RIVER PLATE CO LTD v. TANG TUNG SANG AND ANOTHER

HCA 476/2021

[2023] HKCFI 262

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 476 OF 2021

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D E C I S I O N

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A.  INTRODUCTION

1.  The Plaintiff sought summary judgment on 5 heads of claim. Master Elizabeth Cheung granted leave to defend 4 heads on condition that the Defendants made payments into Court. The Defendants did not fulfil the condition. Judgment was thus entered against them. The Defendants lodged an appeal against the Judgment. They sought to stay the Judgment pending appeal, but Master Dick Ho refused to stay execution. On the Plaintiff’s application, Master Dick Ho gave leave for payment out of money paid in by D2 (to discharge an injunction) in partial satisfaction of the Judgment against her. This is the Defendants’ appeal against Master Dick Ho’s orders.

B.  BACKGROUND

2.  Fant Chuck Lam Sanchez (“FC"), Nam Chuck Lam Sanchez (“NC") and D1 are shareholders of the Plaintiff, holding 33%, 34% and 33% shares respectively. Since incorporation, the 3 of them used to be directors of the Plaintiff but D1 was removed as a director after 1 May 2021 upon discovery of his alleged dishonest acts forming the subject matter of this action. D1 was terminated as an employee on 8 April 2021.

3.  The Plaintiff’s previous registered address was the residence of D2. D2 is the mother of D1.

4.  The Plaintiff operated a bar with a trading name of La Luna. FC and NC were allegedly responsible for daily operation of the bar. D1 was responsible, principally, for the financial side, including accounting, book-keeping, personnel, banking, managing the payroll and other administrative work. Each of the directors was supposed to receive salary and/or bonus in the same amount.

5.  The Plaintiff maintained a bank account with HSBC (“HSBC Account”) with 3 directors being its authorized signatories until D1 was removed as a signatory on 31 March 2021. Prior to his removal, any payment by cheque had to be signed by 2 of the 3 signatories. D1 had access to the ebanking system of the HSBC Account.

6.  There was no dispute that all cash income of La Luna would be passed to D1 for checking and he would be responsible for depositing it into the HSBC Account.

7.  There was no dispute that D1 had control of a Corporate Credit Card and had used it for his personal spending.

8.  Allegedly as a result of D1’s fraud, fraudulent misrepresentation, breach of trust and breach of director’s duties, the Plaintiff’s funds had been, amongst others, transferred or paid to D1 as unauthorized salary / bonuses / dividends and for personal spending; and to his affiliates without the Plaintiff’s authorization or commercial reasons. D1 used the Corporate Credit Card for personal expenses. He also fraudulently employed D2. The Plaintiff thus claimed against D1 for various heads of loss and damage to the tune of HK$15 million.

9.  In respect of D2, she was purportedly employed by the Plaintiff since 1 October 2016. The Plaintiff claimed that her employment, the services she provided or termination were never made known to or authorized by FC and NC. The Plaintiff therefore claimed against D2 for repayment of her purported salary in the amount of $2,348,000 (being HK$42,000 per month from 1 October 2016 to 31 May 2020 and thereafter at HK$50,000 per month from 1 June 2020 to 31 March 2021).

10.  The Defendants denied the claims against them.

11.  D1 did not deny having taken money from the Plaintiff but the general theme of his defence could be summarized as follows:

(1)  He had repaid by deposit into the HSBC Account by cash, cheque or bank transfer.

(2)  He put back cash into the cash pile for the business to be banked into the HSBC Account.

(3)  There was an account reconciliation exercise every year when the Plaintiff prepared its financial statements.

(4)  The amount owed by D1 to the Plaintiff should be set off against the amount owed by the Plaintiff to D1.

(5)  FC and NC as the other directors knew of and approved of the payments that were made by cheques as one of them had to sign on the cheques alongside D1 for the cheques to be valid.

(6)  What D1 had taken as salaries/bonuses/dividends were similar to the amounts received by FC and NC.

(7)  FC and NC themselves had taken cash of the Plaintiff and that was dealt with by account reconciliation as well.

(8)  FC and NC knew and approved of the employment of D2.

12.  D2 admitted receiving salary but only in the total amount of HK$742,600. Even the MPF records at best showed that she had received only HK$972,000. She claimed to have used past business experience to assist the Plaintiff and provided service as an employee.

13.  The Plaintiff denied D1’s defence for, amongst others, the following reasons:

(1)  D1 has not provided any substantial evidence on the agreement to let him use the Corporate Credit Card for his personal spending. He only purportedly dealt with 83 out of over 840 items of credit card spending. The explanations he offered defied commercial sense and appeared to be a cherry‑picking exercise of random deposits with irregular timing. Some items were for entertainment with customers and study of the Taiwan market which was not part of the Plaintiff’s business plan. The Plaintiff had evidence of D1’s admission to a regular customer that he had been using the Corporate Credit Card for his personal expenses;

(2)  D1 has failed to produce any evidence of cheque or bank transfer as repayment. He could only allege that he had repaid by cash, but the bank statements did not show who deposited cash or for what purpose;

(3)  If D1 had repaid by bank deposit or by adding cash to the cash pile to be banked in, the net cash inflow into the HSBC Account should have been larger than its revenue from its bar business, yet this was not the case;

(4)  The annual financial statements (which was the responsibility of D1 to prepare) did not accurately reflect the Plaintiff’s financial situation, as D1 had no record or recollection of whether certain payments by him or for him had been recorded properly, and there was no evidence to suggest that any sum owed to D1 was closely connected to any of the Plaintiff’s claims. The alleged account reconciliation was not supported by evidence of actual transfers and accounting record;

(5)  Cheques prepared by D1 included blank cheques pre-signed by FC or NC en-masse, on the basis that these were reserve cheques in case D1 made mistakes, but D1 breached FC and NC’s trust in him in using those cheques;

(6)  D1’s explanations on the Unauthorised Transfers Claim and the Unauthorised Salary Claim were not supported by or contradicted by contemporaneous documents;

(7)  Regarding the Unauthorised Transfer to Affiliates Claim, D1’s explanation that they were for investment not only did not make commercial sense, but it flew in the face of reason that the Plaintiff would have taken no action at all since 2016 to chase after the sum of HK$1,700,000 paid to “Lok Ka Fai” for alleged investment in his business and which as admitted by D1 was lost. The only explanation must be that none of the other directors had knowledge of this transaction; and

(8)  D1 had not and could not point to any specific incident where the income from the bar was misappropriated by FC and NC.

14.  The Plaintiff denied D2’s defence as bare assertions. It was D2’s own case that she would only communicate with D1 in respect of the company’s affairs. She had at most been assisting D1 in the discharge of his own duties, which was a far cry from the Plaintiff formally employing her. Her prior business experience could hardly be relevant to assist the Plaintiff’s business. The Plaintiff’s own evidence showed that other employees were not aware that D2 had ever been employed at La Luna.

C.  PROCEDURAL HISTORY

15.  Upon discovery of D1’s alleged dishonest conduct, a Mareva injunction was imposed on the Defendants on 26 March 2021, which was varied and extended on 1 April 2021 (collectively, “Injunction Order”). D1’s assets frozen by the Injunction Order amounted to HK$13,678,664; and D2’s HK$2,120,000.

16.  D2 paid HK$2,120,000 into Court, thus discharging the Injunction Order against her pursuant to the Court order dated 28 April 2021.

17.  On 20 September 2021, the Plaintiff made the first summary judgment application. It was dismissed by Recorder Pao SC on 17 January 2022 pursuant to Order 14, rule 1 (2)(b), RHC which then prohibited summary judgment to be entered in an action based on fraud.

18.  Meanwhile, on 11 January 2022 (after the rule was changed to permit summary judgment in a case of fraud), the Plaintiff took out the subject Order 14 application seeking partial judgment of HK$ 4.92 million for 5 heads of claim abbreviated as: (i) Unauthorized Transfers Claim; (ii) Unauthorized Payment of Salary and/or Bonuses Claim; (iii) Unauthorized Transfers to Affiliates Claim; (iv) Unauthorized Personal Spending Claim; and (v) Unauthorized Credit Card Spending Claim.

19.  The hearing took place on 22 August 2022 before Master Elizabeth Cheung who gave conditional leave to defend (“22 August Directions”). The parties were informed in writing on the 24^th (“24 August Directions”):

(1)  D1 do have leave to defend 4 out of 5 heads of claim (ie not including the Unauthorized Personal Spending Claim) on condition that D1 shall pay the sum of HK$4,160,773.66 into Court within 14 days from the date of the hearing (ie by 5 September 2022); and if payment in was not made, judgment be entered in favour of the Plaintiff; and

(2)  D2 do have leave to defend on condition that D2 shall pay the balance of the sum claimed by the Plaintiff in an unspecified amount within 14 days from the date of the hearing; and if payment in was not made, judgment be entered in favour of the Plaintiff.

20.  On 30 August 2022, the Defendants invited Master Elizabeth Cheung to withhold making a formal order until the Defendants were given an opportunity to adduce evidence on financial ability, relying on Liu Ke Mian Lorraine v De Xin Da Trading Co Ltd, HCMP 1481/2016, 30 September 2016.

21.  On 31 August 2022, Master Elizabeth Cheung agreed that the 24 August Directions were not a formal order. As there was inadvertent omission of the amount to be paid in by D2, Master Elizabeth Cheung directed that the condition was for D2 to pay HK$2,348,000 into Court within 14 days thereof (“31 August Directions”). The 22, 24 and 31 August Directions were eventually put together in the form of an order dated 22 August 2022 (“Summary Judgment Order”).

22.  On 6 September 2022, Master Elizabeth Cheung rejected the Defendants’ application by letter to file further evidence on impecuniosity for the reason that “there [was] no basis to ask for leave after the hearing when it was a live issue in the evidence filed for the purposes of, and as raised, at the hearing on 22 August 2022.” She considered that any application to be made should be done formally by way of a summons.

23.  On 13 September 2022, the Defendants lodged a notice of appeal:

(1)  Against the Summary Judgment Order (“Summary Judgment Appeal”);

(2)  Against Master Elizabeth Cheung’s refusal of the Defendants’ request to adduce further evidence on impecuniosity (“Further Evidence Appeal”); and

(3)  For extension of time to appeal, if necessary.

24.  Also on 14 September 2022, the Defendants issued a summons for stay of the Summary Judgment Order pending appeal.

25.  D1 did not fulfil the condition. D2 did not pay in the difference between HK$2,348,000 and HK$2,120,000. On 27 September 2022, judgment was entered against the Defendants on the terms of the Summary Judgment Order (“the Judgment”). The Defendants withdrew the 14 September 2022 summons.

26.  On 28 September 2022, the Plaintiff took out the subject summons for payment out of HK$2,120,000 paid in by D2 in partial satisfaction of the Judgment (“Plaintiff’s Summons”).

27.  On 29 September 2022, the Defendants filed the subject summons for stay of execution of the Judgment pending the appeal against the Summary Judgment Order (“Stay Summons”).

28.  At the call-over hearing on 12 October 2022, Master Dick Ho dismissed the Stay Summons but granted the Plaintiff’s Summons.

29.  On 12 October 2022, the Defendants issued a notice of appeal to appeal against Master Dick Ho’s orders.

D.  LEGAL PRINCIPLES ON APPEAL AND STAY OF EXECUTION

30.  An appeal against a master’s decision before a judge is by way of rehearing. The judge considers the matter afresh, giving weight to the reasons of the master as it deserves.

31.  The legal principles on granting a stay has been summarized by Chow J (as he then was) in Astro Nusantara International BV v PT Ayuna Prima Mitra (No 2) [2016] 1 HKLRD 591, §15, citing the judgment of Ma J (as he then was) in Star Play Development Ltd v Bess Fashion Management Co Ltd [2007] 5 HKC 84 as follows:

(1)  The applicant is required to demonstrate a good reason for a stay of execution and the minimum is the existence of an arguable appeal;

(2)  If the court is not convinced that there are arguable grounds of appeal, no stay will be granted, however exceptional the circumstances may otherwise be justifying a stay of execution;

(3)  On the other hand, the existence of a strong appeal will usually by itself enable a stay to be granted;

(4)  In most cases, where the court is faced with simply the existence of an arguable appeal, it becomes necessary for the applicant to provide additional reasons as to why a stay is justified;

(5)  Commonly, this is done by demonstrating that without a stay the appeal would be rendered nugatory, for example, because of an appreciable risk that the respondent to the appeal would not be able to repay in the event of a successful appeal against a money judgment, or because the failure to grant a stay would have a serious deleterious effect on the applicant; and

(6)  In considering an application for a stay pending appeal, it would be impractical and even undesirable for the court to go deeply into the merits or strengths of the appeal, although the court must still form a preliminary view of these aspects.

E.  LEGAL PRINCIPLES ON SUMMARY JUDGMENT

32.  The plaintiff must first show a prima facie sustainable case: Hong Kong Civil Procedure 2023, Volume 1, §14/4/1. The burden then shifts to the defendant to raise triable issues.

33.  Where the grant of final judgment will not obviate the trial, the Court is reluctant to give judgment for part of the claims, especially when it may make an incidental finding which may constitute an issue estoppel: Skillsoft Asia Pacific Pty Ltd v Ambow Education Holding Ltd (No. 2) [2016] HKLRD 1052, §§9(1), 10 and 15, A Chan J.

34.  This case is one of fraud, a tort committed with intent. Compelling evidence is necessary to establish it on the balance of probabilities. The fact that Order 14, rule 1 (2)(b) has been amended to allow summary judgment to be entered for a claim in fraud does not undermine this principle.

F.  ARGUABLE GROUNDS OF APPEAL

35.  As all parties acknowledged, Master Dick Ho went straight to consider the question of whether the summary judgment appeal would be rendered nugatory if no stay was granted without first considering whether there were arguable grounds of appeal. That, without disrespect, was a wrong approach in the light of Astro Nusantara, because if the Defendants were able to demonstrate strong grounds of appeal, that could itself have justified a stay.

F1.  Arguable grounds for the Summary Judgment Appeal

36.  It is not necessary to analyze the details of each party’s arguments although I have considered them. I took into account 2 factors as regards the case against D1.

37.  Firstly, both the Plaintiff and D1’s cases relied heavily on accounting documents and explanations of bank transfers, deposits or cash deposits. The Plaintiff had prepared documents at the request of D1 but, for reasons best known to himself, D1 did not collect the documents. He could hardly rely on the lack of documents to justify his lack of memory.

38.  The Plaintiff was able to demonstrate that for some items, D1’s explanations simply contradicted contemporaneous documents such as tax returns, which it was D1’s responsibility to prepare.

39.  However, D1 was able to show that he had purportedly paid back some of his personal expense through the Corporate Credit Card to the Plaintiff by cash, transfer or cheque, although according to the Plaintiff, that at best only accounted for 83 out of 840 items. He had also produced affirmations from ex-employees (“Lam” and “Zhang”). They purported to prove that FC and NC had taken cash from La Luna’s cash till 3-4 times per month and asserted that he would return the money later; that FC would cancel some of the invoices of his friends’ expenses at La Luna, and that D1 had paid for the Plaintiff’s expenses for the company trip to Thailand. They also claimed that the entries in the POS system might not reflect the whole picture because some of the cash expenses were not included.

40.  The Plaintiff, on the other hand, produced the evidence of FC and another employee (“SWW”), as to how the income of the bar was handled, to contradict D1’s case.

41.  To reject D1’s explanations would require the Court (i) to prefer the evidence of the Plaintiff over D1’s witnesses when there were factual disputes; (ii) to reject the annual financial statements which recorded the auditors’ belief that the audit evidence they had obtained was sufficient and appropriate to provide a basis for their opinion; and (iii) to reject D1’s case that FC/NC signed cheques with knowledge of the purposes and prefer the Plaintiff’s version that pre-signed cheques were used by D1 in breach of trust. These raise queues as to whether the Order 14 procedure was suitable.

42.  Secondly, there was risk of issue estoppel arising from entering the Judgment whilst the rest of the claim including a head called Revenue Shortfall Claim shall proceed to trial.

43.  The Revenue Shortfall Claim alleged that there was a shortfall between the cash revenue and the amount actually deposited into the HSBC Account (SOC §§36-40). The Plaintiff asserted that if D1 was allowed to run his defence of repayment by depositing into the bank or adding to the cash pile, the cash inflow of the HSBC Account should be larger than its revenue from La Luna.

44.  The implication of rejecting D1’s defence of repayment (and the evidence of Lam and Tsang) could mean that the Court accepted that the amount of cash revenue and the amount of bank deposit must be equal. This would prejudice D1’s defence to the Revenue Shortfall Claim, which did not form part of the application for summary judgment. Arguably, the risk of issue estoppel existed to render summary judgment inappropriate: Silksoft v Ambow.

45.  In view of these 2 factors, I am of the view that D1 has arguable grounds of appeal.

46.  In respect of the case against D2, I took into account 4 factors:

47.  Firstly, D2 admitted receipt of “salary” of HK$742,600, covering 2 periods of “employment by the Plaintiff” from 16 November 2016 to 8 January 2018; and June to October 2020. D2 denied receipt of the rest. The Plaintiff’s documentary proof, based on MPF documents, was that she received HK$972,000. The Plaintiff’s case was based on inference from D2’s monthly salary of HK$42,000 and HK$50,000, lack of record of “termination” and MPF documents to make out the balance of the HK$2,348,000. The Plaintiff’s case did not meet the principle in §32 above. It is arguable that D2 was at least entitled to unconditional leave to defend the difference between HK$2,348,000 and HK$972,000.

48.  Secondly, before Master Elizabeth Cheung, §103 of the Plaintiff’s skeleton submission asked the Court to infer that the Plaintiff had paid HK$2,184,000 to D2. And yet payment in of HK$2,348,000 was required, more than what the Plaintiff had asked for.

49.  Thirdly, following on from the first 2 factors, if the condition of payment in was limited to HK$742,600 or even up to HK$2,184,000, D2 might not have failed to meet the condition.

50.  Fourthly, giving part judgment to D2 based on her admission of the “salary” received and unconditional leave to defend the rest may create a risk of issue estoppel, barring her from disputing the fact that she was employed without authority and limiting her defence to one of quantum. It would, in turn, bar D1 from disputing that part of breach of director’s duties in employing D2 without authority.

51.  Given these 4 factors, D2 has strong grounds of appeal.

F2.  Arguable grounds of the Further Evidence Appeal

52.  It is true that the Defendants have failed, there and then on 22 August 2022, to ask Master Elizabeth Cheung for leave to file further evidence on their inability to meet the conditions: Liu Ke Mian Lorraine, §§24-25.

53.  It was only about one week after the hearing, but before the Summary Judgment Order was sealed, that they sought leave to do so. By then, about half of the time for them to comply with the conditions had elapsed. They used the wrong procedure of using a letter instead of a summons.

54.  However, even before Master Elizabeth Cheung, there was evidence that the Defendants might not be able to meet the conditions imposed. Firstly, they were subject to a disclosure order and there was nothing to suggest that they had failed to disclose their means in full. Their assets had been frozen to meet the Plaintiff’s claim. Secondly, the Plaintiff themselves sought to impress upon the Court that the Defendants were delaying proceedings so that the Plaintiff might end up in empty judgment.

55.  Subsequently, D1-12^th [1] and D2-3^rd, both filed on 14 September 2022, did disclose that the Defendants did not have means to meet the conditions.

56.  The Plaintiff doubted the Defendants’ alleged impecuniosity as early as in FC-4^th dated 23 September 2021, since D1 was found planning to set up a competing business to La Luna. However, FC-4^th was made in the context of D1’s summons to withdraw funds from his frozen assets. In the end, DHCJ Winnie Tsui gave leave to D1 to withdraw HK$229,877 to meet legal costs. It was a recognition that he did not have other available assets apart from the frozen ones. Therefore, even disregarding D1-12^th and D2-3^rd, the situation could only be worse 11 months later when he had to pay in over HK$4 million.

57.  In my view, the facts in Section F2 do disclose arguable grounds for the Further Evidence Appeal in that the learned Master had not given the Defendants an opportunity to address her on the conditions to be imposed and those imposed were tantamount to giving judgment against them.

G.  APPEAL MAY BE RENDERED NUGATORY

58.  In §59 of FC-3^rd, FC stated that there was a liquidity strain for the Plaintiff arising from the trying times of COVID-19 in 2020 and 2021. It was FC’s own evidence that while the Injunction Order helped secure the defrauded money at D1’s account, it could not assist the Plaintiff’s liquidity when it was most needed because the defrauded sum was locked up.

59.  The financial status of the Plaintiff was challenged in D1-14^th, §6, and yet the Plaintiff did not provide evidence in rebuttal. The Plaintiff’s submission before me was that there could not be any hard and fast rule that a trading entity could not continue to operate as a going concern or that it must have subsisting liquidity issues. With respect, a business might continue trading but it did not mean it did not have liquidity issues.

60.  On the evidence before me, I am satisfied that the appeal might be rendered nugatory in the sense that the Plaintiff may not be able to repay any judgment sum received in the event the Defendants succeed in the Summary Judgment Appeal.

61.  I therefore grant a stay of execution of the Judgment.

H.  PLAINTIFF’S PAYMENT OUT SUMMONS

62.  Given my decision on stay of execution, I am not satisfied that I should order a payment out of the amount of HK$2,120,000. As I am also of the view that there is risk of issue estoppel against D2, I am also of the view that even partial payment out of the amount she had admitted receipt of should not be entertained at this stage.

63.  There is no prejudice to the Plaintiff if no payment out is ordered because the Plaintiff is already protected by the Injunction Order. On the other hand, D2 may be prejudiced as the appeal may be rendered nugatory if a payment out order is made.

64.  I therefore adjourn the Plaintiff’s summons to be disposed of together with the Summary Judgment Appeal.

I.  CONCLUSION

65.  I find there to be arguable grounds of appeal for D1 and strong grounds of appeal for D2. The appeal would be rendered nugatory since the Plaintiff may not be able to repay the Judgment sums to the Defendants if the appeal is successful. Given these findings, it is not appropriate to order payment out of the amount paid in by D2.

66.  I therefore order as follows:

(1)  The appeal against Master Dick Ho’s order dated 12 October 2022 be allowed such that:

(a)  There be stay of execution of the Judgment pending the Summary Judgment Appeal; and

(b)  The Plaintiff’s summons for payment out is adjourned to be disposed of together with the Summary Judgment Appeal.

(2)  On a nisi basis,

(a)  costs of the Stay Summons before the Master be in the cause of the Summary Judgment Appeal.

(b)  costs of the Plaintiff’s Summons before the Master be in the cause of the Summary Judgment Appeal.

(c)  defendants, costs of this appeal (including certificate for Mr Vincent Lam) be in the cause of the Summary Judgment Appeal.

67.  I thank counsel and Oldham, Li & Nie for their assistance.