MARCOSTAR LTD. v. WONG LIN YAU

IN THE COURT OF APPEAL

1996, No. 255
(Civil)

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J U D G M E N T

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Nazareth, V.-P. :

1. I will invite Godfrey, J.A. to give the first judgment.

Godfrey, J.A. :

Introduction

2. This is Marcostar's appeal against an order of Gall, J. made on 29 November 1996, whereby the judge allowed the appeal of Mrs. Wong against an order of Master O'Donnell made on 25 October 1996, and ordered that summary judgment in the sum of HK$634,925 be entered for Mrs. Wong against Marcostar.

3. The judge, in giving judgment, noted that Marcostar was a limited company incorporated in Hong Kong with a share capital of $10,000, being the total value of 10,000 ordinary shares at $1 each; that Mrs. Wong, having been a director of Marcostar from 30 April 1991, ceased to be a director on 1 November 1991; and that Mr. Li and Mrs. Wong each hold 25% of the issued shares while Mr. Ip holds 50% of the issued shares.

Mrs. Wong's claim

4. The claim of Mrs. Wong against Marcostar is a claim for the sum I have mentioned, said to be the balance of "loans" advanced by Mrs. Wong to Marcostar.

5. A contract of "loan" of money is a contract whereby one person lends or agrees to lend the sum of money to another for consideration of a promise express or implied to repay that sum on demand, or at a fixed or determinable future time, or conditionally upon an event which is bound to happen, with or without interest: see Chitty on Contracts, 27th Ed. (1994), Vol. II paragraph 36 - 202.

6. It is impossible to ascertain what the terms of a "loan" are without a proper investigation into the background, in particular such oral agreements as may have made between the lender and the borrower and such documentary evidence as may record that agreement.

7. Paragraph 3 of the statement of claim describes Mrs. Wong's claim against Marcostar as a claim for the sum of HK$634,925, "being the balance of loan advanced by the plaintiff as director to the defendant on divers dates in the period from 27 May 1991 to 23 March 1994". Particulars of the alleged "loans" are then set out. These amount to HK$728,120, but credit is given to Mrs. Wong for "capital paid up by the Plaintiff as shareholder" in the sum of $2,500 (representing her 25% interest in the issued share capital of the defendant) and also for a partial payment of HK$90,695, leaving a balance outstanding of $634,925. Clearly, this money was paid or advanced by Mrs. Wong to Marcostar; but, one must ask, on what terms?

The answer to Mrs. Wong's claim

8. In an affirmation made on Marcostar's behalf by Mr. Ip, he deposes that at all material times the other shareholders of Marcostar apart from Mrs. Wong were himself and Mr. Li. Mrs. Wong, he says, lent her "name" as shareholder in Marcostar for her son, Mr. Yu Siu Hung, also known as Ken Yu, and his wife Ms. Li Kit Han. Day-to-day administrative and financial affairs of Marcostar including accounts were handled by Ms. Li. He, Mr. Ip, does not understand the English language. Neither does Mr. Li. They are only responsible for production and operational matters of Marcostar.

9. At some time before 1991, he says, it was agreed between Mr. Ip, Mr. Li and Mrs. Wong that a company would be formed to manufacture accessories for toys such as synthetic hair for dolls. The respective shareholdings of 50:25:25 were agreed and the parties bought a shelf company (which became Marcostar). It was envisaged that at least over $4 million capital, and quite probably more, would be required, which they agreed they would pay into the company in stages, since the company did not require that much money immediately and since they did not have that much ready funds.

10. Marcostar started business in or about May 1991 and within the first three months or so, Mr. Ip had paid up at least $1 million in various sums. By the end of March 1992, he had paid up over $2 million. By the same time Mr. Li had paid up about $1 million, but Mrs. Wong had paid up only about $0.5 million. This meant Mrs. Wong had paid up only about half of what was due from her by way of contribution. Mrs. Wong and Mr. Yu often made excuses that they had no money but would pay up later. Mr. Ip and Mr. Li did not have the heart to push Mrs. Wong too hard on her payments. In fact, Mr. Ip paid in more than his due share, in order that Marcostar could continue in business, despite Mrs. Wong's failure to pay up to her due amount.

11. In the course of the following year, Mr. Ip says, it became apparent that Marcostar required more capital, and it was therefore agreed between the three shareholders that the total capital was to be increased to $6 million.

12. By March 1993, Mr. Ip had paid up well over $3 million. He understood that Mr. Li had paid up to about $1.25 million, leaving a shortfall of about $0.25 million yet to be paid up, and that Mrs. Wong had paid up to about $0.6 odd million, leaving the shortfall to be paid up later.

13. As in the previous year, Mrs. Wong and Mr. Yu often made excuses that they did not yet have funds for paying up Mrs. Wong's share and asked Mr. Ip please to be kind enough to pay his share first and allow them time to pay up later. He says he obliged and accommodated his fellow shareholders.

14. So, he says, it is not true that the amounts paid in by the plaintiff were "loans" to Marcostar. He says, the amounts paid in were for capital, and that she had not paid up sufficiently to meet her obligation as agreed between the shareholders. To date, Mrs. Wong had only paid $637,425 towards her contribution of $1,500,000, leaving the balance of $862,575 outstanding and unpaid. In the result, then, Mr. Ip denies that the sum of $634,925 was advanced by Mrs. Wong to Marcostar as "loans". He asserts that the sum of $634,925 was paid by Mrs. Wong to Marcostar as part of her contribution to the capital of Marcostar as shareholder.

Mrs. Wong's reply

15. As against this, Mrs. Wong is able to point to the accounts (drawn up by her daughter-in-law) which show many entries of deposits made into her director's loan account with Marcostar and many withdrawals out of that account, which is an ordinary running account of the kind found in many private companies where directors put money in and take money out of the company from time to time. Mrs. Wong says that Mr. Ip's story about contributions to working capital is untrue; unsupported by any documentary evidence; and ought to be regarded by the court as unbelievable.

The judgment of Gall J.

16. That argument appealed to the judge.

17. The judge said, in his judgment, that there was no evidence showing an agreement to increase the nominal share capital of the company or any other adjustment of the amount of share capital as alleged on behalf of Marcostar. He pointed out that as evidenced by the shareholder's accounts in the account ledgers exhibited in the affirmations, different sums of money were indeed shown to be frequently deposited in and withdrawn from Marcostar by each of the shareholders. The accuracy of the ledgers was not challenged. The judge took the view that the assertions put forward on behalf of Marcostar were not believable. He gave judgment for Mrs. Wong, as I have said.

Conclusion

18. It appears to me far from plain and obvious that Mrs. Wong's story is correct, and far from plain and obvious that Marcostar's story is unbelievable. I think it is, if anything, easier to accept the believability of Marcostar's story than Mrs. Wong's. But that is not for this court to decide any more than it was for the judge.

19. In my view, the dispute between these shareholders must be properly investigated. Marcostar ought not to be shut out at this stage from the ordinary right of a litigant to have a trial of the action against it.

20. The truth of the matter is that the relationship between the parties here is or was the relationship of quasi-partnership. Rarely will it be the case that claims made by one "partner" against the other "partners" in cases like this will be suitable for determination under Order 14. So much needs to be investigated as to the relationship between the parties, and the events which caused the break up of the relationship between the "partners". Indeed, it is rarely the case that such a dispute is suitable for trial by action at all. It is normally more suitable for determination by the court in the exercise of its companies jurisdiction. But that is as may be. It is sufficient to dispose of the present appeal for us to accept that Marcostar has advanced a story properly to be treated at this stage as believable. Accordingly it should have unconditional leave to defend the action.

21. I would therefore allow this appeal, and restore the order of the master.

Ching, J.A. :

22. I agree and I have nothing further to add.

Nazareth, V.-P. :

23. I also agree.

[Argument on costs]

Godfrey, J.A. :

24. In the course of my judgment, I suggested that we should grant Marcostar unconditional leave to defend. But it has been pointed out that the master in fact dismissed Mrs. Wong's summons. I have to say that, on reflection, that seems to me to be more appropriate, since the view I take of the case is that it was never a suitable case for Order 14 at all. As to the costs, these must follow the event. Accordingly, although I appreciate that the judge took a different view of the matter, I think the right course for us to take is to dismiss the summons, and to order that Marcostar's costs here and below be taxed (if not agreed) and paid by Mrs. Wong.

25. I express my gratitude to Mr. Sakhrani for his argument, which has, however, ultimately failed to convince me that as he submits we ought to make an order granting Marcostar unconditional leave to defend and for costs in the cause. There is nothing I wish to add.

Ching, J.A. :

26. I agree.

Nazareth, V.-P. :

27. I also agree. The order of the court will be as proposed by Godfrey, J.A.