SHEK WANG SANG v. LI TIN SANG

HCA12478/97

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 12478 OF 1997

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J U D G M E N T

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1. The Plaintiff claims against the Defendant for the recovery of a debt due and owing for the sum of HK$500,000 which was lent by the Plaintiff to the Defendant as evidenced by a written memorandum written in Chinese, signed by the Defendant and dated 9th November 1995 in which the Defendant agreed to repay the loan unconditionally within two years.

The Plaintiff's Case

2. The Plaintiff bases his entire case on the written memorandum signed by the Defendant. This memorandum as translated, (the translation being agreed by the parties) reads :-

" LOAN FROM CHIU CHUN TAK, FINAL AGREEMENT

Now received from Mr Shek Wang Sang a loan in the sum of HK$500,000.00 (Hong Kong Dollars Five Hundred Thousand only) (Hongkong Bank cheque no.474305) and agreed to repay unconditionally within two years.

I at the same time write out a HK$500,000.00 (Hong Kong Dollars Five Hundred Thousand only) two-year post-dated cheque (dated 30th of October 1997) for the repayment of the above-mentioned loan.

 

(Signature)

__________________

Li Tin Sang

9th of November 1995."

3. It is not disputed that the signature on this memorandum is that of the Defendant.

4. It is also not disputed that a Cashier Order from the Hongkong Bank bearing number 474305 for $500,000 was paid by the Plaintiff into Texbloom (China) Ltd., a company controlled by the Defendant, at the request of the Defendant on or about 9th November 1995. The Plaintiff gave evidence that this amount of $500,000 has not been repaid to him to date. Again this is not disputed.

5. The Plaintiff also gave evidence that at the time of signing the memorandum. The Defendant did not make out a post-dated cheque to the Plaintiff for $500,000 as security as he was obligated to do under the memorandum. Thereupon, the Plaintiff had by letters dated 8th April, 27th June, 17th September 1996 and also 6th June 1997 requested from the Defendant the post-dated cheque for $500,000, but received no replies from the Defendant to these letters. When the Defendant failed to reply, the Plaintiff had written two further letters by registered post to the Defendant making the same request. These two registered letters were dated 8th October 1997 and 28th October 1997. Still the Defendant did not give any reply. Copies of all those letters as well as the two registration certificates were produced by the Plaintiff into evidence.

6. Apart from the above letters, the Plaintiff also gave evidence that he had phoned the Defendant on about 10th October 1997. In that telephone conversation, the Plaintiff said that the Defendant acknowledged receiving the Plaintiff's letters and told the Plaintiff that he would attend to the post-dated cheque matter later.

7. Not satisfied with that, the Plaintiff called the Defendant by phone again on 21st October 1997. On this occasion the Plaintiff took the precaution of tape recording this phone conversation between them. This tape recording as well as a transcript and agreed translation thereof was produced into evidence. The relevant part of that phone conversation between the Plaintiff and the Defendant is as follows :-

"Shek : You said you would call me last week

Li : 2 more days, OK?

Shek : 2 more days, the post-dated cheque will be due next week on 30th, please help me, I am poor, big bother.

Li : Take it easy, Shek

Shek : I am really poor.

Li : I am also poor, not only you.

Shek : Next week, when? When is it ready?

Li : I will call you in 2 days' time, OK?

Shek : Please deal with it this week, OK?

Li : O.K."

8. When after 9th November 1997, the two years term for the loan had expired, the Plaintiff's solicitors wrote to the Defendant on 18th November 1997 demanding repayment of the loan and the Writ was issued the following day.

The Defence Case

9. To properly understand the defence in this case, it is necessary to go back in time and deal with certain background to this matter.

(I) Background

10. The Plaintiff and the Defendant were friends and business acquaintances and had known each other for a number of years. In early 1993, both were jointly interested to purchase a large block of shares in a listed company by the name of Kosonic International Holdings Ltd. for short term investment ("Kosonic"). As a result of certain misrepresentations made to the Plaintiff by Mr Chiu Chun Tak, the financial director and company secretary of Kosonic, which was then passed on by the Plaintiff to the Defendant, both the Plaintiff and the Defendant together purchased 11,614,000 shares of Kosonic at an average price of $1 per share, the Plaintiff's holdings being about 60% and the Defendant's about 40%. As a result of a further misrepresentation by Chiu to the Plaintiff, which again was passed on by the Plaintiff to the Defendant, both of them were induced to hold on to their Kosonic shares. In about February 1995, when the annual report of Kosonic was made known publicly. Those misrepresentation came to light. By that time the shares of Kosonic had dropped to $0.38 per share.

11. The Plaintiff and Defendant then engaged solicitors and threatened legal action against Chiu, Kosonic and another director of Kosonic, a Mr Ko. After lengthy negotiations, the parties to this dispute reached a settlement. The settlement manifested itself in the form of two Deeds both executed on 29th May 1995. The first Deed is a Deed of Confirmation executed by both the Plaintiff and Defendant herein to the effect that both of them acknowledge and admit that they have acquired and retained the Kosonic shares purely of their own volition and solely on the basis of their own assessment of the then prevailing market conditions. Moreover in that Deed of Confirmation both the Plaintiff and the Defendant jointly and severally withdrew completely all such allegations against Mr Chiu, Mr Ko and Kosonic as set out in the correspondence between solicitors and alsolutely waive and renounce all claims demands rights remedies and redress whatsoever against Mr Chiu, Mr Ko and Kosonic in connection with or arising out of their acquisition and/or retention of the Kosonic shares.

12. The second Deed ("Deed of Settlement") is a Deed entered into between the Plainitff herein as borrower and Chiu Chun Tak as lender whereby Chiu agreed to lend the Plaintiff HK$2.3 million by three instalments between the execution of that Deed and 9th October 1995. As to repayment of the $2.3 million loan, it was firstly agreed that the loan is to be repaid at the expiry of five years but that interests at the rate of 3% per annum would only be calculated as from the 4th year onwards. Notwithstanding the agreement for repayment at the expiry of five years, it was also agreed that the loan would become repayable on the happening of one of two events, namely,

(a) if the borrower defaults in observing or performing Clause 4; or

(b) if the average closing price for Kosonic shares reaches HK$1 or above and remains so for 10 consecutive business days and 60 days have expired after written notice of such event is given by the lender to the borrower.

13. By Clause 4 of this Deed, the borrower undertakes to keep the existence of this Deed and the Deed of Confirmation and their contents confidential and in strict confidence unless required by law to disclose same and provided the lender is not in breach of the Deed.

14. In so far as the background as stated above is concerned, there is no dispute between the parties. Both Deeds were produced into evidence.

(II) The Pleaded Defence

15. The Defence was initially filed in January 1998. It was substantially amended in September of that year. It was further amended at the start of the trial on 26th November 1998 and once more during the course of the trial itself. On each occasion they were substantive factual amendments. In its final form, the Defence runs along the following lines :-

(a) the Defendant admits to having signed the memorandum dated 9th November 1995;

(b) although the memorandum was concluded in terms of a purported loan by the Plaintiff to the Defendant, it was not in actual fact an agreement between the parties for a loan but that the $500,000 represented the Defendant's compensation for his loss in the Kosonic shares debacle, i.e. his share of the $2.3 million settlement;

(c) moreover, despite the contents of the memorandum providing that the $500,000 be repaid in two years and the Defendant to issue a post-dated cheque post-dated to 30th October 1997 to the Plaintiff, such terms were not intended to come into operation until and unless the $2.3 million became repayable under the Deed of Settlement between the Plaintiff and Chiu;

(d) that there was an oral agreement reached between the parties herein during the negotiations leading to the settlement between the Plaintiff and Chiu that :-

(i) the Defendant would receive $500,000 as compensation for his loss in consideration of the Defendant executing the Deed of Confirmation;

(ii) the Defendant would reimburse or indemnify the Plaintiff the $500,000 without interests if the conditions materialise whereby the $2.3 million became repayable; and

(iii) as security thereof, the Defendant would give a cheque post-dated to 30th October 1997 for $500,000 made payable to Chiu on the understanding that the Plaintiff would not take steps to enforce the memorandum or present the said cheque unless the events happened whereby the $2.3 million became repayable.

(e) that since the events have not materialised making the $2.3 million repayable the Defendant is therefore not liable to the Plaintiff for the $500,000.

(III) The Defendant's Evidence

16. The Defendant gave evidence that he understood the $2.3 million was to settle both his and the Plaintiff's claim against Chiu, Ko and Kosonic, and that the $2.3 million should be shared between himself and the Plaintiff on a pro rata basis in which case he should be entitled to about 40% which comes to about $900,000. However during the negotiations for that settlement, the Defendant himself declined to sign as a surety in respect of the $2.3 million loan to the Plaintiff which led the Plaintiff to re-negotiate the terms with Chiu. As a result of that the Plaintiff then informed the Defendant that the Plaintiff would only give him $500,000 as his share of the compensation on condition that the Defendant would sign the Deed of Confirmation. It was also agreed between him and the Plaintiff that he would have to issue a post-dated cheque. This was because the $2.3 million was in fact compensation paid to the Plaintiff and the Defendant, but the terms of the Deed was such that it was framed as a loan to the Plaintiff and the Plaintiff was afraid that Chiu might go back on his word and ask the Plaintiff to repay the $2.3 million, in which case the Defendant would have to repay the $500,000 and it was for this reason that the Plaintiff made the Defendant to promise to issue a post-dated cheque in the name of Chiu for $500,000 so that if Chiu should ask the Plaintiff for repayment of the $2.3 million, the Plaintiff could then give that post-dated cheque to Chiu as part of the repayment. This according to the Defendant was the oral agreement arrived at between him and the Plaintiff before the Defendant signed the Deed of Confirmation on 29th May 1995.

17. The Defendant further gave evidence that the reason why he agreed to take $500,000 and not his full share of $900,000 on a pro rata basis was because the Plaintiff was at that time in a poor financial position, at the same time the Plaintiff was planning to emigrate to New Zealand and so pleaded with the Defendant to accept only $500,000. This the Defendant agreed to do as he sympathised with the Plaintiff's predicament, and also because the Plaintiff was his friend.

18. It was, according to the Defendant, under those circumstances and pursuant to the above oral agreement between them that he signed the memorandum on 9th November 1995 which was written out by the Plaintiff. At the time when he signed, he had queried the Plaintiff as to the heading for although he knew that the loan was from Chiu Chun Tak, he wanted to know why the words "Final Agreement" was put down on the heading by the Plaintiff. In reply the Plaintiff told him that since initially they had agreed to share the $2.3 million compensation on a pro rata basis but eventually the Defendant had agreed to take only $500,000, so the Plaintiff had written the words "Final Agreement" with the hope that the Defendant would not ask him for the remaining money.

19. The Defendant also explained that in the body of the memorandum the words "agreed to repay unconditionally within two years" meant that he (the Defendant) had received $500,000 of Chiu Chun Tak's loan and agreed to repay that amount in two years time without condition - that condition means in case Mr Chiu broke his promise and regarded the amount of money was a loan and not compensation, he (the Defendant) should repay $500,000 of that money to Mr Chiu.

20. The Defendant also gave evidence that at the time he signed the memorandum on 9th November 1995 he had asked the Plaintiff why in the body of the memorandum was the period of two years put down, because that period was different from the period stipulated in the proposed settlement deed with Mr Chiu in which the Defendant was to be a surety for the loan (but which was not signed ultimately because the Defendant refused to sign as a surety). The Plaintiff then told him that the deed in which the Defendant was to act as a surety was not signed and was only a draft; the Deed of Settlement which was signed by the Plaintiff and Mr Chiu as a loan agreement did provide for a two-year period also. Although quite untrue, he (the Defendant) at that time believed what the Plaintiff told him because he had not seen a copy of that Deed of Settlement at that time and because the Plaintiff was his friend and employee then. The Defendant went on to say that it was not until about two or three days before the start of the trial in this case that he got to see a copy of the Deed of Settlement signed between the Plaintiff and Mr Chiu on 29th May 1995.

21. The Defendant went on to give evidence that at the time the settlement was reached with Mr Chiu, Mr Ko and Kosonic, the Plaintiff had told him that since Kosonic was a listed company, and Chiu its executive director, it was not possible for Kosonic to enter any kind of agreement with the Plaintiff for compensation resulting from Kosonic having overstated its financial situation thus causing loss to the Plaintiff (and the Defendant), because that was a criminal offence. For that reason the Deed of Settlement had to be entered with Chiu and had to be framed as a loan agreement. However it was also verbally agreed that the loan would not be called in by Chiu.

22. The Defendant also gave evidence that at the time he signed the memorandum with the Plaintiff, he had made out a post-dated cheque for $500,000 payable to Chiu. However the Plaintiff refused to take that post-dated cheque. In support of this the Defendant produced a cheque stub in respect of cheque No. 029430 for $500,000 to Chiu Chun Tak bearing the date 30th October 1997. Bank statement was also produced to show that this cheque had not been presented for payment.

23. The Defendant agrees that he did receive two registered letters from the Plaintiff chasing him for the post-dated cheque but explained that as the Plaintiff had left his company he was not in contact with the Plaintiff, and therefore did not reply to those letters.

24. The Defendant also agreed that the Plaintiff had phoned him a couple of times also chasing him for the post-dated cheque and that he, (the Defendant) was at all times willing to give the Plaintiff a post-dated cheque made out in favour of Chiu for $500,000 and had actually said so to the Plaintiff on one of the phone conversation but the Plaintiff refused to accept it.

25. The Defendant was extensively cross-examined by Mr Barlow. When asked why, if the oral agreement was made between him and the Plaintiff even before the Deed of Confirmation was signed in May 1995, that oral agreement was not reduced into writing since they had solicitors acting for them at that time, the Defendant's only answer was that he trusted the Plaintiff then.

26. When reminded by Mr Barlow that the Defendant had told the Court earlier in his evidence that on 29th May 1995, the Plaintiff had told him the terms of the Deed of Settlement with Chiu provided for a period longer than three years as well as the other terms it contained, the Defendant answered that in May 1995 the Plaintiff had told him one version, yet in November 1995 (when the memorandum was signed by the Defendant) the Plaintiff had told him a different version as to the terms of the Plaintiff's agreement with Chiu, but since he (the Defendant) could do nothing about it, he just believed what the Plaintiff told him. Therefore he signed on the memorandum. Even after 9th November 1995 the Plaintiff did not tell him that the version given by the Plaintiff to him on 9th November 1995 as to the terms of the Plaintiff's loan agreement with Chiu was wrong. He further explained that as far as the memorandum goes he was not too concerned as to the time for repayment. The most important matter to him was that the repayment should be made to Chiu (and not the Plaintiff).

27. When cross-examined on the post-dated cheque, he agreed with Counsel that a post-dated cheque made out to Chiu and post-dated to 30th October 1997 would be useless to Chiu because the loan by Chiu to the Plaintiff would not be due until May of 2000. He also agreed that since the time he signed the memorandum, the Plaintiff had been chasing him for a post-dated cheque made out in favour of the Plaintiff. However he was only ready to issue a post-dated cheque made out to Chiu. In fact he said he had made out such a post-dated cheque in favour of Chiu on two occasions - once when he signed the memorandum in November 1995 and again when he gave the Plaintiff one months' notice to terminate the Plaintiff's employment in his company which was in March 1996. However on both occasions the Plaintiff refused to accept a cheque made out in favour of Chiu.

28. When cross-examined on the taped phoned conversation he had with the Plaintiff, he said that in the conversation both he and the Plaintiff was aware that he was ready to give a post-dated cheque made out to Chiu but he also realised that the Plaintiff was chasing after a post-dated cheque in favour of the Plaintiff. In those circumstances, he simply tried to delay the matter by telling the Plaintiff he will deal with it in a couple of days time.

29. Finally he was cross-examined on the cheque stub produced by him to show that he had issued a post-dated cheque in favour of Chiu in November 1995. He agreed that normally he would use the top cheque in a cheque book, so that the cheques used would follow in chronological sequence. He also agreed that if that was done, the cheque used should have been cheque No.029423, since the post-dated cheque was made out on 9th November 1995, and not cheque No.029430 which was the last cheque in the cheque book. However he explained that because he was post-dating this cheque, (to 30th October 1997), his practice when making out a post-dated cheque was to use the last cheque in the cheque book. For that reason, the cheque that was used was out of sequence with the dates written on the other cheques.

Findings of Facts

30. Having heard all the evidence in this case, I have no difficulty whatsoever accepting the Plaintiff's evidence where it conflicts with that of the Defendant. The Plaintiff struck me as a truthful and honest witness doing the best he can in the witness box to answer the questions as accurately and precisely as he could.

31. On the other hand the Defendant was wholly unconvincing as a witness. His lack of credibility in the evidence he gave coupled with the fact that the version put forward by him was wholly unsupported by acceptable concrete evidence made it very clear where the truth laid.

32. On the Defendant's own version that the $2.3 million was compensation to both him and the Plaintiff, and not a loan, it is inconceivable that the terms of that settlement was unknown to him especially in view of the fact that both he and the Plaintiff were represented by the same solicitor negotiating that settlement and that he was in the solicitor's firm (albeit that he came later than the Plaintiff) on 29th May 1995 to sign the Deed of Confirmation.

33. Secondly the Defendant's evidence that there was an understanding or an agreement between the Plaintiff and Chiu that the loan of $2.3 million would not be called in by Chiu has never been pleaded, not even in the Further Re-amended Defence; it is unsupported by any other evidence as Chiu was not called as a witness; nor do I find it likely if that was actually the case the parties to that Deed of Settlement would have gone to all the trouble of providing for its repayment if the average price of Kosonic shares would reach not less than $1.00 per share for 10 consecutive business days. They may as well have simply drafted the Deed of Settlement as a loan agreement for a fixed term of five years and left it at that.

34. Thirdly I find it wholly inconceivable that the Defendant, a man well versed in business and commercial dealings, would have signed the memorandum in the form that it was drafted, had there been such an oral agreement between him and the Plaintiff as he told this Court in his evidence.

35. If there was in fact such an oral agreement between the Plaintiff and the Defendant, I have not heard any acceptable explanation from the Defendant as to why he could not have reduced the terms of such oral agreement into writing and signed it instead of signing the memorandum that he did.

36. The explanation put forward by the Defendant as to why he made no replies to the Plaintiff's two registered letters chasing him for the post-dated cheque is flimsy and unconvincing. It seems to me that the Defendant had no good excuses to avoid issuing the post-dated cheque as he well knew he was obligated to do under the terms of the memorandum and in those circumstances he could only avoid it by not replying at all - in the same way that he kept delaying and deferring the matter as shown in the tape-recorded telephone conversation. This taped conversation, accepted by the Defendant to be one of the phone conversations he had with the Plaintiff, really shows up the Defendant's evidence relating to the post-dated cheque to be quite untrue. If the Defendant's version was true, one would have expected the Defendant to have said words to the effect along the lines that he (the Defendant) was always ready to give to the Plaintiff a post-dated cheque made out in favour of Chiu as had been agreed, but it was the Plaintiff who declined to accept it. Not only were there no such words on tape, but what there was on the tape fully supports the Plaintiff's case namely that the Defendant well knew that he owed the Plaintiff the amount of the loan as well as failing to keep his word about giving the Plaintiff a post-dated cheque.

37. Although the Defendant had produced the cheque stub relating to cheque No.029430 and the relevant bank statement showing that cheque had not been presented for payment while other cheques in that same cheque book were presented for payment in around the time the memorandum was signed, I am unable to accept his explanation as to why that cheque was out of sequence with the other cheques. Moreover, that cheque stub was only produced by the Defendant at the eleventh hour making the whole episode of the cheque stub suspicious to say the least. Therefore the production of that cheque stub neither alters my view of the above matters nor does it prove that the Defendant did in fact make out a post-dated cheque in favour of Chiu Chun Tak on 9th November 1995.

38. In the circumstances of this case based all the evidence before me, I make the following findings of facts : -

1. The settlement arrived at between the Plaintiff and the Defendant on the one hand with Chiu, Ko and Kosonic on the other hand was as contained in the terms of the Deed of Confirmation and the Dead of Settlement both dated 29th May 1995. I do not accept that there was any oral agreement or understanding between the Plaintiff and Chiu that Chiu would not seek to enforce the repayment of the loan contained in the Deed of Settlement.

2. Whilst there may have been earlier discussions between the Plaintiff and the Defendant as to how the Plaintiff would share the $2.3 million loan with the Defendant, all these discussions were superceded or overtaken by the final agreement reached between them as contained in the terms of the memorandum dated 9th November 1995 signed by the Defendant and that the Defendant well knew that he was loaned a sum of $500,000 by the Plaintiff for two years without interests and that he was to issue the Plaintiff with a cheque post-dated to 30th October 1997 as security for the repayment of that loan by the Plaintiff.

3. That the Defendant had failed to issue such a post-dated cheque to the Plaintiff and kept on postponing or delaying that matter whenever he was chased by the Plaintiff to do so.

4. That the loan for $500,000 became due at the latest by 9th November 1997 but remains unpaid to date.

39. According there will be judgment for the Plaintiff for the sum of $500,000 and interests thereon at judgment rate from the date of the writ until payment. There will be an order nisi that the Plaintiff be awarded the costs of this action to be taxed if not agreed.