LAU, WILLIAM JOHN v. WAN YUK LIN, ALISON AND OTHERS

HCA 1255/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1255 OF 2006

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BETWEEN

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J U D G M E N T

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Introduction

1.  The Plaintiff claims in this Action what he describes as a return on investment in the 4^th Defendant (“Company”) of which he owns 47% of the shares.  Between 1990 and 1998 he was also a director.  He is entitled to these sums, so he alleges, pursuant to agreements made in 1991 and 1996.  The agreement is pleaded in paragraphs 7 and 8 of the Re‑Amended Statement of Claim as arising as follows:

“7.  In or about 1991, all the shareholders, and directors of Skydon and Skydon reached an oral agreement that each shareholder be paid a return of investment monthly and a further dividend at year-end if Skydon could afford such.  It was also agreed between all the shareholders and directors of Skydon and Skydon that the Plaintiff would be entitled to a thirteenth month payment in addition to annual increments.  The exact amount of increments would be determined in February each year.  The Plaintiff has been receiving such returns till April 2004 but has since then stopped.  The aforesaid oral agreements are collectively called “the Agreements”.

8.  In or about November 1996, the Plaintiff and the 1^st Defendant acquired all shares of Skydon from other shareholders and thereafter became the only two shareholders and directors of Skydon of which the Plaintiff and the 1^st Defendant held respectively 47% and 53% of the shareholdings.  The Agreements were also affirmed again by the Plaintiff, 1^st Defendant and Skydon.”

2.  The loss claimed in paragraph 13 of the Re-Amended Statement of Claim is $1,640,000.  Paragraph (1) of the prayer claims “The 4^th Defendant or alternatively the 1^st, 2^nd and/or 3^rd Defendants to pay the Loss and Damages to the Plaintiff as pleaded in paragraph 13 above.”

3.  This is an imprecise pleading of an agreement and it is unclear why the Plaintiff might be entitled to be paid the sums claimed from the 1^st to 3^rd Defendants.  The pleading in paragraph 7 is as consistent with an agreement merely as to the parties’ general intention at the time it was made as it is with an agreement, which was intended to give rise to enforceable rights.  Noticeably absent is a pleading of consideration.  The vagueness in paragraph 7 is repeated at the end of paragraph 8: “The Agreements were also affirmed again by the Plaintiff, 1^st Defendant and Skydon”.

4.  This failure to think through the claim properly at the outset as evidenced by the pleading perhaps accounts for the way it developed during the trial.  In paragraph 1 of the Plaintiff’s written opening the claim is described as against the “Defendants” arising from an agreement between the Plaintiff and the 1^st Defendant.  In paragraph 17 the first issue to be decided is described as “Whether there was an oral agreement for the 1st Defendant to pay a return of investment and a further dividend at year‑end (“Entitlement”) made between the Plaintiff and the shareholders of the 4^th Defendant in or about 1991, of which the 1^st Defendant was one of the shareholders and directors.”  Paragraph 19 of the written opening, however,  says this:

“THE ORAL AGREEMENT

19. It is the Plaintiff’s case that the 2 oral agreements as in paragraphs 17 & 18 herein existed, which are particularized as follows:-

(a)  In or about 1991, the Plaintiff avers that all the shareholders, and directors of the 4^th Defendant reached an oral agreement whereby each shareholder be paid the Entitlement in addition to annual increments same as other employee-shareholders.  [paras 24-25, W/S of the Plaintiff; paras 6-7, W/S of Szeto Kin Wing]

(b)  In or about November 1996, when the Plaintiff and the 1^st Defendant became the only 2 shareholders of the 4^th Defendant, they continued with the oral agreement referred to in the preceding paragraph without the inclusion of the former shareholders of the 4^th Defendant (“the Agreement”) and that the 4^th Defendant was to be run as a quasi partnership as before and the Entitlement was to be maintained.  It was also decided that the Entitlement and staff salary would be reviewed thereafter in February each year and that both of them should put in extra effort to recoup the money they have used in taking up the shares of other shareholders.  [paras 33-34, W/S of the Plaintiff; paras 6-7, W/S of Szeto Kin Wing]

(c)  The uninterrupted Entitlement payments to the Plaintiff for over 12 years through CAPRI since January 1992 to December 1995 and through AVIZ since January 1996 until April 2004.  [paras 24-25 of W/S of the Plaintiff; Day Book Entries]”

5.  Nowhere in the Amended Statement of Claim is it made clear that the claim is principally against the 1^st Defendant. The most sensible reading of the Amended Statement of Claim is that the claim is against the Company and that the 1^st to 3^rd Defendants have been added because it was thought that as the case progressed it might transpire that claims should be made against them.  The fact is that there does not appear to be any foundation for the suggestion that there was a legally enforceable agreement made between the Plaintiff and the 1^st Defendant not least because there is no suggestion anywhere in the pleadings or evidence that the Plaintiff provided any consideration to her for the alleged promise.  This muddled and artificial claim is repeated in the written closing in which it is suggested that there was an agreement between the Plaintiff and the 1^st Defendant when there is no evidence that comes close to suggesting any discussion ever took place which either party thought placed an obligation on her personally to pay any sums to the Plaintiff.  Any claim against the 1^st Defendant and the 2^nd and 3^rd Defendants was misconceived from the start and I note that any claim against the 5^th Defendant was abandoned when the Statement of Claim was re-amended.  The only sensible approach to this case is to ask whether or not an agreement was reached for the payments claimed (to which I refer in the next paragraph) between the Plaintiff and the Company, which in my view is the only claim raised for determination by the Re-Amended Statement of Claim.  The claims against the other the other Defendants are clearly demurrable and were not improved by the evidence.

6.  Paragraphs 9 to 10 of the Re-Amended Statement of Claim plead matters which resulted in the Plaintiff’s exclusion from decision making in relation to the Company.  It seems to be intended to suggest that this resulted in the Company ceasing to pay the Plaintiff, what is referred to in the Re-Amended Statement of Claim as the “return of investment”, which “reached HK$20,000 a month in or about 2003”: see paragraph 12.  The resulting loss is pleaded in paragraph 13, namely, $20,000 a month until issue of the writ, totalling $1,500,000, and a 13^th month payment from 2004 to 2010, totalling $140,000.  Originally only HK$$840,000 was claimed and thus the claim came within the District Court’s jurisdiction.  The Action came before the Companies Court because it was ordered to be tried with a winding-up petition concerning the Company.  The Petition proceedings were settled before trial.  Thus leaving for determination only this Action.

7.  The Company denies that there was any agreement to pay shareholders any return of investment and that such sums as the Plaintiff received which are similar in amount to those claimed to be a return of investment were in fact payments of consultancy fees between 1996 and 2004 to companies owned by the Plaintiff’s family, namely, Capri Investment Limited (“Capri”) and AVIZ Consultants Ltd (“AVIZ”).  The Company counterclaims for shareholders loans of $142,124.50 to the Plaintiff which are recorded in the audited financial statements of the Company and acknowledged by him in a signed confirmation of balance dated 17 December 2003.

Background

8.  The Company was formed in 1987.  It originally carried on business as a trading company.  In about 1989 its business changed to providing public search services.  The change arose as a result of the liquidation of another search company, Asianet, and a number of its former staff including the 1^st Defendant seeing this as an opportunity to establish a company to provide similar services to the clients of Asianet.  It appears that the 1^st Defendant and presumably others approached the then owners of the Company, Philip and Roger Hui, and proposed that the Company be used a vehicle for this new business.

9.  Between 1986 and 1990 the Plaintiff worked for the Economic Research Group (“ERG”), which provided commercial enquiry and private investigation services.  ERG used the public registry and litigation search services of Asianet for which the 1^st Defendant worked.  This is how the Plaintiff got to know her.  When Asianet ceased business the 1^st Defendant joined the Company to help it develop a search services business.  The Plaintiff was invited to join the Company at this time by the Hui Brothers, but declined to do so because he felt its business conflicted with that of ERG.  However, he did assist it during his own time by, for example, introducing overseas contacts who could provide overseas search facilities when required.  In 1990 he left ERG and set up AVIZ.  He was asked by the 1^st Defendant at about this time to take up most of the shares of a shareholder who was about to emigrate and wished to sell his shareholding.

10.  The Plaintiff became a shareholder in the Company on 13 October 1990 and also a director. He currently owns 47% of the Company’s shares pending the determination of their value and subsequent sale to the 1^st to 3^rd Defendants pursuant to a consent order in HCCW 576 of 2007.  In November 1996 the Plaintiff and the 1^st Defendant acquired the shares of the other shareholders and thereafter became the only 2 shareholders and directors of the Company until July 1998 when the Plaintiff and the 1^st Defendant resigned as directors to be replaced by the 2^nd and 3^rd Defendants.  On 1 December 2001 the 1^st Defendant was reappointed as a director and subsequently she transferred 500 shares to each of the 2^nd and 3^rd Defendants.  During the following 3 years the Plaintiff and the other shareholders’ relationship deteriorated.

11.  Between January 1992 and December 1995 the Plaintiff received a monthly sum and a 13^th month payment through a company controlled by him called Capri.  Between January 1996 and April 2004, when payment was stopped, the payments were made to AVIZ.  It is not in dispute that these payments were made and recorded as consultancy fees in the books and audited accounts of the Company.  It appears that at least for the 2001/2002 financial year AVIZ signed a confirmation of balance for the sums it received.

The Argument

12.  The Plaintiff argues that these payments are consistent with his case. I could understand the argument if it was also the Plaintiff’s case that he had done nothing, or at least very little, in connection with the Company’s business and, therefore, there was no explanation for the payment of consultancy fees.  However, this does not appear to be his case.  The Plaintiff’s witness statement goes into some detail about what he did to help develop the Company’s business.  The Plaintiff’s closing written submissions summarise in paragraph 29 the Plaintiff’s case in this regard as follows: “It is submitted that after the oral agreements have been agreed in or about 1991 and in or about November 1996, the Plaintiff has been making constant and periodic contribution to assist the operation of Skydon by obtaining banking facilities, raise funds for the company, business development – Deloitte and any ad hoc matters since 1991 and continued from 1996 up to 2004….”  As the Plaintiff was not paid a salary or director’s fees it is a fairly obvious inference to draw that he was paid, through companies he controlled, a fee for the assistance that he provided.  It seems to me that the contemporaneous documents are on their face inconsistent with the Plaintiff’s case.  In paragraph 30 of the Plaintiff’s closing submissions it is argued that “the long term 12 year pattern is simply far too uniform to be a consultant retainer, the uninterrupted and consistent CF payment and a DP since January 1992 to until April 2004 must be pursuant to the oral agreements between shareholders in 1991 and between the 1^st Defendant and himself in November 1996.”  The payments were, of course, made pursuant to an agreement, but it simply does not follow, as the Plaintiff suggests, that the agreement was, necessarily, as contended by the Plaintiff.  The 1^st Defendant says that it was an agreement to pay him for the assistance he could provide through his contacts in establishing the business.  What happened and is recorded in the accounting records of the Plaintiff is consistent with such an agreement and is consistent with paragraph 29 of the Plaintiff’s closing submissions.

13.  The Plaintiff also argues that it is inherently likely that some form of return of investment would be paid in addition to a dividend otherwise it made no sense to invest in a private company in which it is difficult to realise ones shares.  This simply makes no sense.  If a company makes a profit it can distribute it all as a dividend.  It cannot pay out, or certainly should not pay out, to shareholders more than its profit.

14.  It is also an obvious inference that the reason why payments stopped was because following their falling out in 2004, the 1^st to 3^rd Defendants took the view that they no longer wanted the Plaintiff’s assistance and did not wish to continue to pay him.

15.  Mr Maurellet, who appeared for the Defendants, also fairly points out that the Plaintiff has not disclosed any of AVIZ or Capri’s documents, which show how they accounted for the payments that they received.  I think that I am entitled to draw the inference that if they had been disclosed they would have revealed that the payments were recorded as commission.

16.  The view of the documentary evidence to which I have referred above creates a significant difficulty for the Plaintiff.  He has to prove on the balance of probabilities through oral and circumstantial evidence other matters which demonstrate that the contemporaneous documents are misleading and that the Plaintiff’s version of events is to be preferred to that of the Company.

17.  I was invited to accept that the Plaintiff was a truthful witness and that he gave consistent and credible evidence.  I accept that he stuck to his case, but I do not accept that his case was as straightforward and told in as compelling a manner as Mr Chien on his behalf submitted.  Following the cessation of the payment to him of monthly payments he instructed lawyers to write letters of complaint starting on 2 June 2004. There is no mention of the Plaintiff being owed a “return of investment”.  The complaint is clearly that he is owed consultation fees and on 10 June 2004 the Plaintiff caused AVIZ to issue a fee note for consultation fees.  The Plaintiff’s explanation for this was that he was angry and confused and that it was not until December that he focused his mind and clearly recalled what he says was agreed in 1991 and 1996.  The problem with the Plaintiff’s evidence in this regard is that it illustrates the difficulty of advancing a case based on vague oral agreement made so long before trial.  If the Plaintiff was unclear in his own mind for a number of months about what had been agreed many years before, it is difficult for a court to accept that what he now says is an accurate recollection of what was discussed rather than a recreation of what he thinks the parties agreed.  It seems to me quite possible, and probably likely, that the Parties discussed how they were going to receive money from, what they hoped would prove to be, a successful business venture, but I am not persuaded that what the Plaintiff now says was agreed is a reliable recollection of events.

18.  The high point of the case for the Plaintiff was the evidence of Szeto Kin Wing, who had known the Plaintiff since 1986 when they worked together at ERG.  He described the Plaintiff as a very good friend.  His directly relevant evidence was contained in paragraphs 6 and 7 of his witness statement, which reads as follows:

“6. I frequented the Petitioner’s office when he had set up his own company. At first he had his office in the premises of the 4^th Respondent. Then he moved away and returned in around 1997 and as such, I came to meet the 1^st to 3^rd Respondents often as well. I had been to the 4^th Respondent’s office premises in Trust Tower, China Hong Kong Tower and On Hong Commercial Building. I note that the 1^st Respondent and the Petitioner each occupied a large room in these premises. The 3^rd Respondent, a bookkeeper, had a small room to herself in both Trust Tower and China Hong Kong Tower while the 2^nd Respondent, a clerk, sat in the general office area. By the time when the 4^th Respondent moved into On Hong Commercial Building, both the 2^nd and 3^rd Respondent had rooms of their own though smaller than those occupied by the 1^st Respondent and the Petitioner.

7.      I recall that I asked the Petitioner why a room was provided to the 3^rd Respondent when I first visited the Trust Tower office.  He told me that a Fung Shui master advised the 1^st Respondent that the bookkeeper of the company should occupy a room by herself.”

19.  The courier service did not, however, materialise.  Mr Szeto gave further evidence that in 2002 he had further discussions with the Plaintiff about taking an interest in a company to acquire Multi Link, which was a competitor to the Company in the search services business.  Mr Szeto said that he also discussed this with the 1^st Defendant and that during one such discussion he “informed the 1^st Defendant whereby all shareholders are provided with a monthly return of investment, a thirteenth month payment and annual increments so long as there is profit for such distribution”, i.e., the system he says he understood the Company operated.  The 1^st Defendant did not, he says, react in puzzlement and say “where did you get that idea from?”  The implication is that this supports the Plaintiff’s case.  Once again these discussions did not lead anywhere.

20.  The 1^st Defendant says that she never had any discussions with Mr Szeto in which the payment of a “return of investment” to shareholders in the Company was mentioned and she did not approach him with a proposal to set up a noodle shop.

21.  Mr Szeto’s evidence is not direct evidence of what was agreed.  It is purely circumstantial.  What is surprising about Mr Szeto’s evidence is that he appears to have a clear recollection, which was not shaken I accept during cross‑examination, of discussions that took place many years ago, which did not lead to any agreement or business venture.  During cross-examination he said in answer to questions about the proposed business transactions to which his evidence relates that “there were lots of things I could not remember but these 2 things I could remember clearly”.  This is inherently doubtful.  It may be that the Plaintiff told Mr Szeto that he had a successful arrangement with his fellow shareholders in the Company and that a similar arrangement could be adopted if the ventures that they were discussing went ahead.  If the Plaintiff gave as precise a description as Mr Szeto’s witness statement suggests one would have expected him to describe the fact that he received his payment in the form of a fee payable to a company he owned.  Mr Szeto’s evidence is almost too good to be true and in my view is probably the result of a collaborative effort with the Plaintiff to try and reconstruct positively the events to which he refers.

22.  The Plaintiff points to various other peripheral matters as indicating that his version of events is correct.  For example that AVIZ received a 13 month payment, which is unusual if it was being paid a genuine consultancy fee.  However, the same point can be made in respect of the argument that his payments were a “return of investment”.  Why make a 13^th month payment each year particularly as the payments were not tied to profits?  If anything the 13^th month payment suggests that in the minds of the Parties the payments were tied to assistance provided by the Plaintiff and that his position equated with that of an employee in Hong Kong where it is common to make a 13^th month payment at Chinese New Year.

23.  Another difficulty with the Plaintiff’s case is that Fung Wing Kai who held 25,000 shares between December 1991 and November 1996, and was not an employee, did not receive any payments.  The Plaintiff attempts to explain this by arguing that Mr Fung’s father was given a job as a messenger at the Company which involved minimal work as means to pay Mr Fung his “return of investment” without causing any problems between him and his employer, Cathay Pacific.  However, there appears to be no correlation between the amounts that AVIZ and Mr Fung’s father received and their respective shareholdings.  This is unhelpful to the credibility of the Plaintiff’s case.

24.  The Plaintiff attempted to argue that the 3^rd Defendant worked with Mr Fung’s father and could have given evidence about whether he was an employee or not.  Mr Chien submitted that because the 1^st Defendant elected not to call her to give evidence about Mr Fung’s father’s salary the court should draw the inference that his salary was in fact a “return of investment”.  The fact is Mr Fung’s father was paid a salary.  The 1^st Defendant did not have to call evidence to prove that his salary was not something else.  It is for the Plaintiff to prove, if it is part of his case, that Mr Fung’s father’s salary was not what it was described as in the books of the Company, not the other way round.

25.  Further it also seems to me far from clear how it is suggested that the Plaintiff’s evidence gave rise to an enforceable agreement with the Company.  The following is paragraph 25 of the Plaintiff’s closing submission:

“25.   In Cross-examination (“XXn”), the Plaintiff told the Court that the 1^st oral agreement was made in 1991, after he has become a shareholder of Skydon in 1990, by all shareholders except Lo Yuk Sim and the Hui brothers [B2/T26/§257/CRD] that a monthly payment as the shareholder’s ROI would be paid to all the shareholders, except Lo Yuk Sim and the Hui brothers.  It was further agreed that if the shareholder would work fulltime in the company, then that shareholder would receive a salary on top of the ROI.  The shareholders further agreed that they would also receive a 13^th month payment and annual increment in or about Chinese Lunar New Year.  [B1/T26/§106-107/paras 24-25/W.S. of P]”

26.  This is not evidence of an agreement with the Company.  It is at best a vague understanding made with a number of shareholders.  There is no explanation of what the consideration was for the promise by the Company to make unquantified payments.  I note that in paragraph 25 of the Plaintiff’s closing submissions it is accepted that the Plaintiff said that the agreement was reached after he became a shareholder so the consideration could not have been (and in any event it is not alleged) his agreeing to become a shareholder.

Conclusion

27.  It is reasonable to assume that when the Company’s new business was being established the shareholders discussed how they were going to benefit financially from what they must have anticipated would be the Company’s successful new business venture.  I accept that for this reason the Plaintiff may have had discussions in 1991 and again some years later with the 1^st Defendant and others about payments to him and others by the Company for their contributions to it.  I do not accept that the Plaintiff has proved on the balance of probabilities that these discussions gave rise to the enforceable agreement described in his Re-Amended Statement of Claim or at all.  I certainly do not accept the submission that the court should draw the inference from the fact that payments were made to Capri and AVIZ that such an agreement was made.  It seems to me clear that the more likely inference is that the payments were what they were described as in the books of the Company.

Counterclaim

28.  The Company claims $142,124.50 from the Plaintiff in respect of a shareholders loan.  This sum is recorded in the books of the Company and the Plaintiff signed an auditor’s confirmation of balance in respect of this sum on 17 December 2003.  He has never disputed this amount prior to these proceedings in which he puts the Company to strict proof of its claim.

29.  In cross-examination the Plaintiff said it was possible that he had borrowed this sum but required the Company to prove.  In my view, and I so hold, the amount claimed is proved by the contemporaneous records, namely, the books of the Company and the signed confirmation of balance.  I therefore find that the Plaintiff is liable to pay the Company $142,124.50 plus simple interest at HIBOR plus 1% from 31 March 2003, the end of the financial year in which the loan is recorded in the books of the Company, at monthly breaks until the date of judgment and thereafter at the judgment rate.

Costs

30.  I order that the costs of the Action are paid by the Plaintiff to the Defendants.