T.L. MANAGEMENT LTD v. EXPERTECH DEVELOPMENTS LTD AND OTHERS

HCCL 5/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO.5 OF 2002

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J U D G M E N T

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Introduction

1. On 29 February 2000 the plaintiff herein, T.L. Management Ltd, remitted the sum of US$265,000.00 by telegraphic transfer from its account with the Hongkong Bank to an account of the 1st defendant, Expertech Developments Ltd ('Expertech') at the head office of Chiyu Banking Corporation in Hong Kong.

2. The return of this sum of money has provided the sole focus of the claim by the plaintiff in this action.

3. The plaintiff is a fund management company incorporated in the British Virgin Islands. The fund in question, which was managed by the plaintiff until the fund's liquidation, was called the China Aeronautical Technology Fund.

4. This fund had been set up with a view to investment in various joint ventures with unlisted PRC enterprises under the supervision of the PRC Ministry of Aeronautics and Aerospace Industries. The latter Ministry comprised two state-owned enterprises, namely Aviation Industries of China and China Aerospace Corporation, of which the former, 'AVIC', is the entity material to this action; although not named as a party, AVIC maintained a presence at both shareholder and board level in both the fund and its manager.

5. The 1st defendant, Expertech, is a company incorporated in Hong Kong. It was, as I have said, the recipient of the disputed sum of US$265,000.00.

6. The 2nd defendant, Madam Chen Guan Wen, was at the material time a director of Expertech.

7. The 3rd defendant, Madam Kung Lin Fen, was at the material time, and continues to be, an accountant employed by AVIC. Within the structure of AVIC, she reported to a gentleman named Mr Chi Yao Zhong, a senior financial officer, who was a director of the fund, although not of the manager, and whom, I am told, is the husband of Madam Chen.

The claim as pleaded

8. In the Re-Amended Statement of Claim, the plaintiff asserts that no valid basis existed for the payment of the sum of US$265,000 from itself to Evertech, and that as the 3rd defendant, Madam Kung "well knew", the plaintiff was under no obligation to make such payment.

9. The plaintiff denies, as was alleged by the defendant in pre-trial inter-solicitor correspondence, that this sum was a repayment by the plaintiff of monies earlier erroneously paid to the plaintiff by AVIC, and the plaintiff further contends (at paragraph 10) that this sum represented reimbursement by AVIC "of sums advanced by the plaintiff for or on behalf of senior management of AVIC in respect of the purchase by them of personal items, the cost of vacations, subsistence and other expenses incurred in the period to 31st December 1998." In this connection, that which appear to be various vacation photographs have been included in the trial bundles.

10. As an alternative to this primary case, it is further pleaded (at paragraph 11) that the payment by the plaintiff "was as the result of a mistake by the plaintiff that it was obliged to make (or that a valid basis existed for the) payment to the 1st defendant."

11. Accordingly it is asserted that the plaintiff is entitled to recovery of the sum of US$265,000 as money had and received by the 1st defendant, alternatively the plaintiff claims damages for misrepresentation against the 2nd and 3rd defendants.

The evidence

12. The evidence called on its behalf did not reflect the plaintiff's case in the manner pleaded. There was no reference whatever to the primary plea, namely as to the purchase of personal items; the cost of vacations and so forth.

13. In the event but one witness was called, namely Mr Koo Ming Hon, the current Financial Controller of the plaintiff, who began his employment in January 2001. Mr Shieh SC, on behalf of the plaintiff, eschewed Mr Koo's witness statement, as drawn, and elicited evidence from his witness in terms of facts solely within his personal knowledge.

14. The sum total of Mr Koo's evidence amounted to little more than that he had been instructed by his superiors, he knew not why, to review the books of the plaintiff, and that in the course of this exercise he had discovered that no documentation existed for the payment of the sum of US$265,000 the subject of the present dispute.

15. Whilst he had known the plaintiff's former Financial Controller, Billy Chan, and of the fact that the latter's employment had been terminated (although again he did not know why), and he also had known Madam Kung as a representative of AVIC who occasionally would visit the plaintiff's office, Mr Koo made it clear that the events the subject of this case had taken place before he had taken up his post; accordingly, from the available records Mr Koo was able to offer no insight as to the reason this payment out had been effected. Nor, for that matter, was he able to say how or why the plaintiff had received the sum of US$265,000 in the first place.

16. Mr Koo added that he had also known one Duncan Hon, the former General Manager of the plaintiff, who would have been aware of the events the subject of this dispute, but who had also now left the plaintiff's employ. He further said that as far as he was aware, at least up until a few months ago, both Billy Chan and Duncan Hon were in Hong Kong; he had, however, spoken to neither about this payment, nor why it had been made, notwithstanding that he had had Billy Chan's contact phone number in his possession throughout, although he had never attempted to call him.

17. Shorn of extraneous detail, in substance this was the totality of the plaintiff's evidence, and the paucity of the plaintiff's evidential resources presents a striking feature of this case. In the circumstances, perhaps, it would have been unsurprising had there been a submission of no case to answer, although in the event this did not transpire, Miss Cheng SC opting to call but one witness on behalf of the defendants.

18. This witness was Madam Kung Ling Fen, the 3rd defendant, whose evidence made it clear that, to the contrary, she was in a position to say what had happened, and why.

19. The substance of Madam Kung's evidence was thus. She said that the plaintiff, T.L. Management Ltd, had been sent the sum of US$265,000, in two tranches of US$165,000 and US$100,000 by AVIC in April and May 1999; in fact, the bank records showed that these payments were effected in Hong Kong dollars in the sum of HK$1,278,255 on 19 April and HK$775,000 on 18 May 1999 respectively.

20. These monies had been paid under a mistake, she said, which thereafter had been corrected, and the monies returned. The genesis of the problem had been the correct calculation of the management fees due to T.L. Management. At the time these payments were made both parties had been under the erroneous belief that management fees were charged and paid on the basis of 2% of the Net Asset Value of the Fund as at the end of the immediately preceding year, whereas now, Madam Kung asserted, it was understood that the correct payment calculation should be 2% of the Fund NAV at the end of the immediate preceding year and 2% of the sum in cash dividends which had been paid out to shareholders in the immediate preceding year. However, this correct mode of calculation had been discovered only in May/June 1999 after professional advice had been taken, and after the payment in the cumulative sum of US$265,000 already had been made to the plaintiff.

21. That which had stimulated the payment to the plaintiff in the first place had been a letter dated 23 February 1999 written by Duncan Hon to Mr Chi Yao Zhong, Chief Accountant of AVIC, which document noted that as the NAV of the Fund "decreased year by year due to the frequent distribution of bonuses, the management fee of the Management Company has also decreased progressively each year", and that the plaintiff would have "genuine difficulty" in meeting the operational costs for 2000 with the 1999 management fee income. The example profferred revolved around shareholder distributions from the Fund in December 1998, thereby reducing the NAV of the Fund by US$27 million, with the stated consequence that the 1999 management fee income (calculated at 2% of the NAV in the previous year) was thus reduced from US$1.2 million in 1998 to "approximately US$700,000 only".

22. This letter, which constitutes a key document in this case, concluded with the request that in order "to allow the Fund to operate normally" it was hoped that AVIC would "assist in resolving the issue of the insufficiency of funds faced by our company in its operations and to give our company a one-off grant of about US$300,000 so as to enable us to perform well all future work for the Fund."

23. Madam Kung further stated that she was given a photocopy of this letter, and that the Fund Office of AVIC had proceeded to consider and to process Duncan Hon's application. Her evidence is that several figures were considered for the purpose of any remittance, but that in the event the amount ultimately decided upon was US$265,000 (which was about half of the then anticipated shortfall in management fees), a figure to which the AVIC leaders, Messrs Chi and Zhang, agreed and approved.

24. In the event, she said, payment of this sum was effected, in the Hong Kong dollar equivalent, through CATIC Hong Kong, on 19 April and 18 May 1999.

25. Realisation that this payment had been made on the erroneous understanding as to the mode of calculation of the 1999 management fees, and hence the mistaken payment of the sum of US$265,000, did not strike home until the end of May/early June 1999, and, said Madam Kung, there was telephone contact between herself and Billy Chan on the issue, and she had understood "all along" that Billy Chan and Duncan Hon had accepted and agreed that there would need to be a repayment of the sum thus erroneously remitted.

26. In September 1999 Madam Kung recalled that Billy Chan had telephoned her in order to obtain a nominated bank account number into which the money could be repaid, and that as a consequence she had sent him a fax dated 15 September 1999, which had stipulated that the US$265,000 to be so transferred should go into a bank account maintained by CATIC (an acronym for China Aeronautical Technology) in Hong Kong in the name of one of its subsidiary companies, Expertech Developments Limited, and held in the San Po Kong branch of the Chiyu Banking Corporation.

27. This particular fax of 15 September 1999 was a document that the plaintiff required to be formally proved, no doubt because it was this fax, with the original date blanked out and replaced by the date of 28 February 2000, which had been used as the instruction to effect the return remittance.

28. Madam Kung further explained that the Evertech account was AVIC's choice, and that it was not thought to be safe to put the money back into the CATIC entity which had made the original payments because that company had a huge deficit.

29. She also said that Duncan Hon and Billy Chan had agreed to return the sum to AVIC before 15 February 2000, but in fact no payment was effected by that date because it was explained to her that payment had not yet received approval of the management company boss. However, on 28 February 2000, after a meeting in Singapore, she had visited the plaintiff's office in Hong Kong, and she had seen Billy Chan 'white out' the date on the fax of 15 September and insert that day's date. Thereafter, on the following day, 29 September 2000, the plaintiff's bank, HSBC, had been instructed to transfer the sum of US$265,000 into the 1st defendant's account.

30. I accept the evidence of Madam Kung. Indeed, given Mr Koo's admitted lack of knowledge as to what occurred, and why, Madam Kung's evidence is the only evidence before the court as to what happened in this case. She gave her evidence coolly and calmly, and although occasionally clearly irked when her credibility was under challenge, fundamentally her story remained undisturbed notwithstanding some penetrating cross-examination by Mr Shieh SC. I further reject the submission that her evidence was implausible, and thus incapable of acceptance.

31. To the contrary. Notwithstanding the plaintiff's critique of the manner in which the figure of US$265,000 was apparently decided upon (that is, as half of the sum of US$530,000, which was the sum thought to have been foregone by the plaintiff if the calculation of the 1999 management fees did not take into account the 2% dividend payment), and the argument that in mathematical terms a dividend distribution in 1997 theoretically would have resulted in the decrease of management fees in 1999, the version of events given to this court by Madam Kung is broadly reflected by such documentary material as is available in this case.

32. Accordingly, since Madam Kung's evidence is the only evidence before the court on the central issue in this litigation, I see no reason whatever not to proceed on the basis, which I now do, that that which the court has been told reflects that which actually occurred.

33. No attempt appears to have been made by the plaintiff to call either of its managerial staff who were on the spot at the time of the initial transfer, and who clearly would have been able to tell the court precisely what had taken place from the plaintiff's standpoint, that is, Messrs Billy Chan and Duncan Hon, although, as Miss Cheng SC commented, both were known to be in Hong Kong and Mr Koo also had had Mr Chan's contact number.

34. In my view it is curious that the plaintiff has chosen to pursue this case to trial in the absence of any input whatever from these two gentlemen. Nor was the plaintiff minded to call Mr Ronald Chum, whose pre-trial witness statement had dealt in substantial part with the pleaded element of the plaintiff's case which pointedly was not pursued, that is, that the payment of US$265,000 as a financial subsidy to the plaintiff manager in respect of expenses incurred by the plaintiff on behalf of the AVIC representatives. Aside from the briefest of references in opening, nothing more was heard on this topic.

35. At the end of the day, therefore, whilst there has been a good deal of forensic shadow boxing in this case, it is solely the defendants who have been in the position actually to throw any punches.

The plaintiff's case as argued

36. This is not a complex matter. The plaintiff based its case solely in terms of the payment as made by the plaintiff to the 1st defendant being a payment made under a mistake. The plaintiff bears the burden of establishing this proposition.

37. In the alternative the plaintiff claims against the 2nd and 3rd defendants in terms of misrepresentation.

38. Let me deal immediately with this alternative element. No case whatever has been established under this head - in fact I have difficulty in recalling whether the 2nd defendant was even mentioned during this trial - and the case in misrepresentation as brought against both these defendants is dismissed.

39. In terms of the claim against the 1st defendant the shape of Mr Shieh's closing submission was twofold : first, that the initial payment to the plaintiff by AVIC of the sum of US$265,000 was not based upon any mistake; and second, that even if there was a liability to repay the said sum, the correct recipient was AVIC, and that the 1st defendant, Expertech, had failed to show that it was authorized by AVIC to receive the payment.

40. The thrust of the first point (with which Mr Shieh did not lead) is that if established it buttresses the argument that indeed there was a mistake in terms of the outward remittance of these monies from the plaintiff, an argument which, of course, is maintained in the striking absence of any direct evidence for the plaintiff upon this issue.

41. I have earlier indicated that I accept Madam Kung's evidence, which covered the circumstances of the original payment to the plaintiff of this sum, and the circumstances of the remittance back of the like amount, and having so accepted this evidence this must be an end to what struck me as an highly optimistic submission. There is clear evidence as to why these parties acted as they did with regard to these monies, and I do not find that these remittances, both inward and outward, were done other than in good faith.

42. It follows that I am unimpressed by the intricate 'mathematical argument' subsequently developed in terms of the relationship between the payment out of the dividends and the management fees. I accept and so find that the original remittance was made in the manner and for the reason stated by Madam Kung, and as a direct consequence of the letter of 23 February 1999, whereby Mr Hon had written to Mr Chi outlining the operational difficulties of the management company caused by the impact the distribution of bonuses was having upon the level of management fee income. In my view, therefore, there is nothing for the plaintiff in the first point.

43. The second argument, namely Expertech's authority to receive the payment, in the event represented Mr Shieh's main submission, although I note in passing that the vires of Expertech to act as it did was but inferentially touched upon in the pleadings.

44. Be that as it may. Mr Shieh's argument was that assuming everything against the plaintiff, it remained incumbent upon Expertech to demonstrate that it was properly authorized to receive the monies so remitted by the plaintiff, or otherwise, as he said, a third party could interpose itself and 'hijack' a debt owed by a debtor to a creditor, thereby exposing the debtor to the risk of being pursued by the creditor. Thus, even if the plaintiff did owe the money to AVIC, if Expertech did not have AVIC's authority to receive the remittance, the plaintiff would risk having to pay twice, in the sense that AVIC could later sue the plaintiff for the like amount.

45. This seemed to me to represent an ingenious, but at bottom a similarly optimistic line of argument, not least because there is no evidence that over the past four years AVIC has demonstrated any inclination to pursue the plaintiff. In any event, Madam Kung gave direct evidence as to the choice of Expertech, the 1st defendant, to be the recipient of the money as remitted from the plaintiff, and I reject the submission that her evidence was "incapable of belief".

46. She was put to proof of her handwritten note, dated 15 February 2000 wherein, under the letterhead of AVIC (or, more precisely, of its successor, AVIC II) she had notified Expertech of the imminent deposit of the sum of US$265,000 as "returned by T.L. Aero-Fund Investment Fund Management Limited of Hong Kong", and she was pressed in cross-examination in terms of whether this was a fax (as pleaded) or whether it was actually given by hand, as she said in evidence.

47. Having accepted her evidence as given, I see no reason to conclude that Expertech lacked authority from AVIC to receive this money. Madam Kung explained that Expertech was chosen because out of the many CATIC companies in Hong Kong, Expertech ran smoothly and did not have a large deficit, as did Catic Finance, which had been the original conduit for the payment to the plaintiff, and also that she did not need to obtain authorization as she was the person responsible for the matter, although she had had an oral discussion with General Manager Wong of Evertech about authorizing Expertech to receive the money on AVIC's behalf.

48. Once again, notwithstanding Mr Shieh's vigorous criticisms, I see no reason not to accept Madam Kung's version of events, and on the evidence before the court I decline to conclude that Expertech lacked authority to act as recipient of these funds.

49. In the event that which transpired was that these funds were retained within Expertech under AVIC's control, and thereafter, said Madam Kung, they were disbursed by AVIC in the normal course of its business. The available evidence, therefore, is that AVIC well knew what had happened to the funds, which had gone into and out of Expertech under its direction, and there thus can be no question of Mr Shieh's scenario arising of AVIC, qua unpaid creditor, now moving against the plaintiff for repayment of the sum already deposited into Expertech's account.

50. Moreover the fact that ultimately Miss Cheng elected not to call anyone from Expertech, in this regard relying solely upon the evidence of Madam Kung, seems to me to be nothing to the point. On the basis of such evidence as does exist before this court, in my view this second argument does not succeed either.

51. Accordingly, the plaintiff's claim against the 1st defendant fails also.

Order

52. In my judgment the plaintiff has not come near to establishing its claim, and the plaintiff's action against the 1st, 2nd and 3rd defendants is dismissed. I so order.

53. Costs are to follow the event. I make an order nisi that the costs of this action are to be to the defendants, to be taxed if not agreed.