PSP Contractors & Traders Ltd. v. Wu Pui Kei

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 16125 OF 2000

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J U D G M E N T

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1. This is an action between three old friends and business associates, Mr Peter Pang, Mr Sammy Law and the Defendant Mr Wu Pui-kei, who have had a very serious falling out. Mr Pang together with Mr Law are directors and shareholders of the Plaintiffs. They have been in business together for many years and remain firm friends. They have been involved in contracting to the construction and quarrying industry, largely concerned with the sale of plant and equipment to those industries, either on their own account or as agents for overseas manufacturers of such machinery.

2. For the purposes of this dispute, I need not go further back than 1990, save to observe that Mr Pang and Mr Law have run the Plaintiff company since its incorporation in October 1979. In about 1990, Mr Pang and Mr Law became acquainted with the Defendant, he having been introduced to them by a Mr John Tran who was involved in the same sort of business, largely based in Thailand. Mr Tran and the Defendant were involved together in similar work through a company called Top Link Limited which had collaborated with the Plaintiff company on some related business. Mr Pang and Mr Law wished to broaden their horizons in terms of the type of business that they undertook and Mr Tran suggested to them that the Defendant would be a suitable person to link up with because of his engineering background and his good connections with manufacturers of engineering equipment in China.

3. As a result, a company called PSP Engineering Limited was formed on 2 February 1992. The Plaintiff Company held 60 per cent of the shares and the Defendant the remaining 40 per cent. The Plaintiffs would provide financial backing whilst the Defendant would do the day to day running of the business and look after the management of the company. Profits and losses would be shared or borne, as the case may be, in the proportions of their respective shareholding.

4. Before I make further reference to the background to the parties' business operations, which I must with particular reference to some specific transactions which will have a bearing on the outcome of the trial, I need to outline the nature of the claim and the counterclaim. The claim, which is in the sum of $110,409, is said to represent money lent to the Defendant by the Plaintiff company which the Defendant has not repaid. These are said to be interest-free loans made to the Defendant to assist him when he was short of money and repayable on demand.

5. The counterclaim relates to claims by the Defendant against the Plaintiffs for commissions due to him and/or a share of the profit in respect of two particular transactions undertaken by the Plaintiffs, not PSP Engineering Limited, in or about September 1992 relating to the sale of two Rapid Reclaimers to K. Wah Concrete Company Limited and another sale to China Cement Company (Hong Kong) Limited in about November 1998. The Defendant says that he was instrumental in acquiring and implementing these two sales and that it was agreed by Mr Pang and Mr Law on the Plaintiff's behalf that the Plaintiffs would pay the Defendant a 40 per cent share of the profit made by the Plaintiffs on these sales. The counterclaim is unquantified and the Defendant seeks an account of the profits made and payment out to him of the amounts found due and owing.

6. The Plaintiffs in their defence to the counterclaim contend that there was no such agreement with the Defendant and that in any event, he played no material part in these two matters, these having been dealt with by a Mr Andrew Blythe from the United Kingdom who sourced the manufacturers of this equipment in Northern Ireland and he, using his connections and technical expertise, prepared the quotations and carried out the demonstration of the equipment for the two clients.

7. This, therefore, in summary at all events, is the substance of the dispute but in order to try and get a proper understanding of how this matter has allowed itself to come to court where I suspect the costs will outstrip the value of both the claim and the counterclaim, I will need to recount more of the background to the history of the parties' business relationship and how they were to fall out rather bitterly, as I judge it, having heard the two protagonists, Mr Pang and the Defendant, give their respective accounts to the court.

8. I propose to recount as briefly as I can the history of the business relationship of the parties ending in the financial failure of PSP Engineering Limited and its liquidation, undefended, on a winding-up petition presented by the Defendant himself. This relationship has also brought about the failure of the Plaintiff company who, although still in existence, is an inactive company with, as I understand it from Mr Pang's evidence, no future trading prospects.

9. PSP Engineering Limited had no liquid assets and consequently it had to be funded from the profits of the Plaintiff company. Its main capital asset was a residential flat at Arbuthnot House, 10 Arbuthnot Road, Central. PSP Engineering, having purchased this property through an introduction by the Defendant, allowed the Defendant to reside there rent-free. Nothing really turns on this but the Defendant has told me that he was able to acquire the property cheaply for PSP Engineering because it had belonged to his wife's former boyfriend who wished to be generous to her and so he agreed to sell it at an undervalue knowing that she would be living there, albeit with her new husband.

10. Apart from a rent-free flat, the Defendant was paid a salary, initially one of $15,000 a month and this was subsequently to increase to about $25,000, and his motoring expenses were also paid by the company. I have not seen any of PSP Engineering's accounts but I accept that initially the company was reasonably successful with the Defendant obtaining work in China which had previously not been forthcoming for the Plaintiff company.

11. Serious difficulties began to appear from about the early part of 1998. Up till then, whilst PSP Engineering were having to look to the Plaintiffs for financing, there was a prospect that it would trade itself into profitability. A major and ultimately fatal blow was struck when a client company in China, Nexon, failed to pay fees owing to PSP Engineering. This put an intolerable strain on the company and in turn on the Plaintiffs who had by then injected over $4 million into the company for no return. PSP Engineering then sued Nexon in the High Court. The claim had a maximum potential of $17 million, $7 million of which represented money due and owing to the company. Most of 1998 was taken up with the conduct of this law suit. PSP Engineering could no longer afford to keep going. It could not pay the Defendant his annual bonus, nor his salary which it did not pay for at least six or seven months. The law suit was eventually settled for $2.5 million, in other words for far less than the claim, and after costs were paid there was very little left over for the Defendant and for the Plaintiff Company.

12. The Defendant, Mr Pang and Mr Law then disagreed on how the amount paid from the law suit should be used and this, no doubt with recrimination and counter-recrimination as to the failure of the company the relationship broke down completely. Creditors were pressing for payment, including the bank. The Defendant then petitioned to wind-up the company on 18 January 1999.

13. As I have already mentioned, in mid-1998 and the end of 1998, the sales of the Rapid Reclaimers were transacted. In the normal course of events this business would have been transacted by PSP Engineering but at this time the company was simply in no financial condition to manage these sales and the business was passed to and done by the Plaintiff company, these two matters giving rise to the counterclaim.

14. From that brief review, I turn to consider the alleged loans to the Defendant. There are four separate amounts totalling $110,409. Mr Pang says that the Defendant was always seriously in debt. He owed tax, he owed credit card companies and he owed school fees for his young son and these needed to be settled. The largest amount is for $75,075 on 17 March 1993. This was a direct payment to settle a tax demand for the Defendant. The transaction is agreed by the Defendant. The demand appears at page 69, it is for personal tax and the cheque stub on the Plaintiff's account is at page 69A. Mr Pang says that the Defendant had no means to pay and this amount was paid on his behalf as a loan.

15. Similarly, the sum of $5,334, although it is right to say that for this precise amount there is no record as to why this exact payment was made to the Defendant. As to these two payments, the Defendant has told me that the amounts were not loans but payments to him on account of profits and commissions due from his 40 per cent share in PSP Engineering. These were payments made on account, payments forward, which were subsequently to be taken into account on future division of profits.

16. Mr Pang's reply to this is to refer to page 36 of the trial Bundle which is a letter dated 30 October 1997 from M K Yam & Company, the Plaintiff's auditors, indicating an outstanding balance of $80,409, ($75,075 plus $5,334), due to the Plaintiffs from the Defendant which the Defendant has signed to indicate his acknowledgement.

17. The Defendant's explanation for this is that the auditor merely asked him to sign this letter telling him that this was an accountancy formality. The Defendant has also explained that at this time he was not in any financial difficulty and counters Mr Pang's evidence that he owed school fees at about this time by pointing out that his son had not at this time attained school age.

18. The remaining two payments for $20,000 and $10,000 were made on 26 June 1998 and 21 August 1998. These were by cheque, the stubs being produced at page 37A and 38A of the Bundle. As to this, the Defendant's case is that these payments were on account of the two sales to K. Wah and China Cement Company. Mr Pang's evidence is to the effect that the Defendant had no real part to play in these sales and would therefore not have been entitled to anything. These matters also go to the heart of the counterclaim and so I must recite the relevant evidence in a little more detail in a moment.

19. But before I turn to this, I should say something about the Defendant's financial position during 1998, particularly as Mr Pang places considerable reliance on this to support his case that these were much needed loans to the Defendant. The Defendant agrees that in 1998 his position was dire. He had not been paid his bonus, his salary had not come through for many months and he was faced with a tax bill of over $170,000 which was artificially high. His income had been overstated to draw income away from PSP Engineering so that the company would not have to pay tax which it simply could not afford to meet. He was therefore forced to take out a tax loan from the bank to pay for this which he had to repay by instalments which he simply could not meet as he had no income coming in. To compound matters, his relationship with his wife was under strain and she returned to England temporarily so that he might sort himself out.

20. It is against this background that Mr Pang says that the Defendant asked for these two loans. Whether they were loans or payments on account of commission due to the Plaintiffs on the two sales of the Rapid Reclaimers will determine the outcome of the case on these two payments.

21. Mr Pang says that the Defendant had left K. Wah on bad terms and for this reason it was thought best to leave the Defendant out of the discussions with K. Wah and that in any event, the Defendant had no knowledge of the workings of the Rapid Reclaimers, so he could not contribute anything on the technical side which was dealt with by Mr Blythe who knew the Northern Ireland manufacturers.

22. The Defendant says that it was he who had met Mr Blythe by accident and they started talking about what Mr Blythe was doing, the two having known each other in the past. Blythe told him about these Reclaimers and the Defendant suggested that they co-operate. As to his relationship with K. Wah, he says it was perfectly cordial. He had left them on good terms to take up a better position elsewhere and he and Mr Blythe had fruitful discussions with the senior people at K. Wah on these possible sales. The Defendant then organised a demonstration of the machinery for K. Wah and a separate one for China Cement. He was very much at the heart of the transactions and because PSP's position was so bad, it was the Plaintiffs that had to transact the sales. He agreed with Mr Pang and with Mr Law that they should treat these two sales on a special and separate basis, whereby the Defendant would receive a 40 per cent cut of the profits.

23. All of this is firmly rejected by Mr Pang. Such documentation as there is on these two sales does not really assist me to resolve the conflict in the evidence. The quote to K. Wah, page 70, is signed by Mr Blythe as the Technical Manager of the Plaintiffs. That is not particularly remarkable given his position and the fact that he had sourced the suppliers in Northern Ireland. On the other hand, the Plaintiff's pro forma invoice, page 73, has been signed by the Defendant, although strictly speaking he was not employed by the Plaintiffs. That may show a degree of involvement but of itself it is not conclusive.

24. For his part, the Defendant has put in documents, page 65 to 68, to show his part in the purchase of supplies through Top Link Limited in the early days, these being dated 1992, which he says show that he was earning commissions or profits for which he was paid in advance in 1993 and 1994, the first two alleged loans that I have referred to.

25. This dispute is entirely a question of fact. Who do I believe? The evidence has provided brief "snapshots" of a 10 year business relationship which was to go sour. There are no accounts, nothing that matters, such as ledgers or agreements in writing, have been produced. Both parties have motives for faulty recollections. I am left with the firmest impression that Mr Pang feels that the Defendant's work was not what he had expected and that it was ineptitude by the Defendant that caused the collapse of PSP Engineering and that this in turn has brought the Plaintiff Company to a standstill. And then to add insult to injury, it was the Defendant who petitioned to wind-up PSP Engineering.

26. For his part, the Defendant feels that he has been badly let down. His financial position was put in very serious jeopardy and he had to give up his home which he had provided to PSP at a very advantageous price and he has not received all that is due to him.

27. From this, I have come to the conclusion that neither party has succeeded in carrying the burden of proving their respective cases. As to the Plaintiffs, the first two alleged loans are dated 1993 and 1994, but no attempt had been made to recover them or put them on a proper recorded basis. The auditor's letter, page 36, goes some way, but the picture is not sufficiently clear. This is what I mean when I say that I have been provided with isolated "snapshots" of a much larger relationship which are incomplete.

28. The Defendant has given an explanation for his signature on page 36 which the Plaintiffs have not been able to negative. No doubt, for perfectly goods reasons, they have not been able to call the auditor himself to explain the status of the accounts referred to in the letter at page 36. I am not prepared to hold on this incomplete evidence, that on a balance of probabilities, these two payments were indeed loans.

29. As the more recent payments, $20,000 and $10,000 in 1998, I am equally uncertain as to their status. If Mr Pang is right, I would have thought that with the ship sinking, Mr Pang would have ensured that he had got the Defendant to sign a letter explaining that these two payments were a loan to alleviate a hopefully temporary financial difficulty. There is no such evidence in existence.

30. I am also rather concerned that this writ may be no more than a settling of old scores between old colleagues who have fallen out badly. The winding-up petition was in January 1999 and the Plaintiff's letter for repayment of the alleged loans arrived a month later.

31. With plenty of motive to attempt a rewriting of past events by both parties, I must proceed with particular care before coming to a conclusion that would justify a judgment. This, I am not able to do on the evidence before me.

32. As to the counterclaim, precisely similar considerations apply. There is simply no documentary evidence to confirm anything that the Defendant has had to say about commissions on account, nor anticipated profits to be paid early. His evidence is also thin in the extreme.

33. Where neither party has proved their cases, the claim and the counterclaim must stand dismissed. I am sorry that these two capable gentlemen have felt it necessary to litigate these issues out of the ashes of their failed venture on unimpressive evidence which has only served to add to the cost that they have already sustained out of the liquidation of the engineering company and the apparent failure of the Plaintiff company.

34. Where both the claim and the counterclaim have failed, there should be no order as to costs, that is to say that the costs should lie where they have fallen.