HORACE YAO YEE CHEONG v. CHINA TECHNOLOGY GLOBAL CORPORATION

HCA 1284/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1284 OF 2004

____________

____________

_______________

J U D G M E N T

_______________

I.       INTRODUCTION

1.  Mr. Horace Yao is a former chairman and director of the Defendant.  By this action he claims remuneration and loans said to be due to him from the Defendant.  By the trial, the Defendant’s solicitors had gone off the record without a corresponding application by the Defendant to be represented by a director.

II.      DISCUSSION

2.  In this section, I consider Mr. Yao’s individual claims against the Defendant.

A. Claim for unpaid loans

3.  Mr. Yao says that he lent $1,162,222.311 (Sum A) to the Defendant between 1996 and 2004.  He also claims to have loaned $100,000 (Sum B) to the Defendant on 20 January 2003.

4.  According to Mr. Yao, the Defendant gave him the option of converting Sum A into an equivalent number of the Defendant’s shares at market price or US$0.20 per share whichever was the less.

5.  The Defendant has admitted much of the loan of Sum A.

6.  Thus, on the Defendant’s admission that it owed at least $1,045,749.30 (Sum A1) of Sum A to Mr. Yao, Master Wong gave summary judgment in favour of Mr. Yao on 3 January 2005.  Mr. Yao having chosen to exercise the option to receive Sum A1 in the form of shares, Master Wong ordered that the Defendant allot 671,471 of its shares to Mr. Yao.

7.  Later, on the Defendant’s admission that it owed $96,473.01 (Sum A2) of the outstanding balance of Sum A to Mr. Yao, Master Au-Yeung made a consent order that a further 61,946 of the Defendant’s shares be allotted to Mr. Yao.  Master Au-Yeung did this pursuant to Mr. Yao’s decision to exercise the option to receive Sum A2 in the form of shares.

8.  I shall refer below to the shares ordered to be allotted to Mr. Yao by Master Wong and Master Au-Yeung as “the ordered shares”.

9.  The foregoing leaves $20,000 of Sum A unpaid.  That amount represents an advance made by Mr. Yao on the Defendant’s behalf to Dovebid Hong Kong Limited.  The payment was made in part settlement of Dovebid’s fee for a valuation report on plant and machinery owned by the Defendant.

10.  To support his claim, Mr. Yao has produced a copy of Dovebid’s invoice, which includes a handwritten acknowledgement by Ms. Emma Cheung Kam Wa.  Ms. Cheung was the Defendant’s Chief Executive Officer at the relevant time.  By her signature she appears to accept that Dovebid was paid on behalf of the Defendant by a cheque from Mr. Yao.

11.  In my view, the invoice from Dovebid and the acknowledgement by Ms. Cheung adequately substantiate Mr. Yao’s claim for the sum of $20,000.

12.  In respect of Sum B, Mr. Yao has produced a written agreement dated 20 January 2003.  That evidences a loan by Mr. Yao of $100,000 for 3 months at 6% per annum.

13.  Clause 7 of the loan agreement additionally provides as follows (in translation):-

“When the loan has become due and payable and [the Defendant] cannot reach a new agreement with me [that is, Mr. Yao], [the Defendant] should repay to me the amount of loan as due and payable, otherwise the Defendant should pay $100.00 per day as compensation.”

14.  The agreement is signed by Ms. Cheung.

15.  There is also a receipt signed by Ms. Cheung stating that $100,000 was received from Mr. Yao by way of a cash cheque “for resolving the cashflow of [the Defendant’s] subsidiary company”.

16.  The Defendant disputes the loan of Sum B.  It contends that the loan was entered into without proper board approval.  But the Defendant has failed to particularise its case.  For example, if the loan had not been approved by the Board, how did Ms. Cheung come to sign the agreement and receipt?  What has happened to the $100,000 which Ms. Cheung acknowledges having received?

17.  I am satisfied that the Defendant received Sum B by way of a loan from Mr. Yao.

18.  Mr. Alexander Wong (appearing for Mr. Yao) asks for the compensation stipulated in cl.7 of the loan agreement.  But I do not think that I can award that.

19.  A sum of $100 a day amounts to $36,500 per year.  This is equivalent to interest of over 30% per annum on the $100,000 principal.  Such interest contrasts starkly with the 6% stipulated in the loan agreement itself. 

20.  It seems to me that the $100 per day in cl.7 is a penalty.  It is excessive.  This was implicitly acknowledged by Mr. Yao when he said in oral evidence at trial that cl.7 was inserted “to pressurise” the Defendant to pay the loan promptly.

21.  It follows that cl.7 is not a genuine pre-estimate of actual damages for late payment.  It is not enforceable.  I am only prepared to order the agreed rate of 6% interest on the outstanding $100,000.

B. Claim for unpaid remuneration

22.  Mr. Yao says that the Defendant has failed to pay salary due for his services as director and chairman during the 60 month period from 1 January 1996 to 31 December 2001 (Period A) and the 16 month period from 1 January 2002 to 30 April 2003 (Period B).  The Defendant removed Mr. Yao as chairman and director on 30 April 2003.

23.  Mr. Yao claims that he is entitled to be paid salary on a contractual or (alternatively) quantum meruit basis at $30,000 per month.

24.  In support, Mr. Yao relies on the minutes of a meeting of the Defendant’s board dated 16 March 2002.

25.  Those minutes refers to Mr. Yao not having received his salary for “over 5 years”.  The minutes then continue:-

“RESOLUTION 9:  a Personnel and Compensation Committee be formed and chaired by the independent director Mr. Kurt Krause (subject to consent) and Professor Li Chang, to review and approve remuneration recommendation made by the CEO.

RESOLUTION 10: salary of key executives, inclusive of directors and Chairman, would be paid by [the Defendant] shares in lieu, for past and future service to help company preserving limited cash resources and to keep the right executives energised.  New shares to be issued at current market price.  This resolution is subjected to clearance on legal and property issues.”

26.  Mr. Yao says that, pursuant to Resolution 10, he executed a “Written Consent” whereby he agreed to the conversion of the $1.8 million payable to him over Period A into 1,153,846 shares in the Defendant.  That number of shares was based on a market price of US$0.20 per share, which (the Written Consent states) was the “average share price for the week ending March 16, 2002”.

27.  In court, Mr. Yao explained that he took the average share price for the week ended 16 March 2002 as his conversion rate because of Resolution 10.  The reference in the latter resolution to “current market price” was understood by those present at the 16 March 2002 board meeting (including Mr. Yao) to refer to the then current price of the Defendant’s shares.

28.  The Defendant denies that Mr. Yao could have served as director or chairman over the entire period claimed.  The Defendant points out that, according to its memorandum and articles, it did not come into existence until 24 June 1996.  Thus, the Defendant argues Mr. Yao can only claim unpaid remuneration (if any) from 24 June 1996.

29.  In any event, the Defendant denies that the Personnel and Compensation Committee ever produced any report pursuant to Resolution 9 of the minute.  The Defendant contends that, there being no report from the Committee, nothing would have been done to implement Resolution 10.  It follows (the Defendant argues) that Mr. Yao was not entitled to a conversion of outstanding remuneration (if any) into share equity.

30.  Finally, the Defendant claims that it never received the Written Consent from Mr. Yao.

31.  I am satisfied, on the basis of Mr. Yao’s oral evidence at trial, that he worked on behalf of the Defendant prior to 24 June 1996.

32.  The Defendant started out as an off-the-shelf BVI company. However, before incorporation, Mr. Yao worked to set up the paper mill business which the Defendant would be undertaking.  Without such work, the Defendant could not have smoothly started out as a going concern on 24 June 2006.

33.  I have already referred to evidence from the Defendant’s 16 March 2002 minutes that Mr. Yao had not then been paid for over 5 years.  As far as the claimed remuneration of $30,000 is concerned, there is documentary evidence that Mr. Yao’s salary was about RMB 360,000 per year.  That equates to around $30,000 per month.  The monthly salary claimed by Mr. Yao for Periods A and B is thus substantiated.

34.  It follows that the Defendant at least owes Mr. Yao $480,000 in relation to Period B.

35.  The difficulty in relation to Period A is that Mr. Yao consented to receive his salary for Period A in the form of shares.  Mr. Yao now asks for the value of the shares which (he contends) ought by now to have been allotted to him in respect of Period A.  So far Mr. Yao has received nothing (whether shares or cash) for his work as chairman and director during Period A.

36.  I have no doubt that it was open to Mr. Yao to consent to receive his salary for Period A in the form of shares.

37.  I accept Mr. Yao’s oral evidence that the Committee mentioned in Resolution 9 was never formed.  This was because of a change of mind by Professor Li Chang (a director), who was originally supposed to be part of the Committee.  In the end, Professor Li refused to join the Committee.

38.  But some sort of scheme in relation to the conversion of unpaid salaries into shares obviously came into effect.  Such coming into effect is evidenced by an e-mail dated 27 April 2002 from Mr. Ken Mak (the Defendant’s secretary) to Mr. Yao mentioning a share conversion scheme.

39.  Further, I accept Mr. Yao’s oral evidence that his Written Consent was accepted by Ms. Cheung on the Defendant’s behalf. Ms. Cheun did this on one of her visits from Shenzhen to consult Mr. Yao in Hong Kong.

40.  The more pertinent question is:  Having opted to receive his salary for Period A in the form of shares, can Mr. Yao now claim the value of such unallotted shares as at a certain date?

41.  Mr. Wong submits that Mr. Yao is entitled to damages in lieu of specific performance.  I think that he is right. 

42.  By an amendment to its Statement of Claim dated 27 July 2004 Mr. Yao intimated that he was prepared to accept the monetary equivalent of the unallotted shares representing his salary for Period A.  But the Defendant still did nothing to allot the shares or pay their value as at the date of the amendment.

43.  In the circumstances, I believe the Defendant is liable in damages for its failure to allot the shares to Mr. Yao.  The measure of such damages would then be the average value of the relevant shares as at the date of the amendment (27 July 2004).

44.  Thus, in relation to Period A, I think Mr. Yao is entitled to receive damages in the amount of about $3,644,999 (that is, 1,153,846 shares x US$0.405 (average share price on 27 July 2004) x $7.80 per US$1).  This can be rounded upwards for convenience to $3,645,000.

45.  I do not think that it would be appropriate to award pre-judgment interest on the latter amount.  I have 2 reasons for coming to this conclusion.

46.  First, Mr. Yao did not particularise any amount of damages until a Re-Re-Amended Statement of Claim.  The re-re-amendments to Mr. Yao’s pleading were only allowed on the date of trial.

47.  Second, of necessity, the damages I calculated must be a rough and ready figure.  On 27 July 2004 a total of 29,815 of the Defendant’s shares were traded.  If Mr. Yao had disposed of 1 million plus shares on that day, the Defendant’s share price might have fluctuated downwards much more.  Denying pre-judgment interest would cater for and counter-balance against the possibility of a greater downward fluctuation.

C. Claim in relation to 62,500 shares

48.  Mr. Yao was the beneficiary of a Stock Option Agreement with the Defendant dated 17 May 2002.  That Agreement gave Mr. Yao the option to purchase up to 100,000 shares of the Defendant at US$0.286 per share (subject to adjustment).

49.  Clause 3 of the Agreement provided that 50% of the option could be exercised from 1 December 2002.  An additional 25% of the option could be exercised “[a]fter the expiration of each annual anniversary of [the 1 December 2002 date].”

50.  Clause 4 of the Agreement provided for the option to be exercised “pursuant to the terms of Section 10 of the Plan”.

51.  Clause 5 of the Agreement provided that:-

“Upon severance of the affiliation of Optionee [that is, Mr. Yao] with the Company, including due to death, the Option shall terminate in accordance with Section 9 of the Plan.”

52.  The Plan referred to in the Agreement is a document entitled “2002 Stock Option Plan”.

53.  Section 9 of the Plan required Mr. Yao to exercise his option within 90 days of ceasing to be employed by the Defendant.

54.  Section 10 of the Plan required Mr. Yao to exercise his option by giving written notice to the Defendant.

55.  The Plan was approved by the Defendant at an annual general meeting on 18 July 2003.

56.  Mr. Yao gave no written notice of exercising his option within 90 days of his affiliation with the Defendant being terminated on 30 April 2003.  He gave no written notice of exercising the option within 90 days of 18 July 2003 (the date when the Plan was approved).

57.  It was not until 3 April 2004 (when Mr. Yao’s solicitors sent a letter before action to the Defendant’s then solicitors) that Mr. Yao might possibly be said to have given written notice of an intention to exercise his option.

58.  April 2004 is well outside any relevant period of 90 days required by Section 9 of the Plan.  It follows that any purported exercise by Mr. Yao in April 2004 of the option granted by the Agreement was too late.

59.  I note that, even if (which is not the case) Mr. Yao had validly exercised his option, Mr. Yao would at most be entitled to 50,000 (not 62,500) shares.  That is because of the clear words of cl.3 of the Agreement and the fact that Mr. Yao ceased to work for the Defendant on 30 April 2003.

D. Claim for damages in lieu of the ordered shares

60.  The Defendant’s shares have been de-listed from the NASDAQ board.  The shares may as a result not be worth much (if anything).

61.  Mr. Wong submits that, in light of this recent development, I should award damages in lieu of the ordered shares.  He stresses that the de-listing and consequent loss in value of the shares cannot be attributable to the Mr. Yao.

62.  But I have no jurisdiction to substitute damages for the ordered shares.

63.  Having valid judgments of this Court for allotment of the ordered shares, it was up to Mr. Yao to enforce the same against the Defendant.  Whatever contractual rights Mr. Yao may have had at one time for the allotment of the ordered shares became merged in the Court’s judgments.  Mr. Yao’s original causes of action in respect of the ordered shares ceased to exist as a result of the merger.

64.  I cannot now as a first instance judge set aside the very Court orders for allotments which Mr. Yao obtained.  The Court is functus as far as such orders are concerned. 

65.  The situation is little different from that which routinely occurs where a company against which a creditor has obtained a money judgment later becomes insolvent. The insolvency is not a ground for varying the creditor’s still unenforced judgment into something else (say, an order for specific performance).

III.     CONCLUSION

66.  There will be judgment in favour of Mr. Yao against the Defendant as follows:-

(1)     for the sum of $20,000;

(2)     for the sum of $100,000;

(3)     for the sum of $480,000; and,

(4)     for the sum of $3,645,000.

67.  Interest on the foregoing sums will run as follows:-

(1)     On the sum of $20,000, at 1% over Hong Kong prime from date of writ until date of judgment and thereafter at the judgment rate.

(2)     On the sum of $100,000, at 6% from 20 January 2003 to date of judgment at 6% per annum and thereafter at the judgment rate.

(3)     On the sum of $480,000, at 1% over Hong Kong prime from date of writ until date of judgment and thereafter at the judgment rate.

(4)     On the sum of $3,645,000 from date of judgment at the judgment rate.

68.  There will be an order nisi that the Defendant is to pay Mr. Yao’s costs of the action, such costs to be taxed if not agreed.