KUANG XUEGUANG v. WU KWAI YUNG

CACV 230/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 230 OF 2012

(ON APPEAL FROM HCA NO. 2660 OF 2008)

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REASONS FOR JUDGMENT

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Hon Cheung CJHC:

1. I agree with the reasons for judgment of Yuen JA.

Hon Cheung JA:

2. I agree with the reasons for judgment of Yuen JA.

Hon Yuen JA:

3. This is the defendant’s appeal from a judgment of Barma J (now Barma JA) given on 12 September 2012 ordering him to pay the plaintiff the sum of $6.9m, with interest at prime +1% from the date of writ to date of judgment, and costs.  At the conclusion of the hearing, we dismissed the appeal with costs.  My reasons appear below. 

The plaintiff’s case

4. In 2004, the plaintiff was introduced to the defendant by a banker.  He understood that the defendant was a very successful businessman who had a substantial development project on the mainland. 

5. Prior to the events the subject matter of this action, the defendant approached the plaintiff saying he had some cash flow problems and asking for a loan from the plaintiff.  This loan was duly repaid.

6. In late 2004, the defendant asked the plaintiff for some loans again.  The plaintiff then lent him an amount of HK$5m on 20 November 2004, and another amount of HK$1.9m on 30 December 2004, each for a term of 3 months.  Interest was not discussed.  The funds were transferred by cheques drawn by the plaintiff in favour of the defendant personally. 

7. Before the due dates for repayment, the defendant told the plaintiff that his friend had an electronics company which was available for acquisition.  The company was called Donguan Global Link (“DGGL”) which was held by a Hong Kong company called Global Link Digital Electronic Co Ltd (“HKGL”) which was in turn held by a company called Digital Future Ltd (“DF”). 

8. On top of the nominal value of $10,000 for the holding company’s shares, the plaintiff would have to pay off DGGL’s debts in the sum of about $5m.  The plaintiff was prepared to acquire DGGL and its holding companies on this basis.

9. Accordingly the plaintiff became a director on 24 March 2005 of HKGL and the shares in HKGL’s holding company DF were transferred to his nominees at the nominal share value on 5 May 2005. 

10. As for DGGL, even before the shares in DF were transferred, the plaintiff had become a director of DGGL on 25 April 2005 and he was appointed its legal representative on 19 June 2005.

11. According to the plaintiff, he only discovered later that the defendant was in fact the ultimate owner of DGGL and its holding companies, and more importantly that DGGL had additional debts of about RMB43m owed to the Dongguan Agricultural Credit Co-operatives which had not been disclosed to him (he not having caused any due diligence exercise to be performed prior to the acquisition).  This led to the defendant’s execution of an Undertaking Letter dated 28 January 2008 to be responsible to provide finance for this sum.

12. Meanwhile, the defendant had defaulted on repayment of the loans of $5m and $1.9m which had been due for repayment in February and March 2005 respectively.  The defendant made various excuses for his failure to repay but the plaintiff became concerned when in 2008 he heard that the defendant had sold his interest in the development project to a third party. 

13. As a result, the plaintiff requested the defendant to sign a document entitled “Confirmation of Loan” on 24 February 2008 (“1^st Loan Confirmation”).  This was a short half-page document with a table attached.  The text stated that:

(1)  the defendant did not dispute the amounts transferred from the plaintiff and companies in his control;

(2)   the defendant agreed to repay $3.5m from 1 March 2008, failing which interest would be charged;

(3)   the defendant must produce evidence of repayment and upon confirmation of receipt of repayment, “such repayment can be used to set off the balance of loans owed by [the defendant]”; and

(4)   the parties agreed that the balance outstanding may be used as a set off against the shareholders’ current account at DGGL.  This somewhat elliptical language was explained by the plaintiff at trial.  He said that DGGL had banking facilities from the Agricultural Bank of China (“ABC”) which had been secured by the defendant’s property.  What was intended was that if the defendant paid any part of those facilities, or allowed his property to be used for that purpose, then the balance outstanding on the loans would be correspondingly reduced. This explanation was accepted by the learned trial judge (para. 39).

14. Importantly, the plaintiff signed the document under the description “creditor”, and the defendant signed it under the description “debtor”.

15. A table was attached to the 1^st Loan Confirmation which included two items, which were the RMB equivalent of the two amounts of $5m and $1.9m respectively.  The dates of the two items, under the heading “Date of Loans”, corresponded to the dates when the cheques were presented.  It was not disputed at trial that, despite a typographical error, the numbers of the cheques drawn by the plaintiff in the defendant’s favour were set out in the two items against the RMB equivalent of those two amounts. 

16. According to the plaintiff, the parties agreed that they would update the table regularly, and on 16 May 2008, a document entitled “Chart of update of loans” was produced. This was called at trial the “2^nd Loan Confirmation”. This again included the two amounts under the heading “loans”.  On the margin of the chart was the defendant’s signature and above it, the handwritten words in Chinese “Confirmed”.

17. The same year, the bank foreclosed on DGGL.  The plaintiff instructed solicitors to send a letter of demand to the defendant for repayment of the amounts of $5m and $1.9m respectively.  There was no reply from the defendant. 

18. On 18 December 2008 the plaintiff issued the writ with a simple claim for repayment of the two loaned amounts.

The defendant’s case

19. It is important to note the defence pleaded.  The defence was simply that the amounts of $5m and $1.9m were not loans, but were part payment of the purchase price of RMB 30m for DGGL.  Since the plaintiff had acquired DGGL, there was simply no obligation on the part of the defendant to repay these amounts. 

20. It was not pleaded that

-   the amounts (or any part thereof) had been repaid; or that

-   the parties had a running account; or that

-   there was a set-off of the amounts (or any part thereof), let alone a counterclaim.

Issues

21. Therefore the sole issue before the trial judge was simply whether the sum of $6.9m was a loan or was part payment for DGGL.

Judgment

22. In a detailed and comprehensive judgment, the learned judge explained his reasons for coming to the finding that the sum of $6.9m was a loan.

23. In line with established practice, the judge focused on the contemporaneous documents, viz. the two Loan Confirmations.  He found that the two documents indicated clearly that the defendant acknowledged that the sums paid by the two cheques were “loans” (para. 35), and that the defendant had signed the 1^st Loan Confirmation as “debtor” (para. 36).  Notwithstanding the passage of three months which would have given the defendant enough time to ruminate on the first document he had signed, he still acknowledged the two cheques were “loans” in the 2^nd Loan Confirmation (para. 38).

24. Accordingly the judge found that the two loan confirmations demonstrated that the payments made by the plaintiff to the defendant the subject of these proceedings were loans (para. 41).

25. In my view, given the only defence pleaded, it was sufficient for the judge to have stopped there. Nevertheless the judge went on to find, for the reasons given in paras. 43-66, that the defendant had failed to establish that the plaintiff had agreed to acquire HKGL/DGGL for RMB30m (and that the sum of $6.9m was part payment therefor).

Appeal

26. The defendant lodged an appeal with originally 7 grounds but at the hearing, his counsel advanced only 3. 

Discussion

27. First, it was argued that even if the defendant had acknowledged in the Loan Confirmations that the amounts were loans, it was still for the plaintiff to prove that they had not been repaid since the Loan Confirmations referred to other amounts and there was a set-off clause and there was evidence that the defendant had paid some money to the ABC.

28. In my view, that ignores the defence pleaded.  As mentioned earlier, the defendant had never pleaded repayment, a running account or a set-off.  The defendant simply alleged that he had no obligation to repay the sum at all, because it was consideration for his sale of HKGL/DGGL.  As the judge observed, that allegation flew in the face of the contemporaneous documents which the defendant had signed. 

29. Once the plaintiff’s case about the nature of the payments was accepted and the defendant’s case on it was rejected, and the plaintiff testified that the two amounts had not been repaid (Transcript Day 1 p 13), the defendant was out of court.  The plaintiff did not have to prove the negative that various acts done by the defendant were not for repayment of the loans, or there had been no set-off, because those were never issues between the parties on the pleaded defence.

30. It was also argued that the Loan Confirmations did not show loans but merely a list of funds transferred from the plaintiff (or his companies) to the defendant (or his companies) arising out of their history of business dealings.

31. This is a challenge to the judge’s findings of fact.  It is well-established that an appellate court would not usually interfere with a trial judge’s findings of fact where he has seen and heard the witnesses give viva voce evidence (Ting Kwok Keung v Tam Dick Yuen (2002) 5 HKCFAR 336).   

32. In the present case, the trial took place over 3 days and the judge had the benefit of observing both the plaintiff and the defendant who were examined and cross-examined. Moreover the judge’s findings were supported by, and consistent with, the contemporaneous documents.  The defendant, a seasoned businessman, simply had no explanation why he executed documents where words such as “loans” or “repayment” were used – not once but twice, why he undertook to pay interest and why he signed under the description “debtor”.  It would appear that at one stage, the defendant suggested that there was also intended to be some confirmation from the plaintiff, presumably of funds going the other way.  However it is clear from the judgment (para. 34) that the defendant’s evidence on this aspect was inconsistent at best.

33. The other grounds of appeal deal with the judge’s finding that the defendant had failed to establish that the plaintiff had agreed to acquire HKGL/DGGL for RMB30m (and that the sum of $6.9m was part payment therefor).  As indicated above, once the judge had found that the nature of the two amounts were loans which the defendant had not repaid, it was not necessary for him to determine the disputes between the parties regarding the price for the acquisition of HKGL/DGGL.  Accordingly I will deal with these arguments briefly. 

34. First it was argued by the defendant that even if the audited accounts of DGGL did not show a net worth of RMB 30m (which was the defendant’s case, at least at one stage), nevertheless it must have been worth more than $10,000 which was the nominal value of the controlling shares. 

35. However it was not the plaintiff’s evidence that that was all.  He also testified that he would have to pay off DGGL’s debts, which were represented to him to be about $5m.  It is true that he did not perform due diligence, but then the defendant’s evidence showed that his own valuation of the company also varied between RMB30m and RMB 50m and RMB 70m (para. 45).  In this respect, it was entirely logical for the judge to find that if the company was really being sold for RMB30m, the parties would have committed the transaction to paper, however unsophisticated or trusting they may have been (para. 51). It was also logical for him to find that if the consideration was indeed RMB30m, there would have been a proper time frame for payment instead of the moveable deadline on the defendant’s different versions (para.50).  It should be noted that the defendant was involved in a substantial development project, no doubt requiring large sums of cash.  The plaintiff was not family, and the defendant gave no reason why he should extend charity to him.

36. As for the defendant’s argument based on the audited accounts, it was common ground that neither the plaintiff nor the defendant had sight of these accounts, or had knowledge of their contents, when they entered into the agreement for the defendant to take over HKGL/DGGL.  The argument based on these accounts is therefore only a forensic after-thought.

37. Finally the defendant relied on the evidence of Mr Juan Sheng-Te, the manager of DGGL, who claimed in his witness statement that he had been present at a meeting at which the parties discussed the plaintiff’s acquisition of DGGL for RMB30m, at which meeting he says something was scribbled on a piece of paper.

38. However, as the judge noted, Mr Juan’s oral evidence showed that he was not aware of any discussions over terms such as liabilities, mode of payment or time of payment.  And his evidence was also inconsistent with the defendant’s with regard to the holding of 30% of DGGL by the technology team (including himself), a significant proportion if he is to be believed.  However there was no reference to this in his witness statement or in the defendant’s witness statement or evidence.

39. In the circumstances the judge was entitled to find that it was questionable whether any agreement was in fact reached at the meeting which Mr Juan attended (para. 57) and that his evidence did not assist the defendant’s case (para. 56). 

Order

40. For the reasons given above, I dismissed the appeal with costs.