LAM SHU PUI AND ANOTHER v. SZETO KAM FAI AND OTHERS

HCA 1910/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1910 OF 2011
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Introduction

1.   This is an unfortunate case involving a financial dispute amongst family members.  The parties went into business together which eventually failed and later erupted into a dispute between them over money.

Background facts

2.   The 1^st plaintiff (“Calvin Lam”) had been working in the garment industry since 1985.  He established Permex Company Ltd (“PCL”) on 27 January 1994 which is the corporate vehicle through which he operated a trading business in garments mainly in Japan.  His younger brother, Stanley Lam, is also a director of the company but it appears in name only.  In mid 2005, he expanded the market base of the business to include Mainland China.  For this purpose, he established Permex Group Ltd (“PGL”) on 20 December 2005 but it did not become operational until 11 October 2006.  It seems that Calvin Lam was experiencing financial difficulties with his business as a result of a dispute with a business partner and he turned to his brother-in-law, the 1^st defendant (“Peter Szeto”), for assistance.  Peter Szeto is an accountant and married to Calvin Lam’s older sister, the 2^nd defendant (“Sallie Lam”). 

3.   At some stage in late 2006, the involvement of Peter Szeto went from providing assistance to Calvin Lam in the running of his business to acquiring a share of it, and for that purpose he entered into a joint venture agreement with Calvin Lam which provided that the business be transferred from PCL to PGL.  The joint venture did not last long.  By early 2008, the business had sustained substantial losses and the joint venture was in the process of dissolution. Peter Szeto wanted to put the company into liquidation, whereas Calvin Lam wanted to transfer the business back to PCL and continue trading.  As Calvin Lam had a controlling interest in PGL, his view prevailed and Peter Szeto and his wife left the company, absorbing what they considered was their share of the losses.  Calvin Lam disagreed and brought this action claiming they owed him money for extra financial contributions he made to PGL, or for their share of the losses sustained by PGL. 

4.   The two main protagonists at the heart of this failed business venture and dispute are Calvin Lam and Peter Szeto.  They were the only witnesses to testify in this case and they both gave, in different respects, unsatisfactory evidence. 

5.   Calvin Lam when testifying was general in his account of matters and sometimes imprecise in that financial aspects of his claim were presented in a selective and incomplete manner.  His case was presented on two alternative bases.  The first was that he made payments to PGL in the sum of about $3.95 million which Peter Szeto and Sallie Lam were obliged to pay him 45% of that sum in accordance with their shareholding in the company.  He identified and described these payments as capital injections into PGL which were either made by him or PCL.  The second was that the company sustained an overall loss of about $4 million and they were obliged to pay him 45% of that sum. The total amount Peter Szeto and Sallie Lam owed him under either basis was $1.8 million.

6.   Peter Szeto and his wife deny Calvin Lam’s claim and argue that they have borne the losses for which they were liable in the sum of $1.4 million.  They also argue that it had been agreed between them that the company would go into liquidation and that they are now being asked to share in the continued trading of the business being run by Calvin Lam.   Mr Szeto also did not impress me as a witness. When testifying, he gave lengthy and sometimes unresponsive answers to questions, and was constantly advancing his case instead of answering the question asked of him.  He displayed a tendency to be dismissive of others if they did not agree with him.

7.   I was presented with a very confusing picture about the relevant events and the financial affairs of the companies and the individuals involved.  In an effort to try to understand what has happened, it is probably best to examine the agreements struck or discussed by the parties and the financial statements provided along the way to the conclusion of this failed business venture.

(a) The Financing Agreement

8.   An agreement was struck between Calvin Lam and Peter Szeto concerning Peter Szeto’s participation in the business.  It was recorded in writing and dated 10 November 2006.   It stated that it had been agreed between them that Peter Szeto would provide certain properties as security for the obtaining of a $2 million credit facility for PGL in order to help ease the liquidity problem of PCL.  It was noted that this was in addition to the security for a credit facility of $2.5 million provided by Calvin Lam and his wife.  It went on to state as follows:

“Peter Szeto would then be nominated as director and work on a full time basis in Permex Group Ltd. His remuneration and returns for serving as director and providing loan facilities to “Permex” are specified in the attached Appendix I & Appendix II schedules. The above-mentioned remuneration and returns would continue to carry on until “Permex” turns into a profitable and a positive cash flow position, and is ready to pay dividends to its shareholders.

It has further agreed that the business originally carried on by Permex Co. Ltd. would be transferred gradually to Permex Group Ltd. during the financial year 2006/07 & 2007/08. Should all the outstanding bank loans of Permex Co. Ltd. are repaid and Permex Group Ltd. turns into a profitable and a positive cash flow position, Peter Szeto & Calvin Lam’s remuneration package in “Permex” would then be reviewed and adjusted accordingly.

Besides, under the above credit facilities arrangement, the future profit-sharing & shareholding % between Calvin Lam (including portion held by his wife & brother if any) & Peter Szeto (including portion held by his wife if any) in Permex Group Ltd. would be 60% and 40% respectively. ”

9.   It was intended that Peter Szeto would play a prominent role within the business which would be transferred from PCL to PGL and that he would receive a substantial share in it, with Calvin Lam keeping a controlling interest.  The appendices to the agreement set out the remuneration package and financial return for Peter Szeto from July 2006 to March 2008.  It noted that in relation to the $2 million loan facility, the company was required to pay interest on the loan of 3% per annum to Peter Szeto on a monthly basis in the sum of $5,000. Soonafter on 11 October 2006, Peter Szeto was allocated one share in PGL[1] and appointed a director of the company on the same day.[2]  I note from the company records that on 20 December 2006, Calvin Lam, Peter Szeto and Stanley Lam each held one share in PGL and that they were all directors of the company.[3]

(b) The Refinancing Agreement

10.   It was not long before another agreement was struck between them in order to deal with the financial difficulties encountered by the company.  It was entitled a Refinancing Agreement and dated 16 July 2007.  It was signed by Calvin Lam, Stanley Lam, Peter Szeto and Sallie Lam.  The agreement provided that Peter Szeto and Sallie Lam would put up additional security for PGL to obtain bank facilities and that it would replace the agreement made between Calvin Lam and Peter Szeto on 10 November 2006.   The section of the agreement on refinancing read:

“It has been agreed that all the business activities of PCL would be transferred to PGL with effect from 1 April 2007. Nevertheless, PGL and Peter Szeto would not undertake the bank loans and liabilities that were incurred by PCL or Calvin Lam on or before and after 1 April 2007. The bank loans and liabilities incurred by PCL and Calvin Lam would be settled in the following manner and orders:

1. Calvin Lam would approach Bank of East Asia (BEA) to re-mortgage his property at Whampoa Garden to obtain funds to pay off the loans and overdraft granted by BEA to PCL.

2. BEA’s loans and overdraft in PCL’s books would then be paid off. The new mortgage loan would become the personal loans of Calvin Lam. On the other hand, Calvin Lam’s remuneration in Permex would be increased by HK$15,000 per month in April 2007 to help him to repay the monthly installments of the new mortgage loan in BEA.

3. The personal loans incurred by Calvin Lam and Stanley Lam for financing the operation of PCL would continue to be recorded under PCL’s books. They will be repaid by the leftover fund in PCL’s accounts. Should the leftover fund in PCL’s account not adequate to settle the above-mentioned loans, PGL may arrange inter-company loans to PCL for settlement.

4. PCL would sell all its fixed assets and the development costs of the brand Dion Reve in Shenzhen office at their net book value as at 31 March 2007 to PGL. The sales proceeds of the fixed assets and development costs would be used to offset the inter-company loans made by PGL to PCL.

5. The leftover inter-company loans due by PCL to PGL, if it is a debit balance in PGL’s books, should be settled by Calvin Lam through deduction of future dividend payments made by PGL to him on its future profits. On the other hand, if it is a credit balance in PGL’s books, PGL has to repay the outstanding balance to PCL accordingly.”

11.   It reiterated the agreement between them to transfer all the business activities from PCL to PGL with effect from 1 April 2007.  It provided that Calvin Lam was to refinance the debts of PCL for which he would be responsible and that the personal loans incurred by Calvin Lam and Stanley Lam to finance the operation of PCL would be repaid by PCL funds and if insufficient by an intercompany loan from PGL to PCL.  It further provided that PCL would sell to PGL its fixed assets and the development costs of the brand Dion Reve at their net book value as at 31 March 2007 and that the sale proceeds would be used to offset any intercompany loans and that any balance either way would be paid accordingly.

12.   Pursuant to the agreement, Peter Szeto was to provide additional securities to increase the bank facilities for PGL from $2 million to $4.5 million.

13.   It was a condition of the agreement that the shareholding of PGL would be restructured on the following percentage basis: Calvin Lam as to 51%; Peter Szeto as to 40%; Sallie Lam as to 5% and Stanley Lam as to 4% and that the registered share capital of $10,000 be fully paid up on or before 31 March 2008 to reflect the new shareholding.

14.   The agreement contained a section on conditions for arranging intercompany loans and additional mortgage properties.  It was a condition of the agreement that profit and loss would be borne by the parties according to the percentage of their respective shareholdings and that:

“3. The new shareholding structure reflects not only the future profit-sharing % among the shareholders, but also the risk-taking & loss-bearing % among them on PGL’s operations. Although Peter Szeto & Sallie Lam do not require Calvin Lam & Stanley Lam to provide any assets to help financing the bank facilities of PGL, they still need to bear their respective losses in accordance with the above-mentioned shareholding %. Should the worst-case scenario come up and PGL was forced into liquidation by its bankers or creditors, Calvin Lam, Stanley Lam and Fanny Wong (Calvin’s wife) have to reimburse Peter Szeto and Sallie Lam for their respective 55% losses through disposition of their personal assets and properties in Hong Kong as well as in Canada.”

15.   There were two further conditions in relation to director emoluments, the details of which do not require examination for the purposes of this judgment.

16.   The agreement concluded with a termination clause which read:

“Should any of the undersigned party want to terminate the above agreement, at least 3-month advance notice is required to give to the other parties for the subsequent follow-up work on the settlement of the bank facilities and accounts of Permex Group Ltd.”

17.   As agreed between them, on 28 September 2007, the paid up capital of PGL was $10,000 by 10,000 shares of $1.00 each. The shares were distributed on the following basis: Calvin Lam held 5,100, Stanley Lam held 400, Peter Szeto held 4000 and Sallie Lam held 500.[4]

(c) The unsigned Termination Agreement

18.   It was apparent that the business was losing money, and as a consequence the relations between the parties had deteriorated.  There were a series of discussions to try to resolve and terminate the joint venture between Calvin Lam and Stanley Lam on the one hand and Peter Szeto and Sallie Lam on the other.  A Termination Agreement dated 16 April 2008 was drafted.  It had been submitted by Peter Szeto to Patrick Lui, the accountant to the business, via an email dated 11 April 2008, who was also invited to attend a meeting between the parties on 16 April 2008 to finalize the contents of it.[5]   It stated that a partnership joint venture of PGL between Calvin Lam and Peter Szeto had commenced on 1 April 2007 upon the transfer of all of the business activities of PCL to PGL.  Even though it was not signed by the parties, it did reflect certain agreements between them for terminating their business interest together.  It set out the following rules that would apply for the termination of the joint venture:

“1. The Expenses cut-off date would be at 29 Feb 2008, a total of 11-month from 1 April 2007 including expenses of Paris office and Zhuhai retail shop. There was no need for Peter Szeto to account for the expenses of Permex Group Ltd. from 1 March 2008 onwards. Nevertheless, the following expenses have to be adjusted and taken into account for calculating the profit & loss termination position:

- Share of the ultimate income & expenses of Shenzhen Co., Dongguan Garment Factory & Dongguan Belt Factory which are going to be closed down or assigned to third parties in March or April 08.

- Assets with no intention of disposal are going to be taken up by the new PGL at their net book value as at 29 Feb 08. Assets with intention of disposal are going to be stated at their best estimated net realizable value if not yet disposed when calculating the termination losses.

2.   As far as sales revenue is concerned, in addition to the accumulated 11-month sales revenue up to 29 Feb 08, the following adjustments have to be made for calculating the profit & loss termination position:

- The revenue of all accessories orders to be delivered in March or April 08 was stated in Appendix 2 of the Dongguan Belt Factory Assignment Contract have to be taken into account together with the corresponding factory costs & expenses for calculating the termination losses.

-    All the other undelivered sales orders that were confirmed on or before 5 March 2008, whose profit & loss would be calculated by taking into account the differences between the sales order amounts & their projected factory costs less a 7% sub-contracting fee for handling the business.

3.   As agreed, there is no need to charge interests on the inter-company loans between PCL & PGL. However, the directors are entitled to receive interests on the personal loans made by them to Permex Group Ltd. at the rate of 5% p.a.

4.   The profit & loss sharing ratio between Calvin Lam & Peter Szeto for calculating the above profit & loss termination would be 60% to 40% disregard the legal shareholding as registered in the Company Registry.

5.   The calculated terminated losses would then be reflected in the corresponding director current accounts of Calvin Lam & Peter Szeto in PGL’s books for settlement.

In addition to the above termination profit & loss calculation, the following settlement arrangements have to be undertaken by both parties for the smooth termination of the partnership joint venture:

1.   The outstanding inter-company balance between PGL & PCL as at 29 Feb 2008 was about HK$1 million. Calvin Lam has to repay the above-mentioned outstanding balance to PGL on behalf of PCL on or before 2 May 2008. Part of the repaid amount would then be used to settle personal loans of $0.7M (plus interest of 5% p.a.) made by Peter Szeto & Sallie Lam to PGL during the year 2007.

2. Peter Szeto has arranged personal bank loans to finance the operation of PGL. The current outstanding amount of bank loans introduced by him was about $0.6M. He could take up the outstanding bank loans by himself to partially offset the 40% termination losses shared by him. Peter Szeto would then repay balance of the 40% termination losses, if any, by paying cash into the company provided all the credit facilities in BEA & BOC are proper released and repaid by Calvin Lam on behalf of the new PGL at the same time. All related bank charges would be paid by the ne PGL.

3.   Peter Szeto’s liabilities to the banking facilities used by PGL in BEA & BOC are limited to repayment of his share of 40% termination losses for PGL.  I t is the responsibility of Calvin Lam & the new PGL to settle the outstanding overdraft and bank loans after Peter Szeto’s repayment of the 40% termination losses to PGL.  Calvin Lam would have to dispose his & his wife’s properties & assets in Hong Kong & Canada for releasing and retiring the banking facilities of PGL in BEA & BOC.

4. If the banking facilities in BEA & BOC could not be released by Calvin Lam by the end of May 08, Peter Szeto has the right to stop all banking facilities and undertake the outstanding bank loans by himself. Should the amount of bank loans undertaken by him is greater than his 40% share of termination losses, Calvin Lam & the new PGL has to repay interest to Peter Szeto at the rate of 10% p.a. on the excess amounts taken up by Peter Szeto from these two banks.

5. Calvin Lam would use Permex Co. Ltd. to operate the new business activities of Permex from 1 April 2008 onwards. Peter Szeto will not get involved and does not have any relationship with the business activities of PCL undertaken by Calvin Lam.

6. Peter Szeto will resign his directorship from Permex Group Ltd when all the bank facilities in BEA & BOC are proper released and all his personal loans are properly repaid by Calvin Lam & the new PGL.

7. The contents and terms of this Termination Agreement would supersede the contents and terms of all the other agreements that had been signed between Calvin Lam and Peter Szeto during the last two years.

8. Patrick Lui, auditors of PGL & PCL, has been appointed as witness and arbitrator for the Termination Agreement signed between Calvin Lam & Peter Szeto.”

19.   On 10 July 2008, Peter Szeto was removed as a director from PGL.[6] On 30 September 2008, it was resolved that Calvin Lam and Stanley Lam would each transfer their single share to their father, Lam Man Hip, and resign as a director.  Lam Man Hip was then appointed a director of the company.[7] On 20 December 2008 the Annual Return revealed that Peter Szeto held one share and Lam Man Hip held two shares which had been transferred to him on 24 October 2008.[8]  It appears that the appointment of the father was an attempt to diffuse the situation between the parties.

(d) The accounting statements

20.   The financial position of PGL from the date of incorporation, 17 November 2005 to 31 March 2007 was that it had accumulated profits of $9,257 and had a total equity of $9,260.[9] This came from the annual reports for PGL, prepared by the firm of P K Lui & Co, public accountants.  The accounting statements for the company thereafter as exhibited in these proceedings were prepared by the accounts clerk of PGL, Caroline Hung. I note at this juncture that I was not provided with full and proper accounting statements from the outside accountant in relation to the companies involved in this dispute.  I will briefly describe the financial and accounting statements that I had before me.

21.   A profit and loss statement from 1 April 2007 to 5 March 2008 showed that PGL had a loss of $4,470,616.88.  A further profit and loss statement from April to June 2008 showed the company had a profit of $571,423.94.  

22.   The balance sheet as at 5 March 2008 showed that PGL was in debt in the sum of $4,461,357.24 with a sum of $1,203,856.17 owing in the current account of PCL.  In other words, PCL owed PGL that sum of money.  There were also various loans in the total sum of $4,308,425.59.  One was from a director for $935,855.76 and the others were from banks consisting of two packing loans of $1,466,998.00, two invoice financing loans of $1,427,268.53 and a separate bank loan of $478,303.30. 

23.   The balance sheet as at June 2008 showed a debt of $3,946,384.22.  The current account of PCL was down to $36,463.95 which meant that PCL had paid off about $1.2 million of its debt to PGL.  There was another current account in the name of Calvin Lam entitled “Termination” with a debt sum of $664,928.10.  The banking loans had been reduced. The two packing loans were both nil.  One of the invoice financing loans was removed, meaning it was paid, and the other was in the sum of $340,573.47.  The separate bank loan was $447,877.82 and the loan from the director was $722,099.68. [10] The director’s loan was from Peter Szeto and Sallie Lam.  It is worth noting that there is no reference to the capital injections by Calvin Lam.

The dispute

24.   As I explained earlier, the dispute between the parties centres on Calvin Lam’s claim that he made capital injections to the company on behalf of the shareholders for which they were indebted to reimburse him according to the percentage of their respective shareholding.  Peter Szeto and Sallie Lam disagree and claim they agreed to absorb losses in the sum of about $1.4 million which they did and therefore they do not owe him any money.

(a) The plaintiffs’ case

25. The plaintiffs’ case is that Calvin Lam in his personal capacity and through PCL, injected capital in the sum of $3,946,384.22 into PGL on behalf of himself and Stanley Lam (as to 55% amounting to $2,179,511.32) and Peter Szeto and Sallie Lam (as to 45% amounting to $1,775,872.90) and that the sum paid for Peter Szeto and Sallie Lam was lent to them by him directly or through PCL.[11] Hence, it is claimed that in breach of the Refinancing Agreement, Peter Szeto and Sallie Lam have refused to pay the sum of $1,775,827.90 to Calvin Lam, or further in the alternative, the debt should correspond with their respective shareholding in PGL.[12]

26.   It is argued that the loan was evidenced by the Refinancing Agreement and it is claimed that it provided that Peter Szeto and Sallie Lam would be liable for 45% of the loss of PGL.  It is also argued that in early July 2008 when the parties orally confirmed their agreement as to refinancing, Peter Szeto and Sallie Lam expressly acknowledged their debt to Calvin Lam to be $1,775,872.90.  It is claimed this was evidenced in emails from Peter Szeto who acknowledged the debt on behalf of himself and his wife.  I should say in passing that that is not apparent from a reading of the emails.

27.   It is also part of the plaintiffs’ claim that PGL owes PCL the sum of $42,450.00, being monies lent to PGL for the costs in relation to PGL joining two expositions held by the Hong Kong Trade Development Council in Russia and China.  As to the claim of this sum, final judgment was entered on 17 January 2012.  It was ordered that PGL pay PCL the sum of $42,450.00 together with interest at the rate of 8% per annum from 8 November 2011 to the date of judgment and thereafter at the judgment rate until payment, and costs fixed at $11,054.00.  This was a Pyrrhic victory for the plaintiffs as Calvin Lam appears now to own and control PGL.

(b) The defence case

28.   Peter Szeto and Sallie Lam deny the plaintiffs’ claim.  They state that Calvin Lam invited Peter Szeto to help him with his business because of financial difficulties he was then experiencing. Sallie Lam by that time had lent Calvin Lam $800,000.00 which had been repaid by 37 post-dated cheques signed by Calvin Lam.  Peter Szeto eventually acquired 1 share in PGL but Sallie Lam never held any shares in the company. The parties entered into a joint venture as evidenced by the Refinancing Agreement of 16 July 2007 whereby Peter Szeto would increase the banking facilities to PGL from a limit of $2.5 million to $4 million on the security of properties owned by Peter Szeto and Sallie Lam.  The agreement also provided for a restructuring of the shareholding of PGL whereupon Calvin Lam would hold 51%, Stanley Lam would hold 4%, Peter Szeto would hold 40% and Sallie Lam would hold 5% which would be the basis for calculating future dividends.

29.   They claim that there was no agreement to inject capital into PGL beyond the authorized capital limit of $10,000 and that the share restructuring had not taken place as Stanley Lam and Peter Szeto held one share each.  They also claim that condition 3 of the Refinancing Agreement which provided for the new shareholding structure to reflect future profit and loss sharing percentage had been overtaken by events.  They state that in June 2008 the parties agreed there would be no contribution of loss and PGL would go into liquidation in the normal course of events.  They rely on an email dated 14 June 2008 from Mr Lui, the accountant of PGL, which confirmed that Calvin Lam had decided to allow PGL to go into liquidation.  

30.   In the 30 June 2008 meeting, Peter Szeto told Calvin Lam that if he was willing to release all the bank mortgages before full settlement of PGL’s trade debtors, he was willing to bear the credit card loans and term loan of the banks, and would further inject $210,622.47 to partially pay off the existing bank loans provided all the bank facilities were frozen immediately without further payment to the unsecured creditors as agreed. As at 30 June 2008 the trade debtors’ balance of PGL was $721,454.08.

31.   It is argued that the Termination Agreement of 16 April 2008 was not signed because the parties could not agree upon its terms which provided that Calvin Lam repay about $1 million to PGL so that $700,000 would be used to pay Peter Szeto and Sallie Lam which was owed to them by PGL and that the banking facilities of PGL be released by Calvin Lam by the end of May 2008.

Terminating the joint venture

32.   Calvin Lam stated that sometime in early July 2008, although it appears it was on 30 June 2008, there was a meeting between him and Peter Szeto and Sallie Lam where Stanley Lam, Patrick Lui, the accountant for PGL, and Fiona Lam, a staff member of PCL, were also present. He stated that at the meeting, Peter Szeto and Sallie Lam acknowledged they owed him the sum of $1,775,872.90 being 45% of $3,946,384.22, being the monies he injected into PGL.  He referred to various emails[13] as supporting him on this fact.  What they reveal is that Peter Szeto understood that it had been settled between them that PGL would be put into liquidation and he “would repay the secured and unsecured loans from the four banks, Sallie’s loan to PGL and other relevant expenses directly by myself to the extent the total amount not exceeding HK$1.4 million.”[14]

33.   In an email from Caroline Hung to Mr Lui dated 30 June 2008, she set out the liabilities and payments Peter Szeto would assume as  confirmed and agreed to by him.   This email was copied to Calvin Lam and Fiona Lam.   The liabilities and the amounts were as follows:

(1)	Repayment of the bank loans injected as working capital of PGL for the amounts of:
	Hang Seng Bank	$94,507.05
	Standard Chartered Bank	$301,924.66
	Wing Lung Bank	$130,068.00
		$526,499.71
(2)	Repayment of the secured bank loans and overdraft from the Bank of China:	$447,877.82
		$210,622.47
(3)	Payment of bank handling charges for release of the loan facilities:	$15,000.00
(4)	Repayment of Sallie Lam’s loan to PGL:	$200,000
(5)	“Termination loss by Mr Szeto”:	$1,400,000

34.   In a letter dated 11 July 2008 to the Bank of China, Peter Szeto discussed the settlement arrangements between himself and Calvin Lam and confirmed that the banking facilities and outstanding bank loans would be settled on 30 June 2008 as follows:

“1. Mr. Peter Szeto will issue a cheque of HK$210,622.47 to Permex Group Ltd.’s HKD current account in BOC to clean off the remaining overdraft balance.

2. Permex Group Ltd will make use of its HK$505K fixed deposit together with the surplus balance on the HKD current account to settle all the outstanding IIF & TR in BOC.

3. Mr. Peter Szeto will further take up the remaining balance of the $500K 5-year term loan granted by BOC to Permex Group Ltd in Nov 07 as his personal loan from July 2008 onwards (detailed arrangements to be agreed directly between BOC & Mr. Peter Szeto).

4. All the banking facilities granted by BOC to Permex Group Ltd in Nov 07 would then be cancelled as a result of the above arrangements.

5. After settlement of all the outstanding loans and cancellation of all the banking facilities of Permex Group Ltd. in BOC under the above arrangements, Mr. Peter Szeto will resign as director of Permex Group Ltd. and the bank accounts of Permex Group Ltd in BOC will be operated solely by Mr. Calvin Lam.”

35.   In an email to Calvin Lam in February 2009, Peter Szeto gave an explanation and breakdown of the figures mentioned in Caroline Hung’s email.  The sum of $526,499.71 was the repayment of the outstanding balances of the bank loans injected as working capital of PGL by Peter Szeto from July 2008 onwards.  The sums of $447,877.82 and $210,622.47 were the repayments of the balances of secured bank loan and overdraft from the Bank of China by Peter Szeto directly in July and August 2008.  There were also release bank loan charges of $15,000.00 that Peter Szeto paid as well.  The sum of $200,000.00 was a repayment by him to his wife of a loan she made to PGL.  Peter Szeto also explained to Calvin Lam that the total amount of secured bank loans paid by him to the Bank of China was $572,310.96 of which he had a right to claim 60% of it, being $343,386.58, from Calvin Lam and his wife under the Refinancing Agreement.

Correspondence before action

36.   Calvin Lam commenced these proceedings, with a solicitor’s letter dated 16 July 2008 to Peter Szeto and Sallie Lam.  It stated that the parties entered into an agreement dated 16 July 2007 where the defendants agreed to bear 45% of PGL’s terminal loss and at a meeting between them and the auditors of PGL it had been agreed that the anticipated loss of PGL would be $4 million to which they would need to contribute $1.8 million towards the terminal loss of PGL.[15]

37.   The defendants replied through a solicitor rejecting the claim and querying that if they were obliged to contribute $1.8 million, then Calvin Lam would be obliged to contribute $2.2 million.[16]

38.   Calvin Lam’s solicitor replied on 5 August 2008 by providing a schedule of the contributions made by Calvin Lam and related parties to PGL.[17] The total sum of the contributions was $3,826,725.10.  It was set out as follows:

Nature	(USD)	Amount	(HKD)	Remark
Payments to 蘭生	79,692.96	7.80	621,605.09	Paid by Mr. Lam direct
Payments to 新雄輝	117,429.73	7.80	915,951.89	Paid by Mr. Lam direct
Payments to 蘭生	128,117.65	7.80	999,317.67	Paid by Permex Co Ltd direct
Payments to 新雄輝	38,000.00	7.80	296,400.00	Paid by Permex Co Ltd direct
Payments to Kam Fung			143,491.20	Paid by Permex Co Ltd direct
Receipts from Mr. Lam direct			500,000.00	Direct payment by Mr. Lam as fixed deposits
Receipts from MAT	26,869.52	7.80	209,582.26	Received on behalf of Permex Co Ltd by Permex Group Ltd
Receipts from LPP	17,997.05	7.80	140,376.99	Received on behalf of Permex Co Ltd by Permex Group Ltd
Total			3,826,725.10

39.   Nearly two years later, on 20 August 2010, Calvin Lam’s solicitor referred to a termination agreement between the parties made on 5 March 2008 where it was agreed that upon payment of $152,606.38 by PCL to PGL, PCL would take over all of PGL’s income and expenditure on or after 1 March 2008.[18] It was also stated that PGL was to continue to receive income from various contracts on behalf of PCL and the total amount was up to US$638,601.68 (HK$4,981,094.50)[19] and that taking into account various expenditures and loans payable by PCL to PGL, PGL was indebted to PCL in the sum of $1,841,276.95.[20]

40.   The defendants denied that there had been such a termination agreement and noted that the accounts had been prepared by Calvin Lam which they described as self-serving.

Analysis of the evidence

41.   As I have already noted, Calvin Lam initially operated a garment business through PCL and later through PGL. He had his younger brother, Stanley Lam, as a minor shareholder in the companies, but it appears he did not play a significant role in the running of the business which was mainly handled by him.  Whilst Calvin Lam had ambitious plans for the business, he from time to time experienced financial difficulties and called on his family, including Sallie Lam, to help him out financially.   From about 2005, Sallie Lam had lent Calvin Lam a total sum of $800,000.   The situation with the business got worse in 2006 and Calvin Lam turned to his brother-in-law, Peter Szeto, for assistance.   He is an accountant and with his expertise Calvin Lam believed he could improve the business.  It was agreed between them that Peter Szeto would join the business and acquire a shareholding in PCL.  This took place on 11 October 2006.  They later transferred the business from PCL to PGL in an attempt to revitalize and restructure it.  It appears that things went from bad to worse and the business lost money.  PGL suffered serious losses in 2007 and 2008.  The parties agreed to cover the losses by injecting funds into PGL according to a Refinancing Agreement in 2007 and a further unexecuted agreement in 2008.  It was during this time that Calvin Lam claimed that he injected capital into PGL personally and through PCL.  The injection of capital included payments for and on behalf of PGL to its suppliers, payments in cash and payments of expenses, including payments for the salary of staff.

42.   Calvin Lam’s case is that Peter Szeto and Sallie Lam were aware of these capital injections which were made on their behalf and which should be taken into account in determining their share of the loss of the business that they had to bear.

43.   Calvin Lam claimed that he in his personal capacity and through PCL injected a total capital of $3,946,384.22 into PGL on behalf of himself and Peter Szeto and Sallie Lam.  He claimed the debt they owe him is 45% of this sum which was lent to them by himself or through PCL.  He claimed that he injected capital into PGL as early on 2007 as evidenced by the Refinancing Agreement.  The amount he claimed he injected was “at least $840,231 in cash”.  The injections of capital apart from the cash were in the form of payments receivables by PCL which were transferred to PGL and payments contributed by himself and PCL on behalf of PGL on various occasions.[21]

44.   Ms Rachel Siu, for the plaintiffs, submitted that the loss as appeared on the Balance Sheet of PGL dated June 2008 [22] is the amount of loss that ought to be shared among the shareholders in accordance with the ratio as stated in the Refinancing Agreement.  This meant that the defendants owed the plaintiffs 45% of $3,946,384.22 which amounts to $1,775,872.90.  Ms Siu also submitted that if the calculation of loss as claimed by Calvin Lam was not accepted, Calvin Lam made payments to or for PGL in the sum of $3,853,811.62 which were supported by documents showing that he made various payments to fund the operation of PGL which he is entitled to be repaid by Peter Szeto and Sallie Lam as to 45% of that amount being $1,734,215.23.

45.   Ms Siu gave a breakdown of the total figure of the capital payments of $3,853,811.62 as follows: (1) amounts paid to factories by PCL or Calvin Lam of $3,056,928.56; (2) Calvin Lam’s personal deposits after termination of $700,000.00; and (3) salary and MPF paid by PCL of $96,883.06.  She submitted the following as being the payments to the factories.

Amount Paid to Factories by PCL or Calvin

Contract No.	Factory	Purchase Amount	Paid By	Date	Paid Amount
CG80092	Kam Fung Garment Factory Limited	HK$143,451.75	PCL	8-May-08	(HK$53,000.00)
			PCL	10-Jun-08	(HK$50,451.75)
			PCL	18-Jun-08	(HK$40,039.45)
		HK$143,451.75			(HK$143,491.20)

CG80092	Kai Ping Xin Xiong Hui Garment Co Ltd	US$128,520.48	Calvin	5-May-08	(US$15,000.00)
	Compensation for without VAT Tax value	US$25,648.05	Calvin	21-May-08	(US$13,000.00)
			PCL	28-May-08	(US$13,000.00)
			Calvin	5-Jun-08	(US$8,000.00)
			PCL	6-Jun-08	(US$5,000.00)
			Calvin	4-Jul-08	(US$12,000.00)
			PCL	14-Jul-08	(US$8,000.00)
			PCL	14-Jul-08	(US$12,000.00)
			Calvin	17-Jul-08	(US$20,168.53)
			Calvin	24-Jul-08	(US$26,000.00)
			Calvin	8-Aug-08	(US$22,000.00)

CG80068

Weiming

US$7,525.80

PCL

21-Apr-08

(US$7,525.80)

CG80088	Shanghai Lansheng	US$9,345.00	Calvin	25-Apr-08	(US$9,345.00)
CG80082	Shanghai Lansheng	US$24,158.46	Calvin	6-May-08	(US$24,158.46)

CG80085	Weiming	US$3,200.00	PCL	21-Apr-08	(US$3,200.00)
		US$812.67	PCL	21-Apr-08	(US$812.67)
CG80078	Shanghai Lansheng	US$46,189.50	Calvin	14-May-08	(US$12,189.50)
			Calvin	29-May-08	(US$34,000.00)
CG80078	Shanghai Lansheng	US$85,481.05	PCL	21-Jul-08	(US$39,750.00)
			PCL	22-Jul-08	(US$45,731.05)

CG80091

Shanghai Lansheng

US$28,114.35

PCL

13-Aug-08

(US$28,114.35)

CG80096	Shanghai Lansheng	US$14,522.25	PCL	13-Aug-08		(US$14,522.25)
						(US$373,517.61)
					(HK$3,056,928.56)

46.   As is apparent from this table, a number of the purported payments were made either in or after June 2008. I will comment more about this later.

47.   The defendants’ dispute that they owe any monies to the plaintiffs and question the payments allegedly made by the plaintiffs to PGL, and that in any event, the agreement between them was to put PGL into liquidation.  The defendants’ account of the events and the arrangements between them differ from Calvin Lam.  Peter Szeto states that in 2006, Calvin Lam approached him to borrow money to help with his business.  He lent him the sum of $350,000.  In the meantime, Calvin Lam had set up PGL which was to take over the business of PCL in an effort to expand its operations.

48.   Initially, Peter Szeto was a consultant to the plaintiffs but later became a shareholder and director of PGL.  He also arranged to provide properties under his control as security to the bank in order to obtain loan facilities for PGL.  He relies on the Refinancing Agreement to argue that he owes no money to Calvin Lam.  In that agreement, the parties agreed on certain terms for a joint venture in running the business of PGL.  It confirmed that the defendants had provided properties as security to the bank to obtain loan facilities in the sum of $4.5 million, that PGL would take over PCL’s business from 1 April 2007, and that certain loans made by PGL to PCL and all of the PCL’s fixed assets and developments costs would be sold to PGL which would be used to offset the intercompany loan owed by PCL to PGL.

49.   There was a clause in the agreement where it stated that should PGL be forced into liquidation, Calvin Lam and his wife, and Stanley Lam had to reimburse the defendants for 55% of the losses through the deposition of their personal assets and properties in Hong Kong and Canada.  It is an issue between the parties as to what was meant by this clause.  Calvin Lam relies on it to argue that the defendants agreed to account for 45% of the debt of PGL.  The defendants argue that the clause was only applicable if PGL was forced into liquidation which did not happen.  The defendants note that in late June or early July 2008, they had left PGL and since then the company has been under the control of Calvin Lam.  I should note that in the alternative, Calvin Lam relies on the unsigned termination agreement as it confirmed arrangements between the parties for the settling of debts and for the apportionment of liability of the losses of PGL on a percentage basis of 40% to the defendants and 60% to Calvin Lam.  I am of the view that the Refinancing Agreement stipulated the basis of the percentage apportionment of profit and loss on a 55/45 % basis and there is no evidence to support it was formally varied to a 60/40 % basis.

50.   The oral testimony before me came from Calvin Lam and Peter Szeto.  Sallie Lam did not give evidence. Accordingly, I disregarded her witness statement but I did not disregard her unfortunate involvement in this matter and her genuine desire to help out her brother, Calvin Lam, who got into financial difficulties with his business from time to time.  From 2005, she lent him money on a frequent and regular basis whenever he needed it.  She and her husband got involved in Calvin Lam’s business to help him out, a fact that appears to have escaped Calvin Lam.  Peter Szeto is not without his failings.  It seems to me he thought he knew it all because of his accounting background and that was evident by the way he gave his evidence. 

51.   Calvin Lam’s case is straightforward but very confusing.  He claims that he injected funds into PGL by way of capital and that the defendants were obliged to reimburse him as to 45% (or 40%) of those funds.  He claimed that there was a mutual understanding between them that whoever injected capital into PGL, the sum paid would be borne by the shareholders according to their shareholding as stipulated in the Refinancing Agreement. It was a condition of the agreement that “The new shareholding structure reflects not only the future profit-sharing % among the shareholders, but also the risk-taking & loss-bearing % among them on PGL’s operations.”  This condition goes on to state that “Although Peter Szeto and Sallie Lam do not require Calvin Lam and Stanley Lam to provide any assets to help financing the bank facilities of PGL, they still need to bear their respective losses in accordance with the above-mentioned shareholding percentage.  Should the worst-case scenario come up and PGL was forced into liquidation by its bankers or creditors, Calvin Lam, Stanley Lam and Fanny Wong (Calvin’s wife) have to reimburse Peter Szeto and Sallie Lam for their respective 55% losses through disposition of their personal assets and properties in Hong Kong as well as in Canada.”  I take this latter part of the condition to mean that if PGL goes into liquidation and the defendants have to make payment of any of PGL’s liabilities secured by their properties, Calvin Lam, his wife and Stanley Lam had to reimburse the defendants in the sum of 55% of any loss that they incurred.  By this agreement they had agreed to share in the profit and loss of PGL on a 55/45 % basis.

52.   The basis of Calvin Lam’s claim was that the contributions he said he made to or for PGL were injections of capital. When testifying, Calvin Lam was examined at length about these payments which he claimed were made by him or PCL.  He was somewhat vague and general when giving evidence about these payments.  It is not clear on what basis these payments were made and how they were accounted for in PGL’s books of account. The payments appear to relate to transactions in the period after March 2008 which was at the time the defendants had terminated the Refinancing Agreement and winding up their involvement in PGL. It is also not clear what was the situation with these transactions, which appear to be sales, and whether any monies were received in payment, and if they had been, how and by which entity and on what basis. 

53.   Calvin Lam claimed that after June 2008, no further monies were received by PGL but this was contrary to the evidence before me.  The balance sheet as at June of 2008 showed trade debtors/total trade debtors in the sum of $721,454.08.  The defendants in submission referred to Calvin Lam’s solicitor’s letter dated 20 August 2010 [23] in which it as stated that a termination agreement had been entered into between the parties dated 5 March 2008 where it had been agreed that upon payment of the sum of $152,606.38 by PCL to PGL, PCL would take over all of PGL’s income and expenditure on or after 1 March 2008.  It was also mentioned that a total sum of $4,981,094.50 had been received which exceeded the loss as stated in the balance sheet as at 5 March 2008 of $4,461,357.24. [24]  This evidenced, as submitted by the defendants, that monies were still being received and the actual loss in all probability was substantially less than stated in the balance sheets.  It was further submitted by the defendants that after deducting the garment sales income of $3,825,625.21 for the period from April to June 2008 [25] from the garment sales income of $4,981,094.50 as stated in the letter under enclosure 2, the difference of $1,155,469.29 would be an amount expected to be received after June 2008.  

54.   The defendants also queried Calvin Lam’s evidence in relation to payments he made in the sum of $1.14 million under contract no. CG80092 in relation to which he claimed he had not received any monies. The defendants point out that the bank statement with respect to CG80092 showed that there was a packing loan of US $90,000 which had been repaid to the bank from PGL’s account and a total sum of US $164,207 had been received.[26] I agree with the submissions of the defendants, and I am of the view that I have not been provided with all the relevant financial information in relation to the specific transactions that Calvin Lam has relied on as representing monies that he has paid directly or through PCL for or to PGL.  I will comment further on contract no. CG80092.

55.   The defendants rely on an email from Caroline Hung dated 30 June 2008, and it appears that the source of the information contained in it is Peter Szeto. It sets out certain liabilities of PGL and the monies owed to or owed by Peter Szeto and Sallie Lam.  The figures are stated to have been agreed to by Peter Szeto.  It suggests that the termination loss of the defendants was $1.4 million which was offset against the loans they had assumed responsibility for on behalf of PGL and monies owing to them by PGL.  

56.   I agree with the submission of Mr Simon HW Lam, counsel for the defendants, that the burden was on Calvin Lam to prove the capital payments that he allegedly made to PGL.  Whilst it is true that they could not be considered injections of capital, they could be considered as working capital contributed to PGL for its operations.  But if that be the case, it should have been recorded as a loan by Calvin Lam or PCL in the books of account of PGL.  This did not happen.  It was a matter for Calvin Lam to prove his case by properly identifying the relevant payments through supporting documents and to properly account for the payments in the overall financial affairs of PGL.  As Mr Lam has rightly pointed out, the evidence as to the payments was at times vague and unclear, and documents were submitted without identifying their relevance and connection with the payments.  There was a significant lack of accounting of the payments and correlation between the documents produced and the purported payments made by Calvin Lam or PCL.  I am left with the distinct impression that proper accounting has not been carried out on the financial affairs of the two companies, in particular PGL, and that I have not been provided with a full and updated financial statement in respect of each company.

57.   There was a payment made by Calvin Lam of $500,000 which he relies on as a capital injection.  Peter Szeto explained that this was a deposit of $500,000 with the Bank of China as a security for the bank facilities and this allowed him to take back the security he provided of an off-the-book deposit of $500,000.  He explained this was not a capital injection by Calvin Lam and was treated as a repayment of the intercompany loan by PCL to PGL.  I note that the balance sheet as of 5 March 2008 showed an intercompany loan of about $1.2 million due by PCL to PGL and a director’s loan of about $936,000 due by PGL to Peter Szeto.

58.   Peter Szeto makes the point that the sum of $3,946,384.22 as disclosed in the June 2008 balance sheet reflected the net liability of PGL and did not represent capital injections to PGL.  I agree that it does not represent capital injections by Calvin Lam as has been suggested.  He also makes the point which was further illustrated in the course of Calvin Lam’s testimony that sales income of PGL was diverted to PCL.  He referred to contract no. CG80092 and the receipt of sale income by PCL in relation to that transaction.  There were also other transactions where it was claimed by Calvin Lam that he or PCL had made payments to factories for PGL from April to August 2008.  This was inconsistent with the fact that PGL stopped trading.  It would appear that these were either PCL trades with the expenses incurred borne by PGL or PGL trades with the income in both instances going to PCL.  It is also evident that payments were made to PGL after 30 June 2008 but there has been no proper accounting of these payments.  It would indicate that monies have been received in excess to what is claimed that have not been properly accounted for in the financial statements of PGL.  Focus on contract no. CG80092 is illustrative of the point.  As I have stated, I have not been provided with the financial and accounting statements of PCL at the relevant times or of PGL after June 2008.

59.   The accounting statements raise more questions than they answer.  In the balance sheet on 5 March 2008, PGL showed a loss of $4,461,357.24.  From April to June, PGL made a profit of $571,423.94.  The balance sheet as at June 2008 showed a loss of 3,946,384.22. And yet in that time the Invoice Financing Loans were reduced by $2,553,693.06 from $2,894,266.53 to $340.573.47 and a debt of $664,928.10 to Calvin Lam was incurred.  The debt to Calvin Lam seems to have included a fix deposit with the Bank of China of $505,437.80 which is recorded in the balance as of June 2008. The profit and loss statement from April to June 2008 shows a total income of approximately $4.3 million and total cost of sales of approximately $3.5 million.  A resultant gross profit of approximately $665,000 is recorded. There is no explanation on how the Invoice Financing Loans were reduced by nearly $2.55 million.

60.   Mr Lam for the defendants is right to complain of the production of documents shortly before the commencement of and during the trial which would indicate to me that I do not have a complete picture of the affairs of PGL and its interrelationship with PCL.  It also meant that the defendants were denied the opportunity of knowing the true financial situation of the company.

61.   Accordingly, I have serious doubts as to the true financial situation of PGL and with respect to PCL.  I am not clear as to the basis of payments made by PCL for or to PGL and how Calvin Lam can claim them as monies belonging to him.  I accept that Peter Szeto knew of certain payments made for or to PGL but what is not known is how these payments impact on the overall financial state of PGL.

62.   I have been presented with a very confusing set of accounting records and statements in relation to the financial affairs of PGL and to the payments made by Calvin Lam and related parties to PGL.  I have not before me a complete picture of the financial dealings and transactions of PGL.  For that reason alone it is difficult to conclude the nature and status of individual payments as submitted by the plaintiffs.  I was not provided with any auditors’ report of PGL after 31 March 2007.  Nor was I provided with any accounting statements for PGL beyond June 2008.  The balance sheet for PGL as of June 2008 showed total trade debtors of $721,454.08 and total trade creditors of $2,316,787.05 but no account has been provided in relation to these items.  Where I am seriously in doubt is that there were monies owing to PGL for past or current transactions but no monies were claimed to have been received after June 2008. 

63.   Peter Szeto also stated that Calvin Lam agreed to his proposal at the meeting of 30 June 2008.  He therefore asked Caroline Hung to issue an email to all the relevant parties at the meeting for confirmation.  He said that he was prepared to pay $210,622.47 to PGL in early July 2008.  Fiona Lam, Calvin Lam’s assistant, told him that he considered the amount was not enough and expected him to pay more in order to settle the matter.  Peter Szeto refused and he was removed as director of PGL on 10 July 2008.  Peter Szeto contacted the Bank of China and informed them that he was going to settle all the loans and release the mortgages himself.  He was informed that the loans were in default. He then arranged settlement of the secured loans from the Bank of China and he made three separate payments in the total sum of $572,310.96.

64.   Calvin Lam may have been prevaricating about whether or not PGL should go into liquidation but it is clear that in the end he wanted to continue with the business.  I am satisfied that Peter Szeto and Sallie Lam gave the required notice under the Refinancing Agreement of 3 months in advance to terminate the agreement in order to settle the bank facilities and accounts of PGL.  This seems to have been understood by the parties and a termination date of 30 June 2008 was finally settled between them.  Under condition 3 it provided that the shareholding of the parties reflected the percentage of any profit-sharing or loss-bearing on PGL’s operations and in relation to the security offered by Peter Szeto and Sallie Lam it provided that Calvin Lam and Stanley Lam would bear their share of any loss in accordance with their shareholding and further provided that if the worst case scenario should arise and PGL was forced into liquidation by its bankers or creditors, Calvin Lam and his wife and Stanley Lam would reimburse Peter Szeto and Sallie Lam for their share of the loss of 55% through the disposal of personal assets and properties.

65.   I accept that the position of the defendants was that they would bear $1.4 million of the liabilities that they identified.  Whilst Calvin Lam was of the view that they should bear more than that, he has not proven the actual loss or losses of PGL that the defendants would or should be liable or bear in accordance with the percentage of their shareholding. Calvin Lam claims he injected capital into PGL of $3,946,384.22. He has not satisfied me on a balance of probabilities that the payments were made by him or PCL for which PGL is in debt to him or PCL or that they were capital injections. 

66.   Based on the totality of evidence, I am not satisfied on the balance of probabilities that Calvin Lam has made capital injections into PGL for which Peter Szeto and Sallie Lam are liable as to 45% of the amount involved, nor that the payments identified as having been made by Calvin Lam or PCL were properly incurred debts by PGL that Peter Szeto and Sallie Lam would be liable to contribute 45% of the amount involved.  I am further not satisfied on the balance of probabilities of the overall financial situation of PGL so as to find that Peter Szeto and Sallie Lam would be liable for any contribution for the loss or losses of PGL in accordance with their 45% shareholding other than what they have agreed to bear by way of the sum of $1.4 million.   In conclusion, the plaintiffs have not satisfied me on the balance of probabilities as to their claim against the defendants. 

Conclusion

67.   For the foregoing reasons, I dismiss the plaintiffs’ claim against the defendants and make an order nisi that the plaintiffs pay the defendants’ costs, to be taxed if not agreed.

68.   It remains for me to thank both Ms Siu and Mr Lam for their helpful assistance throughout the proceedings and comprehensive submissions. 

[1] Trial Bundle (TB) at 367-372.

[2] TB at 373.

[3] TB at 419-428.

[4] TB at 347-353.

[5] TB at 452-455.

[6] TB at 360.

[7] TB at 362-366.

[8] TB at 496-503. See also Annual Returns dated 20 December 2011 at 513-520 and 20 December 2012 at 590-602.

[9] TB at 432-441.

[10] TB at 333 to 341.

[11] TB at 5 – Statement of Claim para 8.

[12] TB at 6 – Statement of Claim paras 14 and 15.

[13] TB at 153-160.

[14] TB at 155.

[15] TB at 390.

[16] TB at 391.

[17] TB at 392-394.

[18] TB at 395-399.

[19] TB at 398.

[20] TB at 399.

[21] TB at 110-111.

[22] TB at 338.

[23] TB at 395.

[24] TB at 334.

[25] TB at 340.

[26] TB at 690.