THIEN KOK WAI v. LEUNG KIN LING JOE

DCCJ 4149/2006

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO.4149 OF 2006

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J U D G M E N T

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Issue

1.  The issue in this litigation may be summarized as follows.

2.  The Plaintiff and the Defendant were business associates.  They invested in a supermarket business which has been a success and in a restaurant business which was not.  In each case, apart from paying for his own capital contribution, the Plaintiff also paid for the capital contribution of the Defendant.

3.  The Plaintiff’s case is that the capital contribution payments he made on behalf of the Defendant were by way of loans to the Defendant, which the Defendant has so far failed to repay despite repeated demands. 

4.  The Defendant’s case is that those payments were not loans but agreed rewards for his efforts in planning the business ventures, finding the other investors, setting up the businesses, and managing them.

The Facts

5.  A large portion of the factual evidence is not in dispute and I accept that it is proven.  A total of 3 witnesses testified on behalf of the Plaintiff, namely, himself, Mr Lam Wing Yee and Mr Lay Che Yung Owen. Only one witness testified on behalf of the Defendant, namely, himself.

6.  Both the Plaintiff and the Defendant are businessmen. They have known each other for over 10 years before the material periods in 2004 and 2005 as social acquaintances. 

7.  They had no business dealings until about early 2004, when the Plaintiff became interested in investing in the business of an advertising company by the name of Glory Advertising Limited (‘GAL’), which the Defendant established with a former colleague Mr Tam Tin Wai (‘Mr Tam’) back in 2002 or 2003.  In the event, the Plaintiff bought into the company and became a shareholder of GAL holding 15% of its shares. 

8.  Later, in about July 2004, the Plaintiff entered into a agreement with the Defendant and Mr Tam in respect of a project between GAL and another company for the sale of Chinese herbal tea lozenges.  By this agreement, the Plaintiff invested $300,000 into the project, which entitled him to share 50% of the profits.

9.  The aforesaid 2 business dealings have not given rise to any dispute.

10.  In about July or August 2004, Mr Yeung Ha Lung (‘Mr Yeung’) and Mr Lay Che Yung Owen (“Mr Lay’), both friends of the Defendant, proposed to open a supermarket selling high-end meat and fruits.  Both Mr Yeung and Mr Lay were then full-time employees of a well-known high-end supermarket chain.  They however did not have sufficient capital for the venture and they asked the Defendant to find an investor for it.

11.  In about August 2004, the Defendant informed the Plaintiff of the business proposal by Mr Yeung and Mr Lay, and the Plaintiff was interested in investing in the venture.

12.  Subsequently, a limited company known as Marvel Union Limited (‘MUL’) was incorporated in October 2004 to operate the supermarket which was named “Chill Club”.

13.  Meanwhile, with the initial working capital of the supermarket business estimated to be around $700,000, it was agreed that the Plaintiff, the Defendant, Mr Yeung and Mr Lay would each make a capital contribution in the sum of $175,000 and become 25% shareholder of the operating company.

14.  These capital contributions were deposited into the personal account of the Defendant to enable him to pay for the expenses for starting the supermarket business. 

15.  The Plaintiff paid a total of $350,000 into the Defendant’s bank account between 8^th and 20^th September 2004.  This sum represented the capital contributions of the Plaintiff and the Defendant.

16.  It should be mentioned at this juncture that upon the incorporation of MUL, it was originally agreed that apart from his 25% shares, the Defendant would also hold the shares of Mr Yeung and Mr Lay in his name as nominee or trustee, as it would not be convenient for them to appear as shareholders of the company on account of his their existing employment.  Later, the plan was changed and Mr Yeung and Mr Lay decided to let their respective wives to hold their shares on their behalf.  Still later, in December 2004, their wives transferred these shares back to their names.

17.  As it turned out, the supermarket business has been a big success making handsome profits every year since its establishment.

18.  In the wake of the success of the supermarket business, the Plaintiff and the Defendant agreed to start another business venture, this time to open a Japanese-style hot pot restaurant.  In the event, a limited company known as Glorious Empire Limited (‘GEL’) was incorporated to operate the restaurant which came to be named as “Jyou Syou”.

19.  Apart from the Plaintiff and the Defendant, there were 3 other shareholders. They were Mr Tam, Mr Lam Wing Yee (‘Mr Lam’) and Mr Lai Chun Pang (‘Mr Lai’).  Mr Lam and Mr Lai were friends of the Defendant.

20.  On this occasion, the initial working capital was estimated to be around $ 2 million.  Each of Mr Lam and Mr Lai agreed to take up 25% of the shares and contribute $500,000 towards the initial working capital.  Each of the Plaintiff and the Defendant agreed to take up 20% of the shares and make capital contribution in the sum of $400,000.  Mr Tam agreed to take up the remaining 10% of the shares and contribute $200,000.

21.  As before, the capital contributions were deposited into the personal account of the Defendant to enable him to pay for the expenses to start the restaurant business.  The money was paid on a “need basis” at the request of the Defendant.  On this occasion, the Plaintiff paid a total of $823,000, which represented the capital contributions of himself and the Defendant (each in the sum of $400,00), as well as an overpayment of $23,000.

22.  As it turned out, the business of the restaurant was not a success.  Shareholders were requested to inject further funds into GEL.  In the event, all shareholders, with the exception of Mr Lam, made further contributions.  Eventually, however, the restaurant was doing so poorly that it had to be sold at a loss.  GEL ceased trading in April 2006.

Plaintiff’s Case

23.  The Plaintiff’s case is that the capital contribution payments he made on behalf of the Defendant were by way of loans to the Defendant.  According to the Plaintiff, on the occasions when the Defendant informed him of the proposed business ventures, the Defendant told him that he did not have sufficient funds to participate in the ventures and requested him to lend him the money to do so. 

24.  The Plaintiff testified that he was prepared to lend the money to the Defendant because, firstly, the amounts involved were not particularly large and represented only a small part of his wealth and, secondly, he and the Defendant had by then been friends for over 10 years.

25.  Mr Lay, the fellow shareholder of the Plaintiff and the Defendant at MUL, testified in support of the Plaintiff’s case.  His evidence was to the effect that even at an initial meeting, the Defendant had already indicated that he did not have sufficient funds to make the initial capital contribution for the supermarket business and that he had to borrow the money from the Plaintiff to pay for it.

26.  Mr Lam, the fellow shareholder of the Plaintiff and the Defendant at GEL, also testified in support of the Plaintiff’s case.  His evidence was to the effect that at an initial meeting, the Defendant said to him that he did not have sufficient funds to pay for the initial capital contribution for the restaurant business and that he had to borrow the money from the Plaintiff to pay for it.

Defendant’s Case

27.  The Defendant’s case is that the capital contribution payments that the Plaintiff made on his behalf in both MUL and GEL were agreed rewards for his efforts in planning the business ventures, finding the other investors, setting up the businesses, and managing them.

28.  The Defendant’s evidence is that on each occasion when he mentioned the proposed business ventures of the supermarket and the restaurant to the Plaintiff, he had made it clear that he did not have the money and would not inject any capital into the ventures, and that his only role was to set up the 2 businesses “from nothing to something”.  His evidence was that on both occasions, the Plaintiff asked him to go ahead with the ventures and agreed that he would pay for his share of the capital contribution on his behalf.

Findings

29.  I accept the evidence of the Plaintiff, Mr Lay and Mr Lam.  I find that they are honest and truthful witnesses. 

30.  I should mention at this juncture that Ms Shannon Leung, on behalf of the Defendant, has very helpfully drawn my attention to various discrepancies between the evidence filed by the Plaintiff when he applied for summary judgment at an earlier stage and the testimony he gave at the trial. 

31.  Having very carefully considered the discrepancies and counsel’s submissions, I have come to the conclusion that the discrepancies were the result of genuine mistakes made by the Plaintiff and his legal advisers in the formulation of the affirmation evidence for the summary judgment application. 

32.  I accept in particular that the Plaintiff was doing a large number of other businesses at the material times and had not kept full and complete records, and that certain assertions were made in the affirmations without first checking the relevant records. 

33.  In this connection, I note that the Defendant had made similar errors in the affirmations he made to contest the summary judgment application.

34.  Apart from the testimony of the Plaintiff, Mr Lay and Mr Lam, the Plaintiff’s case has also been supported by contemporaneous documentary evidence. 

35.  One such document is an agreement in Chinese entitled “Shareholders and Shareholdings Agreement” (‘the Agreement’).  The Agreement was drafted by the Defendant himself for the signature of himself and the Plaintiff.  They signed the Agreement on 20^th September 2004.  Paragraph 3 of the Agreement was in these terms:

“是項業務總集資金額為HK$700,000圓正，股東鄧國偉Thien Kok Wai (HKID: [ID card number])將要支付港幣HK$175,000圓正作為佔有25%股權。另外塾款HK$175,000圓給股東梁健寧Leung Kin Ling Joe (HKID: [ID card number])作為其中之25%股權費用，而這筆塾款將會在本公司獲得盈利期間，悉數歸還予股東鄧國偉。”

36.  In my judgment, the Agreement contained a clear acknowledgment or admission by the Defendant that the capital contribution payment that the Plaintiff made on behalf of the Defendant in MUL in the sum of $175,000 was by way of a loan to the Defendant.

37.  The Defendant sought to explain that he drafted and signed the Agreement in order to alleviate the Plaintiff’s worry that he would be holding not only his own shares in MUL but also the shares of Mr Yeung and Mr Lay in his name.

38.  I am unable to accept the Defendant’s explanation. 

39.  First, the proposed arrangement whereby the Defendant held the shares of Mr Yeung and Mr Lay in his name would not have worried the Plaintiff at all as the Plaintiff knew very well throughout that the Defendant would be holding such shares not as beneficial owner but only as nominee or trustee for Mr Yeung and Mr Lay. 

40.  Second, I cannot see any connection between the need to alleviate the Plaintiff’s worry about the said shareholding arrangement and the Defendant’s acknowledgment that the capital contribution made by the Plaintiff on his behalf in MUL was a loan from the Plaintiff which he agreed to repay in due course.

41.  The other piece of documentary evidence is a short text message sent by the Defendant to the Plaintiff on 1^st April 2006 in the following terms:

“RAYMOND，我不是避，我一直在想辦法。如果真的關門轉讓，短時間我一定無法還錢給你。現在如果轉手收回的都是僅夠支出，看我能否找到人接手投資，公司其他一切都不用你們去理，轉給我負起所有責任，我這二三日就可決定。”

42.  This short text message was sent to the Plaintiff by the Defendant in response to the Plaintiff’s repeated demands for repayment of the loans he made to the Defendant.  In my judgment, it is clearly in support of the Plaintiff’s case that the capital contribution payments made on behalf of the Defendant in MUL and GEL were loans to the Defendant.

43.  I do not accept the evidence of the Defendant that the capital contribution payments made on his behalf by the Plaintiff were agreed rewards for the Defendant’s efforts in planning the business ventures, finding the other investors, setting up the businesses, and managing them.

44.  While I accept that the Defendant devoted a lot of time on the co-ordination of the setting up of the businesses, I also note that the other shareholders including the Plaintiff had played a significant role in the setting up of the businesses. 

45.  For example, it was Mr Yeung and Mr Lay who were the experts on the supermarket business of MUL and it was they who gave detailed advice as to how the supermarket should be operated. 

46.  Further, the Defendant’s work in this regard was for the common good and benefit of all shareholders, and I cannot see why it would have been the Plaintiff alone who had to shoulder the entirety of the Defendant’s capital contribution.

47.  For the above reasons, I find that the Plaintiff’s payment of the Defendant’s capital contribution in MUL in the sum of $175,000 was a loan advanced by the Plaintiff to the Defendant.

48.  I also find that the Plaintiff’s payment of the Defendant’s capital contribution in GEL in the sum of $400,000 was a loan advanced by the Plaintiff to the Defendant. 

49.  As to the over-payment of $23,000, there is no dispute that it was deposited into the Defendant’s personal account.  However, it has not been suggested that the amount had been spent on the expenses of GEL by way of further capital contribution made on behalf of the Plaintiff, or for that matter, on behalf of the Defendant.  In my judgment, this constituted an additional loan to the Defendant, or alternatively, the Defendant is liable to repay this amount to the Plaintiff by way of money had and received.

Conclusion

50.  For the above reasons, I give judgment in favour of the Plaintiff for the total sum of $598,000.  The Defendant is to pay interest on such sum at the rate of 1% above the prime rate of the Hong Kong and Shanghai Banking Corporation from the date of the writ to the date of this judgment, and thereafter at the judgment rate until payment.

51.  I make an order nisi that the Defendant do pay the costs of the Plaintiff, including all costs reserved, to be taxed if not agreed, with a certificate for counsel.  Unless an application is make to vary it, this costs order shall become absolute 14 days from the date hereof.

52.  Lastly, I would like to thank counsel for their assistance, especially Ms Shannon Leung for the Defendant, for her thorough and helpful written submissions.

Amendment of Pleadings

53.  I should say a few words about an application made by the Plaintiff in the course of the trial to re-amend the Statement of Claim.  I allowed the application.  The amendment was to tidy up the Plaintiff’s case on the pleadings and was by no means substantial.  The matter sought to be amended was not new and had been reflected in the further and better particulars provided by the Plaintiff in December 2006 as well as in his 2^nd affirmation prepared for the purpose of the summary judgment application.  The Defendant was therefore not taken by surprise.  I was satisfied that the amendment would not cause any prejudice to the Defendant.

54.  In order to be fair to the Defendant, upon allowing the Plaintiff’s application for amendment, I have made consequential orders allowing the Defendant to further amend his Defence, as well as an opportunity to recall witnesses.  I also award costs to the Defendant in respect of the amendment application.