ELECTRONIC SPIDER TECHNOLOGY LTD & ANOTHER v. AU CHEONG TAT & OTHERS

DCCJ 17323/2000

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 17323 OF 2000

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J U D G M E N T

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Background

1. The 1st plaintiff was incorporated on 13th May, 1998. The first three directors and shareholders were the 1st defendant, one Ms. Lee Ngan To and one Ms. Lee Wai Man who held 6 shares, 2 shares and 2 shares respectively. Its business was in computer hardware and software. It also provided internet website solutions. In May, 1999, Ms. Lee Wai Man left the company and transferred her shares to the 2nd defendant. The 3rd defendant and one Flying International Holdings Ltd. also joined as shareholders. The 3rd Defendant was also made a director. Flying International was a company controlled by one Wong Foon Hoi Mandy ("F H Wong") and was allotted 25% of the shares of the 1st plaintiff. F H Wong is the cousin of the 1st defendant.

2. On 7th March, 2000, the 2nd plaintiff acquired 70% of the shares of the 1st plaintiff. The terms of acquisition were set forth in two letters dated 17th February, 2000 and 1st March, 2000 from the 2nd plaintiff to the 1st and 2nd defendants. The consideration of the acquisition was the allotment of 2,000,000 shares of the 2nd plaintiff to the then shareholders of the 1st plaintiff and the injection of HK$2,000,000 into the 1st plaintiff as its working capital. After the 2nd plaintiff's acquisition of 70% of the 1st plaintiff's shares, the 1st, 2nd and 3rd defendants continued to operate the 1st plaintiff as before.

3. In a meeting of the board of the 1st plaintiff held in the middle of March, 2000, the 1st defendant was appointed as the Chief Executive Officer, the 2nd defendant as the Chief Operating Officer and the 3rd defendant as the Administration Director. The salaries of the 1st and 2nd defendants were also increased from HK$10,000 to HK$40,000 per month and the salary of the 3rd defendant was increased from HK$6,000 to HK$20,000 per month. The increases were to reflect the market rate. The 3rd defendant's title was later changed to Administration Manager. The 1st defendant's wife Ms. Louisa Wu also joined the 1st plaintiff on 7th July, 2000 as Project Manager drawing a salary of HK$20,000 per month.

4. The 3rd defendant worked until 30th September, 2000 with notice of termination having been given to her on 10th September, 2000. The employments of the other members of staff were also terminated at the end of September, 2000 leaving behind the 1st and 2nd defendants, Ms. Wu and a trainee. The employment of Ms. Wu was also terminated in the middle of October, 2000. Finally, the 1st and 2nd defendants resigned from their directorship as well as the employments on 26th October, 2000. The 1st and 2nd defendants and Ms. Wu handed over the business of the 1st plaintiff to the 2nd plaintiff's representatives on 30th October, 2000 in the presence of the 1st plaintiff's auditor Mr. Quan Fat Hing Walter ("Quan").

The Plaintiff's Claims

5. The Re-Amended Statement of Claim has set out 4 claims against the defendants. The first claim is by the 1st plaintiff against the 1st and 2nd defendants for payment by each of them a sum of HK$34,039. The 1st plaintiff says that these two defendants should have given one-month notice of termination but had not done so. It relies on sections 5, 6(2)(a) and 8A of the Employment Ordinance, Cap. 57 and says that each of them is liable to pay it one month wages in lieu of notice. The 1st plaintiff however agrees to pay them their accrued salaries from 1st to 26th October, 2000 and salaries in lieu of their pro rata annual leave at 10 days. Since the two defendants have each withdrawn HK$42,039 from the 1st plaintiff's bank account on 27th October, 2000, the net amount payable by each of them is HK$34,039. One of the items in dispute within the scope of this claim is whether the 1st and 2nd defendants were entitled to pro rata 13th month salary.

6. The second claim originally made was against all three defendants for damages for missing equipment which included computer hardware and software. The cost of the missing equipment is pleaded at HK$245,374.31 and amount claimed is at HK$149,352.92 possibly after taking into account of depreciation and wear and tear. This 1st plaintiff abandoned this claim by counsel at the beginning of the plaintiffs' final submissions.

7. The third claim originally was against all three defendants for their having caused the 1st plaintiff to pay out HK$53,790 on 9th March, 2000 to the 3rd defendant, HK$100,000 to F H Wong on 20th March, 2000 and HK$300,000 also to F H Wong on 24th October, 2000 all without the approval of those directors of the 1st plaintiff as appointed by the 2nd plaintiff (namely Messrs. Wai Chung Fai ("Wai"), Chen Chien ("Chen") and Co Vi Cuong Dennis ("Dennis Co")). The 1st plaintiff by counsel at the beginning of final submissions abandoned part of this claim in relation to the sum of HK$53,790 as against all defendants. It also abandoned part of this claim at HK$300,000 as against the 3rd defendant only. This claim in the final form is for HK$300,000 and HK$100,000 as against the 1st and 2nd defendants and for HK$100,000 as against the 3rd defendant. At the end of the final submissions, this is the only claim made against the 3rd defendant.

8. It is the defendants' case that the sum of HK$100,000 was used to repay a loan from F H Wong which was advanced to the 1st plaintiff before the 2nd plaintiff's acquisition of 70% shares of the 1st plaintiff. The defence of the 1st and 2nd defendants for the sum of HK$300,000 is also a repayment to F H Wong for a loan advanced by him to the 1st plaintiff prior to the 2nd plaintiff's acquisition of the said 70% shares. The 1st plaintiff however denies that there were these loans. It also says that decisions to make such payments or repayments were material decisions that should have been approved by Wai, Chen and Dennis Co before payment and there was no such approval. The defendants in answer say that payments to discharge existing commitments of the 1st plaintiff were not material decisions, and material decisions were only those that would change the shareholding structure in the 1st plaintiff.

9. The fourth claim is by the 2nd plaintiff against the 1st and 2nd defendants for having misrepresented to the 2nd plaintiff about the financial situation of the 1st plaintiff in the course of negotiation leading to the 2nd plaintiff's acquisition of 70% of the 1st plaintiff's shares. The 2nd plaintiff says that the 1st and 2nd defendants had concealed the existence of a debt due from the 1st plaintiff to the 3rd defendant in CAD10,000 and two debts due from the 1st plaintiff to F H Wong at HK$300,000 and HK$100,000 the repayments of which form the basis of the third claim. The 2nd plaintiff says that if these three debts should have been disclosed to it in the course of negotiation, the 2nd plaintiff would not have acquired the 1st plaintiff's shares. The 1st and 2nd Defendants deny any misrepresentation. They say that these were genuine loans and the repayments of the CAD10,000 and HK$100,000 made in March, 2000 had been recorded in the accounting documents that had been sent and disclosed to the responsible director of the 2nd plaintiff Wai. The three payments form the subject matter of the third claim in its original form referred to above.

The Plaintiffs' Evidence

Wai Chung Fai (PW1)

10. The plaintiff has called three witnesses, namely Wai, Dennis Co and Wong Lup Yin Louis ("Louis Wong"). Wai has a Ph. D. degree in physics. He has the experience of working in a merchant bank as an analyst and as a financial consultant providing advice to the bank's customers. He has been and still is a director of the 2nd plaintiff and other companies.

11. Around the end of 1999 or the beginning of 2000, Dennis Co introduced the 2nd defendant to Wai and his then fellow director Chen. The 2nd defendant in turned introduced the 1st defendant to him. At that time, the 1st and 2nd plaintiffs already had business dealings. The 2nd defendant had assisted in the development of the 2nd plaintiff's websites. Wai found that the 2nd defendant was good at computer graphics. After the introduction, the 1st and 2nd defendants had some discussions with Wai on possible cooperation of the 1st and 2nd plaintiffs. They later held a demonstration of their computer software to Wai and Chen at the 2nd plaintiff's office.

12. Soon after the demonstration, the 1st defendant told Wai that another computer company was interested in acquiring the 1st plaintiff. There was then a dinner party at the Excelsior Hotel attended by Wai, his wife Yvonne Chan ("Y. Chan") and the 1st and 2nd defendants. On this occasion, Wai told the 1st and 2nd defendants that the 2nd plaintiff was interested in investing and acquiring the shares of the 1st plaintiff. The terms of acquisition were agreed in a subsequent meeting at the 2nd plaintiff's office in Sheung Wan. Wai said that in the course of the negotiation, he had been assured by the 1st and 2nd defendants that the 1st plaintiff's financial position was very sound and it was making profit. In particular, the 1st and 2nd defendants had warranted to him that the 1st plaintiff did not have any outstanding loan from any party including all its directors. He further said that from beginning to end, they had never given him the telephone number of the 1st plaintiff's auditor Quan or had asked him to check with Quan on the 1st plaintiff's financial situation. He denied that he had asked them whether HK$3 million or HK$4 million dollars would be enough for the 1st plaintiff to complete their projects on hand. He said he had merely asked them how much did they need to complete the projects on hand and they replied that they needed HK$2 million.

13. After the terms for acquisition were agreed upon, Wai left the documentation to his fellow director Chen to handle. He had told Chen to conduct a due diligence exercise on the 1st plaintiff which was a standard exercise in merger and acquisition. He also said that he had asked Chen if he had read the 1st plaintiff's financial documents and Chen said the 1st plaintiff was "OK". He denied that he had said to Chen that he was prepared to invest several million dollars into the 1st plaintiff.

14. Chen duly prepared the two letters of 17th February, 2000 and 1st March, 2000 setting out the terms for the 2nd plaintiff's acquisition of 70% of the 1st plaintiff's shares by share swap. In addition, Chen also prepared an undated letter to Quan setting out the details of the new directors to be appointed to the 1st plaintiff's board and the documentation that Quan had to prepare for the 1st plaintiff. Paragraph 6 of the letter of 17th February required the 1st plaintiff to provide audited financial statements for the years of 1998 and 1999. Wai said he was not given these statements as they had not been prepared yet. After the letters containing the terms were signed, the shares swap duly took place on 7th March, 2000 and the 2nd plaintiff injected 2 sums of HK$1 million each into the 1st plaintiff on 13th March, 2000 and in June, 2000 to fund the latter's working capital. Wai stressed that the HK$2 million dollars were for the 1st plaintiff to complete its projects.

15. Wai stressed in cross-examination that the 1st and 2nd defendants had told him that the 1st plaintiff had no outstanding debt and he believed in them. He had asked the 1st and 2nd defendants for the audited financial statements in May or June, 2000 but was told that the same were not available yet. He never directly asked the auditor Quan for the statements. (The audited financial statement of the 1st plaintiff for 13th May, 1998 to 31st December, 1999 had in fact been prepared at around 27th March, 2000.) Apart from the occasion referred to above, he had not asked any of the three defendants for the audited statement despite his frequent visits to the 1st plaintiff's office. He only saw the statement after the departure of the 1st and 2nd defendants from the 1st plaintiff. These are relevant to the fourth claim on misrepresentation.

16. Despite the acquisition of 70% of the 1st plaintiff's shares and the appointment of 3 directors on its behalf onto the 1st plaintiff's board, the 2nd plaintiff did not get involved with the management of the 1st plaintiff. The 1st plaintiff was managed by the three defendants exactly as before. There was also no discussion on whether there should be any change in the bank account or in the arrangement of signatories for issuing cheques. In order to monitor the 1st plaintiff's spending, Wai had asked the 1st defendant to e-mail him the 1st plaintiff's payment records. This was done by the 3rd defendant. He said that he had been given such e-mail once or twice each week. But the payment records mailed to him only had the details of payments for the very day when the mail was sent. For the pervious days, the mail only contained the balance. He was very unhappy with the way the 3rd defendant had sent him such e-mail and had wanted to terminate her service. He was thus unaware of the repayments of HK$53,790 (CAD10,000) to the 3rd defendant and HK$100,000 to F. H. Wong on 9th and 20th March, 2000 respectively. In answer to questions from the Court, he said that he did not print out such e-mails and had deleted them after reading. Despite the rather unsatisfactory state of the payment records sent by e-mail, he had not asked for the complete payment records at the end of each month. He did not do so as he thought the 1st plaintiff was being run properly and that he was busy with other matters. Regarding the other types of accounting documents referred to in the evidence of the 3rd defendant, he either had not received them or had only received the balance without breakdown. These are relevant to the third and fourth claims.

17. Wai further referred to the second sentence in paragraph 4 of the letter of 17th February, 2000 which states that:

"All material decisions including any increase in share issue with respect to Electronic Spiders Limited will be subject to the agreement of iST East Limited."

He said that decisions to make payments of such large sums were material decisions which required the approval of the 2nd plaintiff and no such approval had been given.

18. He also did not accept these two loans of HK$300,000 and HK100,000 were genuine loans advanced by F. H. Wong though his checking of the account revealed that there were such payments to the 1st plaintiff. He did not accept these loans because he had not been told about the same. He also queried that if the HK$300,000 was a genuine loan, why was it not repaid by the 1st plaintiff after the 2nd plaintiff's injection of HK$2 million. In answer to questions from the Court, he said that the HK2 million was injected as share capital and not as loan to the 1st plaintiff. He further said that if the loans should be genuine, he would have approved their repayments. These are relevant to the third claim.

19. Wai agreed that sometime in the middle of March, 2000, he had promised the staff that there would be a 13th month salary at the end of the lunar year and that annual leave was at 12 days per annum. But he disagreed that such terms applied to the 1st or 2nd defendant as they already had their salaries increased from HK$10,000 to HK$40,000 per month and they were also shareholders and directors. This is relevant to the first claim.

Co Vi Cuong Dennis (PW2)

20. Dennis Co gave evidence on the resignations by the 1st and 2nd defendants and the handover of the 1st plaintiff's affairs to representatives of the 2nd plaintiff on 30th October, 2000. He was not involved in the negotiation for the 2nd plaintiff's acquisition of the 1st plaintiff's shares. In so far as the handover was related to the second claim, that is no longer relevant as the 1st plaintiff has abandoned the second claim.

21. Co was appointed as a director of the 1st plaintiff in March, 2000 but had not taken part in the day-to-day management of the 1st plaintiff. In his witness statement which was adopted as his evidence in chief, Co merely said that the 1st and 2nd defendants purported to terminate their employment contracts with the 1st plaintiff immediately as well as to resign as directors of the 1st plaintiff and that the 1st plaintiff did not accept that the notices of termination were valid and did not waive its right to claim damages in lieu of notice. There was no detail of the conversation that took place between him and the 1st and 2nd defendants.

22. In cross-examination, he said that on 26th October, 2000, he had received a phone call from either the 1st or 2nd defendant who told him that the 1st and 2nd defendants were resigning. He said that he had an impression of having expressed a view. He could not tell if he had said the exact words "無問題" meaning "OK". He seemed to have said "OK, you resign, there are details-follow up that we have to discuss to have a transition or take over." He said he did not mean that he had accepted the resignations and he did not say that. When further questioned, he said what he meant was that there was need for transition from one company to another, because the defendants were not going to work there and they had to discuss how to hand over works on hand.

23. On the question of when to have the handover, he was not clear if they had discussed to have the handover on that very day. He was however not free then. He could not recall if he had suggested to have the handover on the following Saturday or the next Monday. He agreed that it was possible that he had later telephoned the 1st defendant suggesting to have the handover on the following Monday, 30th October, 2000. The handover indeed took place on 30th October, 2000 and he said that the atmosphere was hostile. His evidence on the whole was vague and at times hesitant, uncertain and shaky. He did not seem to have a clear recollection of his conversations with the 1st and 2nd defendants on 26th October, 2000. But he confirmed that he had not said that he did not accept the resignations of the two defendants.

Wong Lup Yin Louis (PW3)

24. The third witness for the plaintiffs was Louis Wong. He dealt with stocktaking and the handover on 30th October, 2000. With the abandonment of the second claim, his evidence on stocktaking is no longer relevant. On the handover, he said that the two defendants were cooperative. He dealt with the handover of passwords with the 2nd defendant. There was no refusal to answer his questions.

The Defendant's Evidence

Chen Chien (DW1)

25. Chen was a fellow director of Wai in the 1st and 2nd plaintiffs. But his involvement with the plaintiffs seemed to have dwindled since March, 2000. He had a litigation with Wai in the High Court in which he was the defendant. That case has been concluded. No detail about that case was revealed in this trial. That case is therefore irrelevant to this case save on Chen's credibility.

26. Chen said in his witness statement that the 2nd plaintiff was in the business of computer programming and website design, but it lacked expertise in technology. The 1st plaintiff had the strength in IT technology and computer programming and could provide complimentary services to the 2nd plaintiff. The 2nd plaintiff wanted the human resources and technical skills of the 1st plaintiff. Wai and he thus decided to invest in the 1st plaintiff. Apart from holding discussions with the 1st and 2nd defendants, he also had discussions with the auditor of the 1st plaintiff Mr. Quan. He also said that Wai and he were aware at that stage that the 1st plaintiff was not in financial strength and had no assets and it was necessary for the 2nd plaintiff to invest HK$2 million working capital into it. At that time, things were moving very rapidly in the IT industry and it was more important to get the right people to work together. He drafted the two letters of 17th February and 1st March, 2000 which contained the terms of the 2nd plaintiff's investment. (The letter of 17th February also contained the address and telephone of Quan's office for the purpose of delivery and collection of the shares to be swapped.)

27. In his oral evidence, he further added that the decision to invest in the 1st plaintiff was made after the demonstration by the 1st and 2nd defendants of their new software package at the office of the 2nd plaintiff. That software was a new technique that was not known to many people and Wai was impressed by the demonstration. He also confirmed that at the demonstration, the two defendants had shown Wai some management accounts of the 1st plaintiff. The most important thing was the 1st plaintiff's manpower and products which were complimentary to that of the 2nd plaintiff and they intended to invest several million dollars into the 1st plaintiff.

28. Regarding the financial statements of the 1st plaintiff for 1998 to 1999, he said that they were not mentioned in the discussions, but he had put it in the letter of 17th February as a normal requirement in acquisition of shares. Wai and he did not ask for the audited account because they thought that such was not necessary before completion of the deal between the plaintiffs. When the 2nd plaintiff paid the first HK$1 million to the 1st plaintiff after completion of the exchange of shares, the audited account of the 1st plaintiff was still not available. He told Wai about it, but Wai said that there was no hurry for the account as it was just a formality. He further confirmed that he had contacted Quan for provision of secretarial service for the share exchange, but he had not enquired with Quan on the financial position of the 1st plaintiff. He said the focus then was on the exchange of shares, finance was not a consideration.

29. He was specifically asked that if the 2nd plaintiff was aware that the 1st plaintiff had outstanding debts of several hundred thousand dollars, would the 2nd plaintiff still invest in it. He said that initially they were talking about several million dollars of investment and the grouping of different website solutions and technical capability under the umbrella of the 2nd plaintiff, several hundred thousand dollars debt was not a concern for them.

30. Regarding employment benefits, Chen confirmed that there was a meeting in which he, Wai, his wife Y. Chan and the 3 defendants attended. He further confirmed the meeting's decision that the 1st defendant would be made the Chief Operating Officer of the 1st plaintiff with a salary of HK$40,000.00 per month. Furthermore, all staff was to have a thirteenth month salary and their salaries should reflect the market rate. He said in his witness statement that there was no special package for the 1st and 2nd defendants. When asked about this in cross-examination by counsel for the plaintiffs, he said the benefits of the 1st and 2nd defendants did not differ from that of the other staff.

31. He further confirmed that there was no change to the cheque issuing arrangement of the 1st plaintiff but that all payment records had to be e-mailed to Wai and copied to him for reference. When he was referred to the account payable of the 1st plaintiff for March, 2000 at pages 257 and 258 of the bundle of documents, he confirmed that he had seen similar documents which was cumulative and in the same form. However, his involvement with the business of the 2nd plaintiff began to be reduced since March, 2000 because of family reasons.

32. When cross-examined by counsel for the plaintiffs, he confirmed his knowledge of the 1st plaintiff's annual turnover was less than HK$1 million dollars. He also further confirmed that the 1st defendant had shown Wai the 1st plaintiff's management account which showed a low turnover and little assets, but that was not their concern. Their concern was on the human side, the good relationship of the staff and their new product was also complimentary to that of the 2nd plaintiff.

33. When asked about his understanding of the meaning of "material decisions" in paragraph 4 of the letter of 17th February, 2000, he said he understood that to mean increase of shares or liability of the 1st plaintiff. However, that did not include normal payment or repayment. If a decision did not create additional commitment for the 1st plaintiff, he did not regard it a material decision. It was only a material decision when it required the 1st plaintiff to assume a new obligation.

Fong Kwan Yin (the 2nd defendant) (DW2)

34. The 2nd defendant Fong Kwan Yin ("Fong") was a classmate of the 1st defendant Au Cheong Tat ("Au") when they were studying in Seneca College Toronto, Canada. He joined the 1st plaintiff in late 1998. He said that in early 1999, the 1st plaintiff was in need of capital for running expenses and on 25th March, 1999, Mr. F H Wong entered into a written loan agreement with the 1st plaintiff and advanced to it an interest free loan of HK$300,000. In order to secure this loan, it was agreed that Mr. F H Wong would be made a shareholder of the 1st plaintiff. This loan was booked as such in the audited account of the 1st plaintiff. He and the 3rd defendant were both appointed directors in May, 1999 and each of them was given 15 shares. In early 2000 (which should be the end of 1999), the 1st plaintiff suffered from lack of funds again and the 3rd defendant on behalf of the 1st plaintiff raised a further loan of HK$100,000 from F H Wong. In addition, the 3rd defendant also advanced CAD10,000 to the 1st plaintiff. These 2 loans had been recorded in the cash flow and account payable statements of the 1st plaintiff.

35. He knew Dennis Co of the 2nd plaintiff. Since the technical expertise of the 2nd plaintiff was rather weak, he had at the request of Dennis Co assisted the 2nd plaintiff in its programming work. Dennis Co also introduced him to Wai of the 2nd plaintiff. Around Chinese New Year in 2000, Wai had a discussion with him and Au and told them his plan to list the 2nd plaintiff. He and the 1st defendant also presented a demonstration to Wai of a new software developed by them. Wai showed interest after the demonstration but became less enthusiastic after knowing that their annual turnover was less than HK$1 million. They were at that time approached by other companies for merger and they sought advice from Wai who was experienced in corporate merger and acquisition. Wai then invited them to dinner at the Excelsior and expressed the 2nd plaintiff's interest in acquiring the bulk of the shares of the 1st plaintiff. In the course of the discussion, Wai asked them if HK$2 to HK$3 million would be enough for them to develop their projects on hand and they said HK$2 million would be enough. Wai then suggested to inject HK$2 million into the 1st plaintiff and there would be a swap of shares of the plaintiffs. In the dinner, they had also provided Wai with the contact of Quan and asked him to talk to Quan on figures. He further said that Wai had never asked him if the 1st plaintiff was indebted to others.

36. After they had discussed the matter of co-operation with Wai, Chen took over the matter and discussed with them on the details. Eventually, they agreed in terms of the two letters of 17th February and 1st March, 2000. All documentation and allotment of shares were to be carried out by Mr. Walter Quan, the auditor of the 1st plaintiff.

37. On the words "material decisions" in the letter of in the letter of 17th February, 2000, he did ask Chen for its meaning and Chen advised him that it meant the change of shareholding structure in the 1st plaintiff so that after the 2nd plaintiff had become the majority shareholder of the 1st plaintiff, any change in the shareholding of the 1st plaintiff had to be approved by the 2nd plaintiff. After the share swap, Wai had told them in a meeting that the 2nd plaintiff would not interfere with the day-to-day operation of the 1st plaintiff except that the 1st plaintiff should e-mail its bookkeeping records to Wai regularly.

38. He also referred to an oral agreement whereby he and the 1st defendant would be entitled to the same employment benefits as the other staff; namely 13th month salary and 12 days annual leave.

39. He then referred to the investment of HK$1 million by the 2nd plaintiff into the 1st plaintiff in March, 2000. The 1st plaintiff then repaid F H Wong the loan of HK$100,000 and the 3rd defendant her loan of CAD10,000. These repayments were recorded in the 1st plaintiff's account payable for March, 2000 which had been e-mailed to Wai for his reference. Furthermore, all loans advanced to the 1st plaintiff were recorded in its accounts and known to its auditor Mr. Quan. In the course of discussion for the take over arrangement in February, 2000, he and the 1st defendant had also told people of the 2nd plaintiff that they could make enquiry with Mr. Quan on the financial status of the 1st plaintiff.

40. He further referred to various project undertaken by the 1st plaintiff including the Book Fair 2000, the Hong Kong Comics Festival 2000 and a failed attempt to list the 1st plaintiff which all featured sometime in July to late August, 2000. He also referred to a road show to USA in about July to August, 2000. After their return from the road show, they had a meeting with Yvonne Chan and Dennis Co and were told to restructure the 1st plaintiff by dismissing all staff in order to minimize costs. As a result only four members of staff left behind; namely the 1st and 2nd defendants, the 1st defendant's wife Louisa Wu and a trainee introduced by Yvonne Chan. He also said that after the 2nd plaintiff had become the major shareholder of the 1st plaintiff, the 1st plaintiff had to do a lot of work for the 2nd plaintiff and was not paid for such work (save the sum of HK$310,000 paid in October, 2000).

41. Regarding the loan of HK$300,000, F H Wong sent the 1st plaintiff a notice dated 16th October, 2000 seeking repayment. The loan was thus repaid on 24th October, 2000.

42. On his resignation, he said that on 26th October, 2000 in a board meeting attended to by Yvonne Chan on behalf of the 2nd plaintiff, the 1st and 2nd defendants tendered their resignations. Yvonne Chan said she had no authority to accept the resignations. The auditor Mr. Quan was present and he suggested that they could inform the other directors. Yvonne Chan tried to locate Wai but failed. She then contacted Dennis Co. The 1st defendant then told Co that he and the 2nd defendant would resign. Co replied "無問題" meaning "OK" but requested them to hand over everything. Co was not available to conduct the handover there and then and suggested to have it done on the following Saturday. However, shortly afterwards, Co phoned back to him and said that Co himself was not available on the next Saturday too and proposed the next Monday, 30th October, 2000. The handover duly took place on the next Monday at the 1st plaintiff's office with Yvonne Chan, Dennis Co., Louis Wong and a girl from the 2nd plaintiff and there was no animosity.

43. He also said that when he and the 1st defendant left the 1st plaintiff, they wanted to get back their arrears of salary, pro rata annual leave and pro rata 13th month salary in the same way as all other staff had been given upon their dismissal. That would mean that each of them would get HK$72,001, but there was insufficient funds for them, so they just divided the funds in the bank and each got HK$42,390.

44. He maintained his story in cross-examination. He denied that the loan of HK$300,000 from F H Wong was in fact Wong's investment or payment for his 25% shares in the 1st plaintiff.

Au Cheong Tat (the 1st defendant) (DW3)

45. The contents of Au's witness statement are almost exactly the same as those of Fong's statement. His oral supplements do not add much. He also confirmed that after the 2nd plaintiff had become the major shareholder of the 1st plaintiff, the 1st plaintiff had to do a lot of work for the 2nd plaintiff for free (save the sum of HK$310,000 paid in October, 2000). On the resignation, he confirmed that both he himself and the 2nd defendant Fong had talked to Dennis Co on the phone and submitted their resignations to him.

46. In cross-examination, he further said that the allotment of 25% shares of the 1st plaintiff to F H Wong was for him to promote the business of the 1st plaintiff in the business of selling watches. The further consideration of the 25% shares was Wong's interest free loan of HK$300,000. The allotment of shares was also to secure Wong's loan. He denied that he had concealed the audited report dated 27th March, 2000 or any thing else from Wai. On F H Wong's demand for repayment of the HK$300,000 loan, he said that Wong received a proxy form in October for a meeting to remove Chen. Wong then phoned him up and he told Wong what had happened in the company. He then received the demand letter from Wong for repayment of the HK$300,000. He also said that in about March, 1999 after F H Wong had advanced the loan of HK$300,000 to the 1st plaintiff, he had phoned the 3rd defendant and asked her to come back to Hong Kong to assist him in the business of the 1st plaintiff. He insisted that he had told the 3rd defendant in that conversation that Wong had advanced a loan of HK$300,000 to the 1st plaintiff and not an investment of such sum.

Quan Fat Hin Walter (DW4)

47. Mr. Quan was the auditor of the 1st plaintiff. Regarding Wong's loan for HK$300,000 to the 1st plaintiff, this was recorded as such by him in the audited account of the 1st plaintiff dated 27th March, 2000. Regarding the loan of HK$100,000 from F H Wong advanced in December, 1999 and the loan of CAD10,000 from the 3rd defendant advanced in February, 2000, he learnt about these from the cash flow statements of the 1st defendant for February and March, 2000 which were faxed to him on 29th June, 2000. He was also responsible for preparation of the documents for the share swap and he was instructed by the 1st and 2nd defendants and Chen to do so. Chen also wrote him an undated letter produced at page 23 of the bundle of documents confirming the instructions to him. The letter had the address and fax number of Quan's office. But nobody from the 2nd plaintiff had enquired him on the financial status of the 1st plaintiff. He was present at the EGM on 26th October, 2000 and witnessed the resignations by the 1st and 2nd defendants. He heard that after the 1st defendant had spoken to Dennis Co on the phone, the 1st defendant said that Co had accepted their resignations. The meeting then proceeded to remove Chen as a director of the 1st plaintiff. He was also present at the handover on 30th October, 2000 at the 1st plaintiff's office.

48. In his oral supplement, he further said that he had been contacted by someone from the 2nd plaintiff who was possibly Yvonne Chan in about February to March, 2000 who asked him for the statutory records of the 1st plaintiff. He duly delivered them to the office of the 2nd plaintiff. This further confirmed that the 2nd plaintiff had the means to contact him. He had also attended the handover on 30th October, 2000 and the atmosphere was very friendly and without any animosity

49. In cross-examination, he said that he came across an entry called "director investment" at HK$300,000. He enquired this with the 1st defendant and was told that this was a loan. He therefore recorded this as a loan in the audited accounts dated 27th March, 2000. He also confirmed that these accounts were given by him to the 1st and 2nd defendants on about 27th March, 2000.

Wong Foon Hoi (DW5)

50. Mr. Wong was called by the 3rd defendant. His business was in clocks and watches. He said the 1st and 2nd defendants intended to use his connections to promote their business in the filed of clocks and watches. They were short of cash and in about March, 1999 requested him for a loan of HK$300,000. He then entered into a written loan agreement with them dated 25th March, 1999 and gave them a cheque for HK$300,000. In order to make use of his connections to promote the business of the 1st plaintiff, he was given the right to subscribe 25% shares of the 1st plaintiff at the price of HK$1 per share and he exercised the right in the name of Flying International Holdings Ltd. He demanded repayment of this sum by a letter of 16th October, 2000 and got the money back on 24th October, 2000. He also referred to his two further loans to the 1st plaintiff at HK$100,000 each which were not recorded in any written loan agreement. They had both been repaid.

51. In his oral supplement, he explained why he saw it necessary to issue his letter of demand on 16th October, 2000. He said he received a proxy form asking him to vote for the removal of Chen form the board of the 1st plaintiff. He found that there was a big change in the company. He wanted to protect his own interest and thus asked for repayment.

52. When cross-examined by counsel for the 1st and 2nd defendants, he confirmed that the HK$300,000 was a loan and not an investment.

53. When cross-examined by counsel for the plaintiffs, he said he was not worried about the absence of written agreement for his second and third loans of HK$100,000 each as he was then already a shareholder of the 1st plaintiff. He also explained that he did not ask the 1st plaintiff for repayment of the HK$300,000 in March, 2000 when it received HK$1 million from the 2nd plaintiff because he wanted to give the 1st plaintiff a chance to grow as a new investor (the 2nd plaintiff) had just come in. He denied that the 25% shares were given to his company to secure the HK$300,000 loan. He insisted that it was an allotment and that was suggested by the 1st defendant. When he was cross-examined by counsel for the plaintiffs, he maintained what he said in his witness statement, his oral supplement in evidence in chief and his cross-examination by counsel for the 1st and 2nd defendants.

Chiu Kit Yee (the 3rd defendant) (DW3)

54. She was a friend of the elder sister of the 1st defendant. She was acquainted with the 1st defendant in 1992 when she resided in Canada. She was experienced in managing computer company and the 1st defendant invited her to come back to assist him in running the business of the 1st plaintiff. She first came back in November, 1998 to work for the 1st plaintiff. The 2nd defendant also joined the 1st plaintiff at about the same time. At that stage, the 1st plaintiff had financial difficulty and she advanced HK$20,000 to it. This sum was never repaid to her and she had not received any salary for her work. She returned to Canada in about December, 1998.

55. In about March, 1999, the 1st defendant phoned her and told her that F H Wong had invested HK$300,000 in the 1st plaintiff by way of acquisition of 25% of its shares and Wong would introduce business to the 1st plaintiff. He therefore invited her to come back to assist him and the 2nd defendant. She agreed and returned also in March, 1999. However, business of the 1st plaintiff did not improve despite the joining of F H Wong. On about 10th August, 1999 she had to request Wong for a further loan of HK$100,000. This loan was repaid within 15 days. The 1st plaintiff had financial problem again in December, 1999 and she asked F H Wong for another loan of HK$100,000 promising to repay the same within one month. She returned to Canada in December, 1999. Before she left, she delivered the accounts to Mr. Quan for audit. In about February, 2000, she learnt that the 1st plaintiff was again short of cash to pay staff salaries. She therefore advanced CAD10,000 to the 1st plaintiff to tide it over the problem.

56. Also in about February, 2000 whilst she was still in Canada, she learnt form the 1st defendant about the 2nd plaintiff's acquisition of 70% of the shares of the 1st plaintiff with consideration to be paid by the allotment of the 2nd plaintiff's shares and investment of HK$2 million into the 1st plaintiff. The 2nd plaintiff paid the first HK$1 million investment to the 1st plaintiff on 13th March, 2000 and she came back to Hong Kong on 16th March, 2000. She referred to the first staff meeting of the 1st plaintiff after the 2nd plaintiff had become its major shareholder. She recalled that the meeting was attended to by Wai and Chen and chaired by Chen. Chen said that there was no need to change the mandate to the bank for honouring cheques and it was not necessary to have Wai's approval for issuing cheques, however it was necessary to e-mail all payments records to Wai and Chen for their reference.

57. On the day after the meeting, she e-mailed the previous payment records of the 1st plaintiff to Wai and Chen as instructed. The e-mail records included the records of the loan of HK$100,000 from F H Wong in December, 1999 and her loan of CAD10,000 in February, 2000.

58. She also confirmed that after the 2nd plaintiff had become the major shareholder of the 1st plaintiff, the 1st plaintiff had to do a lot of work for the 2nd plaintiff for free. On about 10th September, 2000, she was advised by the 1st defendant that Wai wanted her to leave the 1st plaintiff. She wanted to leave immediately, but Wai did not respond to her request. She therefore stayed until 30th September, 2000. When the 1st plaintiff repaid the HK$300,000 to F H Wong on 24th October, 2000, she had already left the 1st plaintiff.

59. In her oral supplement, she said that she had e-mailed the 1st plaintiff's payment records to Wai almost everyday including the days when no payment was made. The e-mail would only stop when she was not in the office or when the computer system did not work. She disagreed with Wai's assertion that she only sent the entries for the day of dispatch together with the balance (but no separate entry) of the previous day. She insisted that her record was in a cumulative fashion containing all entries and she added new entries everyday. When cross-examined by counsel for the 1st and 2nd defendants, she also said that she had e-mailed Wai seven sets of records at the end of every month and they were account payable, account receivable, cash on hand, cheque records (including void cheques), net income, cash flow statement and bank account record.

60. On the HK$300,000 from F H Wong, she told counsel for the 1st and 2nd defendants that the 1st defendant had phoned her and told her about it on a day in March, 1999 very late at night. She had already gone to bed and was awaken to take the call. She had the impression that that the 1st defendant had told her that his cousin would give HK$300,000 and introduce 200 customers to the 1st plaintiff in return for 25% of its shares and she should come back to Hong Kong as soon as possible. She was then very sleepy and it was possible that she had misunderstood the message from the 1st defendant.

Wu Hiu Pui Louisa (DW7)

61. Ms. Wu is the wife of the 1st defendant. She joined the 1st plaintiff on 7th July, 2000 as a project manager. She had taken part in various projects and a failed attempt to list the 1st plaintiff. After the 3rd defendant had resigned, she took over her duties. She was also dismissed in mid-October, 2000. She had also taken part in the handover on 30th October, 2000.

Findings

First Claim

62. For the first claim, I would consider whether the instant resignations by the 1st and 2nd defendants had or had not been accepted by the 1st plaintiff. There is no dispute that they firstly tendered their resignations to Yvonne Chan, wife of Wai in the presence of the auditor Quan. Yvonne Chan did not think that she was in a position to accept the resignations, so she tried to contact Wai but failed. She then managed to contact Dennis Co and the 1st defendant then told Co of the resignations by him and the 2nd defendant. I find that Co had accepted their resignations instantly. If Co had not accepted their resignations to take effect there and then, he would have told them so. In any case, he would not have arranged a handover with them so soon. If one month of notice of resignation was required, as the 1st plaintiff now contends, the handover should not have taken place just 4 days later, but should only have taken place at or shortly before the expiry of the notices. In fact, there was an earlier arrangement to have the handover 2 days after the resignation. It was postponed for 2 more days before Co was not available on the first day. The arrangement for such an early handover showed that both sides understood that the resignations of the 1st and 2nd defendants were to take effect immediately and without the one month notice.

63. Furthermore, the handover was not done in haste. The plaintiffs sent a number of people to attend to it. They were Ms. Yvonne Chan, Mr. Dennis Co, Mr. Louis Wong and a girl of the 2nd plaintiff. If the 1st plaintiff should have formed the view that one month notice was necessary after the 1st defendant had spoken to Dennis Co, it could still have told the two defendants about this and proposed to postpone the handover to the expiry of the notice. But nothing of the sort had happened. It is thus clear that the 1st plaintiff had accepted their resignations there and then and the resignations were to have immediate effect. The 1st plaintiff also did not have a change of heart even at the handover on 30th October, 2000.

64. I further find that when the 1st defendant told Dennis Co that they were resigning, Co responded by saying "無問題" meaning "OK". On this point, I accept the evidence of the 1st and 2nd defendants as they were corroborated by Mr. Quan. Quan was present on the occasion and he heard the 1st defendant repeating Co's response to his resignation. Quan is an unrelated third party and I see no reason why he should have lied to the Court. His evidence on this was also unchallenged. Furthermore, Yvonne Chan was also present at the meeting. I do not think it possible that whilst Co was demanding notice of resignation from the 1st defendant on the phone, the 1st defendant could have lied to those present in the meeting by saying that Co had told him "無問題" to his resignation. The 1st defendant would have been extremely stupid if he should have told such a lie. The lie would have been exposed very quickly as Yvonne Chan and Dennis Co were working together. In any case, both Chan and Co attended the handover. Co's evidence on this is rather unclear and I have already noted above that his evidence on the whole was vague and at times hesitant, uncertain and shaky. He did not appear to have a clear memory of what he had said with the 1st and 2nd defendants on 26th October, 2000 though he tried to maintain that he had not accepted their resignations.

65. I further note that it is not the 1st plaintiff's case that these two defendants were leaving under protest of the 1st plaintiff. There is no suggestion whatsoever that Co or Wai or anyone from the 1st or 2nd plaintiff was demanding notice but these two defendants were leaving regardless. There was no protest up to and after the handover. The first objection to their immediate resignations was by the solicitors' letter dated 21st November, 2000. I also find that the handover was done in an amicable atmosphere and I accept the evidence of the defendants and Quan and reject the evidence of Co. In fact, the evidence of Louis Wong on the handover is also in line with that of Quan. An amicable handover further militates against any suggestion that the defendants were leaving under the protest of the 1st plaintiff for lack of notice. I do not wish to speculate on why the 1st plaintiff saw it necessary to make the belated objection to their instant resignations in the solicitors' letter of 21st November, 2000, but I find that this objection was made too late and it was of no use. The resignations had already been accepted on 26th October, 2000 to take immediate effect. Any requirement for notice had been waived by the response of Dennis Co of "無問題" and the immediate arrangement to have an early handover. The 1st and 2nd defendants were thus not liable to the 1st plaintiff for any salary in lieu of notice under section 8A of the Employment Ordinance.

66. With this finding, I have effectively disposed of the first claim. The reason being that the claims against them for salary in lieu of notice under section 8A of the Employment Ordinance amount to HK$40,000 for each of the defendants. After giving credit to them for various amounts due to them, the 1st plaintiff is only claiming against each of them a net sum of HK$34,039. If the claim for salary in lieu of notice at HK$40,000 is disallowed, there is in fact a sum of HK$5,961 due to each of them.

67. However, for the sake of completeness, I would also deal with the other issue of pro rata 13th month salary which is within the scope of the first claim. The first point to note is the undisputed fact all staff were entitled to the 13th month salary. When they were dismissed, they were all given pro rata 13th month salary. The only dispute is whether the 1st and 2nd defendants were entitled to the 13th month salary. Wai said that they were not entitled to. The two defendants said they were as they had the same benefit as the other staff of the 1st plaintiff. Wai said that they were not entitled to this benefit because their salary had been increased from HK$10,000 per month to HK$40,000 per month after the 2nd plaintiff's acquisition of 70% of the shares of the 1st plaintiff. But the increases were only to elevate their remuneration to the market level. There was no reason not to let them enjoy the 13th month pay as enjoyed by all other staff. On this point, I also accept the evidence of Wai's then associate Chen that the benefit of the 1st and 2nd defendants did not differ from that of the other staff. Though Chen had a litigation with Wai, I see no reason why he should lie about this to assist the 1st and 2nd defendants. He had no interest in this litigation. Since I have found that the 1st and 2nd defendants were entitled to the 13th month salary or a pro rata sum thereof, the amount due to them would be larger than the sum of HK$5,961 aforesaid. This makes the first claim more unmeritorious.

Third Claim

68. Regarding the third claim for HK$300,000 and HK$100,000 as against the 1st and 2nd defendants and HK$100,000 as against the 3rd defendant, the question is whether the payments of these sums to F H Wong were repayments of loans advanced by him to the 1st plaintiff. Regarding the repayment of HK$100,000, it was firstly paid in by F H Wong in December, 1999. The fact that it had been so paid in by Wong is beyond dispute. Unlike the case of the HK$300,000, the 1st plaintiff does not suggest that this sum was an investment and not a loan. Faced with the undisputable payment in by Wong, I see no reason why I should reject the defendants' case that it was a loan and thus had to be repaid. I find that this was a loan.

69. I also accept the evidence of the 3rd defendant that the repayment of this sum and the repayment of CAD10,000 to her were properly accounted for in the cash flow statements and account payable statements of the 1st plaintiff for February and March, 2000. I also accept her evidence that these accounts had been e-mailed to Wai for his reference in accordance with Wai's instructions.

70. All parties agreed that there was no change to the bank mandate nor any need for approval for Wai for issuing of cheques after the investment by the 2nd plaintiff, the payment record was the only way for Wai to supervise the spending of the 1st plaintiff. If the 3rd defendant should have supplied Wai with unsatisfactory and incomplete payment records, Wai should have complained and demanded proper records. Wai never made any complaint to the defendants nor demanded replacement accounts. The 3rd defendant's evidence is supported by Chen who said that he had seen accounts from the 3rd defendant in the format as produced by the defendants in the bundle and the accounts that he saw were in a cumulative fashion as described by the 3rd defendant.

71. Since I accept the evidence of the 3rd defendant, I therefore find that the repayments of HK$100,000 to F H Wong and CAD10,000 to the 3rd defendant in March, 2000 had been disclosed to Wai in March, 2000 and Wai was fully aware of such payments described as repayments of loans. Wai never found it necessary to query these payments until the issue of the solicitors' demand letter on 21st November, 2000. I therefore find in the same vein that the sum of HK$100,000 was indeed a repayment of a loan advanced by F H Wong to the 1st plaintiff in December, 1999.

72. Regarding the repayment on 24th October, 2000 of HK$300,000 by the 1st plaintiff to F H Wong, the 1st plaintiff says that this sum was F H Wong's investment into the 1st plaintiff in March, 1999 for 25% shares and it need not be repaid to him. The 1st and 2nd defendants disagree and say that the payment of this sum to Wong on 24th October, 2000 was to repay the loan advanced by him in March, 1999. There are a number of issues in relation to this sum that need consideration. Firstly, the 3rd defendant said in her witness statement that it was an investment. Unlike the other loans Wong had advanced to the 1st plaintiff which were repaid after 10 odd days to a few months, this sum was only repaid after more than a year. Furthermore, Wong had demanded repayment of a smaller loan of HK$100,000 in March, 2000 but not demanded repayment of this loan at the same time. Unlike the other loans, this loan had the support of a purported written loan agreement and the agreement had not been seen by the auditor Mr. Quan. Quan also found it necessary to enquire with the 1st defendant on the nature of this payment in by Wong when Quan prepared the audited account.

73. The 1st and 2nd defendants and Mr. F H Wong say that this sum of HK$300,000 was a loan from Wong to the 1st plaintiff advanced in March, 1999. Wong said that he was given the right to subscribe to 25% of the shares of the 1st plaintiff because he had good connections in the clocks and watches business and he could bring business to the 1st plaintiff. Indeed, the 3rd defendant said that when she returned to the 1st plaintiff in about March, 1999, Wong appeared to be one of the bosses of the company. She thus thought that he was also a director. Both the 1st and 2nd defendants said in their witness statements that the 25% shares were allotted to Wong so as to secure the repayment of his loan of HK$300,000. They however said in oral evidence that the 25% shares were also allotted to Wong for him to bring in business to the 1st plaintiff.

74. The 3rd defendant was first advised by the 1st defendant about this matter sometime in March, 1999. She was in Toronto, Canada at that time. She said when she received this call, it was late at night and she had already gone to bed. She was awaken to take the call. As she was in a sleepy state, she could have misunderstood the 1st defendant's message and took the loan as an investment. She returned to Hong Kong in March, 1999 and resumed the duty of preparing the accounts. That is perhaps the reason why when Quan prepared the audited account of the 1st plaintiff, he saw an accounting document saying that the HK$300,000 was a director's investment as that document probably was prepared by the 3rd defendant. It was this document that prompted Quan to make enquiry with the 1st defendant on the nature of this sum.

75. The time when Quan enquired with the 1st defendant on the nature of this sum was probably sometime in February to March, 2000 as the audited report prepared by him was dated 27th March, 2000. As a result of the clarification by the 1st defendant, Quan booked this sum as a loan to the 1st plaintiff. Since the clarification by the 1st defendant that it was a loan was made at an early stage and before the injection of the second installment of the investment of HK$1 million by the 2nd plaintiff, I accept that the 1st defendant's clarification to Quan was a truthful one. When he made the clarification, he knew that it was for auditing purpose and should know that the clarification would find its way into the audited account and thus be known to all shareholders and directors including the 2nd plaintiff. If he had to lie about the nature of the payment so as to enable Wong to get the money back, it was too early for him to do so. There was at that time no sign that the business of the 1st plaintiff would not be successful. I therefore find that this HK$300,000 was a loan and not an investment. Since I find that this sum was indeed a loan, I also find that the 3rd defendant had misunderstood the message from the 1st defendant to her in March, 2000 when she was in Canada.

76. I also accept that this loan of HK$300,000 was evidenced by a written loan agreement though it had not been furnished to Quan. I also accept Wong's explanation that he was not worried about the lack of written agreements for his subsequent loans to the 1st plaintiff because he was by then a shareholder of the 1st plaintiff and could take part in its business. On the point of Wong not asking for repayment of this sum but had asked for the repayment of another loan of HK$100,000 in March, 2000, I accept his evidence that he wanted to give the 1st plaintiff a chance in developing its business as the 2nd plaintiff had just invested in it.

77. Since I have found that the sums of HK$300,000 and HK$100,000 were loans advanced by Wong to the 1st plaintiff, I therefore dismiss the third claim against the defendants.

78. There is one further point in this claim. It is the 1st plaintiff's case that the decisions to repay were material decisions that required the approval of the directors as appointed by the 2nd plaintiff. There was no such approval to these repayments and hence the defendants should be responsible to pay them back to the 1st plaintiff. However, as these were genuine loans, they had to be repaid in any event. I do not regard decisions to make repayment and discharge of existing obligations of the 1st plaintiff as material decisions. The repayments were not matters of choice. If it was a decision to assume a new commitment for the 1st plaintiff, it could be otherwise. I go further to say that even if the decisions to repay were material decisions which required approval from the directors appointed by the 2nd plaintiff, the fact that the repayments in fact discharged the obligations of the 1st plaintiff means that the 1st plaintiff has not suffered any loss or damage by reason of their having been made without the approval of the other directors. In any event, Wai has said in evidence that if the loans were genuine, he would have approved their repayment. Wai might not have been aware of this loan of HK$300,000 because, as pointed out below, he never asked and was not concerned about such matters. As I have found that these were genuine loans, I would also dismiss the third claim.

Fourth Claim

79. The basis of this claim is misrepresentation by the 1st and 2nd defendants to Wai. Wai said that he had been told by the 1st and 2nd defendants that the 1st plaintiff had no indebtedness and that they did not provide him with the contact for Quan. If Wai was concerned about the financial status of the 1st plaintiff, even if the two defendants should have withheld from him Quan's contact, he should have asked for it. Furthermore, it was unsafe for him to just rely on the casual assurance of the two defendants. If this was a matter of his concern, he should have found it necessary to look into the accounts and make enquiry with the auditor. Wai had not done anything and I do not believe that the 1st and 2nd defendants had assured him that the 1st plaintiff did not owe any debt to anyone.

80. I do not accept that Wai had not been provided with Quan's contact. I accept the defendants' evidence that they had given such contact to Wai in the Excelsior dinner. I can see Quan's telephone number having been recorded in the letter dated 17th February, 2000 from Chen for the 2nd plaintiff to the two defendants. Chen has also written to Quan direct confirming the instructions on the share swap and he quoted Quan's address and fax number on the letter. Thus the 2nd plaintiff had all the necessary contacts of Quan and could have enquired with him on the financial status of the 1st plaintiff if it should have found the need to do so.

81. I also do not believe Wai's evidence that he had told Chen to conduct a due diligence exercise on the 1st plaintiff and had asked Chen if he had read the 1st plaintiff's financial documents to which Chen said the 1st plaintiff was "OK". If he should have raised these matters with Chen, that should have been before the conclusion of the deal for the acquisition of the 1st plaintiff. But there is no dispute that no due diligence exercise had been carried out by Chen and thus no basis for Chen to assure Wai that the 1st plaintiff was "OK". According to Wai, Chen had thus lied to him. But I can see no reason why Chen should have lied to Wai at that stage. They were partners in the acquisition of the 1st plaintiff. If the finance of the 1st plaintiff was a matter of concern for Wai, it was a matter of concern for Chen.

82. I find that the truth of the matter was as said by Chen in evidence. At the stage of discussion for acquisition of the 1st plaintiff, Chen and Wai were aware that the 1st plaintiff was not in financial strength and had no assets. It was thus necessary for the 2nd plaintiff to invest HK$2 million working capital into it. At that time, things were moving very rapidly in the IT industry and it was more important to get the right people to work together. The 1st plaintiff's manpower and products were complimentary to that of the 2nd plaintiff and Chen and Wai originally intended to invest several million dollars into it. The financial statements of the 1st plaintiff for 1998 to 1999 were not mentioned in the discussions, but he had put it in the letter of 17th February as a normal requirement in acquisition of shares. Wai and he did not ask for the audited account because they thought that such was not necessary before completion of the deal between the plaintiffs. When the 2nd plaintiff paid the first HK$1 million to the 1st plaintiff after completion of the exchange of shares, the audited account of the 1st plaintiff was still not available. He told Wai about it, but Wai said that there was no hurry for the account as it was just a formality. Though he had discussions with Quan, he had not enquired with him on the financial position of the 1st plaintiff as the focus then was on the exchange of shares and finance was not a consideration. When asked whether the 2nd plaintiff would still invest in the 1st plaintiff if it was aware that the 1st plaintiff had outstanding debts of several hundred thousand dollars, Chen said initially they were talking about investing several million dollars into the 1st plaintiff so as to group different website solutions and technical capability under the umbrella of the 2nd plaintiff, indebtedness at several hundred thousand dollars was not a concern for them.

83. I accept Chen's evidence because it is in line with the other evidence that I have accepted. He had the contacts for Quan but never bothered to enquire with him on the finance of the 1st plaintiff. Furthermore, they valued the worth of the 1st plaintiff at about 12 million dollars, an indebtedness of less than half a million would not have a significant factor in their overall consideration. That at most would only have reduced the quantity of shares allotted by the 2nd plaintiff for the swapping. I accept the evidence of Chen also because he is an unrelated party and has no interest in the outcome of this action. I reject Wai's evidence because its unreasonableness. I do not think it reasonable for him just to rely on what he alleged to have been said by the two defendants and not to make any enquiry with Quan the auditor.

84. The plaintiffs have raised one more issue on the audited accounts. The letter of 17th February, 2000 required the 1st and 2nd defendants to provide the audited accounts of the 1st plaintiff but that was never done. However, that failure cannot support any of the causes pleaded in this action. I am of the view that after the report was available on about 27th March, 2000, either the 1st or 2nd defendant would have been willing to provide it if they were reminded about it. In any case, a copy could have been obtained from Quan. I do not accept that the 1st and 2nd defendants had withheld it from the 2nd plaintiff deliberately.

85. Though Wai was not aware of the loans for HK$300,000 and HK$100,000 from F H Wong and CAD10,000 from the 3rd defendant, the 1st and 2nd defendants had never practiced any misrepresentation on him because he had never asked. He and Chen were then eager to acquire the 1st plaintiff and its finance was not a matter of concern for them. If they had wanted to know about the details, they could have enquired from Quan. They did not do so because they were not concerned. Wai had suggested at one stage of his evidence that had he known about the indebtedness, he could have acquired the manpower and projects of the 1st plaintiff without the shell and liability of the 1st plaintiff. But as I have found, that was not how his mind had operated. He was then eager to acquire the 1st plaintiff and group it under the umbrella of the 2nd plaintiff. Even if he should have wanted to acquire just the assets of the 1st plaintiff and not its shell and liability, I doubt whether the 1st and 2nd defendants would have agreed to such proposal. I therefore dismiss the fourth claim as well.

86. On the question of costs, I am of the view that after the departure of the 1st and 2nd defendants, the 1st plaintiff is nothing but an empty shell. This action was brought at the direction and engineered by the 2nd plaintiff. I therefore make an order nisi that the 1st and 2nd plaintiffs do pay the costs of this action to the 1st, 2nd and 3rd defendants and that the 1st and 2nd defendants' own costs be taxed in accordance with the Legal Aid Regulations.