XCHRX WA LEE FINANCE CO. LTD. v. GOLAN LTD. t/a EMPEROR SEAFOOD RESTAURANT

HCA 15354/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 15354 OF 1999

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D E C I S I O N

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1. This is an appeal by the Plaintiff against the decision of Master H C Wong who dismissed the Plaintiff's summons for summary judgment against the Defendant.

2. The Plaintiff claims against the Defendant for arrears of rent and/or mesne profits at the rate of $100,000 per month from 1 August 1999 in respect of the premises known as Shops Nos. A-1, 3-10, 62, 69 and 70, Ground Floor, Fortune Centre, No. 19 Fung Kam Street, Yuen Long, New Territories, Hong Kong ("the said premises").

3. The said premises were originally registered in the name of Staryork Investment Limited (Staryork) and by a tenancy agreement dated 1 March 1999 (the said tenancy agreement), Staryork leased the said premises to the Defendant for a term of 3 years and 6 months at the monthly rental of $100,000 payable in advance on the first day of each calendar month.

4. By a loan agreement dated 12 March 1999, the Plaintiff agreed to lend to Staryork $29,500,000.

5. Pursuant to the loan agreement, a mortgage in respect of the said premises was also executed by Staryork in favour of the Plaintiff. Staryork also agreed to assign the rental of the said premises to the Plaintiff and Staryork undertook not to alter the terms and conditions of the said tenancy agreement.

6. The assignment of the rental was executed on 22 March 1999 in which Staryork again undertook not to vary the terms of the said tenancy agreement. In addition, Staryork also executed a rent assignment notice under which Staryork authorised and instructed the tenants including the Defendant to pay the rent in respect of the said premises directly to the Plaintiff.

7. At all material times, Staryork was represented by its only 2 directors, Mr Kan Choi Ming and Mr Chan Kwong Man. Chan Kwong Man and the wife of Kan Choi Ming, namely Madam Tsang Kwai Lan are the only 2 directors of the Defendant.

8. It is clear on the evidence that Staryork and the Defendant are indeed closely related.

9. There is no dispute that Staryork had defaulted in the payment under the mortgage and the Plaintiff took possession of the said premises and assumed the right to collect rent directly from the Defendant.

10. By a letter dated 14 July 1999, the Plaintiff through his solicitors requested the Defendant to pay rent in respect of the said premises to the Plaintiff. In that letter the rental assignment notice was also enclosed.

11. On 9 August 1999, the Defendant through his solicitor informed the Plaintiff's solicitors that the Defendant had paid rent for the said premises for the entire period of the tenancy from 1 March 1999 to 31 August 2002 in advance. A rent receipt for $4.2 million was also enclosed.

12. It was suggested that the said tenancy agreement had been varied on 15 March 1999. Not surprisingly, the Plaintiff did not accept the assertion by the Defendant that the advanced payment of rent in the sum of $4.2 million had been paid.

13. On 10 August 1999 and 6 September 1999, the Plaintiff asked the Defendant to provide documentary proof of the alleged payment of $4.2 million including bank documents such as cheques, statements and passbook. The Defendant did not provide the Plaintiff with any such documentary proof and the present proceeding was commenced on 24 September 1999.

14. The defence was filed by the Defendant on 20 October 1999 in which it was again suggested that the tenancy agreement between Staryork and the Defendant had been varied on 15 March 1999 and that $4.2 million had been paid by the Defendant to Staryork as advanced payment of rent for the entire 3 1/2 years of the tenancy.

15. Subsequent to the filing of the defence on 27 October 1999, the Plaintiff again sought further particulars as well as documentary proof of the alleged payment of $4.2 million.

16. The Plaintiff's request was not responded to except a suggestion was made by the Defendant's solicitors that their client was out of town. The Plaintiff took out the Order 14 application on 21 December 1999.

17. In opposition to the Order 14 application, Chan Kwong Man made an affirmation in which it was again repeated that Staryork and the Defendant had executed a supplemental tenancy agreement on 15 March 1999 in which Staryork agreed to relax the sub-letting restrictions and to extend the lease for a further time of 3 years at the option of the Defendant. In return, the Defendant agreed to pay the rent for the period from 1 March 1999 to 31 August 2002, a sum of $4.2 million in advance.

18. Chan Kwong Man further said that the $4.2 million was in fact not paid to Staryork direct. Instead, a sum of $2,180,000 was paid to one Power Engineering and a sum of $2,020,000 was paid to Kwong Ming Construction Company on behalf of Staryork on 8 March 1999 and 10 March 1999 respectively. Those payments were said to be made in cash.

19. The suggestion was that Staryork was liable to Power Engineering and Kwong Ming Construction Company for those sums under 2 contracts dated 12 May 1997 and 8 May 1997 respectively.

20. There is no dispute that Chan Kwong Man is in fact the sole proprietor of Kwong Ming Construction Company.

21. Mr Chan on behalf of the Plaintiff suggests in the course of his submission that even if the Defendant did pay the two sums of $2,180,000 and $2,020,000 on behalf of Staryork, it is not a defence to the Plaintiff's claim.

22. The suggestion is that, as a matter of law, advanced payment of rent cannot discharge the tenant's liability to pay rent as rent should be payable on the due date to the mortgagee.

23. As I have said in the course of counsel's submission, the simple answer is that if the supplemental tenancy agreement dated 15 March 1999 is genuine and that the rent had been paid in advance pursuant to the supplemental agreement, there will not be any further rent payable and there will not be any future due date for the payment of rent.

24. With respect, the sole issue in this particular case is whether the allegations put forward by the Defendant in defending the Plaintiff's claim is believable.

25. I am grateful to counsel for leading this court through the factual background of the matter and those factual backgrounds are in fact not too complicated.

26. I have considered them carefully. Let me say at the outset that the arrangement whereby the alleged advanced payment of rent was made, is highly suspicious and completely defies commonsense.

27. The Defendant and Staryork are controlled by the same group of people, in particular, Chan Kwong Man is one of the only 2 directors in both companies.

28. At the same time, he is the sole proprietor of Kwong Ming Construction Company. There is no dispute that Chan Kwong Man was one of the only 2 persons acting on behalf of Staryork in its dealings with the Plaintiff.

29. In the present proceeding, Chan Kwong Man is also acting for the Defendant and has filed an affirmation which is the only affirmation filed by the Defendant in opposition to the Plaintiff's summons for summary judgment.

30. I have considered the background of this matter and as I have observed in the course of counsel's submission, even on his own account, Chan Kwong Man is indeed a most dishonest person. He executed the said tenancy agreement on 1 March 1999 on behalf of Staryork under which the Defendant had to pay a monthly rent of $100,000 in advance on the first day of each calendar month.

31. Chan Kwong Man claims to have, on behalf of Staryork accepted the sum of $4.2 million from the Defendant as advanced payment of rent for the entire term of the tenancy, a term for 31/2 years, and those payments were said to have been made on 8 and 10 March 1999.

32. Chan Kwong Man also claims to have executed a supplemental tenancy agreement on 15 March 1999 which varied the said tenancy agreement in a most significant manner.

33. The supplemental tenancy agreement not only relaxes the restriction against sub-letting, it has the effect of extending the tenancy agreement for a term of 3 years. More importantly, the supplemental tenancy agreement purports to suggest that the rental for the entire period of the tenancy, a period of 3 years and 6 months had been paid in advance.

34. On 12 March 1999, Chan Kwong Man executed the loan agreement and then the mortgage in favour of the Plaintiff. He also executed documents under which Staryork assigned the rentals of the said premises to the Plaintiff and undertook not to alter the terms and conditions of the said tenancy agreement. On behalf of Staryork, Chan Kwong Man executed the assignment of rental on 22 March 1999 in favour of the Plaintiff. In the assignment Staryork again undertook not to vary the terms of the said tenancy agreement.

35. If what Chan Kwong Man said in his affirmation is true, the terms of the said tenancy agreement had already been varied, at the latest on 15 March 1999, if not earlier, either on 8 or 10 March 1999.

36. The way in which the two sums of $2,180,000 and $2,020,000 were said to be paid to Power Engineering and Kwong Ming Construction Company is also highly suspicious.

37. Firstly, was it pure coincidence that Staryork owed Power Engineering and Kwong Ming Construction Company the total sum of $4.2 million, the exact amount for the entire rental of the full 3 1/2 years term of the tenancy? Was it pure coincidence that these 2 very large sums of money were paid in cash?

38. Of course, apart from the bare assertion by Chan Kwong Man, there is not a scintilla of evidence to show the actual source of the $4.2 million and what had happened to the money after the payments were effected.

39. One must not ignore and it is not in dispute that Chan Kwong Man, as the sole proprietor of Kwong Ming Construction Company should have received $2,020,000, a very significance sum indeed by any standard.

40. Is he suggesting that he received the sum in cash and somehow kept the cash and perhaps spent them all. There is no explanation from Mr Chan although the undisputed factual background cries out for an explanation.

41. As Mr Chan on behalf of the Plaintiff quite rightly points out, the two contracts purportedly made between Staryork and Power Engineering and Kwong Ming Construction Company under which the sum of $4.2 million cash was paid are both in very brief terms.

42. Despite the substantial sums of money involved, there is no breakdown for the costs of the individual items of the works. The terms of both contracts are strikingly similar and they appear to have been produced from the same source.

43. Despite repeated requests by the Plaintiff, the Defendant failed to provide the particulars of its allegation until Chan Kwong Man filed his affirmation. But up to today not one single document relating to the source of this very large sum of money of $4.2 million had been produced and similarly not one single document was produced to show where this $4.2 million had ultimately gone to.

44. The said tenancy agreement was properly stamped on 15 March 1999, about 2 weeks after its execution on 1 March 1999. Yet the purported supplemental tenancy agreement was not stamped until much later on 22 February 2000 after the Defendant was alerted to this point by the Plaintiff on 21 February 2000. The purported supplemental tenancy agreement had not been registered by the Defendant despite the significant variation of its original terms.

45. I have considered the facts of this case as well as counsel's submission carefully. As I have said, on his own admission, Chan Kwong Man is indeed a most dishonest person. The Defendant's allegation is based on the affirmation of Chan Kwong Man only.

46. I have considered and analysed the details of his affirmation. The conclusion I reach is that the Defendant's allegation is indeed unbelievable.

47. In my view, there is no fair or reasonable probability of the Defendant having a real of bona fide defence to the Plaintiff's claim.

48. It is not usual for a court to make the finding at the interlocutory stage that a party in a proceeding has fabricated a story in order to avoid its contractual obligation or liability.

49. But in the light of the background of this case, I am persuaded that this is the only reasonable conclusion to reach.

50. The action is not one which is based on an allegation of fraud. What the Plaintiff is suggesting simply is that the Defendant, in trying to avoid liability under the contractual arrangement, has subsequently made up a defence to the Plaintiff's claim.

51. In my view, there is no arguable defence to the Plaintiff's claim. The learned master was wrong in dismissing the Plaintiff's application. Summary judgment should have been granted in favour of the Plaintiff.

52. In the circumstances, the appeal is allowed. The order of Master H C Wong is set aside. There will be judgment for the Plaintiff against the Defendant for arrears of rent and/or mesne profits at the rate of $100,000 per month from 1 August 1999 until judgment.