MID-GREEN ENTERPRISE CO LTD v. LAU SHING AND ANOTHER

1988, NO. A2865

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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PRELIMINARY :

1. Prior to the commencement of hearing of this Action, I invited Counsel acting for the Plaintiff ["Mid-Green"] and Counsel acting for the Defendants into Chambers. I explained to them my professional involvements with Ching Hing Construction Company Limited ["Ching Hing"] and its shareholders. I requested Counsel to take instructions in relation to the case being heard before me. After taking instructions both Counsel confirmed in open Court that their Clients wish the matter to be heard by me.

BACKGROUND :

2. Mid-Green is a company incorporated in Hong Kong. As at 31st December, 1983, its issued share capital was $1,500,000 divided into 15,000 shares of $100 each. Wong Miu Shim and her daughter Roseanna Ip Man Sum ["Roseanna Ip"] held 4,000 and 3,500 shares respectively making a total of 7,500 shares (or 50%) of Mid-Green's issued share capital. The balance of Mid-Green's shares were held in the names of 23 persons including Man Kui Bo ["Mr. Man"] (600 shares); Lee Shun Choi ["Mr. Lee"] (300 shares). Wong Pak Ying ["Mr. Wong"] (300 shares) and Cheng Kiu (300 shares). Wong Miu Shim passed away on 2nd May, 1981. Prior to her death, Wong Miu Shim and her co-shareholders in Mid-Green acted as directors 'of Mid-Green. She also chaired the meetings of Mid-Green. Roseanna Ip assumed that position after Wong Miu Shim's death until her own resignation at an Extra-ordinary General Meeting of Mid-Green held (according to the minutes) on 30th July, 1983.

3. Mid-Green operated a seafood restaurant called Man Nin at Ground to 5th Floors of Nos. 96 to 100 Prince Edward Road, Kowloon ["the said Premises"] under a tenancy granted by Ching Hing. The tenancy between Ching Hing and Mid-Green ["the Mid-Green Tenancy"] was signed on or about 19th May, 1980 expiring on 31st May, 1989. Rental under the Mid-Green Tenancy was as follows :

4. Ching Hing was a company controlled by the Ip family. The issued share capital of Ching Hing was 770 shares of $10,000 each. Those shares were registered in the names of various members of the Ip family including Henrietta Ip Man Hing ["Henrietta Ip"], Marion Yip Man Hoi ["Marion Yip"] and Roseanna Ip. As at 23rd December, 1983, Ching Hing had 5 directors including the said Henrietta Ip, Marion Yip and Roseanna Ip.

5. Mid-Green's restaurant business in the name of Man Nin was not a success. According to the minutes of a Directors' Meeting of Mid-Green also dated 30th July, 1983, it was allegedly resolved that all installations and business utensils in Man Nin be transferred to Sea Bead Investment Limited ["Sea Bead"] at $1.23 million.

6. By an Agreemnt dated 6th September, 1983 ["the said Agreement"] entered into between Mid-Green as Vendor, Sea Bead as Purchaser and the two Defendants as the Guarantors, Mid-Green agreed to sell all fixtures, furnitures, fittings, utensils and chattels at the said Premises to Sea Bead for $1.23 million. According to Clause 1, $600,000 was to be paid upon signing of the said Agreement. The balance of $630,000 was to be paid by 70 equal monthly instalments at the rate of $9,000 per month. The first payment was to be made on 7th October, 1983 and thereafter on the 7th day of each month. By Clause 15(a) of this Agreement, the Defendants guaranteed the liability of Sea Bead under the said Agreement.

7. Counting from July 1983 the Mid-Green Tenancy would still have about 70 months to go. 70 payments of $9,000 per month would make up the sum of $630,000 under the said Agreement.

8. Mid-Green surrendered its tenancy in favour of Ching Hing. On 15th September, 1983, Sea Bead entered into a Tenancy Agreement with Ching Hing ["the Sea Bead Tenancy"] in respect of the said Premises for a term of 7 years from 1st October, 1983 to 30th September, 1990. Rental under the Sea Bead Tenancy was as follows :

9. Sea Bead took over the said Premises and paid the monthly instalments of $9,000 per month. After paying 29 instalments, Sea Bead ceased to pay any further instalment from February 1986. By letter dated 9th April, 1986, Messrs. Leonard K.L. Heung & Co. demanded payment on behalf of Mid-Green. By further letter dated 17th April, 1986 Mid-Green resolved to terminate the said Agreement. By letters dated 27th June, 1986, Mid-Green pressed the Defendants for payment of $369,000 being the outstanding instalments payable (totalling 41 instalments in all). The Defendants disputed liability. By letters dated 5th July, 1986, the Defendants asserted that the sum of $9,000 payable to Mid-Green "was in fact forming part of the monthly rent payable by Sea Bead".

THE PLEADINGS :

10. Sea Bead was wound up on 2nd June, 1986. On 19th April, 1988, Mid-Green commenced the present proceedings against the Defendants for payment of the said sum of $369,000 as Guarantors under the said Agreement. Liability was resisted on the following grounds :-

In closing submission on behalf of the Defendants, Counsel for the Defendants agreed that the sole issue before this Court is one of illegality. The alleged illegality relates to the channelling of $9,000 per month to Mid-Green without the knowledge or consent of Ching Hing.

THE EVIDENCE :

11. The 1st witness for the Plaintiff was Mr. Man. He became a director with Mid-Green since its incorporation in 1980. Mid-Green operated a restaurant business at the said Premises under a lease entered into with Ching Hing on 19th May, 1980. The business was not satisfactory and Mid-Green decided to offer the restaurant for sale. Sea Bead was introduced by his co-director Cheng Kiu. After several discussions, the entire restaurant including decorations, tools of trade and equipments were sold at $1.23 million. When Man Nin first started in 1980, Mid-Green spent a total of roughly $1.1 million to decorate the restaurant and to pay for its various equipments. He referred to the 7 items listed in the Schedule to the Agreement and pointed out that they comprised only part of the subject matters sold. He accepted that those 7 items would amount approximately to between $400,000 and $500,000. Before the sale to Sea Bead it was "reflected" to Ching Hing that business of the restaurant was not good and Mid-Green intended to sell the business. Mid-Green sought Ching Hing's consent. With Ching Hing's consent, Mid-Green located the intended purchasers. One of Mid-Green's shareholders promised to introduce Sea Bead to Ching Hing and the lease between Ching Hing and Sea Bead was negotiated exclusively between them. After signing the agreement Sea Bead paid 29 instalments of $9,000 each. That ceased in March 1986 with 41 instalments unpaid. He denied any misrepresentation being made by Mr. Wong at the signing of the agreement. He pointed out that Mr. Wong was only the Secretary of the company and was in no position to make the alleged representation. In cross-examination he did not accept that Mid-Green was controlled by the Ip Family. He pointed out that there were two sides, each holding 50% of the shares of Mid-Green. He admitted that in September 1983, Mid-Green managed restaurants in properties owned by Ching Hing. Despite being pressed, he maintained that he did not know that Ching Hing was controlled by the Ip Family. He indicated that it was Cheng Kiu who introduced Sea Bead to the deal. After the introduction, Mr. Lee was the main negotiator on behalf of Mid-Green. He denied that the first meeting took place at Man Nin. He further denied that he or Mr. Lee named $900,000 as their first opening price. He accepted that the rental under the lease between Ching Hing and Mid-Green was very cheap. He cannot remember telling the Defendants that they had a special relationship with Ching Hing and could obtain favourable terms for Sea Bead. He denied that no introduction was ever made of Ching Hing to the Defendants. He thought that such introduction should have taken place after the deal was struck between Sea Bead and Mid-Green. He denied that Mr. Lee acted as assistant to Roseanna Ip but accepted that Mr. Lee worked in the past for Wong Miu Shim. He accepted that without Mid-Green's surrender of its lease to Ching Hing, Sea Bead would not be able to obtain a lease from Ching Hing. He denied that he asked for $9,000 per month being rent to Mid-Green. He further denied that Ching Hing did not know about $9,000 as those payments were clearly stated in Mid-Green's ledger. He had a vague recollection of going to Messrs. Lo Wing Sum & Co., solicitors acting for the Defendants in relation to the purchase of the restaurant. He denied knowledge that Lo Wing Sum became upset when told that $600,000 was consideration for the purchase and $9,000 was payment to Mid-Green. He could not remember whether Roseanna Ip was present at Directors' Meeting of Mid-Green to discuss sale of the business but he pointed out that Roseanna Ip was not there for most of the time. He denied that the sum of $9,000 was discussed as monthly payment to Mid-Green or that the same should have been rental payable to Ching Hing.

12. The second witness for the Plaintiff was Mr. Wong He was the Company Secretary of Mid-Green since its incorporation. He was present when the Agreement of 6th September, 1983 was signed at Messrs. Leonard Heung & Co. When asked whether there was any conversation with Lau SHing and Chung Yat Fai at the signing of the agreement he said he "didn't say anything". In cross-examination he accepted that Wong Miu Shim was the major shareholder of Mid-Green. Wong Miu Shim would chair meetings of the company prior to her death on 2nd May, 1981. After her death, Roseanna Ip would chair the meetings. He recalled that Mid-Green had a meeting to discuss the sale of Man Nin prior to signing of the agreement at Messrs. Leonard Heung's office on 6th September, 1983. He accepted that $600,000 was mentioned at that meeting as consideration not only for sale of the restaurant but for sale of its tool of trade. The $600,000 would include "Everything. Decoration. Tools of trade. Everything." He was not aware of the circumstances whereby Messrs. Leonard Heung & Co. acted for both the vendors and the purchasers. At Messrs. Leonard Heung's office, the Agreement was explained to Lau SHing and Chung Yat Fai. He denied that he told the two Defendants that "its mere formality. Nothing would result." He admitted that he knew that Ching Hing belonged to Wong Min Shim. He had no idea whether the lease between Ching Hing and Sea Bead was arranged by Roseanna Ip. He had no idea whether the Defendants were introduced to Ching Hing. He denied that Mid-Green obtained a lease from Ching Hing for Sea Bead. In re-examination he accepted that the sum of $9,000 was mentioned at the Directors' meeting of Mid-Green. When asked what that sum was for, he indicated that the amount of $9,000 was "recorded as income of the company". On that answer being given, the Plaintiffs sought to adduce in reply minutes of the meetings of Mid-Green. Mr. Wong then further amplified his statement that $9,000 was income to Mid-Green. He said he meant "The monies were paid by instalments". He was then further cross-examined on the minutes. He pointed out that Roseanna Ip was not present at Mid-Green's meeting resolving the sale of Man Nin. Her signature on the minutes was appended "belatedly" after her return from abroad. Roseanna Ip had by then tendered her resignation by letter as Chairman of Mid-Green. That resignation, according to the written minutes of an extra-ordinary general meeting of Mid-Green, was accepted at that meeting.

13. For the Defence, the 2nd Defendant Chung Yat Fat ["Mr. Chung") gave evidence. He said he met Cheng Kiu in 1983 and was told that the bosses of Man Nin did not have the heart to run that restaurant. He was told by Cheng Kiu that the rent was cheap with many floors and location was good. During negotiations, a sum of $900,000 was mentioned as the consideration. He was told that Ching Hing was the Landlord of the premises. He was aware of Ching Hing in the restaurant trade. He was told by Mr. Lee that he was very familiar with Ching Hing and with Roseanna Ip in particular. The $900,000 was to include decorations, tools of trade, transfer of lease and licence. He was further told that the lease between Ching Hing and Mid-Green had 70 months to go. Both sides eventually agreed to a price of $600,000 for transfer of furnitures etc. The Man Nin side then pointed out that as the lease was at cheap rent and if Man Nin did not get any benefit it would be unfair to let Sea Bead have a lease at low rent. It was pointed out that Mid-Green would be willing to transfer the lease to Sea Bead if a sum of $9,000 per month be paid as rent. Mr. Lee expressly said that Ching Hing should not know about $9,000. Mr. Man and Cheng Kiu were also present. After these terms were agreed, he instructed solicitor Mr. Lo Wing Sum to represent his side. Messrs. Leonard K.L. Heung & Co. was instructed by Mid-Green and was responsible for drafting the agreement. A meeting took place at the office of Mr. Lo Wing Sum. Mr. Lee and Mr. Man were present at that meeting. Mr. Lo Wing Sum was told the terms of the agreement and said that he would not process that kind of agreement for sale. Mr. Lo Wing Sum explained that there was an element of fraud in that kind of agreement. The objectionable element was the sum of $9,000 as rent. Mr. Lo Wing Sum advised Sea Bead not to carry on with it. Mr. Man then commented that Mr. Lo Wing Sum was an upright person. After this meeting, Mr. Lee suggested that Messrs. Leonard Heung & Co. be appointed to represent Sea Bead as well. The Agreement was explained by staff of Mr. Heung. Mr. Ching found the guarantee not reasonable. Mr. Lee, Mr. Man and Mr. Wong explained that its only a formality and that if everything were to be carried out properly no firm of solicitors would be willing to process the Agreement. After signing the 6th September, 1983 Agreement, he was not introduced to Ching Hing despite the promise of Mr. Lee during negotiations. Mr. Lee and Mr. Man accompanied him to Messrs. Gallant Y.T. Ho & Co. to sign the lease with Ching Hing. Mr. Lee negotiated those terms with Ching Hing. Ching Hing (through Henrietta Ip and Marion Ip) executed the tenancy on a separate occasion. After taking over the premises from Man Nin, instead of a seafood restaurant, Sea Bead operated a restaurant selling snacks and noodles in the name of "Fu Kai Shiu Chiu." The decorations of Man Nin were not useful to Fu Kai Shiu Chiu. In 1986, he wanted to close down his business. He went to see Henrietta Ip of Ching Hing. Henrietta Ip found out about the $9,000 and said it was unreasonable for the middleman to get a benefit out of rents when Sea Bead rented the premises from Ching Hing. In cross-examination, he pointed out that getting a benefit out of rent was one matter and the consideration of $600,000 was another matter. Mid-Green indicated that since they were able to get a lease at low rent Mid-Green ought to get some benefit. Mid-Green insisted that the sum of $9,000 per month should be described as part of the consideration for taking over the business of Man Nin. He repeated that Mr. Lo Wing Sum advised that there was fraud involved in the said Agreement. Despite his understanding that there was a fraud, he eventually signed the said Agreement. He refused to accept the suggestion that Sea Bead was not in a position in 1983 to pay $1.23 million in one go.

14. The Defence tendered the 1st Defendant for cross-examination. Mr. Lin declined that offer on behalf of Mid-Green.

THE FINDINGS :-

15. I have no hestitation in preferring the evidence of Mr. Chung to the evidence of Mr. Man. Mr. Man was particularly evasive in relation to his knowledge of the status of Ching Hing and his participation at the office of Messrs. Lo Wing Sum & Co. As far as Mr. Wong is concerned, I find his evidence as a whole more favourable to the Defendants than to Mid-Green.

16. I hold that the sum of $630,000 was wholly unrelated to the decorations, furnitures, fixtures and chattels of Mid-Green at the said Premises. Mr. Man himself admitted that Mid-Green spent only $1.1 million in decorating Man Nin at the inception of the Mid-Green Tenancy in May 1980. 3 years elapsed since then. Furthermore, Mr. Wong also admitted, in cross-examination that the sum of $9,000 constituted income of Mid-Green. I am not persuaded by the attempts in re-examination to mitigate the damage arising from this piece of Mr. Wong's evidence.

17. I accept Mr. Chung evidence that Mid-Green through Mr. Lee and Mr. Man sought to obtain a benefit for Mid-Green wholly unrelated to the decorations, furnitures and fixtures of Man Nin. Mid-Green was to secure a tenancy from Ching Hing to Sea Bead. Vis-a-vis Ching Hing, Mid-Green was to surrender the Mid-Green Tenancy so as to facilitate the grant of the Sea Bead Tenancy. As part of the consideration for the aforesaid, Sea Bead was to pay Mid-Green $9,000 per month. As laymen the parties used the term "rental" as the monthly payments were tied to the residue of the Mid-Green Tenancy. Sea Bead was notionally treated by them as the sub-tenant of Mid-Green.

18. By virtue of the true nature of such monthly payments and the role of Roseanna Ip in Mid-Green, it was vital for Mid-Green to conceal the true purpose of such payment. As far as Ching Hing was concerned, Mid-Green had voluntarily surrendered its tenancy deriving thereafter no benefit therefrom. Mr. Wong admitted that Roseanna Ip signed the two minutes of 30th July, 1983 belatedly. From the minutes, she would not be able to detact that Mid-Green was going to obtain financial benefits arising from the surrender which benefits were wholly unrelated to the decorations of Man Nin.

19. I further find that the parties explained the true bargain to solicitor Mr. Lo Wing Sum. I accept what Mr. Chung said in relation to the reaction of Mr. Lo Wing Sum. He was of the view that the scheme was a dishonest one. The dishonesty comprised of representing to Ching Hing that save for sale of the decorations, furnitures and fixtures, there was a clean break by Mid-Green when in truth Mid-Green was deriving additional benefits arising from the grant of the Sea Bead Tenancy.

20. Very little authority was cited to me on the issue of illegality. Mr. Cheng for the Defendants cited to me Chitty on Contracts [25th Edition] and Cheshire & Fifoot Law of Contract [11th Edition]. Page 346 of Cheshire & Fifoot states .

Mr. Lin for the Plaintiff did not challenge the statements of legal principles cited by Mr. Cheng. He was content to confine himself in arguing that on the facts I should be slow to make any finding that the said Agreement is illegal with the object of deceiving Ching Hing. Mr. Lin made no serious challenge to Mr. Cheng's contention that if the agreement was made with the object of deceiving Ching Hing, the Court should not then enforce the Guarantee. I was rightly reminded by Mr. Lin that such finding of fact is a serious matter. I have also borne in mind the somewhat convoluted pleadings between the parties. However Mr. Lin himself drew my attention to page 375 of Cheshire s Fifoot which reads :

21. Having warned myself the implications of making such findings, I am of the clear view that the true agreement between Mid-Green and Sea Bead was to deceive Ching Hing in the manner as I outlined above. I find the matter sufficiently pleaded in the pleadings and adequately put to witnesses for Mid-Green. Even if I be wrong on this, I rely on the passage cited to me by Mr. Lin quoted above. Mr. Lin has not drawn my attention to any other circumstances which might be of relevance as to prevent me from making the aforesaid findings.

22. For these reasons, I refuse to enforce the said Agreement which the Guarantee forms part. I therefore dismiss the Plaintiff's claim. As far as the question of costs is concerned, Mr. Chung himself candidly admitted that he was fully aware of the fraud involved. The Defendants participated in the illegality. I would exercise my discretion to deprive the Defendants of the costs of these proceedings to signify the Court's disapproval of such participation. I therefore make an order nisi that there be no order as to costs in relation to this Action. In the absence of any application to argue before me the question of costs within 7 days from the date of this Judgment, such order for costs be made absolute.