CHAN KWONG HING JAMES v. CONVERGENT TECHNOLOGIES LTD.

HCA 9152/1995

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 9152 OF 1995

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REASONS FOR JUDGMENT

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Introduction

1. On 27 November 2000, after trial, I entered judgment for the plaintiff against the 1st defendant for $500,000 with interest and costs and dismissed the 1st defendant's counterclaim against the defendants by way of counterclaim, who are the plaintiff and his wife, with costs. I have indicated that I will give the reasons later, which I now do.

Plaintiff's case

2. The plaintiff's primary case is this. In or about the end of December 1993, the plaintiff and his wife started to negotiate with the 2nd defendant through his agent, Chan Wai Tak (Chan"), for the sale and purchase of his shares in the 1st defendant. In the course of negotiation, Chan Wai tak, also a director of the 1st defendant, asked the plaintiff to lend money to the 2nd defendant. The plaintiff agreed. The sums advanced on 3 different occasions on 31 January, 22 March and 28 March in 1994, totalled $500,000. The negotiation eventually fell through in November 1994. But the 1st defendant failed to repay the loans despite demands.

3. The plaintiff has an alternative claim of money had and received against the 2nd defendant. It is framed in this way. The sums advanced represented the prepayment of the price for the 2nd defendant's shares. Since the negotiation fell through, the 2nd defendant should repay the plaintiff the $500,000, the consideration of which had wholly failed, but he did not do so. At the trial before me, the plaintiff abandons this alternative claim against the 2nd defendant. He says it was only made to respond to the 1st defendant's case, to which I now turn.

Defendants' case

4. The defendants do not deny that the plaintiff had made the 3 payments as aforesaid. However, they say that by virtue of an oral agreement between the plaintiff and his wife on one part and the 2nd defendant on the other, each of the plaintiff and his wife had agreed to buy 1st defendant's 25,000 shares for $10 each. The price was to be paid by three installments. The payments by the plaintiff were in fact those installments. As the 1st defendant was in financial difficulties, it was agreed that the installments be paid by the plaintiff to the 1st defendant direct and the money would be treated as a loan from the 2nd defendant to the 1st defendant. After the oral agreement was made, the plaintiff and his wife had behaved as shareholders and directors of the 1st defendant. Among other things, they had taken over the management of the 1st defendant and represented to others that they were shareholders and directors of the 1st defendant. Drafts of the deed for the sale and purchase of the shares had been prepared in the following months. However, the final draft was not signed in because the plaintiff and his wife wanted to renege on the agreement.

5. Accordingly, the 1st defendant accordingly denies that it had borrowed the $500,000 from the plaintiff. The 2nd defendant denies that the consideration for the $500,000 had wholly failed. He further counterclaims against the plaintiff and his wife for specific performance of the oral agreement or alternatively damages for repudiation of the same.

Evidence & evaluation

6. Both the plaintiff and his wife give evidence to substantiate the claim against the 1st defendant. Their evidence is summarised as follows.

7. It is the plaintiff's evidence that in or about December 1993, Chan employed his wife as the general manager of the 1st defendant. Shortly thereafter, Chan told his wife that the 2nd defendant, holding 99,999 shares in the 1st defendant, intended to sell 50,000 of his shares at the price of $500,000. He and his wife were interested. Negotiation then followed with Chan on behalf of the 2nd defendant as the latter travelled quite extensively. On 3 different occasions in 1994, namely on or about 31 January, 22 March and 28 March, Chan on behalf of the 1st defendant asked the plaintiff to lend $200,000, $200,000 and $100,000 to the 1st defendant. The plaintiff agreed and did lend the money as aforesaid. All the payments were by way of cheque. While the negotiation went on, various drafts deed for the proposed sale had been prepared. However, it eventually fell through in November 1994 as the 2nd defendant refused to sign the final draft and insisted on amending the clause relating to the power given to the plaintiff and his wife to manage the affairs of the 1st defendant. In or about April or May 1994, name cards showing the plaintiff and his wife had been printed. However, the plaintiff denied that he had ever used such name cards. They were printed together with the name cards of 1st defendant's other employees. It was anticipated that the sale of shares would complete within a short time. Thereafter they would become the directors. It was a mere preparatory step to have the name cards printed.

8. The evidence of the plaintiff's wife is in similar terms. She went on to add that she had prepared a fax to the plaintiff's bank in or about May 1994 setting out the respective ownership of the shares in the 1st defendant. The fax was used in connection with a potential application for banking facility for the 1st defendant. The parties had agreed to use the plaintiff's bank after the plaintiff and his wife became shareholders and directors. To facilitate the application, the bank requested information about the distribution of the shareholding. Because the sale eventually fell through, the application with the bank simply did not proceed further.

9. Both the plaintiff and his wife deny that they had, as alleged, behaved as de facto directors and shareholders of the 1st defendant. They also deny that they had taken over the management of the 1st defendant. The plaintiff's wife specifically refers to the fact that she was at the material times the general manager of the 1st defendant and was hence responsible for its management any way. Further, when she applied for a job with another company, the 2nd defendant himself had referred to her as the general manager in the performance reference form dated 2 April 1996.

10. In December 1994 and January 1995, the 2nd defendant had apparently negotiated with one Frank Lee for the sale of his shares in the 1st defendant. In the letter dated 18 January 1995 by the 2nd defendant, he stated that the plaintiff's wife had to withdraw her shares and asked for investment schedule to repay her. Both the plaintiff and his wife say they were not aware of the negotiation when it apparently took place. The plaintiff's wife only saw the relevant correspondence later in her capacity as the general manager.

11. The defendants being absent, there is no evidence to contradict the plaintiff or his wife. Nor is there any evidence to substantiate their defence or the 1st defendant's counterclaim.

12. Be that as it may, the plaintiff still needs to prove his case. After carefully considering all the evidence before me, I am satisfied that he has discharged the burden. There is no dispute that the plaintiff did pay a total sum of $500,000 to the 1st defendant. The only issue is what is the nature of such payments.

13. I have no hesitation in accepting the plaintiff's version. He and his wife were obviously interested in keeping the 1st defendant going when negotiation with the 2nd defendant continued. They clearly took the view that there was potential in the 1st defendant's business; otherwise, they would not have considered making the investment. According to their assessment, the 1st defendant faced financial difficulty mainly because of poor management. They anticipated that they would soon become the majority shareholders and directors, vested with the power to manage the 1st defendant. They would then be able to put the 1st defendant on the right track. In those circumstances, there was nothing unusual for the plaintiff to lend the money to the 1st defendant to help it meet the needs.

14. I find it difficult to accept the defendants' version of the events. If, as alleged by them, an oral agreement on the 2nd defendant's shares had indeed been reached and the payments were in fact for the 2nd defendant's shares, a number of questions remain unanswered:

(1) Why would negotiation between the parties still need to carry on?

(2) Why would the parties fail to effect the transfer of the shares after payment?

(3) Why would the plaintiff appear to have accepted that the shares need not be transferred after payment?

(4) Why would the plaintiff eventually refuse to sign the deed allegedly because they were dissatisfied with certain clauses relating to their right to manage. He and his wife had already become the de facto majority shareholders and directors. They even acted as such and have effectively taken over the management of the 1st defendant. The 1st defendant was already under their control.

Conclusion

15. For the above reasons, I find that the plaintiff did lend a total sum of $500,000 to the 1st defendant as claimed and the 1st defendant has failed to make any repayment. I therefore enter judgment for the plaintiff for $500,000 against the 1st defendant with interest and costs, dismiss the plaintiff's claim against the 2nd defendant with no order as to costs, and dismiss the 2nd defendant's counterclaim with costs.