COLLECTED MIND INVESTMENTS LTD v. SHEBO TRADING CO LTD AND ANOTHER

HCA 1007/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1007 OF 2010

____________

____________

______________

J U D G M E N T

______________

1. The defendants act in person in these proceedings, Mr Loo Ka Lok (“Loo”), representing the 1^st defendant (“Shebo”) and himself as 2^nd defendant. The trial was conducted in Chinese, but the key documents relied upon by the parties are in English, and Loo confirmed at the end of the hearing that the Judgment can be given in English.

2. The plaintiff’s claims against the defendants are not immediately comprehensible from the documents relied upon, as the agreements entered into by the parties are confusing on their face.  After some careful scrutiny, it would appear that the plaintiff company (“CMI”) agreed with Loo in 2005 to acquire 70% of the shareholding in a company named Wai Sum Industrial Company Limited (“WS HK”).  WS HK was formerly owned 100% by Loo.  For this purpose, a company by the name of Shebo China Limited (“Shebo China”) was used by CMI and Loo to hold the shares of WS HK.  CMI was to hold 70% of the shares of Shebo China, whereas 30% of the shares of Shebo China were to be held in the name of Loo’s company, Shebo.  At all material times, WS HK owned the entire interests in Wai Sum (Dongguan) Ltd (“WS DG”).

3. A document entitled Shares Transfer Agreement (“Transfer Agreement”) was entered into between the parties on 11 August 2006.  It was described to be entered into “between the shareholders of Shebo China, a company located at … (hereinafter to be called the “Transferee”) and WS HK, a company located at … (hereinafter to be called the “Transferor”)”.

4. The recitals to the Transfer Agreement refer to the Transferor (identified in the Transfer Agreement as WS HK) agreeing to sell to the Transferee 2000 shares of WS HK for the consideration of $2,994,143. 

5. At first brush, it may not be immediately clear from whom and to whom the 2000 shares were being transferred.

6. Clause 1 of the Transfer Agreement adds to the confusion, as it refers to the mutual agreement of the parties, that 70% of the consideration of $2,994,143, in the sum of $2,095,900, was to be paid to Loo, “being the common shareholder of WS HK and Shebo”. 

7. The Transfer Agreement was signed by CMI, WS HK and Shebo.  Loo signed on behalf of both WS HK and Shebo.  It would appear from a careful reading of the Transfer Agreement that the Transferees are in fact CMI and Shebo, as shareholders of Shebo China, and that the shares being transferred to CMI and Shebo China are the shares in WS HK, based on the value of the assets of WS HK and WS DG, being $2,994,143.  Loo was to receive the sum of $2,095,900 as the consideration for the transfer to CMI of 70% of the shares in Shebo China, which in turn was to hold 100% of the shares formerly held by Loo in WS HK. 

8. Under clause 13 of the Transfer Agreement, the working capital required by WS HK and Shebo were to be advanced by CMI on an interest free basis, but CMI reserved the right to set off the working capital advances against the consideration payable for the transfer of the shares to it under clause 1 of the Transfer Agreement.

9. Hence, CMI claims in these proceedings that it had advanced to Shebo the money required for Shebo’s 30% portion of the working capital to be put into Shebo China for WS HK, in the sum of $4,431,101 (“Loan”).  As evidence of the loan, a separate Loan Agreement was signed on 19 November 2007 between CMI as lender, and WS HK and Shebo as co-borrowers.  The Loan was guaranteed by Loo, evidenced by a written Personal Guarantee signed by Loo and dated 19 November 2007 (“Guarantee”).

10. In April 2012, Shebo China was wound up by the Court on Shebo’s petition, under section 177 (1) (f) of the Companies Ordinance.

11. Loo raised various grounds of defence to CMI’s claims against him and Shebo.  Unfortunately, none of these grounds have any substance.

12. First, Loo claims that the consideration for the transfer of the WS HK shares to CMI had not been paid for in full.  He specifically referred to an amount of $3,800,000 which CMI allegedly had failed to pay.

13. Clause 17 of the Transfer Agreement provides that the calculation of the value of the WS HK shares was based on the directors’ valuation of the net asset value of WS HK, according to the report attached to the Transfer Agreement.  A document entitled “Calculation of Shares Valuation” was attached to the Transfer Agreement and produced in evidence, together with the figures used in the valuation.  These show the calculation of the consideration of $2,095,900 (“Consideration”) stated to be payable to Loo under clause 1 of the Transfer Agreement.

14. The Transfer Agreement also sets out the parties’ agreement as to the manner of payment of the Consideration, including how various amounts were to be set-off against the Consideration.

15. Counsel for CMI referred to clauses 3 and 12 of the Transfer Agreement. These refer to WS HK’s option to purchase the land on which its factory was situated in Dongguan on the Mainland (“Land Option”), for approximately $9 million.  The directors’ valuation of the net asset value of WS HK included the valuation of the Land Option at $3,800,000.  Under Clause 12 of the Transfer Agreement, it was agreed that as the Land Option was not yet exercised, the Consideration would not be payable until revenue was received after the Land Option had been exercised.

16. On CMI’s case, the Land Option was not exercisable, was not enforceable and was not in fact exercised, such that no revenue was received from the Land Option, and the amount of $3,800,000 of the Consideration was not separately payable. In any event, the value of the Land Option was already provided and accounted for in the calculation of the Consideration.  CMI had made payment of the working capital and loans required under clause 13 of the Transfer Agreement, in the total sum of $16,866,235, and it was entitled under clause 13 to set-off the Consideration payable against this sum.

17. Further, Loo claims that he or Shebo is entitled to set-off various sums against the payment of the working capital to be made under the Transfer Agreement, and/or against the repayment of the Loan CMI made to Shebo, and which he guaranteed.  These include, on the defendants’ case, the defendants’ share of profits from Shebo China and/or WS HK, a debt of $2 million owed by WS HK to Loo’s father, rent due to Shebo, salary due to Loo, and other amounts payable by way of damages to WS HK or Shebo China.

18. At common law, so long as debts are liquidated and there is mutuality, set-off can apply.  Mutuality means that the demands must be between the same parties, and that they must be held in the same capacity, or right, or interest (Re Finbo Engineering Co Ltd [1998] 2 HKC 480).  It means no more than that the same two parties were involved, and that each of the parties who is liable to the other must be beneficially interested in a cross claim against that other.  In equity, even unliquidated debts may be set-off, so long as the debts are sufficiently closely connected.

19. In relation to the amounts which Loo seeks to set-off against the Loan, the amounts are not payable by CMI at all.  Even if due, the alleged debts cannot be set-off at common law against the advances made by CMI in respect of the working capital required to be paid by Shebo under the Transfer Agreement.  Any salary due and payable to Loo was due not from CMI, but from Shebo China or WS HK.  Any assets, moulds, patents, trademarks or goodwill claimed to have been misappropriated by CMI were, likewise, either the property of Shebo China, or WS HK, or WS DG.  Any cause of action in respect of such alleged misappropriation vests not in Loo or Shebo, but in Shebo China, WS HK or WS DG.

20. In respect of the debt allegedly due to Loo’s father, it is claimed by Loo that the debt is due by WS HK.  According to CMI, the alleged debt had in any event been waived in writing, as evidenced by a document dated 16 February 2007 and signed by Loo’s father and WS HK.

21. In relation to the rent claimed to be due in respect of the lease of the premises in Dongguan, Loo claims in his witness statement that the rent is payable under a lease made between 建明商業(中國)有限公司 (“Jian Ming”) and WS DG.  Any rent payable is not a debt due from CMI, and cannot be made the subject matter of a set-off against the Loan due from Loo and Shebo to CMI.

22. Similarly, for the sums sought to be set-off and claimed to be payable under an agreement for transfer of property, such sums are not due from CMI, since the agreement for transfer was made between Loo and Jian Ming.  In any event, CMI’s evidence is that the transfer of property was not in fact made such that no amount is payable.

23. Loo further claims that he or Shebo is entitled to deduct the Loan from the bonuses payable to him or Shebo out of the profits of Shebo China or WS HK. CMI denies that there was any such agreement, which is not reflected in either the Transfer Agreement or the Loan Agreement.  Even if there was such an agreement, any dividends or share of profits would be payable from the profits of WS HK to Shebo China, or from the profits of Shebo China to Shebo.  There cannot be any debt due from CMI to Loo or Shebo, to support any claim of set-off as asserted by Loo. 

24. CMI further claims that Shebo China has been wound up, that no profits or dividends are available, and that any claim by any of its shareholders to any profits should be dealt with in the winding up proceedings.

25. Nor are any of the debts asserted by Loo connected with the Loan under the Transfer Agreement, for any equitable set-off to be raised.  The debts asserted all arise out of transactions entirely unrelated to and independent of the Transfer Agreement.  They are not even cross claims that can be made against CMI.

26. The Loan advanced by CMI pursuant to clause 13 of the Transfer Agreement is acknowledged in the Loan Agreement which is signed by Loo on behalf of both Shebo and WS HK.  The Defences raised by Loo and Shebo in this action are totally misconceived.  I accordingly grant judgment to CMI for the defendants’ payment of the Loan, with interest at judgment rate from the date of service of the writ until payment, and for the costs of the action, with certificate for counsel, to be taxed if not agreed.