COMPREHENSIVE AUTO RESTORATION LTD v. LEE SENG SIEW

CACV 159/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 159 OF 2012

(ON APPEAL FROM HCA 960/2011)

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BETWEEN

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Hon Cheung JA :

1.  The plaintiff obtained summary judgment from Master Kwang against the defendant in the sum of HK$2,317,672 with interest. The defendant appealed to Chung J but was unsuccessful. He then appealed to this Court. We dismissed the appeal at the conclusion of the hearing. I now give reasons for the dismissal.

The plaintiff’s case

2.  The plaintiff’s case is a simple one.  The defendant was a former shareholder and director of the plaintiff. As at 31 August 2008 the defendant was indebted to the plaintiff in the sum of HK$2,317,672 (‘the debt’).  The defendant had admitted this debt.  The debt was shown in the balance sheet of the Financial Statements of the plaintiff for the year ending 31 December 2008.  The amount was described under the Current Assets of the plaintiff as ‘Amount due from a director’.  Under the Notes to the Financial Statements, this amount is described as follows :

‘ 12. AMOUNT DUE FROM A DIRECTOR

Name of a director	At 31.12.2008 HK$	At 01.01.2008 HK$	Maximum amount outstanding during the year HK$
Lee Seng Siew [i.e. the defendant]	2,317,672	963,792	2,317,672

The amount due from a director is unsecured, interest-free and has no fixed repayment terms.’

3.  The Financial Statements were approved and authorised for issue by the Board of Directors of the plaintiff on 14 August 2009.   The defendant was one of the two directors who approved and authorised the issue of the Financial Statements.  

4.  The defendant ceased to be a shareholder of the plaintiff on 28 August 2009.  On that day he sold and transferred his 120,000 ordinary shares of HK$1 each (total $120,000) in the plaintiff in favour of Mr. Lam Man Kuen (‘Mr. Lam’). 

5.  On 28 August 2009 the defendant also resigned as a director of the plaintiff.  

6.  The plaintiff issued an invoice dated 16 November 2010 demanding the defendant to repay the debt. 

The defence

7.  The defendant denied that he was indebted to the plaintiff.  He had filed a defence.  This is what he said :

‘ 5. ……

(1) The Plaintiff was founded by the Defendant in 1990;

(2) Prior to the sale and transfer of the Shares on 28^th August 2009, the Defendant solely owned and controlled the Plaintiff.

(3) The Defendant also owned and controlled CARS (Hong Kong) Limited.

(4) By an agreement made orally between the Plaintiff, the Defendant and Kwok on or about 26^th August 2009, it was agreed inter alia that in consideration of the Plaintiff’s relinquishing its claim for the sum of $2,317,672 due from the Defendant to the Plaintiff, the Defendant should transfer all the shares in the said CARS (Hong Kong) Limited and in the Plaintiff to Kwok and/or his nominee(s), and the Plaintiff then accepted Kwok as its debtor for the said sum of $2,317,672 in consideration of the discharge of its claim against the Defendant.

(5) The Defendant accordingly transferred the Shares to Lam who held them as nominee for Kwok pursuant to such agreement.

(6) The aforesaid agreement and its performance accordingly was accepted in discharge of the Plaintiff’s alleged cause of action.’

8.  The defendant further stated that he sold the shares to Mr. Kwok Hey (‘Mr. Kwok’) and it was pursuant to Mr. Kwok’s request that the shares were transferred to his nominee, Mr. Lam.   

9.  The defendant expanded on his defence in his affirmation dated 24 September 2011 filed in opposition to the Order 14 summons :

1) The defendant was a businessman with business in Malaysia, Singapore and Hong Kong. His business consisted of two types : car beauty business and also bird’s nests food products.  He owned a number of companies in Hong Kong including the plaintiff and Lo Hong Ka Birdnests Wholesale Limited (‘LHK Wholesale’).  Mr. Lam and Mr. Kwok were two of his former employees.  Mr. Lam was the Operation Manager and Mr. Kwok, the General Manager. 

2) In 2009 Mr. Kwok misled him into believing that the prospect of his business in Hong Kong was not good and he should dispose of his business.  He then decided in August 2009 to let Mr. Kwok acquire his car beauty and bird’s nests food products businesses in Hong Kong.  The companies he transferred to Mr. Kwok included the ownership of the plaintiff and LHK Wholesale.  This is what he said about the transfer :

‘ 13. Prior to the acquisition, Harry [Mr. Kwok] told me that he could only pay me a nominal sum (i.e. at par value per share). He said I could treat the sum of HK$1 million that he had previously loaned to LHK Wholesale as part of the consideration. And Harry promised me that he would take over my liability for the Indebted Sum since it was actually lent to LHK Wholesale, the business of which he was also to acquire. As I was in effect the sole shareholder and managing director of the Plaintiff, I readily agree to this promise for and on its behalf. Harry further asked me to bear the tax liability of LHK Wholesale prior to 2009. At that time, Harry represented to me that this would be about several million Hong Kong dollars but this turned out to be over HK$10 million. And Harry said unless I agreed, the acquisition was not going to work. However, in return for my undertaking to pay the tax, Harry offered to pay me a monthly fee (under the name of consultancy fee) of $80,000. Eventually, I agreed and Harry later gave me a memorandum of understanding (“the Memorandum”) for signature. (emphasis added)

14. There is now produced and shown to me and marked exhibit “LSS-1” a copy of the Memorandum.  There is simply no reason why Harry would agree to pay me this monthly fee if the Indebted Sum was still due from me.  There is also now produced and shown to me and marked exhibit “LSS-2” copy extracts from my bank statements which clearly showed that a sum of $79,000 was transferred to me in each of the 9 months from August 2009 to April 2010.  I believe a sum of HK$1,000 was deducted each month for the Mandatory Provident Fund payment.’

3) The defendant further claimed that :

‘ 17. …. it is an affront to common sense to suggest that I would ever agree to let Harry to acquire my car beauty and bird nests businesses in Hong Kong at par value per share whilst assuming at the same time liability not only for the Indebted Sum but also such a huge tax liability for LHK Wholesale. As a matter of fact, the Plaintiff’s balance sheet as at 31^st December 2008 clearly showed that a sum of $5,498,158 was due from the Plaintiff to related companies. Although I am now unable to recall the precise identities of these related companies, they were no doubt members of the Group i.e. companies owned and controlled by me (or my nominees). There is simply no reason why I would agree not to set off this indebtedness against the Indebted Sum if I were actually responsible for it. Obviously, I would be much better off financially if I were to have the Plaintiff and LHK Wholesale wound up.’

4)  The following is a translation of the Memorandum which was in Chinese :

‘ Memorandum of Understanding

  Background: As the owner of Comprehensive Auto Restoration Limited (hereinafter called “Comprehensive Auto Company”), Mr. Lee Seng Siew (hereinafter called “Party A”), wishes to concentrate on the development of biolyn’s business and hence decided to transfer Comprehensive Auto Company to Mr. Lam Man Kuen (hereinafter called “Party B”).  The two parties have reached the following consensus:

1. Party B agrees to use the HK$l million, which has been paid previously on behalf of Party A to Lo Hong Ka Birdnests Wholesale Limited to settle arrears on the bird’s nest (payment), as consideration for the transfer of the company.

2. Party B undertakes that after the share transfer, the company will continue to be responsible for all the existing creditor’s rights, debts and assets and liabilities of “Comprehensive Auto Company”.

3. Party B shall employ Party A as a life consultant of “Comprehensive Auto Company”. The consultancy fees shall be HK$80,000 per month.

4. If the operation of the company shall meet with difficulties, Party A out of understanding agrees that Party B may delay the payment of the consultancy fees.

5. If the existing business premises shall cease to operate, Party B will return the rental deposit of the premises to Party A.’

The plaintiff’s response

10.  The plaintiff denied there was any oral agreement that the defendant would no longer be responsible for the debt.  The real reason for the defendant to dispose of his Hong Kong businesses was that the Inland Revenue Department (‘IRD’) was investigating into the financial affairs of the defendant and his businesses in Hong Kong since 2006.  The IRD had taken action to freeze the bank accounts of his Hong Kong businesses.  

Mr. Edward Shum’s argument

11.  Mr. Edward Shum, counsel for the defendant, submitted in gist that :

1) An application for summary judgment Order 14 is a peculiar proceeding, it is only intended to apply to cases where there can be no reasonable doubt that a plaintiff is entitled to judgment : Jones v Stone [1894] AC 122 at 124; Clarke v Union Bank of Australia Ltd. [1917] 23 CLR 5 at 8.

2) The legal burden remains upon the plaintiff to persuade the Court that he is entitled to summary judgment, the party showing cause against the application assumes an evidential burden by that process : Cordinup Resorts Pty Ltd & Others v Terana Holdings Pty Ltd (1997) 143 FLR 18 per Murray J at 24.  (Supreme Court of Western Australia (Full Court)).

3) Paragraph 14/4/1 of the Hong Kong Civil Procedure 2013 (Vol. 1) (‘HKCP’) is imprecise because one of the most important considerations, namely, whether the plaintiff has shown on the whole of the material that there can be no reasonable doubt that he is entitled to judgment, is missing.

4) The correct approach is stated by Ribeiro J (as he then was) in Billion Silver Development Ltd. v All Wide Investments Ltd. [2000] 2 HKC 262 at 268.  In that case the judge ordered conditional leave to defend because the defence was shadowy. Ribeiro J held that :

‘ The judge also acknowledged that, in developing his arguments as to weaknesses in the plaintiff's case, Sir John Swaine SC (appearing with Miss Linda Chan for the defendant) may have sown what he called “seeds of suspicion” in relation to the plaintiff’s case. The judge held that some of these matters could be reasonably explained away but that others, which he did not identify, remained “in the realm of suspicion and speculation”. However, this did not save the defendant from having terms imposed on it as a condition of allowing it to defend the case because the judge was not persuaded that such doubts raised the defence beyond the category of “shadowy”.

          With respect, this was not the correct approach to the exercise of the judge’s discretion.  The importance of there being doubts or suspicion as to the validity of the plaintiff’s case is that such doubts detract from the plaintiff’s right to summary judgment.  It was not to the point to dismiss them on the basis that they did not improve the quality of the defence and “raise it” beyond the category of “shadowy”.  If possibly genuine weaknesses were exposed in the plaintiff’s case, this casts doubt on the plaintiff’s right to invoke the summary procedure in the first place.’

5) The judge erred in failing to consider in the first place whether there were possible doubts or suspicion as to the validity of the plaintiff’s case which would detract the plaintiff’s right to summary judgement.  The judge never dealt with in his judgement the doubts or suspicion raised by the defendant on the plaintiff’s case at all. 

6) It defies common sense to suggest that the defendant would be so generous as to assume the debt and also the huge tax liability of LHK Wholesale in the sum of HK$8,113,952 while he agreed to dispose of all his interests in the plaintiff for the mere sum of HK$120,000. 

7) An agreement must have been reached between the parties on the liability for the debt because according to the plaintiff’s Financial Statements as at 31 December 2008, apart from the debt, a total sum of HK$10,952,099 was said to be due from related companies within the defendant’s groups of companies.  This being the case it is only natural that the parties would agree on the future liabilities for those inter-companies loans as well as the debt before the defendant disposed of all his shareholdings in the plaintiff.

8) Contrary to the plaintiff’s case that the true cause of the defendant’s decision to dispose of the Hong Kong business in 2009 was the problem arising from the IRD’s investigation, the defendant actually took a proactive role in resolving his tax disputes with the IRD.  

9) The judge failed to appreciate the importance of the documentary evidence in this case.  The defendant’s lawyers had sent some draft documents to the plaintiff. Upon receipt of these documents, the immediate response of the plaintiff was not to demand the defendant to settle the debt, but rather :‘關於卡士我們與李先生已有現成的協議，並且該協定經已在執行，似乎沒有再另定協議的必要’(‘Regarding [the plaintiff] we and Mr. Lee have an existing agreement and which is being executed.  There seems to be no need for making another agreement.’)  

10) As to the judge’s observation that the agreement relating to the debt was never stated in any of the drafted legal documents prepared by the solicitors, all that the defendant has to establish is a state of facts that displaces the prima facie effect of the statement of the mere belief of the plaintiff that there is no defence to the action.  Further, even if certain aspects of the evidence may be found wanting or unsatisfactory it does not necessarily render the defence incredible and whether the defendant’s case is to be believed is a matter for trial : Wellship Co. Ltd. v Ngan Chung Leung (unreported) CACV No. 174 of 2002; 2^nd October 2002 at paragraph 10.

11) There was also an agreement for the plaintiff to pay consultancy fee to the defendant.  After the plaintiff had stopped the payment in April 2010, the plaintiff did not immediately demand the defendant to pay the debt.  The demand was only made on 16 November 2010.

My view

12.  Order 14 is a well established and useful summary procedure which enables the Court to dismiss an unmeritorious defence and give judgment to the plaintiff without going through a full trial.  The starting point in an Order 14 application is that the plaintiff must show that there is no defence to its claim.  This is specifically required by Order 14, Rule 1(1).  If the plaintiff knew that the defendant relied on a contention which would entitle him to unconditional leave to defend, the Court may dismiss the application with costs instead of ordering leave to defend : Order 14, Rule 7(1).

13.  The explanatory notes in the HKCP are succinct summary of principles, extracted from authorities, applicable to that procedure.  Many of these explanatory notes are in the main based on the same notes contained in the pre 1999 edition of the English Supreme Court Practice (‘SCP’).  Paragraph 14/4/1 in the HKCP is also found in the English SCP before the introduction of the English Civil Justice Reform. 

14.  Paragraph 14/4/1 states that :

‘ In every summons under O.14, the first considerations are (1) whether the case comes within the Order, see para. 14/7/2 “Dismissal where the case is not within the Order” and (2) whether the plaintiff has satisfied the preliminary requirements for proceeding under O.14, see para. 14/1/3 “Preliminary requirements”. If the plaintiff fails to satisfy either of these considerations, the summons may be dismissed; if, however, these considerations are satisfied, the plaintiff will have established a prima facie case, and he becomes entitled to judgment. The burden, as it were, then shifts to the defendant to satisfy the court why judgment should not be given against him.’ (emphasis added)

15.  I disagree with Mr. Shum that paragraph 14/4/1 is materially lacking in an important requirement, namely, the plaintiff being required to establish there is no defence to its claim.  This is because if the plaintiff cannot even establish in the first place that its claim comes within Order 14, the application must be dismissed.  The first consideration stated in this paragraph clearly includes a requirement that the plaintiff has to show that there is no arguable defence in the first place.

16.  In my view, no useful purpose is served, as in the Western Australian approach, by a conceptual discussion whether the burden on the plaintiff to show there is no arguable defence is a legal burden and that the defendant carries with him an evidential burden only.  Whether and how the plaintiff can show there is no defence to its application for summary judgment must be considered in the context of each case.  The starting point must be the nature of the claim itself.  Order 14 is clearly not intended to be used where there are complicated facts and law involved.  By contrast the present claim is a simple one.  It is based on a debt which is quantified and there was a clear admission that this sum was due from the defendant to the plaintiff.  This is a classic example where an Order 14 application can be properly resorted to.

17.  What then is the defence to this simple claim?  The defendant relies on an oral agreement between the parties that Mr. Kwok or Mr. Lam who acquired the shares of the plaintiff would cause the plaintiff not to pursue this sum against him.  There is no indication that the plaintiff was aware of this defence before the defendant filed his defence (the fact that a defence was filed is not an obstacle to an Order 14 summons).  This is again a classic example of the defendant being required to show cause why summary judgment should not be granted against him.  The defendant may, for example, rely on contemporaneous documents confirming the existence of the oral agreement or rely on the conduct of the parties which shows that the parties proceeded on the basis of such an oral agreement. However, none of these was shown by the defendant.  To the contrary, the documents produced by the defendant not only failed to confirm the existence of an oral agreement but actually pointed towards its non-existence.  The Memorandum (which Mr. Kwok denied was given by him to the defendant for signature) only bore the defendant’s signature and was not signed by Mr. Lam despite his name being stated at the lower part of this document. It also did not contain any reference to the oral agreement.  If the parties had actually taken the trouble of preparing a memorandum for the transfer, I really see no reason why the terms of the oral agreement should not be included as well.  After all it was a simple term of the defendant not being further held liable for the debt.

18. Then came the email of 1 December 2009 from the defendant’s lawyer sending the second draft of seven documents to Mr. Kwok.  The defendant only chose to produce one of the documents, namely, the draft consultancy agreement.  There was again no reference of the oral agreement in this draft.  One would have thought, if it dawned on the defendant four months after the transfer that proper documentations should be prepared, that the terms of the oral agreement should be included in this new document. This did not happen.  The response from Mr. Kwok that they already had an agreement in place, far from being an admission that he was in the wrong, was in fact a contemporaneous denial of the defendant’s case.

19.  In respect of the defendant’s argument that there was no reason for him to be continuously responsible for the tax liabilities of LHK Wholesale, again there was no reference to this in the draft consultancy agreement.  The reference to tax liability in the draft consultancy agreement was only in respect of the defendant’s tax liability on the consultancy fee.

20.  The defendant’s case on his role as a consultant was also contradicted by the documents he produced.  While the Memorandum stated he was hired as a consultant for life, the draft consultancy agreement referred to a term of six years.  Mr. Alfred Chan, counsel for the plaintiff, had further showed that according to the defendant’s bank statements, the so-called payment of the consultancy fee was described as ‘LO HONG KA BIRD NESTS SALARY/W’.  It had nothing to do with the plaintiff.  Further after the transfer on 28 August 2009, the defendant remained as a director and shareholder in LHK Wholesale until 31 March 2010.  The alleged payment did not advance the defendant’s case.

Conclusion

21.  In my view the plaintiff had plainly established that there was no defence to its claim and summary judgment was properly entered against the defendant.  The appeal was accordingly dismissed with costs to the plaintiff.

Hon Yuen JA :

22.  I agree with the reasons set out in Cheung JA’s and Lam JA’s judgments and that the appeal be dismissed with costs to the plaintiff.

Hon Lam JA :

23.  I respectfully agree with the judgment of Cheung JA.  I only wish to add some observations on Mr Shum’s reliance on Billion Silver Development v All Wide Investments Ltd [2000] 2 HKC 262.  The Court of Appeal in that case applied the approach of Watkin LJ in Extraktionstechnivk Gesellschaft Fur Analagenbau MbH v Oskar (1984) 128 SJ 417.  The relevant principle was cited by Ribeiro J (as he then was) at p.269A to E.  The material parts of the judgment concerning examination of the plaintiff’s case are as follows,

‘ If that examination arouses suspicions that the claim may be made in bad faith or there is something shadowy about it or, worse, that it may be tainted with illegality, no measuring, however approximate, of the respective degrees of possible bad faith should be made and no opinion expressed, however tentative, as to which case appears to be the stronger at that time.

That in our judgment is a classic instance in which in principle the court should give unconditional leave to defend.’

24.  For the reasons given by my Lord, I cannot see anything suspicious in the plaintiff’s claim in this action.  Nor can I see anything shadowy about that claim.  It is a claim admitted by the defendant though he said there was an oral agreement for the debt to be discharged by Mr Kwok.  The defendant simply failed in setting up a believable defence with regard to this alleged oral agreement. In such circumstances, the appeal must be dismissed.