YEE TUNG-SING, DEREK AND OTHERS v. KINGSTON ENTERTAINMENT LTD. AND ANOTHER

HCA 5069/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. HCA 5069 OF 2001

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J U D G M E N T

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1. This is an appeal from a decision by the Master declining leave to the 1st Defendant to defend the proceedings and entering judgment under order 14.

2. Mr Pow sensibly accepts that this matter is to be conducted by way of rehearing, and it is open to me to read the affidavit of the 2nd Defendant made on behalf of the 1st Defendant, which affidavit was before the Master only in draft form and was not taken into account.

3. The 1st Defendant company operates restaurant businesses. The 2nd Defendant is, by the Statement of Claim, alleged to have encouraged the Plaintiffs to make investments to operate the businesses.

4. The 1st Plaintiff claims that he would be allotted 49 per cent of the shares in the company in return for a total investment of $735,000. The 2nd Defendant was at the same time to invest $765,000.

5. The company has a share capital of 10,000 $1 shares, of which 400 shares have been allocated: 49 per cent of those 400 to the 1st Plaintiff, and the remaining 51 to the 2nd Defendant. The sum of $735,000 was paid to the company and has been treated in the company accounts as, in part, the payment of share capital and, in part, a shareholders' loan.

6. The terms upon which the money was paid in are that the return would be based in part upon the profits made by the company.

7. The contention of the Defendant is that the 1st Plaintiff, along with the remaining Plaintiffs, was to be some form of secret or concealed shareholder in the business and that, although they were not to be named as shareholders in the company records, with the exception of the provision for the 1st Plaintiff, they would be able to say to people that they were "bosses" of the restaurants.

8. Following the making of the arrangement and the payment by the 1st Plaintiff of his sum, accounts were issued in which the balance of his investment, less $400, was shown as a loan to the company.

9. In respect of the remaining Plaintiffs, the contention is set out in paragraph 16 of the Statement of Claim, namely that in return for the investments made by each, the 2nd Defendant would procure the 1st Defendant to allot shares which would reflect the proportion that the investment bore to the total investment in the 1st Defendant, which was to be a sum of $3 million.

10. The total amount actually invested by the 5 Plaintiffs, the 2nd Defendant and another investor, who is not a party to the proceedings, is $2,700,000.

11. At a very late stage in the proceedings a document has been produced which is described as an agreement between the 1st Defendant and an "investor". The document produced is signed by the 3rd Plaintiff, and the argument for the 2nd Defendant is that the 2nd, 4th and 5th Plaintiffs have signed identical agreements. That is denied by the 2nd, 4th and 5th Plaintiffs, and that is an issue which remains to be determined.

12. The agreement contains a provision which demonstrates, in paragraph 5, that the return on the investment was to be by way of a distribution of profits in the investment. The expression "investment" itself is not defined by the document, but the total value of a share in the investment is $300,000. The document does not describe how many shares there are to be in the investment or what the investment is.

13. A particular provision is that in paragraph 15, which provides that:

"Nothing contained or implied in the agreement shall constitute or be deemed to constitute the subscription of shares in the company by the investor."

14. It is right that from an accounting point of view, to date, the company accounts have treated the sums invested by the various Plaintiffs in the company as loans: in respect of the 1st Plaintiff, as a shareholder's loan; in respect of the remaining Plaintiffs, as unsecured loans.

15. It is plain from the way in which the case has been pleaded by the Plaintiffs that it was contemplated that, notwithstanding clause 15 of the agreement, they would have the right to call upon the 2nd Defendant to procure an allotment of shares reflecting their investment in the business.

16. Mr Pow for the Plaintiffs says that that was called on, it was not complied with, and the agreement has been repudiated, but that is a matter which would have to be determined.

17. This is a case in which the relationships between the Plaintiffs and the company and the 2nd Defendant are not clear-cut. This is not a simple case of plain loans to the company being treated appropriately in the accounts, upon which there could be no dispute.

18. Having regard to all of the matters that have been put before me, I am satisfied that there are triable issues which ought to be considered, and that this is not an appropriate case for an O.14 judgment.

19. The decision of the Master to enter an O.14 judgment will be set aside.

20. It is plain, however, that the defendants need to put their house in order in relation to their defence as a matter of urgency.

21. The order I make setting aside the judgment is to be conditional upon the 1st and 2nd Defendants filing an amended statement of defence setting out the basis upon which they wish to answer the claim within 14 days of today's date.

22. The question of costs will be reserved.