XCHRX KWONG KWOK HEI v. SILEIGH HOLDINGS LTD. AND ANOTHER

HCA 4793/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4793 OF 2000

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J U D G M E N T

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1. The Plaintiff has a claim against the Defendants for $3,070,165.55 in respect of an alleged loan. More accurately it appears to be a claim for the total of a number of loans by him to the first Defendant company over a period of about 1 1/2 years to which interest has been added since May 1997.

2. The claim against the second Defendant is in respect of a guarantee signed by him to pay the sum in the event of default by the second Defendant.

3. The Plaintiff sought summary judgment for this sum but the Learned Master gave unconditional leave to the Defendants to defend. Against this decision the Plaintiff appeals. An examination of the relationship between the three parties is essential.

4. At all material times the second Defendant was the director and a shareholder in the first Defendant company. The Plaintiff was the former Managing Director and principal shareholder of the first Defendant company before the events which resulted in the second Defendant buying the Plaintiff's interest in the first Defendant company. The second Defendant was working for the Kemklen Group under the supervision of the Plaintiff for about a decade. In or about 1995 both Plaintiff and second Defendant set up the first Defendant company. In due course the Plaintiff, through a nominee company - held 50% of its shares and the second Defendant held the other 50%.

5. It appears that this company, the first Defendant, was established to market a German product, Loos Boilers. Loos Boilers had formerly been a customer of Hale Engineering Limited (Hale) one of the subsidiaries of Kemklen for whom both the Plaintiff and the second Defendant worked. It appears that the two men concerned devised a dubious scheme whereby Loos Boilers' custom was taken away from Hale and given to the first Defendant (Sileigh). Within Sileigh the Plaintiff was responsible for its management and finance, and the second Defendant was responsible for the sales of Loos Boilers. Another person, Mark Chan, then emerged as the financial controller of Sileigh, appointed by the Plaintiff. The Plaintiff disputes the respective roles of the parties within Sileigh.

6. In March 1998 the Plaintiff and the second Defendant reached an agreement whereby the latter was to purchase the Plaintiff's shareholding (held in Cosec's name) for $14m. payable over ten years. That agreement is dated the 31 March 1998. On 9 March, almost three weeks earlier, the second Defendant signed what appears to be an acknowledgement of a short term loan in the sum of $3,570,165.55, on behalf of Sileigh, with a schedule for repayment attached. At the bottom of that acknowledgement is a short guarantee signed by the second Defendant in his personal capacity for the same amount. The wording is in an open ended form leaving the second Defendant liable for further "losses and damages arising from non-payment of the amount due". Despite the vulnerable phraseology I am only concerned with the loan and interest.

7. The second Defendant in his affirmation says that he had no idea whether the alleged loan was genuine but simply signed the acknowledgement and guarantee on the assurance of Mark Chan and on the instruction of the Plaintiff. Subsequent to the purchase by him of the shareholding in Sileigh, he caused an audit to be carried out of the company's accounts. The audit has not been disclosed or put in evidence so there is no knowing its contents other than the second Defendant's general statement that there was no documentary evidence to support the alleged loans and that the schedule of alleged loans, and interest, attached to the acknowledgement/guarantee was no more than a list of figures.

8. The signing of the acknowledgment of the loan (or loans) coincided more or less with the purchase by the second Defendant of the Plaintiff's shareholding in the company.

9. It is agreed that the second Defendant has made only one payment under the Agreement for the purchase of the shares and none under the loan acknowledgment which also had an instalment schedule within it. However a payment in the sum of $830,000.00 made by the second Defendant was appropriated as to $500,000.00 by the Plaintiff as the first instalment of the "loan" repayment. What happened to the remaining $330,000.00 is not entirely clear. In fact the explanation by the Plaintiff of some cheques which were apparently dishonoured, and a loan arranged between a friend of the Plaintiff and the second Defendant is so convoluted that I am far from clear as to what was going on in relation to sums of money alleged to be due to the Plaintiff.

10. On the face of it the Plaintiff seems to have a simple case, despite the rather coy omission of a number of material matters in his first affirmation, and an unconvincing version of his relationship with the second Defendant which led to the formation of the first Defendant company. The acknowledgment and guarantee are clearly signed by the second Defendant. There is a schedule of the "loans" attached to the signed agreement. Some time elapsed before the second Defendant questioned the basis of the "loans". He has not produced his auditor's report which he relies upon as questioning the factual basis of the alleged loans. There is a series of three letters between October and December 1999 which clearly acknowledge a debt and ask for the Plaintiff's indulgence in order to give him time to get funds together. These do not of course unequivocally relate to the alleged "loan" repayment but at the same time it is pertinent to comment that none of the letters makes any comment to the effect that the "loans" were a sham and that the second Defendant is rejecting any liability to repay them.

11. The second Defendant had solicitors acting for him in the purchase of the shares and they are identified in the body of that agreement. It is however difficult to believe that solicitors drew up the Loan Repayment Agreement or the Guarantee.

12. All these points were urged forcefully by Mr Houghton for the Plaintiff. On the face of the documents there is almost an unanswerable case for the Plaintiff. There are nonetheless a number of features in relation to the "loan" transaction and its background which I find troubling, not the least being the establishment of Sileigh to hive off trade from Hale, which appears to be the company which benefited from the sums of money recorded as loans in the schedule attached to the agreement. I bear in mind the affirmation of Miss Tang, Sileigh's accountant, in which she says that she took over the accounts in May 1996 and followed instructions to continue the existing system.

13. A quick glance at the schedule shows a total lack of consistency in the descriptions given to what appear to be payments into Sileigh's account. There are four cheques from Balnox, a company controlled by the Plaintiff. None of those sums is described as a loan. Only two sums are described as loans from the Plaintiff. They total $1.120m. An amount in excess of $0.5m. is linked with the Plaintiff as an HSBC Call Deposit. A number of items are concerned with payments to and from Hale Services. This was the company, a subsidiary of the Kemklen Group, from which Loos Boilers custom or business had been hived off into Sileigh. All these transactions - whatever they truly represent - took place before the second Defendant took over the company. None of the purported loans has been satisfactorily explained by the Plaintiff in his affirmations. There is merely a statement that he and companies under his control constantly advanced loans to Sileigh to finance its operations. The Plaintiff further relies on a trial balance which reflects the figure claimed as the total of loans made by the Plaintiff and due to him. There is no loan account in Sileigh's books exhibited to explain the unanswered question which lies between the Schedule of 9 March 1998 and the trial balance of the 15 July 1999 - how are these purported payments recorded and dealt with?

14. Miss Lau's submissions for the Defendants are built around the second Defendant's proclaimed ignorance as to any loans at all. One of the questions arising is who kept the books and what are the material entries. The company accounts for the year ending March 1997 intriguingly refer to a sum due to shareholders of $2.4m. and "other loan" of $2.481m. Again they are deficient in detail.

15. I have serious doubts as to whether the parties have set out all that they know. There are serious unexplained gaps in the documents provided. The two versions of certain events are unreconciled. The "loan" or "loans" strike me as strange against a background which is itself not straightforward. All may not be as it appears to be. This dispute needs to be resolved and complete discovery may give a clearer picture. There seem to have been some strange intercompany transactions involving Hale Services which concern some large sums of money going backwards and forwards. In my view the Master made the correct decision. This action needs transparency. The appeal is therefore dismissed with costs.