FUNG YEE WAN v. LUI FU SING

cacv 45/2006

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 45 of 2006

(on appeal from DCCJ NO. 2042 of 2005)

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REASONS FOR JUDGMENT

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Hon Le Pichon JA:

1.  This was an appeal from the judgment of Deputy District Judge J. Ko dated 3 November 2005 granting the plaintiff summary judgment in the sum of $1 million.  At the conclusion of the appeal hearing, the appeal was allowed with written reasons to be handed down later which we now do.

Background

2.  The plaintiff’s case was that in or about July 2002 she entered into an agreement with the defendant whereby she agreed to purchase 4% of the shares in a company called Weld-Tech Electrical Supplies Co Ltd (“Weld-Tech”) from the defendant for $1 million and the money was paid to the defendant by the plaintiff by cheque dated 17 September 2002.  The plaintiff relied on a letter from the defendant dated 23 July 2002 to the following effect:

“Further to our discussion, I am pleased to confirm the above transfer of old shares of [Weld-Tech] from [the defendant] to [the plaintiff].

The value of the 4% old shares of the Company is agreed to be HKD1,000,000.00.

A legal party will be consulted and documents will be ready as soon as possible.”

3.  Although the defendant has cashed the cheque, he has not transferred any Weld-Tech shares to the plaintiff and in fact he can no longer do so not least because Weld-Tech went into liquidation on 21 February 2005.  The plaintiff’s claim was for the return of the $1 million for total failure of consideration.

4.  The defence of the defendant in a nutshell was that the $1 million was paid on behalf of the plaintiff’s husband pursuant to an investment agreement reached in September 2002 between the plaintiff’s husband, Mr Clint Wong Wai Leung on the one hand, and the defendant and a Mr Chan Chung Yuen (“Mr Chan”) on the other under which the plaintiff’s husband agreed to take up a 4% shareholding in WESCO Lightning Technologies Inc (“WESCO”).  The defendant’s case is set out in greater detail in paragraphs 5 to 8 (inclusive) below.

5.  There were preliminary negotiations in July for the acquisition by the plaintiff’s husband of a 4% shareholding in Weld-Tech but that such shares would be taken up not in his own name but in the name of his wife i.e. the plaintiff.  However no binding agreement was reached.  Meanwhile, the plaintiff’s husband, the defendant and Mr Chan formulated a plan to reorganise WESCO and Weld-Tech.  The plan involved the formation of a holding company which would acquire and hold 100% of the shareholding of WESCO and WESCO would in turn hold 100% of Weld-Tech with a view to the listing of the holding company on the stock exchange.

6.  At all material times prior to 15 August 2002, the defendant and Mr Chan were the sole shareholders and directors of Weld-Tech which had an issued share capital of 500,000 shares.  As a first step in the reorganisation plan, on 15 August 2002, the defendant transferred 299,999 shares in Weld-Tech to WESCO in return for 299,994 shares of par value of US$0.01 in the capital of WESCO and declared himself trustee of the remaining share in Weld-Tech for WESCO.  On the same day Mr Chan transferred his shareholding in Weld-Tech to WESCO in return for the allotment of 199,996 shares of par value of US$0.01 in that company.  Therefore as at 15 August 2002, apart from the single share registered in his name which he held in trust for WESCO, the defendant no longer owned any shares in Weld-Tech which became a wholly owned subsidiary of WESCO.  According to the defendant the plaintiff’s husband was fully conversant of the share transfers to WESCO, having been an active participant in the reorganisation and listing plans.

7.  In September 2002, the negotiations between the plaintiff’s husband, the defendant and Mr Chan continued and culminated in the investment agreement whereby the plaintiff’s husband agreed to take up a 4% shareholding in WESCO in his own name at a consideration of $1 million.  By this time, it is to be noted that all the Weld-Tech shares had been transferred by the defendant and Mr Chan to WESCO.  On 17 September 2002, payment of the $1 million pursuant to the investment agreement was effected by means of the plaintiff’s cheque in return for 4% of the shareholding of WESCO represented by 20,008 WESCO shares which were transferred to the plaintiff’s husband 3 days later on 20 September 2002.  On 30 July 2003, the plaintiff’s husband acquired a further 99,010 shares in WESCO from a number of shareholders including the defendant and Mr Chan.

8.  The reorganisation plans were subsequently abandoned apparently due to an unfavourable economic climate.

9.  Before the judge and in this court much reliance was placed on contemporaneous documentary evidence said to contradict the defence put forward and as to which no explanation has been forthcoming from the defendant.  Those documents consisted of board minutes of WESCO dated 13 September 2002 signed by the defendant as chairman which referred to the establishment by the defendant and Mr Chan of a share benefits scheme in recognition of the contribution made by its employees, consultants or advisers of the company and its subsidiaries over the years.  The minutes recorded the resolution approving the transfers to various employees and consultants including the plaintiff’s husband for a nil consideration.  There was an offer letter to the plaintiff’s husband of even date offering him 20,008 shares for nil consideration in recognition of his “efforts and contribution to the group during these years”.  The acceptance form signed by the plaintiff’s husband is dated 16 September 2002.  The bought/sold note and instrument of transfer as well as the register of members of WESCO recording the transfer to the plaintiff’s husband on 20 September 2002 showed the consideration to be nil.  For convenience, all the above documents will hereafter be referred to collectively as “the contemporaneous documents”.

The judgment below

10.  The judge granted the plaintiff summary judgment.  He considered the defence to be incredible.  He noted that it was, to a large extent, unsupported by documentation.  The judge commented on the absence of particulars such as a timetable or roadmap for the listing exercise and documents evidencing the reorganisation plans.  He was critical not only of the absence of evidence on the total number of WESCO shares issued, but proceeding on the assumption that the WESCO shares transferred to the defendant and Mr Wong totalling 499,990 shares represented the entire issued share capital, he found that 20,008 shares did not represent 4%.  He further found that the defendant’s case was contradicted by the contemporaneous documents.

Is the defence believable?

11.  There are curious features and unanswered questions in this case.  This applies as much to the plaintiff’s claim as to the defence. 

12.  As far as the defence is concerned, in essence, the sum was said to be in payment of 4% of the issued share capital of WESCO.  Was there evidence that 20,008 shares represented 4% of WESCO’s issued capital?  It is common ground that a share swap took place on 15 August 2002 whereby Weld-Tech became a wholly owned subsidiary of WESCO.  The entire share capital of Weld-Tech was transferred in return for the allotment of 499,990 shares to the defendant and Mr Chan.  The number of shares transferred to the plaintiff’s husband, as a percentage of that allotment (20,008/499,990), is 4% notwithstanding the judge’s conclusion to the contrary.  The absence of evidence as to whether the WESCO shares allotted to the defendant and Mr Chan represented the entire issued capital of WESCO is no reason for disbelieving the defendant.  The plaintiff has not asserted that the issued capital was something different and as that was a matter of public record she could easily have done so.  There was no valid basis for the judge not to have accepted that the 20,008 shares did represent 4% of WESCO’s issued capital for Order 14 purposes.

13.  I would add that if 4% of Weld-Tech had a value of $1 million in the period between July and September 2002, given the share swap, prima facie, the 20,008 shares in WESCO would have had a similar value in August/September 2002.

14.  So far as the plans for reorganisation and listing concerned, it was part of the defendant’s case that the plaintiff’s husband was an active participant in that exercise and was fully aware of what was going on.  The judge approached the matter on the basis that it was unbelievable because of the absence of documentation.  But it is pertinent to note that in the affirmation filed by the plaintiff’s husband, whilst denying that he was an active participant of the reorganisation or listing plans, there was no outright denial of the existence of such plans.  This feature is of some relevance because it would appear from that affirmation that not only was the plaintiff’s husband a seasoned businessman and investor, he was no stranger to WESCO although he only became a member of WESCO on 20 September 2002.  It is clear from the board minutes and the offer letter of 13 September 2002 that he had been acting as a consultant to WESCO and its subsidiaries which would have included Weld-Tech and the offer of shares was made “in recognition” of his efforts and contribution as consultant “in all these years”.  In his affirmation, the plaintiff’s husband accepted that he had been a consultant to WESCO.  Although he refrained from disclosing the nature of the consultancy services provided and the period over which he acted as consultant, his involvement must have been substantial judging by the value of the 20,008 shares transferred to him.  The judge appeared to have overlooked these matters which are of significance.

15.  As Mr Wong readily acknowledged, the contemporaneous documents were damaging to the defendant’s case.  Taken at face value, they appear to contradict the defendant’s case in as much as they show the transfer of the 20,008 WESCO shares for zero consideration as part of a share benefits scheme when it is the defendant’s case that $1 million was to be paid for those shares which represent a 4% shareholding in WESCO.  Mr Au who appeared for the plaintiff stressed that upon acceptance of the offer on 16 September, the agreement to transfer the shares for nil consideration became binding.  Therefore the delivery of the cheque on 17 September must have been for another transaction.

16.  It is true that the defendant offered no explanation for the contemporary documents.  Nevertheless, it is his evidence that at least four other persons (being Mr Chan and the three other persons who were to benefit from the share benefits scheme) “have knowledge of the reorganisation and listing plans and the Investment Agreement, as well as the circumstances in which the Cheque was drawn.”  There is an affirmation from Mr Chan which corroborates the defendant’s evidence.

17.  So far as concerns the plaintiff’s case, given the terms of the July letter, there would not appear to be any particular reason why the plaintiff should have delivered a cheque for $1 million, as it were, out of the blue, to the defendant on 17 September.  It was not as if legal documentation referred to in the July letter had become available.  Indeed it is surprising that the cheque should have been delivered without it being in exchange for a bought and sold note and an instrument of transfer.  It is even more inexplicable for the defendant to have accepted payment for shares which by that date were no longer within his power to transfer.

18.  Having regard to the evidence filed, the timing of the events and all the circumstances, in my view, it could not be said that the defence is unbelievable.  Whether the defendant will succeed at the end of the day is a different question but the dispute between the parties is one that can only be resolved once the facts have been found.  This case must go to trial.

Hon Barma J:

19.  I agree.