PROLINE PRODUCTS INC. v. LAM LIN TIM PATRICK

1997, No. A259

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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J U D G M E N T

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Introduction

1. In these two actions, which I heard together, the two Plaintiffs each seek the recovery of money lent to the Defendant. As far as the earlier claim by Proline Products Inc. is concerned, the Defendant pleaded that the money was to be set off against salary due to him from the Plaintiff. That salary was HK$20,000.00 per month to be paid to the Defendant for assisting in the setting up and supervision of the operations of a new joint venture in China to be called Meizhou Yali Electronics Limited (I will call it Yali). By counterclaim, the Defendant claimed the sum of HK$60,710.00 due to him as salary after setting off the sums claimed by Proline.

2. In relation to the second action, the Defendant pleaded that the various sums were advanced to him by Johnson Lau (Mr. Lau) on behalf of Yali in connection with the setting up and putting into operation of that company.

3. Two things need to be stated immediately. First, the two claims are superficially at least straightforward claims for loans unpaid. The alleged loans, however, are closely connected with the Defendant's activities in Yali. The circumstances in which the Defendant came to leave Yali are hotly in dispute. Those circumstances might well give rise to an action against the Defendant based on breach of fiduciary duty if such a cause of action exits on the Mainland. I made it plain from the outset that I did not wish to get involved in what was essentially a collateral issue. I declined, therefore, to go in any detail into the underlying reasons for the Defendant leaving Yali. Necessarily, however, some hint of what occurred crept into the evidence.

4. Second, the Defendant was unrepresented at the trial although he had until recently been represented by 2 different firms of solicitors. The defences were drafted by the different firms of solicitors. The Defendant applied for the trial to be adjourned so that he could apply for legal aid, notwithstanding that a previous Legal Aid Certificate had been discharged and that a later application had been refused. I refused an adjournment having regard to the fact that the claims were each for $200,000.00 or less and the fact that Mr. Lau, who also gave evidence on behalf of Proline, had come from U.S.A. for the trial. The result, however, as might have been expected was that the trial proceeded far from smoothly because the Defendant had not exchanged witness statements as previously ordered by the court so that the tenor of his evidence was unknown, and he called three unexpected witnesses. The Defendant also produced as the trial progressed a number of documents which had to be both translated and digested by the Plaintiffs.

The Plaintiffs' case

5. Mr. Lau owns two companies in U.S.A. being Proline and Akihabara Inc. That is to say Mr. Lau is the sole shareholder in his companies so that he and his companies are indistinguishable. Through these companies, Mr. Lau imports watches, clocks and other electronic equipment.

6. Mr. Lau met the Defendant in 1982 or 1983 through business. Mr. Lau dealt with companies owned by the Defendant, in particular, Likoton Limited, a Hong Kong company. The two businessmen became friends. According to Mr. Lau, in 1994 the Defendant phoned him in U.S.A. saying that he needed money. Mr. Lau arranged a loan of HK$100,000.00 through a friend, Mr. Faith Tang in Hong Kong. The loan was to be repaid with interest. Following demands by Mr. Tang, the Defendant repaid $50,000.00. Mr. Lau eventually repaid the balance through Proline on 13th July 1994. After converting that balance and outstanding interest into US$ and including cable charges, the cost to Proline was US$6,903.12.

7. Repayment by the Defendant to Proline was left in suspense until August 1995 when the Defendant borrowed US$12,000.00 from Mr. Lau personally. To protect his position or the position of his company, Mr. Lau required the Defendant to acknowledge both the outstanding loan and the new one. The outstanding loan was recorded in a document called 'debit memo' dated 8th June 1994 issued by Proline to Likoton. The Defendant wrote on this document "confirm this amount we loan from your company", signed and dated it 18th August 1995.

8. As to the new loan, the Defendant signed a formal document, which included a copy of his identity card, acknowledging "I borrow USD12,000.00" from Proline and which was dated 19th August 1995.

9. According to Mr. Lau, both loans for remain outstanding. Hence the claim by Proline.

10. By August 1995, Mr. Lau and the Defendant had been in discussion about setting up a company in the Mainland to sell watches locally and overseas. The Defendant suggested he run the company but not full time because he was already engaged with Likoton and another company in the Mainland. He could not contribute financially but would invest his time in setting up and running the new company, Yali. Mr. Lau agreed, as he did to 4 other terms requested by the Defendant:-

(1) Help with immigration to U.S.A.

(2) The opportunity to become a shareholder in Yali and Mr. Lau's US companies.

(3) Help in selling of stock of the Defendant's old Mainland company.

(4) An opportunity to develop business in China.

11. The Defendant also agreed to allow Yali, the use of his trademark, Balento, which he had registered in China.

12. Mr. Lau gave the Defendant full authority to make arrangements for setting up Yali. He did not, however, agree any salary with the Defendant who was getting the terms which he had requested and which could lead to participation in Yali as well as the U.S. companies if all went well. In other words, said Mr. Lau, there was no risk to the Defendant but the possibility of benefits.

13. It was in this context that Mr. Lau, through Proline, lent US$12, 000.00 to the Defendant.

14. The Defendant proceeded to set up Yali which obtained its formal licence from the Mainland authorities in January 1996 to operate in Meizhou. Later, in April, a licence was granted for a branch office in Shenzhen which effectively became Yali's head office and principal place of business.

15. Between October 1995 and May 1996, Mr. Lau personally made further loans to the Defendant amounting to RMB108,000.00, HK$30,000.00 and US$5,500.00. Mr. Lau recorded the individual loans in a note book which the Defendant signed by way of acknowledgment.

16. Not only did the Defendant not repay these loans but, after June 1996, he disappeared from Yali. Mr. Lau suspected that the Defendant and other staff were setting up a rival company. Later, Yali was notified by the local authority that the Defendant had resigned and his name should be replaced on Yali's licence by that of another responsible person.

17. On 30th December 1996, Proline's solicitors wrote to the Defendant demanding repayment, amongst other things, of the two loans. The Defendant replied promptly to the effect that Mr. Lau had said that the Defendant would be paid HK$20,000.00 per month from August 1995 for helping to set up Yali. Because of financial difficulties, the Defendant had asked for an advance. Mr. Lau lent US$12,000.00 and agreed that the money which had been lent to Likoton should be set off against the Defendant's salary. The Defendant said he received no salary but, having worked for 11 months, was owed HK$220,000.00.

18. On 9th July 1997, the solicitors wrote to the Defendant on behalf of Mr. Lau. There was no reply.

The Defendant's case

19. The Defendant said that, in November 1993, he asked Mr. Lau for a loan of HK$100,000.00 for Likoton. He collected this loan from Mr. Lau's friend, Mr. Tang. It was repaid with HK$2,000.00 interest on 26th February 1994.

20. A further HK$50,000.00 was borrowed in 1994. It was agreed that this could be set off against goods to be supplied by Likoton. In June, goods to the value of US$5,141.00 were delivered to Proline and another quantity of components was sent to another company, Kaimaxi, at Proline's direction. The total value of these goods was sufficient wholly to set off the loan.

21. The Defendant acknowledged that he had received a personal loan of US$12,000.00 from Mr. Lau. Mr. Lau had noticed that the Defendant was miserable because of his financial problems and business difficulties both on the Mainland and in Hong Kong. It was suggested that Mr. Lau would set up a company on the Mainland and that the Defendant would help to run and manage it as general manager. The Defendant agreed to this and to a salary of HK$20,000.00 per month together with a bonus if there was any profit. The Defendant's share of the profit could be invested in Yali or Akihabara so that the Defendant would become a shareholder in these companies. The Defendant denied, however, that he was interested in emigration to U.S.A.

22. The Defendant asked for and received the loan of US$12,000.00 so that he could settle his family affairs before going to the Mainland to work full time.

23. The Defendant also agreed to lend his trademark "Balento" to Mr. Lau, but left it to Mr. Lau as to how much the Defendant should be paid for the use of the mark.

24. The Defendant worked hard setting up the company. Mr. Lau visited it from time to time and paid the Defendant for expenses incurred in whatever currency Mr. Lau had available at the time. A note of the expenses was recorded in Mr. Lau's note book.

25. The Defendant, however, became disenchanted with both Yali and Mr. Lau because

(1) Mr. Lau did not pay the Defendant's salary, so that the Defendant's family was in difficulties.

(2) Mr. Lau treated his own brother, who also worked in Yali, very badly so that eventually the brother left in May 1996.

(3) Mr. Lau would not follow the Defendant's plan which was to set up their own factory to assemble watches. As a result, there appeared to be no future for Yali.

(4) Mr. Lau would not help the Defendant to sell stock which the Defendant had in hand from his defunct Mainland company.

26. In May or June, the Defendant and Mr. Lau had a bad quarrel about the Defendant's salary. Mr. Lau said he would pay the Defendant US$20,000.00 per year and not HK$20,000.00 per month.

27. With the help of a friend, the Defendant decided to set up another company, Da Bu Jeda. On 1st July, with the help of his son in Hong Kong, the Defendant composed a letter of resignation and had it faxed to Mr. Lau in U.S.A. A few days later, Mr. Lau telephoned to ask the Defendant why he resigned. After discussion, the Defendant agreed to stay on and helped with customs formalities. The Defendant completed this work in August when he returned keys and chops belonging to Yali and left.

28. In summary, therefore, the Defendant's case is this.

(1) The sum of US$6,903.12 claimed by Proline as the balance of a personal loan of HK$100,000.00 was in fact a loan of HK$50,000.00 to Likoton which had already been discharged by the agreed delivery of goods.

(2) US$12,000.00 was an advance by Proline to be set off against the salary to be paid by Proline or Mr. Lau for the Defendant's services in connection with Yali.

(3) The amounts claimed by Mr. Lau represent advances for or reimbursement of expenses incurred by the Defendant on behalf of Yali.

US$6,903.12

29. The Defendant produced what is undoubtedly Likoton's daily ledger for the relevant period which had been kept by an accounts officer who is no longer with Likoton. This appears to support the Defendant's claim that $100,000.00 was borrowed from Mr. Lau in 1993 and later repaid. There are appropriate entries in the book. There was also produced a copy of Likoton's bank statement showing a cheque payment of HK$102,000.00, the number of the cheque corresponding with the reference number shown in the book. The book then records a later acquisition of HK$50,000.00 from Mr. Lau.

30. The Defendant's difficulty, however, is that his professionally drawn defence pleads that this sum was a trade debt which Likoton owed to Proline, which the Defendant agreed to repay on behalf of Likoton, and which was to be set off against the salary to be paid by Proline to the Defendant in connection with Yali. This assertion was repeated in the Defendant's affirmation of 25th February 1997, which he made to resist the Plaintiff's application for summary judgment.

31. Further, the Defendant signed the acknowledgment of this debt in August 1995.

32. When these matters were pointed out to the Defendant, he explained that Likoton had relocated, that staff had left and files had become confused. Only recently had he been able to attribute the two invoices for the delivery of goods to this loan. He signed the acknowledgment hurriedly when discussing the new company with Mr. Lau.

33. The Defendant said that Mr. Lau sometimes paid for goods in advance if Likoton or the Defendant was without money and sometimes after delivery. Although repayment of this loan was agreed to be by way of delivery of goods, it was effectively a species of advance payment.

34. The Defendant called his wife to give evidence. She had assisted in Likoton's office on a part-time basis and worked in close connection with Likoton's book-keeper. She professed to be familiar with Likoton's affairs. In particular, she said that when checking Likoton's accounts in 1996, she knew that the outstanding loan of HK$50,000.00 had already been repaid by delivery of goods to Proline and Kaimaxi. If that is right, it is difficult to understand why this was not pleaded and put in the Defendant's affirmation.

35. Further, on 3rd June 1994 Likoton drew a cheque for $50,000.00 in favour of Mr. Lau's friend, Mr. Tang. A few days later, on 13th June, Proline remitted through its bank, the sum of US$6,883.00 for the credit of Mr. Tang. That sum coincides with an amount of HK$50,000.00, plus HK$3,000.00 representing interest outstanding interest on the alleged loan of HK$100,000.00. When cable charges are added, the total amount is US$6,903.12.

36. In his evidence, Mr. Lau acknowledged that there were occasions when he paid in advance for goods in order to help the Defendant. There is no doubt that Mr. Lau, the Defendant and their respective companies had a somewhat loose and friendly arrangement in many respects. But it was not so loose and friendly that a loan could somehow have been discharged without either side appreciating what had happened.

37. It is clear to me that the Defendant was simply seeking an excuse to avoid paying this outstanding sum. The question remains, however, as to who is liable for this sum. Mr. Lau, of course, said that $100,000.00 was lent to the Defendant personally by Proline. I find this difficult to accept. As I have already indicated, the books of Likoton indicated that it had received two loans or advances from Mr. Lau. Further, on Proline's own case, the part repayment of the loan to Mr. Tang was by way of a cheque drawn by Likoton. The acknowledgment of the balance of the loan signed by the Defendant was drawn on Proline's letterhead and addressed to Likoton. And the Defendant's acknowledgment was that 'we loan'. Further, Proline's instruction to its bankers for the transfer of funds to Mr. Tang contained reference to Likoton.

38. In my judgment, therefore, all the indicators are that the loan of HK$100,000.00 which, I am satisfied, was made by Proline was a business loan to Likoton and not a personal loan to the Defendant. Accordingly, Proline cannot recover this sum from the Defendant.

US$12,000.00/Personal Loans by Mr. Lau to the Defendant

39. The crucial question is whether the Defendant was to be paid a salary in connection with Yali and, if so, by whom. Again, there is a measure of inconsistency in the Defendant's case. In the action brought by Proline, the Defendant pleaded that his salary was to be paid by Proline. In the action brought by Mr. Lau, the formal defence seems to suggest that the Defendant would be paid by Yali. In evidence, the Defendant asserted that he was to be paid by Mr. Lau personally.

40. There is no record of the Defendant as a salaried employee in the books of Yali. The Defendant's explanation for this was that, in the case of a joint venture, certain staff have to be supplied by the foreign partner to the venture and paid as overseas staff by the foreign partner. On the evidence, however, there is no record of the Defendant being an employee of Proline either.

41. The Defendant called two witnesses in connection with the affairs of Yali. The first was Wuang Xue Xiang, who had been vice general manager of Yali. He had worked in another company with the Defendant before Yali. However, he regarded both the Defendant and Mr. Lau as his friends. It was clear to me that, as far as possible, he was trying to maintain a neutral stance. He did, however, give evidence of a meeting between Mr. Lau and the Defendant at which he was present and which took place in July or August 1996. At this meeting, the Defendant complained to Mr. Lau about his salary and about the use of the trademark. Mr. Wuang said that, on another occasion, he told Mr. Lau that the Defendant should get his salary, but Mr. Lau replied that he had already paid over US$10,000.00. So there is some support for the Defendant's case that he was to receive a salary.

42. The second witness was Miss Li Yuen Lin. She worked for Yali as accounts clerk from 2nd January 1996 and was responsible for keeping the books. She supported the Defendant's case in two respects. First, she told of a quarrel between the Defendant and Mr. Lau at which the Defendant said that Mr. Lau had promised him HK$20,000.00 per month. Mr. Lau replied that he meant US$20,000.00 per year. She also said that, when she first reported for duty, she asked Mr. Lau to whom she was introduced by the Defendant for details of salaries. These Mr. Lau gave her. The Defendant said that his salary was HK$20,000.00. Mr. Lau neither agreed or disagreed but said "you get the picture".

43. Miss Li, however, was a very partisan witness. Her evidence was dogmatic with none of the give and take and hesitations that one normally expects of a witness trying to give an account of events that took place over several months some years before.

44. Then, Miss Li complained of her treatment at the hands of Mr. Lau who peremptorily searched her desk and the office's safe without offering any explanation. She felt humiliated when Mr. Lau went through her personal belongings. As a result, she decided to resign but, surprisingly, was persuaded to stay on and help Mr. Lau and Yali until November. It is plain, however, that there was a very good reason for Mr. Lau to have carried out this search. Mr. Lau had put the money into Yali. He was plainly very meticulous in examining the books and accounts of the company. He was no doubt shocked to discover details of another company in Yali's computer. That company, Da Bu Jeda, is one in which Miss Li and the Defendant both now work and in which Miss Li herself is a substantial investor. Clearly, Mr. Lau was fully justified in trying to find out what was going on. It is hardly appropriate for Miss Li, who was well aware of the setting up of this new other company, to complain.

45. Finally, Mr. Lau had produced a document dated 14th November 1996, in which he had set out a summary of the advances he had made to the Defendant. After an over night adjournment in her evidence, Miss Li's attention was drawn to this document. Without hesitation, she said she remembered it and that she was responsible for marking in the exchange rates for the Hong Kong and US dollars and the corresponding amounts in RMB. Further, she protested, the Defendant had not been repaid these sums. It is, of course, no part of the Defendant's case that Mr. Lau owes him anything for expenses. The Defendant's case is simply that this money was advanced to him but in connection with Yali expenses.

46. In the Defendant's favour, I recognize the point that the brief notations of the alleged loans or advances to the Defendant which Mr. Lau made in his note-book contrast with the more careful documentation in relation to the loans or advances made by Proline. The fact remains, however, that Mr. Lau did make a note of the sums and did obtain the Defendant's signature to them.

47. I also recognize that Mr. Lau steadfastly maintained that the Defendant never formally resigned from Yali. While neither the Defendant nor Miss Li were clear about when the Defendant resigned, there is incontrovertibly the faxed letter which the Defendant says he sent to Mr. Lau with the help of his son. This letter is undated but the context suggests, as the Defendant said, it was sent in June. In the letter, after making various complaints about the operation of Yali, the Defendant said that both his company Likoton and his family were in financial difficulties. He continued "I cannot maintain the daily expenses with my salary from Yali". He then said that he would have to leave Yali to keep Likoton and asked that someone be sent to take over his job in early July.

48. About the letter, three things can be said. First, there was a clear indication that the Defendant was going to leave Yali even if 'resignation' is not a true description. Secondly, the Defendant made reference to his salary. But third, the Defendant said he was going to keep Likoton which, on his own evidence, was virtually dormant and has been so ever since, when in fact he was to become involved in the new company, Da Bu.

49. I also note that, apart from an advance of RMB500.00 in May 1996, all the other payments made by Mr. Lau to the Defendant occurred between 5th October 1995 and 3rd January 1996, the period when the Defendant was busy setting up the company. After 3rd January, Miss Li was in the company as accounts clerk and was responsible for checking receipts and vouchers and making payments thereon where necessary. The other payment in May 1996 for RMB500.00 was, it now appears to be accepted, made to the Defendant for personal reasons and should be repaid. It is perhaps a little strange that, after Yali received its licence and began formal operations in January 1996, the Defendant apparently found no need for further advances from Mr. Lau.

50. In the end, however, I am forced to say that Mr. Lau's evidence was far more clear, organized and cogent than that of any other witness. Although Mr. Lau was not professionally cross-examined, the Defendant's case was eventually put to him but his evidence was not shaken. It is clear to me that Mr. Lau is an uncompromising businessman who likes to keep his affairs in order. He decided to make an investment in China. He was determined not to be disadvantaged by those working in Yali. Hence his careful checking of Yali's accounts. I am in no doubt that, if Mr. Lau had made payments to the Defendant in respect of expenses incurred in connection with Yali, he would have made a more detailed entry in his note-book as to the nature of the expenses.

51. The Defendant's evidence, on the other hand, was confused and confusing. It is clear, however, that he is not a simple employee but a businessman who has been and still is involved in many businesses. Doubtless, he saw an opportunity to derive profit from his association with Mr. Lau in Yali and felt no need for a formal salary. If, indeed, he had been employed as a salaried general manager, it is difficult to understand why, after he had made it plain that he was dissatisfied with Yali and was leaving the company, he agreed to stay on and help Mr. Lau complete all the customs formalities for which he was the responsible person. He could easily, at that stage, have insisted upon receiving at least part of his unpaid salary and held Mr. Lau to ransom until payment had been made.

52. I accept Mr. Lau's evidence. I find that there was no agreement that the Defendant should be paid a salary and that the advance of US$12,000.00 should be set off against that salary. I further find that the amounts claimed by Mr. Lau personally were personal loans to the Defendant and not payments of expenses in connection with Yali.

53. Accordingly, in Action 259, there will be judgment for Proline in the sum of US$12,000.00. There is a claim for interest at the rate of 2% per month. The evidence about this, however, is unclear. Accordingly, there will be interest on that sum at the rate of 10% p.a. from 30th December 1996, the date of the first formal demand, until the date of judgment and thereafter at the rate prescribed by the Chief Justice until payment.

54. The Defendant's counterclaim is dismissed.

55. In Action 7308, there will be judgment for the Plaintiff for the sums of RMB108,000.00, HK$30,000.00 and US$5,500.00. There will be interest on these sums at the rate of 10% p.a. from 9th July 1997, the time of the first demand, until the date of judgment and thereafter at the rate prescribed by the Chief Justice until payment.

56. In the case of foreign currency sums, the equivalent in Hong Kong dollars may be paid.

57. The Defendant is to pay the Plaintiff's costs in each action.