NG CHING KEUNG v. WAH HIP ENGINEERING CO LTD AND ANOTHER

HCA 3379/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3379 OF 2002

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J U D G M E N T

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I. Background

1. The Plaintiff ("Mr Ng") (also known as Andy Ng) claims $966,300 ("Sum X") against the 1st Defendant company ("Wah Hip") and $600,000 ("Sum Y") against the 2nd Defendant ("Mr To"). Mr To (also known as Tommy To) is a director of Wah Hip.

2. Wah Hip was incorporated on 23 July 1998 and commenced business on 1 August 1997. Prior to 8 March 1999 38 shares in Wah Hip were registered under Mr To's name. On 8 March 1999 documents filed by Wah Hip in the Companies Registry show that Mr To caused 30 of his shares to be transferred to Mr Ng and the remaining 8 shares to be transferred to Ms To Kit Han ("Ms To") (Mr To's younger sister).

3. The claim against Wah Hip arises out of payments made by Mr Ng to Wah Hip as follows:-

(1) Payments to Wah Hip by cheques in the amounts of $500,000 (dated 26 February 1998), $100,000 (dated 23 March 1998), $300,000 (dated 26 March 1998) and $200,000 (dated 29 June 1998).

(2) Cash deposits into Wah Hip's account with Kwong On Bank of $1,100 (made on 8 May 1998), $120,000 (made on 31 July 1998), $14,000 (made on 5 October 1998), $28,000 (made on 24 December 1999).

(3) An automatic transfer of $50,000 which was made from Mr Ng's Hongkong Bank account to the account of To Kit Yee ("Ms K Y To") (Wah Hip's accountant and the elder of Mr To's younger sisters) on 30 September 1998 and which was then deposited on the same day by Ms K Y To into Wah Hip's Kwong On account.

(4) A cheque payment of $80,000 (dated 3 December 1998) to Ms K Y To which she then transferred on the same day into Wah Hip's Po Sang Bank account.

(5) Cash payments of $1,300 (made on 1 September 1999) and $10,000 (made on 2 September 1999) to Wah Hip directly.

(6) Various payments amounting to a total of $162,900 made by Mr Ng to 3rd parties on behalf of Wah Hip between 2 August 1999 and November 2000.

The foregoing payments add up to $1,567,300 ("Sum W"). Against that sum, Mr Ng gives credit to Wah Hip for the following amounts:-

(a) A cheque payment of $70,000 (dated 17 September 1998) from Wah Hip to Mr Ng.

(b) The sum of $300,000 incurred as described below.

(c) Withdrawals for the total amount of $231,000 made by Mr Ng between 1st June and 5 January 2000 while he was employed by Wah Hip.

Deducting those credits from Sum W yields Sum X.

4. Mr Ng says that he made the payments to Wah Hip pursuant to a discussion which he had with Mr To in February 1998. Mr Ng says that it was agreed that he would join Wah Hip and lend money to finance Wah Hip's operations.

5. Mr Ng in fact joined Wah Hip as Constructions Contracts Manager on 16 March 1998. He left Wah Hip's employment in March 2001.

6. Mr Ng claims that in March 1999 Mr To and he agreed that in partial repayment of Mr Ng's advances to Wah Hip made in February and March 1998, Mr To would transfer 30 of his shares in Wah Hip to Mr Ng for $300,000. The share purchase price would be set-off against the amounts due from Wah Hip to Mr Ng.

7. As stated above, 30 of Mr To's shares in Wah Hip were transferred to Mr Ng on 8 March 1999. The sale transaction is evidenced by a Bought and Sold Note and Instrument of Transfer, both of which are dated 8 March 1999 and signed by Mr Ng and Mr To. The Bought and Sold Note expressly states the consideration to have been "HK$300,000.00 only (No other consideration given)". Stamp duty was paid in respect of the share transfer.

8. It is worth noting that the transfer of the remaining 8 Wah Hip shares registered under Mr To's name to Ms To also took place on 8 March 1999. The Bought and Sold Note for that transaction records the consideration for that sale as "HK$80,000.00 only (no other consideration given)". Stamp duty was paid on the transfer.

9. The claim against Mr To personally arises out of an advance of $600,000 which Mr Ng made by cheque dated 26 March 1998. The cheque was presented and duly paid.

10. It will be noticed that, if one takes into account the cheque of $600,000 paid to Mr To, then between 26 February and 26 March 1998 Mr Ng would have made a total payment of $1.5 million. Mr To's case is that in about December 1997 and March 1998 he offered to sell 30% of Wah Hip's existing shares to Mr Ng for $1.2 million plus an additional sum of $300,000 to be paid to Wah Hip as Mr Ng's "participation for initial raising the said operation fund for the company" (Defence §3(h)). Mr To alleges that Mr Ng accepted the offer in mid-December 1997 at a lunch meeting in Hang Fook Lau Restaurant, Tai Kok Tsui, Kowloon. It was for this reason (Mr To claims) that Mr Ng made his total payment of $1.5 million in February and March 1998. Payments by Mr Ng over and above the $1.5 million:-

"were not the loan(s) at all as alleged by the Plaintiff but the further raising of fund for the operation of the business of the 1st defendant contributed by all the shareholders" (Defence §3(m)).

11. The principal issue before me is whether Mr Ng or Mr To is right. On the eve of the trial Wah Hip and Mr To instructed their solicitors to cease to act on their behalf. I adjourned the first day of trial to enable Mr To to apply to the Registrar to represent Wah Hip pursuant to RHC Order 12, Rule 1(2A). That application was heard by Master de Souza on an urgent basis on the same day. The Master refused the application. As a result Wah Hip was not represented at the hearing before me, although de bene esse since there was a substantial degree of overlap between his defence and that of Wah Hip I heard such points as Mr To wished to make on Wah Hip's behalf.

12. At the trial I heard evidence from Mr Ng, Mr To and Ms To. A witness statement was tendered for Mr Lee Ho Cheung ("Mr Lee"), who was to have testified that in December 1997 at Hang Fook Lau Restaurant he overheard Mr To offering to sell an unspecified number of Wah Hip shares to Mr Ng at some unparticularised price on condition that Mr Ng work for Wah Hip as Construction Work Manager. Mr Lee, however, did not appear in Court for cross-examination. I am consequently unable to attach any weight to his evidence.

II. Discussion

13. In support of his case Mr To relied on a document ("Document X") headed "WAH HIP ENGINEERING COMPANY LIMITED -- FIRST TO-BE SHAREHOLDERS MEETING ON -- POINTS DURING 1ST AND VARIOUS MEETINGs". At the upper-left hand corner of Document X, someone has scribbled and encircled the word "Draft". A date of 14 March 1998 is stamped on top of the document above Wah Hip's name. Apart from that Document X is undated. At the bottom of Document X under the words "AGREED BY" are spaces for signature by Mr To, Mr Ng, Ms To and Ms K Y To. The spaces were never signed.

14. Document X reads as follows:-

"1.	Mr Andy Ng is to become new shareholder from April 1, 1998.
2.	The three existing shareholders of WHECL agree for the transfer of shares to Mr Ng if the following points are to be agreed by the four existing and new shareholders.
3.	The existing issued shares of 100 shares at HK$1 each will be reallocated as follows:

Mr Tommy To	old 70%	new 45%
Ms To Kit Yee	old 15%	new 12.5%
Ms To Kit Han	old 15%	new 12.5%
Mr Andy Ng	old nil	new 30%

	Provided that Mr Andy Ng paid HK$1,200,000 for the purchase of the 30% shareholdings on or before March 31, 1998.
4.	The stamp duty documents for transfer of shares to Inland Revenue Dept is to base on the assets on hand as at or around March 31, 1998 which is estimated at appx. less than HK$100,000 (including van, fax, mobile phones and paging etc but exceeding any a/c receivables and a/c payables and deemed zero bank c/a balance and T/R loan nil balance).
5.	The 3 existing shareholders will approve the appointment of Mr Ng as new director and new signatory of bank accounts when point (3) is completed.
6.	Suggested new and existing bank accounts to be signed by any two directors.
7.	Funding of the company

	a)	Suggested no new shares to be issued. Instead, to enable the company to operate, Ms To Kit Han agreed to continue to secure her residential flat at South Horizons for the L/C and T/R facility of HK$600,000 and HK$100,000 respectively. In return, the four shareholders will provide written personal guarantee on pro rata basis. Mr Tommy To agreed personally to guarantee the full amount.
	b)	Uses of fund expected in first 3 months to June 30, 1998:

1 month rental in advance shop 3 -	32,000
3 months rental deposit shop 3 -	97,270	.50
1 month rental in advance 9/F -	23,790
2 months rental deposit shop 3 -	55,998
Legal cost and stamp duty	6,446	.15
Totalling	HK$215,504	.65
Car CF9883 (not to include rental charges, gasoline etc)	50,000
Office staff salary, first 3 months, say, ($350,000 per month)	980,000
2 months rent @ 60,422.5	120,845
Decoration say,	100,000
Liquidity needs	150,000
Above items totalling	HK$1,616,349	.65
The fundings is to be borrowed from the 4 shareholders on pro rata basis:

 

Mr Tommy To new 45% x 1620000	= 729,000
Ms To Kit Yee new 12.5% x 1620000	= 202,500
Ms To Kit Han new 12.5% x 1620000	= 202,500
Mr Andy Ng new 30% x 1620000	= 486,000

8.

Project income and expense re VIP no. and before are deemed to be completed before March 31, any profit/loss will be shared by existing 3 shareholders and not Mr Ng although some additional work may be required after March 31. The following VIP projects are to be injected into the new company in the manner mentioned below."

15. Mr To contends that Document X, although unsigned, constitutes a record of what was discussed and agreed at a meeting among Mr To, Ms To, Mr Ng and Ms K Y To on 14 March 1998. I am not persuaded by Mr To's case on Document X for a number of reasons.

16. First, Ms To's evidence was that Document X was prepared and handed out by Ms K Y To at the start of the meeting on 14 March 1998. Thus, Document X cannot be regarded as minutes of what actually transpired at any meeting held on 14 March 1998. At best Document X constituted an agenda for the meeting or an offer of the terms on which Mr To and his sisters were proposing that Mr Ng invest in and become a shareholder of Wah Hip.

17. Second, as a record of what the parties agreed was to happen in relation to Wah Hip's shareholding and funding, Document X is inaccurate:-

(1) Consider Document X §3. The "old" shareholdings recited there are incorrect. According to Wah Hip's returns in the Companies Registry, as of 14 March 1998 Mr To only held 38 (not 70) Wah Hip shares and Ms K Y To held 0 (not 15) wah Hip shares. After Mr Ng's payments of $1.5 million ($900,000 to Wah Hip and $600,000 to Mr To) made between February and March 1998, no shares were transferred to him and he was not made a director of Wah Hip contrary to what Document X §3 stipulates. 30 shares were not transferred to Mr Ng until 8 March 1999 and then, as evidenced by the relevant Bought and Sold Note, at a consideration of no more than $300,000 (as opposed to $1.2 million). Nor did any of the 30 shares come from holdings of Ms To or Ms K Y To as suggested in Document X §3. Only Mr To transferred shares to Mr Ng.

(2) Consider Document X §7. That does not suggest a total cash injection of $1 million by old and new shareholders with Mr Ng contributing $300,000 as pleaded in the Defence. The paragraph does talk of loans to be advanced by shareholders but the amount does not tally with the case put forward by Wah Hip or Mr To. Even if the $486,000 mentioned alongside Mr Ng's name in Document X §7 was for some reason reduced to $300,000, Mr To was adamant in the course of his oral examination that the $300,000 was not meant to be a loan by Mr Ng to Wah Hip. If that is right, the $300,000 is something different from the funding referred to in Document X which is clearly described as a loan from shareholders (for instance: "The funding is to be borrowed from the 4 shareholders"). In other words, if Mr To is right, the $300,000 of operational funds to be provided by Mr Ng pleaded in the Defence is not supported by Document X §7.

18. Third, the explanations given for the discrepancies which I have identified in Document X §3 in relation to shareholdings are vague and confused:-

(1) Ms To stated that Mr To Tung (Mr To's father) held all 15 of his shares in Wah Hip for Ms K Y To. On Ms To's evidence, when Document X mentions Ms K Y To originally holding 15 shares, it was referring to those 15 shares registered in the name of Mr To Tung. But Mr To Tung never transferred any shares to Mr Ng as Document X §3 (if accurate) suggests ought to have been the case.

(2) Mr To claimed that his mother (Ms Kwong Ling Kee ("Ms Kwong")) and Mr To Tung held their respective 32 and 15 shares in Wah Hip on trust for him. When his attention was drawn to Ms To's evidence to the contrary, Mr To suggested that Mr To Tung held 11 shares on trust for Ms K Y To and only 4 shares on trust for Mr To. But that still does not explain why Mr To Tung did not transfer any of the shares held by him to Mr Ng in accordance with Document X §3. Nor is it clear how as a result of the transfer to Mr Ng of 30 shares Mr To can be said to have ended up with a new shareholding (whether beneficially or otherwise) of 45% as envisaged by Document X §3.

(3) There is no real explanation as to why the 30 Wah Hip shares were not transferred to Mr Ng in March 1998 immediately upon payment of $1.5 million. Ms To in evidence simply asserted that in any event it was orally agreed that Mr Ng would be regarded as a shareholder after he made his payment.

19. Fourth, why would Mr Ng have agreed to invest $1.2 million in a company whose audited accounts balance sheet for the year ended 30 April 1999 only shows fixed assets of $102,460 with net current assets of $17,721 and net profits of $120,181? It is true that the audited accounts (Wah Hip's first) cover a period which goes substantially beyond March 1998. But the audited accounts are instructive because they should be indicative of Wah Hip's worth during the period from its incorporation until 30 April 1999.

20. Mr To suggests that Wah Hip's most important asset was its factory in Guangzhou. He values that factory at $4 million. However, there is no mention of such factory in Wah Hip's audited accounts. It appears that Mr To did not mention the factory to Wah Hip's auditors. This was said by Mr To to have been done in order to keep matters simple for the purposes of the Inland Revenue. No specific explanation was given as to what this means. In any case, there is just no evidence to support the supposed valuation of $4 million attributed by Mr To to the factory. What is more likely (it seems to me) is that 30 Wah Hip shares were transferred on 8 March 1999 as Mr Ng contends for a price of $300,000. The latter amount is more consistent with the values contained in Wah Hip's audited accounts.

21. There was some debate before me on whether Mr Ng ought to have known of the value of the factory because he had seen it a number of times in or around March 1998 and thereafter. But it is difficult to see any prudent businessman investing in a mainland factory in the absence of a formal valuation, no matter how many times he has seen the premises.

22. In all the circumstances, Document X is dubious evidence of what was agreed among the parties in relation to the $1.5 million paid by Mr Ng between February and March 1998. Further, Mr To's insistence on Document X as a record of what was agreed appears to me to undermine the reliability of his evidence of an alleged agreement by Mr Ng to purchase Wah Hip shares for $1.2 million. This contradicts the statement (which both Mr Ng and Mr To acknowledged by their signature) in the Bought and Sold Note that the consideration for the 30 Wah Hip shares was only $300,000 and no more.

23. I note that there is another unsigned document, this time entitled "WAH HIP ENGINEERING COMPANY LIMITED -- SECOND TO-BE SHAREHOLDERS MEETING ON APR 17, 98 5-7 PM -- RE INTERNAL MANAGEMENT OF COMPANY -- AGENDA". That document, however, appears to be little more than a list of matters for discussion at a meeting. It does not take the case much further.

24. I note also in passing that Mr To alleged at trial that the parties agreed shortly after the 14 March 1998 meeting (Mr To could not be precise as to when) that Mr Ng would provide $300,000 of operational funds. But that would still leave the question of characterising the $300,000. If not a loan, then what could it be? On Wah Hip's and Mr To's own contentions, it does not form part of the alleged consideration of $1.2 million for the 30 shares. Thus, given it was not for the purchase of anything, it could only be a shareholder's loan.

25. Accordingly, on the whole I prefer Mr Ng's evidence. Mr Ng said (and I accept) that, due to the economic turmoil in 1998, he did not wish to invest in Wah Hip in March 1998. He made plain his rejection of Mr To's offer. Mr Ng was prepared, however, to lend money to Wah Hip on the understanding that the loan would be repaid within a short period (initially 3 to 4 months and later extended to a year).

26. Mr Ng was prepared to lend money for a variety of reasons, including the following:-

(1) Mr Ng and Mr To had been classmates at the Hongkong Polytechnic. They had been close friends initially as students and thereafter as employees in the same office. They had worked together in Builders Federal ("BF") after their graduation. Mr Ng was embarrassed by the fact that he had been selected by BF for training engagements in the US in preference to Mr To, despite the fact that Mr To had been instrumental in helping Mr Ng secure employment with BF.

(2) Mr Ng was interested in working for Wah Hip since the company in which he was then working was facing liquidation. He was also keen to bring in several of his colleagues at the latter company to work with him at Wah Hip. Mr Ng thought that, by lending money to Wah Hip and Mr To, he would show goodwill and make it harder later to dismiss him and his colleagues from employment with Wah Hip.

27. I am fortified in my views in relation to Mr Ng's evidence by the fact that a number (but by no means all) of the cheques paid by Mr Ng are matched by deposit slips on which Ms K Y To has written words to the effect that the money being deposited is a temporary loan from Mr Ng. I accept that Mr Ng made cash advances amounting to $434,000 to Wah Hip between 8 May 1998 and 24 December 1999. Many of the relevant deposit slips for the latter payments identify the same to have been loans.

28. It is correct that deposit slips in relation to the $1.5 million paid by Mr Ng between 26 February and 26 March 1998 do not bear such annotations by Ms K Y To. But this cannot be conclusive. Even on the Defence, at least some $300,000 of that $1.5 million must have be a shareholder's loan from Mr Ng as I have discussed. But that has not been noted in any relevant deposit slip.

29. Mr To queried the additional sums paid by Mr Ng to Wah Hip between March 1998 and November 2000. Mr To asked, for instance, why Mr Ng simply did not pay third parties on behalf of Wah Hip by signing Wah Hip cheques as Mr Ng was authorised to do. There was a debate over whether Mr Ng was sufficiently computer literate to operate Wah Hip's banking systems and whether Mr Ng was able to sign cheques on his own for Wah Hip. I do not believe that such debate is helpful. I accept that Mr Ng paid third parties on Wah Hip's behalf as pleaded in the Statement of Claim. He did so because Wah Hip was having difficulty paying its sub-contractors and employees on time. Whether Mr Ng could operate Wah Hip's bank accounts would not be material, unless there were funds in any Wah Hip accounts which Mr Ng could operate. It is clear that Wah Hip was encountering financial difficulties at the time. It seems entirely plausible and likely that Mr Ng, whether through good intention or embarrassment, attempted to forestall ugly disputes with employees and sub-contractors by advancing payments on behalf of Wah Hip.

30. I also accept Mr Ng's evidence that he made withdrawals amounting to $231,000 while employed by Wah Hip. In the course of trial Mr Ng acknowledged that he had forgotten about a sum of $6,000 received from Wah Hip. He agrees that credit should be given for that amount.

31. It follows from my rejection of the allegation by Wah Hip and Mr To of an agreement by Mr Ng to purchase Wah Hip shares at $1.2 million, that the $600,000 paid to Mr To must be regarded as a loan to him by Mr Ng. Mr To accepted in examination that the $600,000 was his to use for his private purposes.

III. Conclusion

32. The Defence of both defendants is dismissed. There will be judgment for Mr Ng against Wah Hip in the amount of $960,300 (that is, Sum X - $6,000) and against Mr To in the amount of $600,000. Interest is to run on those amounts at 1% over Hong Kong prime from date of the Writ (4 September 2002) until date of judgment. Interest is to run on the judgment debt at the judgment rate until payment.

33. There will be an Order Nisi that the Plaintiff is to have the costs of his action against both defendants. Such costs to be taxed if not agreed.