reached agreement on the shareholding ratio at [the meeting].
	69.	Coincidentally, both Mr. Ko and Mr. Cheung claimed they privately thought the extra shareholding was because Mr. Roh wanted them to be more aggressive in looking for business and in generating income, yet they never asked Mr. Roh or sought confirmation from him about this. I find it hard to believe that in a small company of three persons who saw each other regularly, (a) this subject was never raised, (b) Mr. Ko or Mr. Cheung never even offered simple thanks to Mr. Roh or (c) Mr. Roh never exhorted them to work harder with the additional shareholding. It is particularly telling that Mr. Ko said his right to profit-sharing depended on the shareholding ratio. In my view, [the parties’] silence on the subject is consistent with Mr Roh’s evidence (which I accept) that [the parties] had agreed at [the meeting] to the shareholding ratio of 40%:30%:30% for Mr. Roh, Mr. Ko and Mr. Cheung respectively.”

28. I now turn to the claim amount.  Insofar as the amount of claim in this action is concerned, all the payments are supported by documentary evidence including:

(a)	cash cheques of First International;
(b)	cheques of First International drawn to Mr. Cheung;
(c)	remittance from First International’s account to Mr. Cheung’s account; and
(d)	invoices/receipts of Korea Travel Services (HK) Co. evidencing reimbursement of Mr. Cheung’s out-of-pocket expenses.

29. The payment of the disputed amount is evidenced by a cash cheque dated 26th November 2004 and a receipt signed by Mr. Ko.  According to Mr. Roh, this payment was made to facilitate Mr. Cheung and Mr. Ko making a business trip to Ma Ahn Shan on 27th November 2004.  Official receipt from the travel agent has been produced to evidence that trip.  Although the receipt was not signed by Mr. Cheung, it is expressed to be “from Mr. Cheung and Mr. Ko”.  Given that there were only 3 active players in Golden Glory at the time and that Mr. Roh had provided money to Mr. Cheung before for his trips outside Hong Kong, I do not accept Mr. Cheung’s contention that he knows nothing about the payment.  Having said that, however, I agree with Mr. Roh that half of the $10,000 lent should be regarded as money lent to Mr. Ko under the agreement.

30. According to Mr. Roh, the loan was repayable in 6 months time.  The learned Judge has found that the loan period commenced on 1st August 2004 and ended on 31st January 2005 [see paragraph 124 of that judgment].  Mr. Cheung should therefore repay the amount lent to him under the agreement from February 2005 onwards.

Conclusion

31. For the above reasons, I find that it was the agreement amongst Mr. Roh, Mr. Cheung and Mr. Ko for the setting up of Golden Glory that Mr. Roh would lend money from time to time to Mr. Ko and Mr. Cheung for 6 months up to the monetary limit of HK$300,000 for the operation of Golden Glory and that any money so lent would be repayable in 6 months time.  Pursuant to such agreement, a total sum of $114,334 was lent to Mr. Cheung.  That loan became repayable from February 2005.

32. I therefore enter judgment in favour of Mr. Roh and against Mr. Cheung for the sum of $114,334, together with interest thereon at the judgment rate from the date of the writ until full payment.

33. Since First International was not a party to the tripartite agreement but was merely a conduit through which Mr. Roh as lender paid the money to Mr. Cheung as borrower, First International’s claim against Mr. Cheung is dismissed.

[Discussion between Court and parties re costs]

34. The general rule on costs is that costs should normally follow the event.

35. Mr. Roh succeeds in his claim against Mr. Cheung, but First International’s claim against Mr. Cheung has failed.  There is nothing in this case to displace the general rule on costs.  Mr. Cheung has confirmed that no extra costs was involved in defending First International’s claim against him that is over and above his costs in defending Mr. Roh’s claim.

36. I therefore order the Defendant to pay the 1st Plaintiff’s costs of this action, assessed by gross sum assessment at $3,000.  The 2nd Plaintiff is to pay the Defendant’s costs of defending the claim by the 2nd Plaintiff, assessed by gross sum assessment at $1.