MEDISHINE INVESTMENT LTD v. CHIU HON CHING

HCA 640/2020

[2021] HKCFI 2900

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 640 OF 2020

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D E C I S I O N

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1.  This is an appeal brought by the plaintiff (“P”) against the order of Master Johnathan Wong giving unconditional leave to the defendant (“D”) to defend the action with costs in the cause save that the costs incurred after D’s affirmation filed on 5 October 2020 be paid by P to D in any event, with certificate for counsel.

2.  P contends that the Master erred in refusing to give final judgment against D given that the debt in the amount of $8 million (“Debt”) was recorded in the following documents signed by D when he was the sole director of P:

(1)     The “Representation Regarding Director’s Information to be Disclosed in Financial Statements and Directors’ Report” dated 23 January 2019 (“Representation”); and

(2)     P’s audited financial statements for the period from 22 December 2016 (date of incorporation) to 31 March 2018 (“2018 Accounts”) wherein the Debt was recorded as an “amount due from a director”, and Note 8 thereof identified D as the director in question.  The 2018 Accounts were approved by D on 23 January 2019. 

3.  D denies that he owes the Debt to P as he has never received $8 million from P. Nor has P provided any consideration for the Debt.  D contends that he signed the Representation and the 2018 Accounts in reliance on the advice given by P’s auditors, Messrs. I-Plus CPA Limited (“Auditors”).

Factual background

4.  Save where otherwise indicated, the following facts are not in dispute. 

5.  P was incorporated on 22 December 2016 with D as its sole director and shareholder holding 10,000,000 shares of $1 each.  D remained as such director until 25 September 2019. 

6.  P is an investment holding company and has not carried on any business in its own right.  Nor does it have any cash fund or any bank account.  P’s only asset is 20% shareholding in Medishine Limited (“ML”).

7.  ML was incorporated on 28 September 2016.  D was its sole shareholder holding 10,000 shares of $1 each, all of which were recorded as paid up.  ML carries on business as provider of medical, dental and medical beauty services in Hong Kong (“Business”).

8.  It is D’s case that he and 6 other persons are the founders (collectively “Founders”) of the Business.  Amongst them, D assumed the “frontman role” in that he held the initial share capital of ML and that of P upon their incorporation and was involved in the operations of the Business. 

9.  The Founders invited 12 investors (“Investors”) to contribute capital to the Business in the following amounts:

Investor	Amount
1) Wu Wenyong	$500,000
2) Yu Congyi	$2,500,000
3) Broadsight Holding Limited	$500,000
4) Suen, Lai Sheung	$250,000
5) Wang, Haobin	$500,000
6) Yi, Haiyan	$500,000
7) Chan Ping	$1,000,000
8) Team Smart Ltd	$500,000
9) Sample Healthy Company Ltd.	$1,000,000
10) Topstand Development Ltd	$500,000
11) PPP Venture Capital Ltd	$500,000
12) Zhang Yi	$1,500,000
Total	$9,750,000

10.  To record the agreement reached with the Investors, from December 2016, a 股份買賣協議書 (“Agreement”) was entered into between ML and each of the Investors. 

11.  The Agreement provides, inter alia, as follows:

“甲方 [ML] 公司為一家於香港註冊成立的有限公司。雙方經友好協商，就甲方持股平臺公司股份轉讓之事宜達成以下基本條款和條件：

1. 甲方成立悅仁醫療投資有限公司Medishine Investment Limited [P] (下稱 “目標公司”) 作為股東持股平臺。

2. 乙方 [Investor] 有意購買目標公司5%已發行股份 (“該股份”)。在完成該股份交易日，乙方將通過目標公司 [P] 持有甲方公司[ML] 1% 的股權。

3. 該股份轉讓的代價合共港幣500,000元 (“入股價”)。於簽署本股份文件5個工作日內，乙方須向甲方支付港幣500,000元或等值的港幣。

    甲方指定代收賬戶信息：Medishine Limited

    銀行名稱：HSBC 香港上海匯豐銀行

    賬戶號碼：[redacted]”

12.  Except Zhang Yi (who has not paid any amount), all the Investors paid the amounts payable under the Agreements into the bank account of ML. 

13.  On 2 January 2017, ML allotted 9,990,000 shares at $1 per share to 9 persons or entities including P (as to 2,000,000 shares) and the Founders (as to 7,760,000 shares) all of which were recorded as unpaid.

14.  According to the annual return dated 22 December 2017 and the annual return dated 22 December 2018 filed by P at the Companies Registry:

(1)     the paid up capital of P was $10,000,000 divided into 10,000,000 shares of $1 each;

(2)     from 24 January 2017 to 7 April 2017, D transferred 7,250,000 shares to some of the Investors, and he only held 2,750,000 shares in P; and

(3)     on 26 January 2018 and 9 November 2018, D transferred another 2,500,000 shares to the remaining Investors whereupon he only held 250,000 shares in P (representing 2.5% of its issued shares).   

15.  It is D’s case that the transfers of 9,750,000 shares in P to the Investors were made pursuant to the Agreements.  He has never received any payment or consideration from the Investors for the transfers of the shares in question. 

16.  As stated above, on 23 January 2019, D signed the Representation and the 2018 Accounts qua sole director of P. 

17.  On 25 September 2019, Mr Tse Chi Yeung (“Tse”), who owned and controlled one of the Investors, replaced D as the sole director of P.

18.  By letter dated 18 December 2019 Messrs. Yiu & Associates (“Y&A”), on behalf of P, referred to the 2018 Accounts and demanded D to pay the Debt.  By another letter dated 24 December 2019 Y&A provided a copy of the 2018 Accounts to D for his reference. 

19.  On 6 January 2020, P served a statutory demand on D requiring him to pay the Debt within 21 days thereof. 

20.  In the letter dated 10 January 2020, D through Messrs. HY Leung & Co denied that he owed the Debt to P and suggested that an independent auditor should be appointed “to audit the financial records of [P] since the date of its incorporation so as to uncover and ascertain how the [Debt] arose and originated in the first place”.  This was rejected by Y&A on 22 January 2020. 

21.  On 13 May 2020, P issued the writ indorsed with a statement of claim (“SOC”) claiming repayment of the Debt.  The only material facts pleaded in support of claim are that (1) the Debt was recorded in the 2018 Accounts as due from D; (2) the 2018 Accounts had been audited by the Auditors and signed by D; and (3) the demands issued against D which remained unsatisfied.

Applicable principles

22.  The principles governing application for summary judgment are well settled.  The following principles are particularly apposite to the present case:

(1)     Summary judgment will only be granted on the claims set out, and facts pleaded, in the statement of claim.  The statement of claim must be complete and good in itself; any defect or omission cannot be corrected or supplemented by the plaintiff’s affidavit (Wong Chow Hoi Sze Elsie v Crown Wine Cellars Ltd, CACV 262/2015, §10 (CA); Hong Kong Civil Procedure 2021, §14/1/5). 

(2)     Where genuine weaknesses are exposed in the plaintiff’s case, this detracts the plaintiff’s right to summary judgment (Billion Silver Development Ltd v All Wide Investments Ltd [2000] 2 HKC 262 (CA), 268C-D).

(3)     If the plaintiff satisfied the preliminary requirements for proceeding under O.14, he is prima facie entitled to judgment unless the defendant shows cause to the contrary.  The burden then shifts to the defendant to satisfy the Court why judgment should not be given against him by demonstrating that there is a triable issue or that for some other reason there ought to be a trial or any other circumstances showing reasonable ground of a bona fide defence (Hong Kong Civil Procedure 2021, §§14/4/1, 14/4/2, 14/4/9B). 

Discussion

23.  Mr Douglas Lam SC (leading Ms Sabrina Ho and Mr Tommy Cheung), counsel for P, submits that the Representation and the 2018 Accounts “are clear and unequivocal documentary evidence of the existence of the Debt”.  Reliance is placed on:

(1)     Kong Sun Engineering & Construction Company Limited v Lam Pong Siu Calvin,HCA 5272/1998, 6 August 1999, where Ribeiro J (as he then was) held (at §§5-10, 12, 22) that an audit confirmation signed by the defendant as director was a clear admission by him that there was a sum due from him to the company.  Further, the director’s act in signing the directors’ report annexing the financial statements clearly indicated the existence of the debt, and the Master was right in giving summary judgment against the defendant.

(2)     Sections 379-380, 382-383 and 387 of the Companies Ordinance (Cap 622) (“CO”) and s.15(3)(c) of the Companies (Disclosure of Information about Benefits of Directors) Regulation (Cap 622G) provide that D, as director of P, must ensure that the 2018 Accounts give a true and fair view of the financial position and performance of P, and record any  loans advanced by P to its directors accurately. 

(3)     Re Cyberworks Audio Video Technology Limited[2020] HKCFI 398, where Coleman J held (at §64) that it is a minimal requirement that a director must scrutinise the contents of the company’s financial statements and ensure, as far as possible and reasonable, that the information included therein are accurate before adopting the financial statements.  Similar holding in Willwin Development (Asia) Company Ltd & Anor v Wei Xing & Ors, HCA 797/2012, 8 March 2016, at §45 perMimmie Chan J. 

24.  Mr Lam submits that D has advanced “evolving versions of events” in his pre-action letter, his Defence and his affirmation filed in opposition to the application in that:

(1)     D’s initial position was to deny liability and suggested appointment of an independent auditor to “uncover and ascertain how the [Debt] arose and originated”, giving the impression that he had little idea as to how the Debt had arisen;

(2)     In his Defence, D claimed that he signed the 2018 Accounts in reliance on the Auditors’ advice that in order to reconcile P’s books of account, an entry showing the Debt had to be included and the entry would be reversed and properly dealt with in P’s future audited accounts (“Advice”);

(3)     In D’s affirmation, he advanced a “suspicion” as to how the entry of the Debt arose.  In short, there was an alleged consensus between the Founders, inter alia, that (“Consensus”) they would arrange investors to invest $10 million into the Business by acquiring shares in P, and the funds paid by the investors would be used as ML’s operating cash flow.  D held all the issued shares in P to facilitate the  transfer of the shares to the Investors.  He “suspected” that the amounts paid by the Investors should have been paid to P in return for the shares in P, but the same were paid into ML’s bank account.  Hence, the Debt should be owed by ML rather than by D.  Alternatively, even if D were to be responsible for any part of the Debt, it should be limited to $250,000, which represents the 250,000 shares he holds in P;

(4)     the Advice was not addressed to D, as it was another Ms Joanna Tang (one of the Founders) who was responsible for handling P’s accounts;

(5)     the 2018 Accounts “could be one of the documents” within a pile of documents which his administrative assistant, Ms Renee Chen, gave him to sign on 23 January 2019.  He did raise a query about the accounting entry of the Debt and “it should be Renee Chen who told [him] about the Advice from the Auditor[s]”; and

(6)     D signed the 2018 Accounts without much concern, as it was consistent with the Consensus. 

25.  Mr Lam submits thatnone of the versions advanced by D are capable of being believed or diminish the strength of contemporaneous documentary evidence against him given that:

(1)     the 2018 Accounts clearly recorded that (a) P’s paid up capital is $10,000,000 and 10,000,000 shares of $1 each were issued to D at the time of its incorporation; and (b) P’s investment in ML was only $2,000,000[1], which is consistent with its 20% shareholding in ML;

(2)     the Auditors have in their letter dated 6 August 2020 “firmly denied” that they had given the Advice to D;

(3)     D’s complaint to HKICPA against the Auditors and his draft Third Party Notice against ML is wholly irrelevant as any such claim is no defence to P’s  claim; and there is no evidence to show that HKICPA considered the complaint to have any substance;

(4)     there is no record that ML owed the Debt to P;

(5)     P was not a party to the Agreements.  There is no evidence that the funds paid by the Investors into ML’s bank account (which appears to have resulted in ML’s increase in issued share capital from $10,000 to $10,000,000 in January 2017) has any connection with the Debt; and

(6)     the WhatsApp and WeChat messages exhibited by D do not assist his case as Tse only confirmed his knowledge of the Agreements.  There is nothing to suggest that Tse or P was aware of D’s alleged belief regarding the accounting entries in the 2018 Accounts. Neither Ms Joanna Tang nor Mr Fu Di (both Founders) has come forward to give evidence for D and the messages exhibited are incomplete.

26.  In any event, on D’s own case, he never paid for the 10,000,000 shares issued to him.  As such, the Debt arose from P’s loan to D for acquisition of those shares.  Irrespective of whether D, as P’s sole director at the time, caused P to act in breach of s.275 of the CO, it is clear from s.276 of the CO that any such breach does not affect the validity of the transaction.

27.  In my view, the Master is right in refusing to give summary judgment against D.

28.  First, the only basis for claiming repayment of the Debt, as pleaded in the SOC, is the “amount due from a director” as recorded in the 2018 Accounts.  However, P is unable to show that it has paid $8 million or provided any consideration for the Debt to D.  This is unsurprising as there is no dispute that P has never had $8 million or any amount which it could pay to D.  For this reason alone, summary judgment cannot be granted.   

29.  Second, it is not open to P to contend that on D’s own case, the Debt arose out of the 10,000,000 shares issued by P to him as this is not a case pleaded in the SOC. 

30.  Third, D’s assertions as to why he signed the Representation and the 2018 Accounts, which are disputed by P, are not issues which can be resolved without a trial having regard to the following facts and matters:

(1)     the Investors had paid the amounts payable on the shares transferred to them by depositing the same into ML’s bank account, and D transferred the corresponding number of shares in P to the Investors;

(2)     D is a medical practitioner and was not familiar with accounting matters.  Nor was he involved in preparing the 2018 Accounts;

(3)     there is some evidence to suggest that the person(s) responsible for preparing the 2018 Accounts and the Auditors had made a mistake in respect of the “amount due from a director”.  In the Representation prepared by the Auditors, it was stated that on 31 March 2018, P advanced a loan in the amount of $8 million to D.  There is considerable doubt as to whether P did advance the alleged loan to D for the reasons stated in §28 above; and

(4)     it is plausible that the Auditors gave the Advice to P’s staff (which was subsequently related to D) at the time the 2018 Accounts were prepared as (a) the 2018 Accounts recorded P’s paid-up capital at $10,000,000 but its only asset was an “investment in an associate” in the amount of $1,979,445.  The difference between equity ($9,970,245[2]), liability ($9,200) and asset ($1,979,445) was accounted for by an “amount due from a director” ($8,000,000). This is reinforced by the contents of the Representation. 

31.  It seems to me that if, as D asserts, he signed the 2018 Accounts in reliance on the Advice, there is a proper basis for P to reverse the entry in respect of the “amount due from a director”. 

32.  As the action will proceed further, it is not necessary for this Court to express any view on the other arguments advanced by Mr Lawrence Cheung and Ms Shirley Leung, counsel for D, in their skeleton submissions. 

33.  For the above reasons, the appeal is dismissed.

34.  As for costs, I make a costs order nisi that P shall pay the costs of and occasioned by the appeal to D, to be assessed by way of gross sum assessment.  I do not think this is a case which warrants the appearance of 2 counsel.  D has lodged a statement of costs claiming $184,070.10 as his costs of the appeal.  It seems to me that the amount claimed is on the high side, bearing in mind that counsel has been instructed to deal with the arguments and the solicitors were only involved in dealing with the agreed dramatis personae, agreed chronology and attending the hearing which lasted for an hour.  I am inclined to assess the costs at $125,000, which commensurate with the amount claimed in P’s statement of costs.  I give liberty to P to provide its comments on D’s statement of costs, if any, within 3 days of this Decision if it contends that the assessed costs should be of a lower amount.